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4.76.15  Business Leagues - IRC 501(c)(6)  (03-01-2003)

  1. This IRM section contains specific examination guidelines for an organization recognized as exempt from income tax under IRC section 501(a) as an organization described in IRC section 501(c)(6). It provides examination techniques effective in identifying and developing issues commonly encountered during the examination of an IRC section 501(c)(6) organization.

  2. These guidelines provide specific assistance for the examination of an IRC section 501(c)(6) organization and are not all-inclusive. The purpose is to supplement the guidelines contained in IRM sections 4.75.2 through 4.75.6. The intent is not to restrict the examiner in identifying issues or using examination techniques not included herein.

  3. This IRM does not contain detailed technical information regarding IRC section 501(c)(6) organizations. The examiner should review the technical information contained in IRM 7.25.6.  (03-01-2003)
Background Information

  1. IRC section 501(c)(6) provides for the exemption of business leagues and similar organizations whose:

    1. Purpose is the promotion of the common business interest of its members',

    2. Net earnings do not inure to the benefit of any member,

    3. Purpose is not to engage in a regular business of a kind ordinarily carried on for profit,

    4. Principal activity is not the performance of particular services for individual persons.


    Activities which constitute the performance of particular services to members may result in revocation of exemption if these are primary activities. If these are not primary activities, any income generated by them is unrelated business income.  (03-01-2003)
Membership requirements

  1. The members of a tax-exempt business league are persons having a common business interest.

  2. Membership support, both in the form of membership dues and involvement in the organization's activities, must be at a meaningful level.

  3. Support from categories of membership formed for the purpose of producing unrelated business income is not considered membership support.  (03-01-2003)
Examination Guidelines - Membership Requirements

  1. ) Ask the following questions and appropriate follow-up questions during the initial contact or initial interview:

    1. What are the membership requirements?

    2. Does the organization have different classes of memberships?

    3. If so, what are the membership requirements for each class of members?

  2. Read the articles of incorporation, bylaws, etc. for the membership requirements to verify membership is limited to persons with a common business interest.

  3. Review lists of members and activities to ensure that actual membership does not represent only a segment of a line of business.


    Activities which relate only to a segment of a line of business may indicate that membership, while theoretically open to all, is in operation, limited to a segment of a line of business.

  4. Review membership solicitation materials to determine requirements, classes of memberships, and benefits.  (03-01-2003)

  1. The net earnings of an IRC section 501(c)(6) business league may not inure to the benefit of any member.

  2. The distribution of cash to members, representing no more than a rebate of dues paid does not constitute inurement if the distribution is paid in the same proportion as the dues are paid. Business income distributed directly to members, however, is considered to be inurement.  (03-01-2003)
Examination Guidelines - Inurement

  1. Review the organizational documents, membership solicitation materials, minutes, contracts with employers, to identify the types of benefits provided to officers and members.

  2. Review the organization's employment contracts, Forms W-2 and other employment records to determine the number and duties of the organization's employees and the reasonableness of salaries and benefits.

  3. Review the disbursement journal to identify any payments to members and determine the reason for any such payments.  (03-01-2003)
Unrelated Business Income

  1. Business leagues frequently have unrelated business income, which may represent their primary source of income.These sources include:

    • Coupon redemption services,

    • Commercial a.dvertising in the organizations publications,

    • Certain management fees,

    • Multiple listing services,

    • Sales of standardized forms to members,

    • Associate member dues, and

    • Convention or trade show income that is not from a qualified convention or trade show (See Treas. Reg. § 1.513-3)  (03-01-2003)
Examination Guidelines - Unrelated Business Income

  1. Read the minutes, newsletters, and other publications. Look for indications of particular services to members and other unrelated activities.

  2. Review publications to determine whether they:

    1. Contain advertising, which may subject the organization to the tax on unrelated business income,

    2. Contain advertising naming the products or services of members only (See Treas. Regs.section 1.512(a)-1(f), Rev. Rul. 64-315, 1964-2 C.B. 147, and Rev. Rul. 65-14, 1965-1 C.B. 236).


  3. Check the organization's website for advertising and other indications of unrelated trade or business activities.

  4. Review any accounts involving non-member income or other income. Such income may be due to a regular business of a kind ordinarily carried on for profit.

  5. Analyze income from members (other than dues) to identify any payments for particular or individualized services.

  6. Review the dues account in the cash receipts journal for associate member dues. (See Rev. Proc. 97-12, 1997-1 C.B. 631).  (03-01-2003)

  1. Officers and employees of IRC section 501(c)(6) business leagues may receive various forms of compensation. The underreporting of compensation is a common problem encountered when examining tax exempt business leagues.

  2. Failure to include or properly include the correct taxable amount in wages constitutes additional compensation. Likely sources include:

    1. Bonuses

    2. Expense reimbursements under a non-accountable plan

    3. Employer provided vehicles

    4. Taxable fringe benefits

  3. An accountable plan has two main requirements:

    1. The employee is required to substantiate the expenses, and

    2. The employee must return any unsubstantiated amount, to the organization.


      See Treas. Reg. section 1.62-2(c) for additional requirements of an accountable plan.  (03-01-2003)
Examination Guidelines - Compensation

  1. During the initial interview,inquire about bonuses, fringe benefits, and expense reimbursements for employees.

  2. Look for discussions of the payment of bonuses in the minutes. Common examples include:

    1. Holiday bonuses,

    2. Performance related bonuses,

    3. Non-cash bonuses (e.g. gift certificates).

  3. Review the employee handbook for information about the organization's expense reimbursement policy.

  4. Determine whether the organization maintains an accountable plan. Pay close attention to expense allowances, expense accounts, and similar arrangements.

  5. Inspect vouchers and other documentation provided by employees

  6. Check the disbursement journal for payments made to employees in addition to payroll checks. Look for:

    1. Payments for the same amount made each month,

    2. Payments for even dollar amounts (e.g. $50.00, $120.00, etc.)

  7. Review any restrictions on the use of employer provided vehicles for personal purposes. (See Treas. Reg. section 1.61-21 for a discussion of the valuation of the personal use of an employer provided vehicle.)

  8. Review employment contracts, employee handbooks, etc. for benefits offered by the organization to identify taxable fringe benefits. Fringe benefits are taxable unless specifically excluded by the IRC. Examples of taxable fringe benefits include:

    1. Club dues,

    2. Deferred Compensation (Nonqualified Arrangements) plans,

    3. Group Term Life Insurance in Excess of $50,000,

    4. Employer Provided Meals and Lodging,

    5. Benefit Plans (Employee Contributions).  (03-01-2003)
Legislative Activities

  1. IRC section 501(c)(6) Business Leagues may participate in lobbying, as a sole activity, if it is germane to the accomplishment of its exempt purpose, e.g. promoting the common business interests of itsmembers.

  2. Expenditures for lobbying by IRC section 501(c)(6) business leagues may be subject to the requirements of IRC section 6033(e).

  3. IRC section 6033(e) imposes a notice requirement and proxy tax on the lobbying expenditures of certain business leagues.  (03-01-2003)
Examination Guidelines - Legislative Activities

  1. Interview the organization's officers and review the minutes, newsletters, web sites, and correspondence to identify any legislative activities.

  2. Determine whether any lobbying is related to the organization's exempt purpose.

  3. Determine whether any officials of the organization are registered lobbyists.

  4. Review any contracts with outside lobbyists to determine the extent and the nature of such lobbying.

  5. Review additional payments to officers, attorneys, etc. for lobbying expenditures disguised as compensation.

  6. Determine whether the business league is subject to the reporting requirements of IRC section 6033(e).

  7. Review dues statements of business leagues subject to such requirements to determine whether amounts used for lobbying were properly reported.

  8. Inspect Form 990-T filed by business leagues which elected not to or failed to provide such notification to verify the proxy tax under IRC section 6033(e)(2)(A) was properly calculated.  (03-01-2003)
Political Activities

  1. ) A business league which otherwise qualifies for exemption under IRC section 501(c)(6) will not be disqualified merely because it engages in some political activity.

  2. Political expenditures made by IRC section 501(c)(6) business leagues may be subject to the requirements of IRC section 6033(e).

  3. IRC section 6033(e) imposes a notice requirement and proxy tax on the political expenditures of certain business leagues.

  4. ) IRC section 527(f) imposes a tax on the direct political expenditures of organizations exempt from tax under IRC section 501(a) including business leagues described in IRC section 501(c)(6).

  5. A separate segregated fund maintained by an exempt business league to conduct its political activities shall be treated as a separate organization subject to IRC section 527.  (03-01-2003)
Political Activites-Examination Guidelines

  1. Interview the officers and review the minutes, newsletters, web sites, and correspondence to identify possible political activities conducted by the organization or the existence of a separate segregated political fund.

  2. Analyze the following accounts for possible political expenditures:

    1. Legal fees,

    2. Bonuses,

    3. Printing,

    4. Advertising, and

    5. Entertainment

  3. Analyze bank statements, disbursement journals, etc., to identify whether the organization maintained a separate segregated fund for the purpose of making political expenditures.  (03-01-2003)
IRC Section 527 Filing and Notice Requirements

  1. ) If the organization made expenditures for political purposes or maintained a separate segregated political fund, the examiner will determine whether: all returns and/or reports required by IRC section 527 were filed.

    If Forms 1120 POL Then
    Were filed The examiner will inspect the organization's copies of the returns and/or reports and determine whether an examination is warranted.
    Were not filed The examiner will secure the delinquent returns and/or reports and determine whether an examination of the delinquent returns and/or reports is warranted.


    Public Law 106-230, 106th Congress, 2nd Session (2000) made substantive changes to the filing and notice requirements of IRC section 527 political organizations and funds. Therefore, the examiner should review IRC section 527, Treas. Regs.section 1.527, IRM 7.27.11 and IRM 4.76.30 and conduct independent research to determine whether there have been any new developments in this area after the publishing IRM 7.27.11 and IRM 4.76.30.  (03-01-2003)
IRC Sections 162(e) and IRC 6033(e) - Notification Requirements

  1. IRC section 162(e) states that certain legislative and political expenditures and dues payments made to specific exempt organizations allocable to such expenditures are not deductible as ordinary and necessary business expense.

  2. IRC section 6033(e) requires certain exempt organizations to disclose the amount of legislative and political expenditures to which IRC section 162(e)(1) applies and to provide a notice to any person paying dues to which those expenditures are allocable. The notice must contain an estimate of the portion of the dues allocable to those expenditures or the organization must pay a proxy tax. See IRM 7.27.12 for a further explanation of the technical requirements of IRC section 6033(e).  (03-01-2003)
Violations of Other Federal Statutes

  1. Be alert to the activities of the organization, any affiliated organization and/or of any officer or trustee that would violate 18 USCS sections 664, or 1954 relating to theft, embezzlement, manipulation of trustee funds, or 2 USCS section 441b relating to illegal political contributions.


    If possible violations of these statutes are found, the examiner will prepare a Form 5666, EP/EO Information Report. The Form 5666 to be forwarded to EO Classification.

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