4.76.22  Credit Unions - IRC 501(c)(14)  (04-01-2003)

  1. This IRM 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)(14). It provides examination techniques effective in identifying and developing issues commonly encountered during the examination of an IRC 501(c)(14) organization.

  2. These guidelines provide specific assistance for the examination of an IRC 501(c)(14) organization and are not all-inclusive. The purpose is to supplement the examination guidelines contained in IRM 4.75.10 through IRM 4.75.13. 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 501(c)(14) organizations. The examiner should review the technical information contained in IRM 7.25.14.  (04-01-2003)
Background Information

  1. Credit unions are democratically controlled, mutual entities created for the purpose of encouraging thrift and providing a source of credit for its members.

  2. To qualify as a credit union exempt from federal income tax under IRC section 501(c)(14)(A), a credit union must be formed and operated under a state credit union law, without capital stock and, thus, have state defined characteristics, operate without profit and for the mutual benefit of its members. (See Rev. Rul. 69-282, 1969-1 C.B. 155 clarified by Rev. Rul. 72-37, 1972-1 C.B. 152.)  (04-01-2003)
Examination Guidelines

  1. Inspect the governing instruments and evaluate the actual operations to determine if the credit union is organized and operated for mutual purposes and without profit.

  2. Review minutes of the board of directors, newsletters and other publications for members to determine if the credit union is operated for mutual purposes.

  3. Review state laws dealing with organizations incorporated as credit unions to determine whether the organization is in compliance with state laws.

  4. Review the articles of organization and bylaws to determine membership requirements. Determine whether the organization has a written, enforced common bond among their members, such as a charter provision requiring members to have the same occupation or employer, or to live within a well-defined neighborhood, community or rural district.

  5. Credit unions are authorized to receive the savings of members either as a deposit or as payment for shares. Review the bylaws to determine:

    1. The maximum number of shares, which a member can hold;

    2. The conditions under which shares may be paid in, transferred, or withdrawn; and

    3. The conditions under which deposits may be received and withdrawn.


  6. Determine if each member is entitled to one vote, regardless of the number of shares owned.

  7. Review activities to determine whether:

    1. The organization meets the short term, unsecured credit needs of its members.

    2. Loans are made only to members of the credit union.

    3. The credit union organization issues stock certificates.

    4. The credit union carries on activities not normally conducted by any financial institutions or any other activities that would indicate that the organization is not a credit union operating for mutual purposes or has unrelated business income.

  8. Conduct a sample review of loan agreements to determine whether:

    1. Loans are made only to members,

    2. Members submit applications in writing to the credit committee stating the purpose of the loan,

    3. Loans are repayable in installments, and

    4. The credit union gives special consideration to officers or employees on loans or interest.  (04-01-2003)
Mutual Reserve Funds

  1. IRC section 501(c)(14)(B) provides exemption from Federal income tax for corporations or associations without capital stock organized before September 1, 1957, and operated for mutual purposes and without profit for the purpose of providing reserve funds for, and insurance of shares or deposits in:

    1. Domestic building and loan associations,

    2. Cooperative banks without capital stock organized and operated for mutual purposes without profit,

    3. Mutual savings banks not having capital stock represented by shares, or

    4. Mutual savings banks described in IRC section 591(b).

  2. Exemption under IRC section 501(c)(14)(B) requires an organization to insure shares or deposits in its member organizations and contains a specific restriction against issuance of capital stock.

  3. IRC section 501(c)(14)(C) provides exemption for corporations or associations organized before September 1, 1957, and operated for mutual purposes and without profit for the purpose of providing reserve funds for associations or banks described in paragraph 22.4(1) items a, b, or c. These organizations are exempt, however, only if 85 percent or more of the income is attributable to providing such reserve funds and to investments. If an organization meets the requirements of paragraph 22.4(2), the income percentage restriction of IRC(c)(14)(C) will not apply.  (04-01-2003)

  1. An organization exempt under IRC section 501(c)(14) must be operated without profit and for the mutual benefit of members. The net earnings can not inure to the benefit of any member.

  2. Examples of activities that may indicate inurement include:

    1. Issuance of stock certificates,

    2. Loans to nonmembers,

    3. Loans made without the approval of the credit committee,

    4. Payment of personal expenses of members or employees, or

    5. Write off of loan to officers or employees.  (04-01-2003)
Examination Guidelines

  1. Inspect balance sheet to identify sources of outstanding stock, including preferred stock.

  2. Compare loan agreements to membership list.

  3. Review minutes of loan or credit committee for required approval.

  4. Review cash disbursements to verify that expenses paid on behalf of officers and employees had a business purpose.

  5. Analyze all loans written off as uncollectable to determine the reasons for the write off to assure officers or employees are not receiving a personal benefit.  (04-01-2003)
Unrelated Business Income

  1. A state-chartered credit union may have unrelated business taxable income. Sources of unrelated business income often found during the examination of credit unions are:

    1. Debt financed rental income

    2. Advertising income

    3. Credit life and disability insurance


    The Service's current position is that credit life and disability insurance issued by a credit union as an added service to guarantee the payment of outstanding member loans is not directly related to its exempt purposes and is unrelated business income. If this issue is discovered during an examination, the examiner should conduct research to determine whether there have been any new developments in this area.  (04-01-2003)
Examination Guidelines

  1. Review cash receipts journal to identify any unusual sources of income. Income from any activities not normally conducted by a financial institution should be considered unusual and may be subject to the unrelated business income tax provisions described in IRC section 511.

  2. Review newsletters, pamphlets and other materials to determine if the credit union offers credit life and disability insurance as an added service to guarantee the payment of outstanding member loans.

  3. Review assets and liabilities to identify acquisition indebtedness. Review cash receipts journal to identify income from such acquisition.

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