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Exempt Organizations
Technical Guide
TG 5: Labor, Agricultural, and Horticultural
Organizations – IRC Section 501(c)(5)
This document is not an official pronouncement of the law or the position of the Service and cannot be
used, cited, or relied upon as such. This guide is current through the revision date. Changes after the
revision date may affect the contents of this document and users should consider any subsequent
resources to ensure technical accuracy. All references to “Section” in this document refer to the Internal
Revenue Code of 1986, as amended, unless specifically noted otherwise. The taxpayer names and
addresses shown in examples within this publication are fictitious.
Technical Guide Revision Date: 2/1/2024
Publication 5843 (Rev. 2-2024) Catalog Number 94226M Department of the Treasury Internal Revenue Service www.irs.gov
Table of Contents
I. Overview................................................................................................ 6
A. Background / History ...................................................................... 6
II. Exemption Requirements .................................................................... 6
A. General 501(c)(5) Information ........................................................ 6
A.1. Regulatory Definition ............................................................ 6
A.2. Non-Deductibility of Contributions ...................................... 7
A.3. Unrelated Business Taxable Income (UBTI) ....................... 7
B. Labor Organizations ....................................................................... 7
B.1. Scope of the Term Labor ...................................................... 8
B.2. Principal Purpose .................................................................. 8
B.3. Membership Composition .................................................... 8
B.4. Organizational Control.......................................................... 8
B.5. Qualifying Activities .............................................................. 9
B.6. Lobbying .............................................................................. 11
B.7. Non-Qualifying Activities.................................................... 11
B.8. Political Activities................................................................ 13
B.9. Inurement ............................................................................. 13
B.10. Other Possible Subsection Classifications ...................... 13
B.11. Unrelated Business Income (UBI) ...................................... 14
C. Agricultural and Horticultural Organizations ............................. 15
C.1. Scope of the Term Agricultural .......................................... 15
2
C.2. Scope of the Term Horticultural ......................................... 16
C.3. Principal Purpose ................................................................ 16
C.4. Membership, Services to Members, & Sales Activities ... 17
C.5. Qualifying Activities ............................................................ 18
C.6. Lobbying .............................................................................. 19
C.7. Non-Qualifying Activities.................................................... 19
C.8. Political Activities................................................................ 20
C.9. Inurement ............................................................................. 20
C.10. Other Possible Subsection Classifications ...................... 21
C.11. Unrelated Business Income (UBI) ...................................... 22
III. Other Considerations ......................................................................... 23
A. Section 527 Related Organizations ............................................. 23
IV. Application for Recognition of Exemption and Return
Requirements...................................................................................... 23
A. Application Requirements ........................................................... 23
A.1. Form 1024 ............................................................................ 24
A.2. User Fee ............................................................................... 24
A.3. Organizational Documents ................................................. 24
A.4. Effective Date of Exemption ............................................... 25
A.5. Denials of Exemption .......................................................... 25
B. Return Requirements ................................................................... 26
B.1. Annual Information Return ................................................. 26
3
B.2. Unrelated Business Income (UBI) ...................................... 26
B.3. Employment Taxes.............................................................. 26
B.4. Political Activities................................................................ 28
V. Examination Techniques ................................................................... 28
A. Labor Organizations ..................................................................... 28
A.1. Membership ......................................................................... 28
A.2. Inurement ............................................................................. 29
A.3. Unrelated Business Income ............................................... 30
A.4. Compensation ..................................................................... 31
A.5. Payments to Members ........................................................ 33
A.5.a Strike Fund and Lockout Benefits ................................... 33
A.5.b Lost Time Payments ......................................................... 34
A.6. Legislative Activities ........................................................... 34
A.7. Political Activities................................................................ 35
B. Agricultural and Horticultural Organizations ............................. 35
B.1. Membership ......................................................................... 36
B.2. Inurement ............................................................................. 36
B.3. Unrelated Business Income (UBI) ...................................... 37
B.4. Legislative Activities ........................................................... 37
B.5. Political Activities................................................................ 38
VI. Additional Examination Considerations........................................... 39
A. Section 527 Requirements for Separate Fund ........................... 39
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A.1. Filed Reports ....................................................................... 39
A.2. Did Not File Reports ............................................................ 39
B. Sections 162(e) Section 6033(e) – Notification Requirements .. 39
B.1. Explanation of Sections...................................................... 39
B.2. Requirements for Labor Organizations ............................. 40
B.3. Requirements for Agricultural & Horticultural
Organizations........................................................................... 40
C. Violations of Other Federal Statutes ........................................... 40
C.1. Review for Possible Violations .......................................... 40
D. Other Filings and Tax Compliance .............................................. 41
D.1. Other Considerations.......................................................... 41
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I. Overview
(1) This Technical Guide (TG) discusses tax exemption of labor, agricultural, or
horticultural organizations described under Internal Revenue Code (IRC)
Section 501(c)(5).
Note: This Technical Guide references General Counsel Memoranda (GCM).
Although GCM may not be used or cited as precedent, they do offer tax law
analysis to consider when precedential guidance does not exist.
A. Background / History
(1) Since introduction in the Payne-Aldrich Tariff Act of 1909 (also known as the
Corporation Excise Tax Act of 1909), the language of what became Section
501(c)(5) has been the same five words for over one hundred years.
(2) Section 501(a) says, in part, an organization described in subsection (c) shall
be exempt from taxation. Section 501(c)(5) then simply states, “Labor,
agricultural, or horticultural organizations.” Though only two letters, the word
“or” has significance; an organization needs only to be one of the three listed
types of organizations, however the qualification requirements differ among
them and are discussed separately.
II. Exemption Requirements
A. General 501(c)(5) Information
A.1. Regulatory Definition
(1) Treasury Regulation (Treas. Reg.) 1.501(c)(5)-1(a) indicates that to be taxexempt, an organization must meet the following requirements:
a. The net earnings of the organization may not inure to the benefit of any
member; and
b. The objectives of the organization must be the betterment of conditions of
those engaged in the pursuits of labor, agriculture, or horticulture, the
improvement of the grade of their products, and the development of a
higher degree of efficiency in their respective occupations.
(2) Treas. Reg. 1.501(c)(5)-1(b)(1) indicates that, generally, an organization is not
described in Section 501(c)(5) if its principal activity is to receive, hold, invest,
disburse, or otherwise manage funds associated with savings or investment
plans.
(3) Treas. Reg. 1.501(c)(5)-1(b)(2) provides for an exception to this rule for certain
dues-funded organizations that do not provide for, permit, or accept employer
contributions.
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A.2. Non-Deductibility of Contributions
(1) Contributions to Section 501(c)(5) labor, agricultural, and horticultural
organizations are not allowable as a deduction under Section 170. Section 6113
requires certain tax-exempt organizations that are ineligible to receive tax
deductible charitable contributions to disclose, in “an express statement (in a
conspicuous and easily recognizable format),” the nondeducibility of
contributions during fundraising solicitations. Section 6710 provides penalties
for failure to comply with Section 6113 without reasonable cause. Organizations
whose annual gross receipts do not normally exceed $100,000 are excepted
from this disclosure requirement.
(2) For solicitations involving membership dues for Section 501(c)(5) labor,
agricultural, and horticultural organizations that may be deductible as business
expenses under another section of the Internal Revenue Code, additional
stipulated safe harbor notices may be substituted in order to meet the Section
6112 requirements, such as, “Contributions or gifts to [name of organization]
are not tax deductible as charitable contributions. However, they may be tax
deductible as ordinary and necessary business expenses.” See Notice 88-120,
1988-2 C.B. 454.
A.3. Unrelated Business Taxable Income (UBTI)
(1) Section 511 imposes a tax on the unrelated business taxable income, as
computed under Section 512, of organizations otherwise exempt from tax under
Section 501(c)(5). The term “unrelated business taxable income” as defined in
Section 512 means, with certain exceptions, additions, and limitations, the
gross income derived by any organization from any unrelated trade or business
regularly carried on by it, less allowable deductions directly connected with the
carrying on of such trade or business. Section 513 defines the term “unrelated
trade or business,” in the case of any organization subject to the tax imposed by
Section 511, as any trade or business the conduct of which is not substantially
related (aside from the need of such organization for income or funds or the use
it makes of the profits derived) to the exercise or performance by such
organization of its exempt functions. See Rev. Rul. 60-86, 1960-1 C.B. 198.
(2) See additional information in Sections II.B.11 and II.C.11, below.
B. Labor Organizations
(1) A labor organization is an association of workers who have combined to protect
or promote the interest of all members by bargaining collectively with their
employers to secure better working conditions, wages, and similar benefits. The
term includes labor unions, councils, and committees. See Portland Cooperative Labor Temple Association v. Commissioner, 39 B.T.A. 450 (1939),
acq. 1939-1 C.B. 28.
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B.1. Scope of the Term Labor
(1) The term labor is commonly accepted as meaning the performance of service
as employees. See Rev. Rul. 78-288, 1978-2 C.B. 179.
(2) The term “labor organization” has “a liberal construction to embrace the
common acceptation of the term, including labor unions and councils and the
groups which are ordinarily organized to protect and promote the interests of
labor.” See Portland Co-operative Labor Temple Association v. Commissioner,
39 B.T.A. 450 (1939), acq. 1939-1 C.B. 28 A “labor union” is one type of
organization under the broader “labor organization” term.
B.2. Principal Purpose
(1) A labor organization must primarily serve the interests of labor. See Rev. Rul.
59-6, 1959-1 C.B. 121, and Rev. Rul. 77-5, 1977-1 C.B. 146.
(2) Entrepreneurs and independent contractors are not considered employees.
Therefore, the interests of entrepreneurs and independent contractors are not
the interest of labor. When most of an organization’s members are
entrepreneurs or independent contractors, it will not qualify for exemption as a
labor organization under Section 501(c)(5). See Rev. Rul. 78-288, 1978-2 C.B.
179.
(3) An organization of retired persons who are no longer working or available for
work is normally beyond the scope of a labor organization as described in
Section 501(c)(5) and does not qualify for exemption. Consider GCM 36264
(1975).
B.3. Membership Composition
(1) An organization need not be composed exclusively of employees to be exempt
under Section 501(c)(5). An organization whose membership includes mostly
employees and some independent contractors can qualify for exemption as a
labor organization under Section 501(c)(5) if its primary purpose is to better the
conditions of its members by negotiating better wages and working conditions
with those who contract for its members’ services. See Rev. Rul. 74-167, 19741 C.B. 134. See also Rev. Rul. 77-154, 1977-1 C.B. 148, which describes a
nurses’ association whose membership includes some private duty nurses.
Membership can also consist of employers and employees. See Rev. Rul. 59-6,
1959-1 C.B. 121.
(2) Where most of an organization’s members are entrepreneurs or independent
contractors, however, it will not qualify for exemption as a labor organization
under Section 501(c)(5). See Rev. Rul. 78-288, 1978-2 C.B. 179.
B.4. Organizational Control
(1) The fact that a collectively-bargained dispatch hall is under the supervision of a
joint committee composed of an equal number of employer and union
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representatives does not preclude exemption under Section 501(c)(5). See
Rev. Rul. 75-473, 1975-2 C.B. 213.
(2) Persons with no connection with a labor organization should not control the
organization. An organization, controlled by private individuals, that provides
weekly income to its members in the event of a lawful strike by the member’s
labor union in return for an annual payment by the members does not qualify for
exemption as a labor organization under Section 501(c)(5). See Rev. Rul. 76420, 1976-2 C.B. 153.
B.5. Qualifying Activities
(1) A Section 501(c)(5) labor organization must have as its principal purposes the
betterment of conditions of workers, the improvement of their products, and the
development of a higher degree of efficiency in their respective occupations.
See Treas. Reg. 1.501(c)(5)-1.
(2) Traditionally, qualifying activities include the representation of employees, in the
form of a labor union, in such matters as wages, hours of labor, working
conditions and economic benefits, and the general fostering of matters affecting
the working conditions of their members. However, the qualifying activities of a
labor organization can be considerably broader. Consider GCM 37942 (1979)
and GCM 38981 (1983).
(3) If an organization is not providing labor representation, qualification is based on
whether the organization’s activities are appropriate undertakings and whether
the organization is controlled and funded by an exempt labor organization. See
Stichting Pensioenfonds Voor De Gezondheid, Geestelijke En Maatschappelijke
Belangen v. U.S., 950 F.Supp. 373 (D.D.C. 1996), aff’d, 129 F.3d 195 (D.C. Cir.
1997).
(4) Principal activities that qualify a labor organization for exemption under Section
501(c)(5) include the following:
a. Employees’ Association – A city school teachers’ association, formed to
improve its members’ professional abilities and to secure for them better
salaries and working conditions, that sponsors seminars and courses for
its members, participates in teacher conventions, bargains collectively,
and processes grievances, and keeps its members informed of its
activities through regular meetings and a newsletter, may qualify for
exemption as a labor organization. See Rev. Rul. 76-31.1976-1 C.B. 157.
b. Labor Newspaper – A corporation engaged solely in publishing a
newspaper containing only matters concerning union activities is exempt
under Section 501(c)(5). See Rev. Rul. 68-534, 1968-2 C.B. 217.
c. Labor Facility – A corporation operating a “labor temple” containing
offices, meeting and recreation halls, and otherwise “providing a home” for
several labor unions qualifies for exemption under Section 501(c)(5). See
Portland Cooperative Labor Temple Ass’n. v. Commissioner, 39 B.T.A.
450 (1939), acq.1939-1 C.B. 28.
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d. Dispatch Hall – An organization, established pursuant to a collective
bargaining agreement to operate a dispatch hall to allocate work
assignments equitably and efficiently among eligible union members and
provides facilities to investigate and adjudicate grievances, is exempt
under Section 501(c)(5). See Rev. Rul. 75-473, 1975-2 C.B. 213.
e. Litigation Support – An organization, established by Section 501(c)(5)
labor organizations that represent public employees, that files amicus
curiae briefs on behalf of its member organizations or individual
employees, in cases of precedential importance to all public employees,
qualified for exemption under Section 501(c)(5). See Rev. Rul. 74-596,
1974-2 C.B. 167.
f. Payment of Work-Related Legal Defense – The payment by an
organization of law enforcement officers for its members’ legal defense in
actions brought against them in connection with the performance of their
official duties does not adversely affect the exempt status of the
organization. See Rul. 75-288, 1975-2 C.B. 212.
g. Prepaid General Legal Services – An organization that provides duesfinanced prepaid general legal services to members of a local of a taxexempt labor organization may itself be an organization described in
Section 501(c)(5). Consider GCM 38981 (1983).
h. Union and Employer Stewardship Trust – A trust organized pursuant to a
collective bargaining agreement, which hired and compensated a steward
who was under the union’s direct control and who was responsible for
investigating complaints filed by employees, assisting in the settlement of
disputes, and assuring that employers complied with the terms of the
collective bargaining agreement, qualified for exemption under Section
501(c)(5). See Rev. Rul. 77-5, 1977-1 C.B. 146.
i. Apprenticeship and Training Committee – A trust that conducted various
educational courses and programs in various aspects of the trade for local
members, employees, or associates of the industry to ensure that local
standards on the quality of work conformed with national codes for the
industry and also selected apprentices and supervised their training,
qualified for exemption under Section 501(c)(5). The trust also had an
affirmative action plan that was approved by the U.S. Department of
Labor. See Rev. Rul. 78-42, 1978-1 C.B. 158.
j. Strike and Lockout Fund – An organization controlled by a Section
501(c)(5) labor organization that provided financial assistance to members
of the union during strikes and lockouts may be exempt as a labor
organization described in Section 501(c)(5). See Rev. Rul. 67-7, 1967-1
C.B. 137. Compare to Rev. Rul. 76-420, 1976-2 C.B. 153, which held that
an organization controlled by private individuals that provided weekly
income to its members in the event of a lawful strike by the member’s
labor union in return for an annual payment by the member did not qualify
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for exemption as a labor organization under Section 501(c)(5) because it
did not directly support the efforts of any labor organization to (or make its
payments with an objective to) improve employment conditions.
k. Financial Aid and Other Benefit Payments to Members – Labor
organizations are exempt from income tax because, in part, they operate
as mutual benefit organizations, providing benefits to their members or
their members’ families in the event of death, sickness, accident, etc.
Accordingly, payment of such benefits, if made under a plan which has as
its object the betterment of the conditions of the members, does not
preclude exemption for the organization under Section 501(c)(5). See
Rev. Rul. 62-17, 1962-1 C.B. 87.
l. Bid Supplement or Report Programs – Typically, a bid supplement
program is a separate fund established by a labor union which awards
subsidies to contractors who use union labor on a project for the purpose
of making that project more price competitive against non-union labor
costs. The goal of these programs is to increase employment
opportunities for the union members. These funds are typically established
through a collective bargaining agreement and funded by contributions of
union member dues. The funds may also have employer members and
receive funding from the employers. Because the fund is a separate entity
from the labor union, it needs to qualify for exemption on its own merits.
There is no precedential guidance specific to bid supplement programs,
however, since the fund is not providing labor representation, qualification
is based on whether the organization’s activities are appropriate labor
undertakings and whether the organization is controlled and funded by an
exempt labor organization. See the discussion of Stichting Pensioenfonds,
cited above.
B.6. Lobbying
(1) A labor organization can conduct lobbying activities that are germane to its
interests. If lobbying activities are germane to labor interests, an organization
could conduct lobbying activities exclusively. Consider GCM 34233 (1969).
(2) Labor organizations described in Section 501(c)(5) are not subject to the
requirements under Section 6033(e) or the related proxy tax because they are
deemed to be an organization, substantially all the dues of which are not
deductible without regard to Section 162(e). See Rev. Proc. 98-19, 1998-1 C.B.
547.
B.7. Non-Qualifying Activities
(1) Activities which do not qualify a labor organization for exemption under Section
501(c)(5) include the following:
a. Providing Employment to Members Through a Business Activity – An
organization established by a Section 501(c)(5) labor organization that
carries on a business activity to furnish employment to its members does
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not qualify for exemption under Section 501(c)(5). See Rev. Rul. 69-386,
1969-2 C.B. 123.
b. Furnishing Laborers to Individual Employers – A nonprofit organization of
farmers formed to furnish farm laborers for individual farmers does not
qualify for exemption. See Rev. Rul. 72-391, 1972-2 C.B. 249.
c. Collecting Employment Taxes – An organization created by an association
of manufacturers and a labor union to receive employment taxes that the
manufacturers were required to deduct from the pay of their union
employees and remit them to federal and state revenue departments was
not exempt under Section 501(c)(5). See Rev. Rul. 66-354, 1966-2 C.B.
207.
Note: If an organization otherwise qualified for exemption as a Section
501(c)(5) labor organization and conducted a less-than-primary amount of
accounting and tax service, income derived from those accounting and tax
services generally would be subject to tax on unrelated business income.
See Rev. Rul. 62-191, 1962-2 C.B. 146.
d. Maintaining a Savings Plan – A savings plan for union members
established pursuant to a collective bargaining agreement does not qualify
for exemption under Section 501(c)(5). See Rev. Rul. 77-46, 1977-1 C.B.
147. Contrast Rev. Rul. 67-7, 1967-1 C.B. 137, and Rev. Rul. 62-17,
1962-1 C.B. 87.
•
Twenty years after Rev. Rul. 77-46, Treas. Reg. 1.501(c)(5)-1(b)
was changed to provide that if the principal activity of the
organization is to receive, hold, invest, disburse, or otherwise
manage funds associated with savings or investment plans or
programs, including pension or other retirement savings plans or
programs, it does not qualify for Section 501(c)(5) exemption
unless it meets specific exceptions.
•
Treas. Reg. 1.501(c)(5)-1(b) also provides an exception for an
organization which is (1) established and maintained by another
labor organization described in Section 501(c)(5); (2) is not directly
or indirectly established or maintained in whole or in part by one or
more employers, governments or agencies or instrumentalities
thereof or by government-controlled entities; (3) and which is
funded by member dues and has not permitted or accepted
employer contributions after September 2, 1974.
(2) However, a less than primary amount of nonqualifying activity could be
conducted without adversely affecting exemption. Consider GCM 34233 (1969).
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B.8. Political Activities
(1) Political Campaign Intervention – Support for or opposition to a candidate for
public office does not further Section 501(c)(5) labor organization purposes.
Consider GCM 34233 (1969).
a. Section 527(f) imposes a tax on the direct political expenditures of
organizations exempt from tax under Section 501(a) including labor
organizations described in Section 501(c)(5).
b. A separate segregated fund maintained by an exempt labor organization
to conduct its political activities is treated as a separate organization
subject to Section 527.
c. Labor organizations described in Section 501(c)(5) are not subject to the
requirements under Section 6033(e) or the related proxy tax because they
are deemed to be an organization substantially all the dues of which are
not deductible without regard to Section 162(e). See Rev. Proc. 98-19,
1998-1 C.B. 547.
B.9. Inurement
(1) Treas. Reg. 1.501(c)(5)-1(a)(1) prohibits the inurement of earnings to the
benefit of any member of a Section 501(c)(5) organization. Because of differing
legislative histories, inurement differs between labor organizations and
agricultural organizations. Consider GCM 38743 (1981).
(2) A labor organization described in Section 501(c)(5) can pay death, sick,
accident and similar benefits to its members because a review of the subject,
including the legislative history of the provisions exempting labor organizations
from income taxation, indicates that labor organizations were exempted for the
very reason they operated, in part, as mutual benefit organizations providing
death, sick, accident, and similar benefits to their members. See Rev. Rul. 6217, 1962-1 C.B. 87.
B.10. Other Possible Subsection Classifications
(1) Because of the rather broad language of some of the paragraphs under Section
501(c), there are situations where a certain amount of overlap occurs, thus
creating a question whether an organization should be classified under Section
501(c)(5) or under some other paragraph. When considering whether the
activities of an organization qualify it for exemption as a labor organization
described under Section 501(c)(5) rather than another Section 501(c)
organization, consider how the amount of the activity affects qualification or
whether the organization is controlled and funded by labor. The following
information illustrates these considerations.
(2) Section 501(c)(5) v. Section 501(c)(3) – Certain activities may either further
Section 501(c)(5) or Section 501(c)(3) purposes, such as training industry
employees. For the organization to qualify for Section 501(c)(3) exemption, it
would need to exclusively further 501(c)(3) purposes. See Rev. Rul. 67-72,
13
1967-1 C.B. 125, Rev. Rul. 72-101, 1972-1 C.B. 144, and Rev. Rul. 77-272,
1977-2 C.B. 191. For Section 501(c)(5) exemption as a labor organization, the
activities primarily need to further Section 501(c)(5) labor purposes. See Rev.
Rul. 59-6, 1959-1 C.B. 121, and Rev. Rul. 77-5, 1977-1 C.B. 146.
(3) Section 501(c)(5) v. Section 501(c)(6) – A corporation whose membership is
made up of individuals, partnerships, firms, and corporations engaged in a
particular industry was organized for the purpose, among others, of assisting in
the making of trade agreements respecting employment of labor by its
members generally; conducting collective bargaining with employees and labor
groups for its members; promoting settlement of labor disputes and preventing
strikes and lockouts. Its activities consist solely of negotiation of collective
bargaining contracts, interpretation of such contracts, and adjustment of labor
disputes. Such organization qualifies for exemption as a business league. See
Rev. Rul. 65-164, 1965-1 C.B. 238. See also these Section 501(c)(6) favorable
rulings: Rev. Rul. 70-31, 1970-1 C.B. 130, and Rev. Rul. 82-138, 1982-2 C.B.
106, in which the members are labor unions and business leagues. Contrast
with these Section 501(c)(5) favorable rulings: Rev. Rul. 59-6, 1959-1 C.B. 121,
and Rev. Rul. 75-473, 1975-2 C.B. 213, in which employees or labor unions
were among the members and for which the activities primarily promoted labor.
(4) Section 501(c)(5) v. Section 501(c)(9)
a. The payment of death, sick, accident and similar benefits to its individual
members by a labor organization, if made under a plan which has as its
object the betterment of the conditions of the members of the organization,
does not preclude exemption under Section 501(c)(5). See Rev. Rul. 6217, 1962-1 C.B. 87.
Note: A Section 501(c)(5) labor organization may provide many of the
benefits that a Section 501(c)(9) Voluntary Employees Benefit Association
(VEBA) may provide. Consider GCM 38981 (1983). See Treas. Reg.
1.501(c)(9)-3(e) for examples of VEBA benefits.
b. An organization that provides dues-financed prepaid legal services to
members of a local chapter of a tax-exempt labor organization is itself an
organization described in Section 501(c)(5). The activities of labor
organizations have traditionally been broader than those of employees’
voluntary beneficiary associations, and an excluded benefit for Section
501(c)(9) is not automatically excluded under Section 501(c)(5). Consider
GCM 38981 (1983).
B.11. Unrelated Business Income (UBI)
(1) Section 511 imposes a tax on the unrelated business taxable income (UBTI), as
computed under Section 512, of organizations otherwise exempt from tax under
Section 501(c)(5).
(2) For example, providing an accounting and tax service is a business of a kind
regularly carried on for profit. The performance of such services is not
14
substantially related to the purposes of 501(c)(5) labor organizations. Income
derived from those accounting and tax services would be subject to tax on UBI.
See Rev. Rul. 62-191, 1962-2 C.B. 146.
(3) Dues payments from associate members are treated as UBI except when the
principal purpose of the associate member category furthers the exempt
purposes of the organization. See Rev. Proc. 97-12, 1997-1 C.B. 631.
C. Agricultural and Horticultural Organizations
(1) Agricultural or horticultural organizations are associations of persons who have
combined to promote the interests of persons engaged in the art or science of
cultivating land, harvesting crops or aquatic resources, or raising livestock. See
Section 501(g).
C.1. Scope of the Term Agricultural
(1) The definition of agricultural for purposes of Section 501(c)(5) is set forth in
Section 501(g), which provides the term ‘agricultural’ includes the art or science
of cultivating land, harvesting crops or aquatic resources, or raising livestock. It
was added to the Code as part of the Tax Reform Act of 1976, P.L. 94-455,
enacted on October 4, 1976. This definition expands upon the definition of
agriculture used by the Service prior to 1976, expressed in Rev. Rul. 75-287,
1975-2 C.B. 211 and Senate Report 94-938(I), 419-20.
(2) Prior to Section 501(g), farm-raised fish was included as agricultural. See Rev.
Rul. 74-488, 1974-2 C.B. 166. Rev. Rul. 75-287 did not treat organizations
devoted to improving fishing or related occupations such as taking lobster or
shrimp as agricultural organizations. In contrast, the Senate Report
accompanying the public law that added Section 501(g) to the Code states:
“There seems to be no valid reason for differentiating under Section 501(c)(5)
between occupations devoted to producing foodstuffs from the earth and
occupations devoted to producing foodstuffs from water. Id. In describing the
definition of “agricultural” provided in Section 501(g), the Senate Report further
states, “The term ‘harvesting aquatic resources’ includes fishing and related
pursuits (such as the taking of lobsters and shrimp). Both fresh water and
saltwater occupations are to qualify as ‘agricultural’ under the new definition. In
addition, the cultivation of underwater vegetation, such as edible sea plants,
qualifies as agricultural in nature, as does the cultivation or growth of any edible
organism. Also, the operation of ‘fish farms’ is to be considered agriculture
under the new definition. However, aquatic resources are only to include animal
or vegetable life, not mineral resources.”
(3) Livestock includes fur-bearing animals raised in captivity for their pelts, as well
as domestic farm animals such as sheep, cattle, hogs, etc. It does not include
dogs that are not used as farm animals. See Rev. Rul. 73-520, 1973-2 C.B.
180, and Rev. Rul. 56-245, 1956-1 C.B. 204.
15
C.2. Scope of the Term Horticultural
(1) Unlike agricultural which is defined in Section 501(g), horticultural is not defined
in the Code. The precedential guidance specific to Section 501(c)(5)
horticultural organizations is limited. The Supreme Court of Texas, though
nonprecedential for federal income tax purposes, provides some context of the
meaning of horticulture. It defines horticulture as being encompassed within the
definition of agriculture as a branch concerned with the cultivation of a garden
or orchards, the science or art of growing fruits, vegetables or flowers, or
ornamental plants. See Guerrero v. United States Fidelity and Guaranty Co., 98
S.W. 2d 796, 128 Tex. 407 (1936).
(2) Congress melds the terms agricultural and horticultural with its explanation of
the definition of agricultural, referencing Sections 3121(g) and 6420(c). In the
Senate Report 94-938(I), the terms are combined under the definition of
farming. Agricultural labor per Section 3121(g) includes, in part, all service
performed on a farm in connection with cultivating the soil, or in connection with
raising or harvesting any agricultural or horticultural commodity, including the
raising, shearing, feeding, caring for, training, and management of livestock,
bees, poultry, and fur-bearing animals and wildlife. Farming purposes are
defined in Section 6420(c) with similar language.
(3) Because Congress melds the terms agricultural and horticultural, the term
agricultural used throughout the rest of this document will denote both
agricultural and horticultural organizations for purposes of brevity.
(4) For a ruling on the scope of horticultural, Situation 3 of Rev. Rul. 66-179, 19661 C.B. 139, provides an example. It describes how a horticultural organization
furthered horticultural pursuits and improved the grade of their products by
publishing a monthly trade journal, reporting periodically to its members any
new developments in horticultural products, and encouraging the development
of better horticultural products through a system of awards.
C.3. Principal Purpose
(1) Rev. Rul. 75-287, 1975-2 C.B. 211, establishes that if the activities of an
organization are directed toward the betterment of the conditions of those
engaged in some pursuit outside the scope of the term ‘agricultural,’ it does not
qualify for exemption from federal income tax as an agricultural organization
described under Section 501(c)(5).
(2) In Forest City Livestock and Fair Co. v. Commissioner, B.T.A.M. (P-H) P 32,215
(1932), the United States Board of Tax Appeals revoked the exemption of an
agricultural organization that was organized to hold agricultural fairs, stock
shows, and horse race meets, but had discontinued the holding of agricultural
fairs and stock shows. It reasoned, “It would be a far stretch of the imagination
that would allow [the word ‘agriculture’] to be used as a cloak to give exemption
from taxation to the racing business. The single fact that horse racing tends to
promote the breeding and raising of better racehorses, which are raised on a
16
farm, is not enough. The connection to agriculture should be more immediate
than this.” Compare to California Thoroughbred Breeder’s Ass’n. v. Comm., 57
T.C.M. 962 (1989), which held that the sale of horses through an auction was
substantially related to the taxpayer’s section 501(c)(5) agricultural purpose for
purposes of determining whether the taxpayer owed unrelated business income
tax.
(3) Rev. Rul. 67-252, 1967-2 C.B. 195, describes an organization formed to
promote the sale and use of a processed agricultural product. To this end, it
conducts research in processing and marketing, and conducts advertising
campaigns to encourage consumers to buy and use the product. The
organization’s members are processers, packagers, and distributors of the
processed agricultural product. The ruling finds the organization does not
qualify as a Section 501(c)(5) agricultural organization because the members
are not engaged in agriculture. It notes improvement of the conditions of
persons engaged in agriculture arises only indirectly from the activities of the
organization whose purpose is to improve business conditions among its
members.
C.4. Membership, Services to Members, & Sales Activities
(1) Agricultural organizations, like labor organizations, are membership
organizations.
(2) Those served by the entity must represent a significant portion of the interested
agricultural community. Rev. Rul. 74-118, 1974-1 C.B. 134, illustrates how the
connection to the agricultural community can be demonstrated. The ruling
provides that a nonprofit organization of farmers’ wives formed to enhance and
improve the agricultural way of life in a particular state qualifies for exemption
under Section 501(c)(5). The ruling notes the organization’s members have a
mutual interest in promoting the occupation of their husbands who are engaged
in agriculture. Primarily providing services simply to relieve the individual
member of work that the member would have to perform otherwise does not
qualify for Section 501(c)(5) exemption. See Section II C.7 Non-Qualifying
Activities, below, for more information.
(3) If individual member benefits are incidental to the objective of bettering
agriculture as a whole, the organization may qualify for Section 501(c)(5)
exemption.
a. Soil Testing – An organization established by a separate organization of
farm bureaus to test soil for members and nonmembers of the farm
bureau and educate the community in soil treatment qualified for
exemption as a Section 501(c)(5) agricultural organization. See Rev. Rul.
54-282, 1954-1 C.B. 126.
b. Program Collection of Data – A nonprofit organization of dairy farmers,
participating in a dairy program sponsored by the U.S. Dept. of
Agriculture, that derives its income from testing fees and membership
17
assessments and that weighs and tests milk of members’ cows and
makes statistical information based on the tests available to members,
nonmembers, and governmental agencies for use in improving milk
production is exempt as an agricultural organization. See Rev. Rul. 74518, 1974-2 C.B. 166. Compare with Rev. Rul. 70-372, 1970-2 C.B. 118,
which states that the processing of milk production and test records for
individual farmers does not of itself better the conditions of those engaged
in agricultural pursuits and does not qualify for exemption under Section
501(c)(5).
c. Pest Control – A local association of farmers, formed to promote more
effective agricultural pest control that employs pest management scouts
who periodically inspect members’ fields, identify and count agricultural
pests, and compile data on agricultural pest infestation qualifies for
exemption. See Rev. Rul. 81-59, 1981-1 C.B. 334.
(4) Sales activities can provide a unique direct benefit to members. Where the
principal purpose of the organization is to act as a sales agent for its members,
an organization will not qualify as a Section 501(c)(5) organization. On the other
hand, where the organization limits its activities to negotiating a price that is
satisfactory to its members, exemption under Section 501(c)(5) is available.
a. Price Negotiations – An organization of growers and producers of a
particular agricultural commodity formed principally to negotiate with
processors for the price to be paid to members for their crops and not act
as a sales agent for its members was held exempt under Section
501(c)(5). See Rev. Rul. 76-399.
(5) If the services to members are not the organization’s primary activity, the
organization may still qualify for exemption as an agricultural organization
described in Section 501(c)(5). Income from the service activity is subject to a
tax on unrelated business taxable income imposed by Section 511.
a. The sale of cattle by a Section 501(c)(5) agricultural organization for its
members on a commission basis as one of its lesser activities is an
unrelated trade or business under Section 513. See Rev. Rul. 69-51,
1969-1 C.B. 159. Contrast Rev. Rul. 66-105 in which the sales activity
constituted the principal activity, and therefore the organization did not
qualify for exemption under Section 501(c)(5).
C.5. Qualifying Activities
(1) In addition to qualifying activities mentioned above, some other qualifying
activities for agricultural and horticultural organizations under Section 501(c)(5)
include:
a. Farm Bureaus – A farm bureau organized to advance and improve
agriculture on a county-wide basis qualified for exemption as a Section
501(c)(5) agricultural organization. See Rev. Rul. 57-466, 1957-2 C.B.
311.
18
Note: If a farm bureau provides services to an insurance company it
partially owns, those services give rise to unrelated business income
because that income is not substantially related to the accomplishment of
the organization’s tax-exempt purposes. See Texas Farm Bureau v.
United States, 53 F.3d 120 (5th Cir. Tex.1995). See also Rev. Rul. 60228, 1960-1 C.B. 200.
b. Exhibitions and Fairs – An organization formed and operated to conduct
exhibitions of livestock and other farm products can qualify under Section
501(c)(5). See Rev. Rul. 67-216, 1967-2 C.B. 180.
c. Breeders Associations – An association organized to guard the purity of
the breed of Welsh ponies, to promote interest therein, and to establish,
maintain, and publish authoritative records, registers, and transfers of
ownership of that breed qualified for exemption as a Section 501(c)(5)
agricultural organization. See Rev. Rul. 55-230, 1955-1 C.B. 71.
d. Rodeos – An organization formed for the purpose of supporting and
maintaining rodeos in a center near ranch and farm activity was a taxexempt Section 501(c)(5) agricultural organization. See Campbell v. Big
Spring Cowboy Reunion, A Corp., 210 F.2d 143 (5th Cir. 1954).
C.6. Lobbying
(1) An agricultural organization can conduct activities influencing legislation, or
lobbying activities, that are germane to its interests. If the lobbying activities are
germane to agricultural interests, an organization could conduct lobbying
activities exclusively. Consider GCM 34233 (1969).
(2) Expenditures for lobbying made by Section 501(c)(5) agricultural and
horticultural organizations may be subject to the requirements of Section
6033(e). Section 6033(e) imposes a notice requirement and proxy tax on the
lobbying expenditures of certain agricultural and horticultural organizations. See
Rev. Proc. 98-19, 1998-1 C.B. 547.
C.7. Non-Qualifying Activities
(1) An organization primarily providing services simply to relieve an individual
member of work that the member would have to perform otherwise does not
qualify for Section 501(c)(5) exemption.
a. Member Collection of Data – A nonprofit organization of agricultural
producers formed to process individual farmers’ milk production and test
records for use in improving milk production does not qualify for
exemption. See Rev. Rul. 70-372, 1970-2 C.B. 118, clarified and
distinguished by Rev. Rul. 74-518, 1974-2 C.B. 166.
b. Providing Laborers – A nonprofit organization of farmers formed to furnish
farm laborers for individual farmers does not qualify for exemption. See
Rev. Rul. 72- 391, 1972-2 C.B. 249.
19
c. Management, Grazing, and Sale of Cattle – A nonprofit organization
formed to manage, graze, and sell its members’ cattle is providing a direct
business. See Rev. Rul. 74-195, 1974-1 C.B. 135.
d. Livestock Facility – A nonprofit organization that owns and operates a
livestock facility and leases it to local members of a nonexempt national
association of farmers for use in implementing the association’s collective
bargaining program with processors does not qualify for exemption as an
agricultural organization. See Rev. Rul. 77-153, 1977-1 C.B. 147.
C.8. Political Activities
(1) Political Campaign Invention – Support for or opposition to a candidate for
public office does not further Section 501(c)(5) agricultural organization
purposes because a candidate for public office has interests broader than those
germane just to agricultural interests. Consider GCM 34233 (1969).
a. Section 527(f) imposes a tax on the direct political expenditures of
organizations exempt from tax under Section 501(a) including agricultural
organizations described in Section 501(c)(5).
b. A separate segregated fund maintained by an exempt agricultural
organization to conduct its political activities is treated as a separate
organization subject to Section 527.
c. Political expenditures made by Section 501(c)(5) agricultural organizations
may be subject to the requirements of Section 6033(e). See Rev. Proc.
98-19, 1998-1 C.B. 547.
(2) However, a less than primary amount of nonqualifying activity could be
conducted without adversely affecting exemption. Consider GCM 34233 (1969).
C.9. Inurement
(1) Treas. Reg. 1.501(c)(5)-1(a)(1) prohibits the inurement of earnings to the
benefit of any member of a Section 501(c)(5) organization. Because of differing
legislative histories, inurement differs between labor organizations and
agricultural organizations. Consider GCM 38743 (1981).
(2) Labor organizations were exempted, in part, as mutual benefit organizations,
and therefore, can provide death, sick, accident, and similar benefits to their
members. See Rev. Rul. 62-17, 1962-1 C.B. 87. On the other hand, the exempt
purposes of a Section 501(c)(5) agricultural organization are to better the
conditions of those engaged in agricultural pursuits generally rather than to
specifically benefit the individual members. There is no indication agricultural
organizations were exempted on the grounds that they operate, in part, as
mutual benefit organizations for their members.
(3) Therefore, as explained in GCM 38743, the holding of Rev. Rul. 67-251, 1967-2
C.B. 196, that the provision of welfare aid and financial assistance to the
members of a Section 501(c)(6) organization constitutes proscribed inurement,
20
applies to Section 501(c)(5) agricultural organizations but does not apply to
Section 501(c)(5) labor organizations.
(4) The refund of excess dues to members of an exempt agricultural organization in
the same proportion as the dues are paid does not constitute inurement under
Section 501(c)(5). See Rev. Rul. 81-60, 1981-1 C.B. 335.
C.10. Other Possible Subsection Classifications
(1) Because of the rather broad language of some of the paragraphs under Section
501(c), there are situations where a certain amount of overlap occurs, thus
creating a question whether an organization should be classified under Section
501(c)(5) as an agricultural organization or under some other paragraph. The
following information illustrates these considerations.
(2) Section 501(c)(5) v. Section 501(c)(3)
a. Because the activities of agricultural organizations usually have a certain
amount of educational value, there are logical reasons to seek exemption
under Section 501(c)(3). However, to obtain tax exemption under Section
501(c)(3), the organization will have to satisfy the requirements of the
organizational and operational tests. See Treas. Reg. 1.501(c)(3)-1(a)(1).
b. If an organization is organized and operated exclusively for Section
501(c)(3) purposes, it will qualify for exemption under Section 501(c)(3)
even if the organization’s activities result in the improvement of
agriculture. For example, an organization organized and operated to
instruct the public on agricultural matters by conducting annual public fairs
and exhibitions of livestock, poultry, and farm products was held exempt
as an educational organization under Section 501(c)(3). Amusement
features presented to increase attendance do not necessarily preclude
Section 501(c)(3) exemption. See Rev. Rul. 67-216, 1967-2 C.B. 180.
(3) Section 501(c)(5) v. Section 501(c)(3) v. Section 501(c)(4) v. Section 501(c)(7)
a. Depending upon how it is organized and operated, a “garden club” may
qualify for exemption under Sections 501(c)(3), (4), (5), or (7). A nonprofit
corporation will qualify for exemption under Section 501(c)(5) where its
members are individuals and firms engaged in the business of horticulture
who intend, through the operation of the club, to better the conditions of
persons engaged in horticulture and to improve the grade of their
products. The garden club may seek to accomplish these purposes by
publishing a monthly trade journal, reporting periodically to its members
any new developments in horticultural products, and encouraging the
development of better horticultural products through a system of awards.
See Rev. Rul. 66-179, 1966-1 C.B. 139.
(4) Section 501(c)(5) v. Section 501(c)(6)
a. Section 501(c)(6) provides exemption for, among others, nonprofit
business leagues. Many associations that are to some degree related to
21
agriculture may be more properly classified as business leagues. The
decisive factor is whether the organization’s purpose is to promote the
common business interests and better the conditions of persons directly
engaged in agricultural pursuits or to promote the common business
interest of some other business groups closely related to agriculture such
as suppliers of goods or services to the agricultural community or packers
or processors of raw agricultural commodities. See Rev. Rul. 67-252,
1967-2 C.B. 1954.
b. An organization of fur ranchers was formed to encourage better and more
economical methods of raising fur-bearing animals, provide for an orderly
system for marketing the pelts of animals raised by its members, and
create a public demand for their products. It carried out its purposes by
furnishing its members educational material on the breeding and raising of
fur-bearing animals and the marketing of pelts, procuring agreements from
auction companies to market the products of its members, and conducting
advertising to encourage the use of fur products. This organization was
held to be principally occupied with improving the conditions and products
of persons engaged in agriculture, and therefore, was exempt under
Section 501(c)(5). See Rev. Rul. 56-245, 1956-1 C.B. 204.
c. In contrast, Rev. Rul. 55-715 discusses an organization incorporated for
the purpose of regulating the sale at auction of a specified agricultural
commodity in a certain area in order to protect the interests of producers,
warehousemen and purchasers. To evenly distribute sales among all
warehousemen where auctions are held, regulations have been adopted
limiting the quantity of products sold and arranging schedules of dates,
hours, and location of auctions. High standards of the market are
maintained by the supervisor, resulting in benefits to the buyers as well as
the growers. The organization was held to qualify for tax-exemption under
Section 501(c)(6) as a board of trade. See Rev. Rul. 55-715, 1955-2 C.B.
263.
C.11. Unrelated Business Income (UBI)
(1) As mentioned above, Section 511 imposes a tax on the UBI, as computed
under Section 512, of organizations otherwise exempt from tax under Section
501(c)(5).
(2) For example, an exempt agricultural organization is subject to tax on the UBI
resulting from services rendered to certain insurance companies and from the
performance of property management services. See Rev. Rul. 60-228, 1960- 1
C.B. 200.
(3) For Section 501(c)(5) organizations, UBI does not include an agricultural and
educational fair or exposition activities, or qualified convention and trade show
activities which stimulates interest in, and demand for, the products or services
of a particular industry or segment of such industry or which educates persons
22
in attendance regarding new developments or products and services related to
the exempt activities of the organization. See Section 513(d).
(4) Dues payments from associate members are treated as UBI except when the
associate member category furthers the principal exempt purpose of the
organization. Rev. Proc. 97-12, 1997-1 C.B. 631.
a. UBI will not apply to annual dues payments to agricultural organizations
described in Section 501(c)(5) if annual dues payments from members do
not exceed a certain cost-of-living adjustment amount. See Section
512(d).
b. As of 2018, that cost-of-living amount is $165. Rev. Proc. 2018-18, 201810 I.R.B.392, Section 3.29.
(5) If the activity generating UBI is the principal activity, the organization will not
qualify for exemption. As discussed above, compare Rev. Rul. 66-105, 1966-1
C.B. 145, to Rev. Rul. 69-51, 1969-1 C.B. 159.
III. Other Considerations
A. Section 527 Related Organizations
(1) Section 527(f) imposes a tax on the direct political expenditures of
organizations exempt from tax under Section 501(a) including labor
organizations under Section 501(c)(5).
(2) A Section 501(c)(5) organization’s separate segregated fund maintained to
conduct its political activities is treated as a separate organization subject to
Section 527. See Section 527(f)(3).
(3) For additional information, see Section IV.B.4 and VI.A below.
IV. Application for Recognition of Exemption and Return
Requirements
A.
Application Requirements
(1) The Code and Regulations do not specifically state that labor or agricultural
organizations have a time limit for filing an application for exemption.
Historically, as long as the organization has an organizing document indicating
it is formed under Section 501(c)(5) and its activities are consistent with Section
501(c)(5), it is considered exempt under Section 501(c)(5).
(2) Organizations may choose to seek a determination letter recognizing exemption
under Section 501(c)(5) but are not required to do so except in certain cases
(see, for example, Section 6033(j)(2) regarding failures to file annual
information returns or annual electronic notifications required under Section
23
6033(a) or (i)). See Revenue Procedure 2023-5 (updated annually), Section
6.07(1).
(3) A completed application is one that:
a. is signed by an authorized individual under penalties of perjury,
b. includes the organization’s correct EIN,
c. includes a statement of receipts and expenditures and a balance sheet,
d. includes a detailed narrative statement of proposed activities, and a
narrative description of anticipated receipts and contemplated
expenditures, and
e. includes a copy of the organizing or enabling document.
See Revenue Procedure 2023-5 (updated annually), Section 6.06.
A.1. Form 1024
(1) An organization seeking a determination letter from the Service recognizing
exemption under Section 501(c)(5) must submit a completed Form 1024,
Application for Recognition of Exemption Under Section 501(a), along with
additional information. See Revenue Procedure 2023-5 (updated annually),
Section 4.02(3) and Section 5.02.
(2) As of January 3, 2022, the IRS requires that Form 1024 be submitted
electronically online.
A.2. User Fee
(1) Section 7528 directs the Secretary of the Treasury or delegate (Secretary) to
establish a program requiring the payment of user fees for requests to the
Service for determination letters and similar requests. See Rev. Proc. 2024-5,
2024-1 I.R.B. 262 (updated annually), Section 4.07 and Section 14.01.
(2) As of January 3, 2022, the user fee must be paid electronically when the
organization’s Form 1024 is filed (also electronically). See Revenue Procedure
2023-5 (updated annually), Section 6.04 and Appendix A
A.3. Organizational Documents
(1) Section 501(c)(5) organizations do not have required language for the
organizational document. Generally, it should have the name, address, and
purposes of the organization. The documents should show that they have been
filed or adopted.
(2) An unincorporated association includes a copy of the organizing or enabling
document that is signed by a principal officer or two members, or is
accompanied by a written declaration signed by an authorized individual
certifying that the document is a complete and accurate copy of the original or
otherwise meets the requirements of a “conformed copy” as outlined in Rev.
24
Proc. 68-14, 1968-1 C.B. 768. See Revenue Procedure 2023-5, Section
6.06(1).
(3) A corporation includes a copy of the articles of incorporation with evidence that
it was filed with, and approved by, an appropriate state official (e.g., stamped
“Filed” and dated by the Secretary of State); alternatively, a copy of the articles
of incorporation may be submitted if accompanied by a written declaration
signed by an authorized individual that the copy is a complete and accurate
copy of the original copy that was filed with and approved by the state. If a copy
is submitted, the written declaration must include the date the articles were filed
with the state. See Revenue Procedure 2023-5, Section 6.06(1).
(4) The organization has adopted bylaws or similar governing rules and includes a
current copy; the bylaws need not be signed if submitted as an attachment to
the application for recognition of exemption; otherwise, the bylaws must be
verified as current by an authorized individual. See Revenue Procedure 2023-5
(updated annually), Sections 4.04 and 6.06(1).
(5) A labor organization formed under a collective bargaining agreement should
also provide a copy of the most recently adopted collective bargaining
document. See Rev Proc 2023-5 (updated annually) Section 5.02(2).
A.4. Effective Date of Exemption
(1) In general – A determination letter recognizing exemption of an organization
described in Section 501(c)(5) is effective as of the date of formation of an
organization if (1) its purposes and activities prior to the date of the
determination letter have been consistent with the requirements for exemption,
and (2) it has filed an application for recognition of exemption within 27 months
from the end of the month in which it was organized. See Revenue Procedure
2023-5 (updated annually), Section 6.08(1).
(2) When an application is not submitted within 27 months of formation – An
organization that otherwise meets the requirements for tax-exempt status and
the issuance of a determination letter but does not meet the requirements for
recognition from date of formation will be recognized from the postmark date of
its application or the submission date of its Form 1023, Application for
Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue
Code; Form 1023-EZ, Streamlined Application for Recognition of Exemption
Under Section 501(c)(3) of the Internal Revenue Code; Form 1024, Application
for Recognition of Exemption Under Section 501(a); or Form 1024-A,
Application for Recognition of Exemption under Section 501(c)(4) of Section
501(a) of the lnternal Revenue Code, as applicable. See Revenue Procedure
2023-5 (updated annually), Section 6.08(2).
A.5. Denials of Exemption
(1) Denials may be appealed – Organizations described in Section 501(c)(5) may
institute a declaratory judgment proceeding in court in response to a denial
under the rules of Section 7428. See Rev. Proc. 2024-5, 2024-1 I.R.B. 262
25
(updated annually), Section 9, generally; Publication 892, How to Appeal an
IRS Determination on Tax-Exempt Status.
B.
Return Requirements
B.1.
Annual Information Return
(1) In general, most exempt organizations are required to file annual returns.
Section 501(c)(5) organizations with gross receipts over $50,000 annually are
required to file either Form 990, Return of Organization Exempt From Income
Tax, or 990-EZ, Short Form Return of Organization Exempt From Income Tax.
If gross receipts are $50,000 or less annually, they are eligible to complete the
Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not
Required to File Form 990 or Form 990EZ, instead.
(2) Effective for tax years beginning after July 1, 2019, the Taxpayer First Act, Pub.
L. No. 116-25 Section 2301, requires that the annual Form 990 returns are to
be filed electronically, unless covered by one of the exceptions. Form 990-EZ
filers are required to file electronically for tax years ending July 31, 2021, and
later.
(3) The Form 990-N, created following passage of the Pension and Protection Act
of 2006, must be submitted electronically.
(4) Required returns that are not filed or are filed late could result in assessment of
penalties and interest.
(5) In addition, if required returns are not filed for three consecutive years, the
organization automatically loses its tax-exempt status through auto-revocation.
See Section 6033(j)(1)(B).
B.2.
Unrelated Business Income (UBI)
(1) As mentioned above, Section 501(c)(5) organizations are subject to unrelated
business income tax. An exempt organization that has $1,000 or more of gross
income from an unrelated business must file Form 990-T, Exempt Organization
Business Income Tax Return.
(2) The obligation to file Form 990-T, is in addition to the obligation to file the
annual information return, Form 990, 990-EZ or 990-N.
(3) An organization must pay estimated tax if it expects its tax for the year to be
$500 or more.
B.3. Employment Taxes
(1) If a Section 501(c)(5) organization has employees, it is responsible for federal
income tax withholding and Social Security and Medicare taxes. In addition, it is
also responsible for Federal Unemployment Tax.
26
(2) For Section 501(c)(5) organizations, services could be rendered by:
a. An independent contractor,
b. A common-law employee (employee),
c. A statutory employee, or
d. A statutory non-employee.
(3) Generally, the Section 501(c)(5) organization has the right to control or direct
only the result of the work done by an independent contractor, and not the
means and methods of accomplishing the result.
(4) Under common law rules, a worker who performs services for a tax-exempt
organization is the organization’s employee if the organization can control what
will be done and how it will be done. Even if the organization gives the worker
wide latitude in how the work is accomplished, they may still be a common law
employee. What matters is that the organization has the right to control the
details of how the services are performed.
(5) Some workers are deemed to be employees by statute. For Section 501(c)(5)
organizations, the most common statutory employees are its officers. Generally,
officers are employees if they perform more than minor services to the
organization and receive or are entitled to receive some type of remuneration
either directly or indirectly.
(6) Directors of a corporation – Members of the governing board are defined by
statute as non-employees. If an exempt organization pays its board members to
attend board meetings or otherwise compensates them for performing their
duties as directors, the organization should treat them as independent
contractors. This is the most common type of statutory non-employee that may
be involved in an exempt organization. Organizations will be required to file
Form 1099-NEC, Nonemployee Compensation, for any director that is paid over
$600 in any given tax year.
(7) When a Section 501(c)(5) organization has common law and/or statutory
employees, the organization will need to withhold income tax, Social Security
and Medicare taxes as applicable and report those taxes on either the quarterly
Form 941, Employer’s Quarterly Federal Tax Return, or annual Form 944,
Employer’s ANNUAL Federal Tax Return.
(8) The organization will also be required to pay federal unemployment tax and file
the annual Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax
Return.
(9) For independent contractors and statutory non-employees, the organization is
required to file the Form 1099-NEC for any person or company that they paid
over $600 total in a year.
27
B.4.
Political Activities
(1) As indicated in Section III, Section 501(c)(5) organizations can set up separate
organizations to handle their political activities. These organizations are
Section 527 organizations. Section 527 organizations are generally required to
file one or more of the following:
a. An initial notice, Form 8871, Political Organization Notice of Section 527
Status
b. Periodic reports on contributions and expenditures, Form 8872, Political
Organization Report of Contributions and Expenditures
c. Annual income tax returns, Form 1120-POL, U.S. Income Tax Return for
Certain Political Organizations, and/or
d. Annual information returns, Form 990-series
(2) Form 1120-POL is due on the 15th day of the 4th month following the end of the
political organization’s taxable year. For organizations on a calendar year, Form
1120-POL is due on April 15th of the following year.
(3) Form 1120-POL is an annual income tax return that must be filed by
organizations with political organization taxable income exceeding $100 for the
taxable year. Only taxable income (generally, the organization’s investment
income) is reported on Form 1120-POL.
(4) Tax-exempt political organizations with gross receipts of $25,000 or more for
taxable years beginning after June 30, 2000, are required to file Form 990.
Certain small political organizations may file Form 990-EZ instead.
(5) A tax-exempt political organization is not required to file Form 990 if it is: (1) not
required to file Form 8871, (including an organization required to file as a
political committee with the Federal Election Committee (FEC)) or (2) a caucus
or association of state or local officials.
V. Examination Techniques
A.
Labor Organizations
(1) A labor organization is an association of workers who have combined to protect
or promote the interest of all members by bargaining collectively with their
employers to secure better working conditions, wages, and similar benefits. The
term includes labor unions, councils, and committees. See Portland Cooperative Labor Temple Association v. Commissioner, 39 B.T.A. 450 (1939),
acq. 1939-1 C.B. 28.
A.1. Membership
(1) A labor organization is a membership organization primarily made up of
employees or representatives of employees.
28
(2) If most of the members are entrepreneurs or independent contractors, the
organization doesn’t qualify for exemption. See Rev. Rul. 78-288, 1978-2 C.B.
179.
(3) Ask the following questions and any follow-up questions during the initial
contact or initial interview:
a. What are the membership requirements?
b. Does the organization have different classes of memberships?
c. If so, what are the membership requirements for each class of members?
d. Are the business owners allowed to be members of or receive benefits
from the organization?
e. Does the employer (or do the employers) withhold and pay member dues
from members’ salaries to the labor organization?
(4) Review the articles of organization to determine the written membership
requirements.
(5) Review materials that solicit members to determine requirements, benefits, and
different classes of memberships.
(6) Review the dues accounts in the cash receipts journal and supporting
documents.
(7) If the employer withholds and pays dues to the labor organization from
member’s salaries, check any separate payments to detect payments from
entrepreneurs or independent contractors.
(8) Check dues solicitations that the labor organization issues. Verify they contain a
statement of non-deductibility of contributions required by Section 6113 that
certain non-Section 501(c)(3) organizations must disclose in fund-raising
solicitations.
A.2. Inurement
(1) The net earnings of a Section 501(c)(5) organization may not inure to the
benefit of any member.
(2) The concept of inurement under Section 501(c)(5) differs somewhat from that
applied under Section 501(c)(3) and Section 501(c)(4).
(3) Benefits provided to the members of a labor organization to improve their
working conditions are permitted. See Treas. Reg. 1.501(c)(5)-1(a).
(4) Examples of permitted benefits:
a. death, sick, accident and similar benefits
b. payment of legal expenses (if the action is related to the member’s
employment)
c. financial assistance to members during strikes and lockouts
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(5) Examples of benefits that may result in inurement:
a. payment of a member’s or employee’s personal expenses
b. loans to members or employees
c. personal use of the organization’s property
(6) Ask about member and employee benefits during the initial interview.
(7) During the tour of the organization’s facilities, identify who uses the facilities to
determine whether employers, related entities, members, or other persons are
using the facilities for nonexempt purposes. For example, if the organization
has five employees and there are eight private offices, determine who uses the
offices and the purpose of the use.
(8) Review the organizational documents, membership solicitation materials,
minutes, and contracts with employers, to identify the types of benefits provided
to officers and members.
(9) Review the organization’s employment contracts, Forms W-2, Wage and Tax
Statement, and other employment records to determine the number and duties
of the organization’s employees and the reasonableness of salaries and
benefits.
(10)Review the cash receipts record for payments from individuals that may be
repayment of loans.
(11)Review the cash disbursement records and supporting documents for
unexplained payments to individuals, unusual purchases of supplies, materials
or assets or unusual payments for services. For example, purchases from a
clothing store recorded as other expenses may indicate the organization pays
personal expenses.
(12)Compare assets on the organization’s books to assets noted in your tour of the
organization’s facilities. Discrepancies could indicate the use of assets for
personal purposes.
(13)Analyze changes in assets. Disposition of assets to officials or members for
less than fair market value could indicate inurement.
(14)Review Form LM-2 or LM-3, Labor Organization Annual Report, and compare
the information with the information on Form 990 for unexplained discrepancies.
A.3. Unrelated Business Income
(1) Labor organizations often have UBI from the following sources:
a. Rental of debt financed property
b. Commercial advertising in the organization’s publications
c. Associate/Limited member dues
d. Provision of goods and services to others
30
(2) Section 501(c)(5) organizations are subject to UBIT. An exempt organization
that has $1,000 or more of gross income from an unrelated business must file
Form 990-T.
(3) During the Interview, discuss all the organization’s activities and how they are
related to the exempt purpose.
(4) Tour facilities to identify offices or areas rented to other entities.
(5) Read newsletters and other publications to check for taxable advertising.
(6) Check revenues from sales to determine whether the organization is conducting
a business operation, for example, a labor temple with a bar or catering facility.
(7) Review the dues account in the cash receipts journal for associate member
dues. See National Association of Postal Supervisors v. United States, 944 F.
2d 859 (Fed. Cir. 1991), and American Postal Workers Union, AFL-CIO v.
United States, 925 F. 2d 480 (D.C. Cir. 1991).
A.4. Compensation
(1) Officers and employees of Section 501(c)(5) labor organizations receive various
forms of compensation. Under-reporting compensation is a common problem
with exempt labor organizations.
(2) Under-reporting results from an organization’s failure to properly include the
correct taxable amount of compensation in an employee’s wages.
(3) Likely sources include:
a. Bonuses
b. Expense reimbursements under a nonaccountable plan
c. Employer provided vehicles
d. Taxable fringe benefits
(4) Expenses reimbursed under an accountable plan are excluded from the
employee’s gross income, are not reported as wages or other compensation on
the employee’s Form W-2, and are exempt from the withholding and payment of
employment taxes.
(5) To be excludable from an employee’s gross income and wages under an
accountable plan, an employer’s reimbursement of a work-related expense
must meet three requirements:
a. Business connection: The expense must be paid or incurred by the
employee while performing services as an employee of the organization
and the expense must be an otherwise deductible trade or business
expense. Also, the employer’s payment to the employee must either be
separate from the employee’s wages or be specifically identified.
31
b. Substantiation: The employee must submit documentation to substantiate
the amount of the expense and its business purpose within a reasonable
period.
c. Return of excess: If the employer gives the employee an expense
allowance before the employee incurs the expense, or the employee is
reimbursed an amount that otherwise exceeds the properly substantiated
amount, the employee must return any amount in excess of the
substantiated expense within a reasonable period.
(6) A non-accountable plan is a reimbursement arrangement that doesn’t meet one
or more of the three requirements listed above.
(7) Expenses reimbursed under a non-accountable plan are included in employee
income and wages and subject to withholding and payment of employment
taxes and FUTA tax under Section 3301. See Treas. Reg. 1.62-2(c)(5).
(8) During the initial interview, ask about bonuses, fringe benefits, and expense
reimbursements for employees.
(9) Look for discussions about the payment of bonuses in the minutes. Common
examples include:
a. Holiday bonuses
b. Performance related bonuses
c. Non-cash bonuses
(10)Review the employee handbook for information about the organization’s
expense reimbursement policy. Determine whether the organization maintains
an accountable plan. Pay close attention to expense allowances, expense
accounts, and similar arrangements.
(11)Inspect vouchers and other employee provided documentation. Check the
disbursement journal for payments made to employees in addition to payroll
checks. Look for payments with the following characteristics:
a. The same amount each month
b. Even dollar amounts (for example. $50.00, $120.00, etc.)
(12)Review any restrictions on using employer-provided vehicles for personal
purposes. See Treas. Reg. 1.61-21 for a discussion of the value of the personal
use of an employer-provided vehicle.
(13)Review employment contracts, employee handbooks, etc. for benefits the
organization offers to identify taxable fringe benefits. Section 61 indicates that
fringe benefits are taxable unless specifically excluded. Examples of taxable
fringe benefits include:
a. Club dues
b. Deferred compensation (nonqualified arrangements)
32
c. Group term life insurance in excess of $50,000
d. Employer provided meals and lodging (but see Section 119)
e. Benefit plans (certain employee and employer contributions)
A.5. Payments to Members
(1) Payment of certain benefits by Section 501(c)(5) labor organizations to their
members or their members’ families aren’t considered inurement. These
benefits include:
a. Strike fund benefits and lockout benefits
b. Payment for sick, accident, and death benefits
c. Lost time payments to union officials
A.5.a Strike Fund and Lockout Benefits
(1) Strike fund benefits may be wages subject to Federal Insurance Contribution
Act (FICA), FUTA, and federal income tax withholding if the labor organization
directs the members’ activity. See Rev. Rul. 75-475, 1975-2 C.B. 406.
(2) Strike fund benefits may be compensation to the member, but not subject to
FICA, FUTA, and federal income tax withholding, if the payment is per the
union’s constitution and not remuneration for services an employee performed
for the employer. See Rev. Rul. 68-424, 1968-2 C.B. 419 and Section 3401,
distinguished as in Gregory v. United States, 637 F.Supp. 624 (E.D. N.C 1986).
(3) Strike fund benefits may be excludable from the member’s income as a gift,
based on the circumstances of the payments. Issues such as form and amount
of the payments and whether the payments were based on the member’s needs
are considered. See Rev. Rul. 61-136, 1961-2 C.B. 20, and United States v.
Allen Kaiser. 363 U.S. 299 (1960), 1960-2 C.B. 33.
Note: There are numerous cases where Kaiser was distinguished and strike
benefits were held to be includable as gross income under Section 61. See
Woody v. United States, 368 F.2d 668 (9th Cir.1966); Halsor v. Lethert, 240 F.
Supp. 738 (D.Minn.1965); Godwin v. United States, 65-1U.S.T.C. 65-1 par
9121, 15 A.F.T.R.2d 258 (W.D.Tenn.1964); Placko v. Commissioner, 74 T.C.
452 (1980); Colwell v. Commissioner, 64 T.C. 584 (1975); Brown v.
Commissioner, 47 T.C. 399 (1967); Hagar v. Commissioner, 43 T.C. 468
(1965); Stone v. Commissioner, T.C.M. (P-H) par. 85-544 (1985); Jernigan v.
Commissioner, T.C.M. (P-H) par. 68-268 (1968). All of these cases refer to the
legal standards the Supreme Court set in Duberstein for determining excludable
income as gifts.
(4) Lockout benefits are treated like strike fund benefits. They are generally
included in gross receipts, but may be excludable from the member’s income as
a gift based on the circumstances of the payments. Issues such as form and
amount of the payments and whether the payments were based on the
33
member’s needs are considered. See Rev. Rul. 61-136, 1961-2 C.B. 20, and
United States v. Allen Kaiser. 363 U.S. 299 (1960), 1960-2 C.B. 33(5) Review
the organization’s constitution, articles, bylaws, etc. for the terms and conditions
under which they pay strike fund benefits and lockout benefits.
(5) Check the organization’s minutes for any references indicating the intent of the
payment. Examine the disbursement journals to determine whether the
members received the same amount. Inspect any member provided
documentation.
(6) Review Forms W-2 and 1099 to determine whether payments were reported to
the members.
A.5.b Lost Time Payments
(1) Payments made by a labor organization to its members for lost time from their
regular employment are includable in income and may be subject to FICA,
FUTA, and federal income tax withholding. Payments for lost time are generally
considered wages under Section 811(a) of the Social Security Act and therefore
included in gross income.
(2) Payments for lost time while conducting negotiations for the union are wages
subject to FICA, FUTA, and federal income tax withholding. See Rev. Rul. 68539, 1968-2 C.B. 422.
(3) Payments for lost time while attending the union’s annual convention are
reportable as income by the recipient as lost salary, but aren’t wages subject to
FICA, FUTA, and federal income tax withholding. See Rev. Rul. 80-348, 1980-2
C.B. 31.
Note: Amounts an international labor union pays to reimburse delegates from
local chapters for travel expenses to attend the annual convention are excluded
from gross income, and the employee may not deduct the reimbursed expenses
under Section 162, even though the employee receives it in a later year.
Amounts the delegates receive as reimbursement for lost salary are includible
in gross income but are not “wages” under Sections 3121, 3306, and 3401. See
Rev. Rul. 80-348, 1980-2 C.B. 31.
(4) Read the organization’s constitution or other documents governing payments to
members for lost wages.
(5) Examine the disbursement journals for payments made to members and
determine the reason for them.
(6) Check Forms W-2 and 1099 to determine whether the payments were reported
to the member.
A.6. Legislative Activities
(1) A Section 501(c)(5) labor organization may participate in lobbying activities if
the legislation is relevant to accomplishing the organization’s exempt purpose.
34
(2) Review personal service and employment contracts, minutes, and publications
to determine if the organization engages in lobbying activities.
(3) If the organization engaged in lobbying activities, determine whether the
legislation is related to the organization’s exempt purpose.
A.7. Political Activities
(1) A labor organization which otherwise qualifies for exemption under Section
501(c)(5) isn’t disqualified merely because it engages in some political activity.
(2) Section 527(f) imposes a tax on the direct political expenditures of
organizations exempt from tax under Section 501(a) including labor
organizations in Section 501(c)(5).
(3) Interview the officers to identify possible political activity by the organization or
the existence of a separate segregated political fund.
(4) Review the minutes, newsletters, web sites, and correspondence to identify
possible political activity by the organization or the existence of a separate
segregated political fund.
(5) Analyze the following accounts for possible political expenditures:
a. Legal fees
b. Bonuses
c. Printing
d. Advertising
e. Entertainment
(6) Analyze the disbursement journals, bank statements, canceled checks and
other supporting documents to identify transfers of funds to a separate
segregated political fund.
(7) Determine whether a Section 501(c)(5) labor organization’s political committee
is engaged in political campaign and voter education/registration activities.
Trace funds used for voter education/registration to their ultimate use to verify
they weren’t used for political campaign purposes. If so, this could constitute an
indirect political expenditure.
B.
Agricultural and Horticultural Organizations
(1) Agricultural or horticultural organizations are associations of persons who have
combined to promote the interests of persons engaged in the art or science of
cultivating land, harvesting crops or aquatic resources, or raising livestock. See
Section 501(g).
35
B.1. Membership
(1) Agricultural or horticultural organizations are membership organizations
primarily made up of persons seeking to better the conditions of those engaged
in agricultural or horticultural pursuits.
(2) All of the organization’s members don’t have to be engaged in agricultural or
horticultural pursuits.
(3) Ask the following questions and any follow-up questions during the initial
contact or initial interview:
a. What are the membership requirements?
b. Does the organization have different classes of memberships?
c. If so, what are the membership requirements for each class of members?
d. What benefits are the various classes of members entitled to?
(4) Review the articles of organization to determine the written membership
requirements. Review membership solicitation materials to determine
requirements, benefits, and different classes of memberships.
(5) Check dues solicitations issued by the organization. Verify that fundraising
solicitations state that contributions are nondeductible, as required by Section
6113 for certain non-Section 501(c)(3) organizations.
B.2. Inurement
(1) No part of the net earnings of a Section 501(c)(5) organization may inure to the
benefit of any member. See Treas. Reg. 1.501(c)(5)-1(a)(1).
(2) The refund of excess dues in the same proportion as the dues are paid isn’t
inurement. See Rev. Rul. 81-60, 1981-1 C.B. 335.
(3) Examples of inurement include the provision of welfare, aid, and financial
assistance to the members of agricultural or horticultural organizations exempt
from tax under Section 501(c)(5).
(4) The concept of inurement under Section 501(c)(5) differs somewhat from that
applied under Section 501(c)(3) and Section 501(c)(4).
(5) Ask about member benefits during the initial interview.
(6) Review the organizational documents, membership solicitation materials,
minutes, etc. to identify any benefits provided to members.
(7) Inspect 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.
(8) Review records related to the use of the organization’s assets to determine
whether related entities, members, or other persons are using the facilities for
nonexempt purposes.
36
(9) Analyze changes in assets. Disposition of assets to officials or members at less
than fair market value could indicate inurement.
(10)Review the cash disbursement record, “PayPal” accounts, and supporting
documents for unexplained payments to individuals, unusual purchases of
supplies, materials, or assets or unusual payments for services.
B.3. Unrelated Business Income (UBI)
(1) Agricultural or horticultural organizations frequently have UBI from the following
sources:
a. Rental of debt financed property
b. Winter storage fees
c. Commercial advertising in the organization’s publications
d. Provision of goods or services to others
(2) Associate member dues are excluded from UBI for exempt agricultural or
horticultural organizations if they are $100 or less. See Section 512(d).
Caution: Beginning with taxable years starting in 2010, the excludable amount
may be indexed for inflation. See Rev. Proc. 2009-50. For 2021, the most
current period noted, the adjusted limitation for annual dues under this
paragraph is $173. See Rev. Proc 2020-45.
(3) Tour facilities to identify possible sources of rental income and winter storage
fees.
(4) Read newsletters and other publications to check for taxable advertising.
(5) Check revenues from sales. Determine whether the organization is conducting
a business operation.
B.4. Legislative Activities
(1) Section 501(c)(5) agricultural or horticultural organizations may participate in
legislative activity that is related to accomplishing their exempt purpose.
(2) Section 501(c)(5) agricultural or horticultural organizations’ lobbying
expenditures may be subject to the requirements of Section 6033(e).
(3) Section 6033(e) imposes a notice requirement and proxy tax on the lobbying
expenditures of certain agricultural or horticultural organizations.
(4) Review lobbying expenditures to verify the lobbying is related to the
organization’s exempt purpose. Review the minutes, newsletters, web sites,
and correspondence to identify legislative activity.
(5) Determine whether any officials of the organization are registered lobbyists.
Review any contracts with outside lobbyists to determine the extent and the
nature of such lobbying.
37
(6) Determine whether an agricultural or horticultural organization is subject to the
reporting requirements of Section 6033(e).
(7) Review dues statements of agricultural or horticultural organizations subject to
these requirements to determine if they properly reported amounts used for
lobbying.
(8) Inspect Form 990-T of agricultural or horticultural organizations that elected not
to or didn’t provide this notification to verify the proxy tax under Section
6033(e)(2)(A) was properly calculated.
B.5. Political Activities
(1) An agricultural or horticultural organization that otherwise qualifies for
exemption under Section 501(c)(5) isn’t disqualified merely because it engages
in some political activity.
(2) Section 527(f) imposes a tax on the direct political expenditures of
organizations exempt from tax under Section 501(a) including agricultural or
horticultural organizations described in Section 501(c)(5).
(3) A Section 501(c)(5) agricultural or horticultural organization’s separate
segregated fund maintained to conduct its political activities is treated as a
separate organization subject to Section 527.
(4) Political expenditures made by Section 501(c)(5) agricultural or horticultural
organizations may be subject to Section 6033(e) requirements.
(5) During the interview with the officers, ask about possible political activity by the
organization or the existence of a separate segregated political fund.
(6) Review the minutes, newsletters, websites, and correspondence to identify
possible political activity by the organization or the existence of a separate
segregated political fund.
(7) Analyze the following accounts for possible political expenditures:
a. Legal fees
b. Bonuses
c. Printing
d. Advertising
e. Entertainment
(8) Analyze the disbursement journals, bank statements, canceled checks and
other supporting documents to identify transfers of funds to a separate
segregated political fund.
(9) Determine whether a political committee set up by a Section 501(c)(5)
agricultural or horticultural engaged in both political campaign and voter
education or registration activities.
38
(10)Trace funds used for voter education or registration activities to their ultimate
use to verify they weren’t used for political campaign purposes, because doing
so could constitute an indirect political expenditure.
VI. Additional Examination Considerations
A.
Section 527 Requirements for Separate Fund
(1) If the organization made expenditures for political purposes or maintained a
separate segregated political fund, determine whether all returns and/or reports
required by Section 527 were filed.
Caution: Public Law 106-230, 106th Congress, 2nd Session (2000) made
substantive changes to the filing and notice requirements of Section 527
political organizations and funds. Review Section 527 and Treas. Reg. 1.527-1.
Research to determine whether there have been any new developments in this
area subsequent to this TG’s publication date.
A.1. Filed Reports
(1) Inspect the organization’s copies of the returns and/or reports and determine
whether an examination is warranted.
A.2. Did Not File Reports
(1) Secure the delinquent returns and/or reports and forward to the FAST team to
process.
(2) Determine whether an examination of the delinquent returns and/or reports is
warranted.
(2) Organizations that collect political contributions or membership dues earmarked
for a separate segregated fund and promptly and directly transfer them to the
fund per Treas. Reg. 1.527-6(e), should:
a. not report them in Part I-A lines 1 or 2 of Schedule C, Political Campaign
and Lobbying Activities, of Form 990 or 990EZ.
b. report them on line 5e, Part I-C of Schedule C.
B.
Sections 162(e) Section 6033(e) – Notification Requirements
B.1. Explanation of Sections
(1) Certain legislative and political expenditures and dues payments made to
Section 501(c)(5) organizations for these expenditures are not deductible as
ordinary and necessary business expenses. See Section 162(e).
(2) Certain Section 501(c)(5) organizations must disclose the amount of legislative
and political expenditures to which Section 162(e)(1) applies and provide a
notice to any person paying dues to which those expenditures are allocable.
See Section 6033(e).
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B.2. Requirements for Labor Organizations
(1) Labor organizations described in Section 501(c)(5) aren’t subject to the notice
requirements under Section 6033(e) or the related proxy tax because they’re
deemed to be an organization in which substantially all of the dues are not
deductible without considering Section 162(e). See Rev. Proc. 98-19 and refer
to Schedule C (Form 990 or 990-EZ) Instructions, & Part III-A.
B.3. Requirements for Agricultural & Horticultural Organizations
(1) Some agricultural or horticultural organizations are subject to the notice and
proxy tax requirements of Section 6033(e). See Rev. Proc. 98-19.
(2) The notice must contain an estimate of the portion of the dues allocable to
those expenditures or the organization must pay a proxy tax, as described
above. Refer to Schedule C (Form 990 or 990-EZ) Instructions, Part III, Section
6033(e) Notice & Reporting Requirements & Proxy Tax.
C.
Violations of Other Federal Statutes
C.1. Review for Possible Violations
(1) Be alert to the activities of the organization, any affiliated organization, and/or of
any officer or trustee that would violate either:
a. 18 USC 664 or 18 USC 1954 (concerning theft, embezzlement, and
manipulation of trustee funds), or
b. 52 USC 30118 (transferred from 2 USC 441(b)) (concerning illegal political
contributions)
Note: If you find possible violations of these statutes, prepare a Form 5666,
EP/EO Information Report, and send to EO Classification.
(2) Form 13909, Tax-Exempt Organization Complaint (Referral) Form, is an online
referral form the general public, state, and local government regulators use to
report tax-exempt organizations’ noncompliance and questionable activities. EO
Classification uses information on Form 13909 to set up compliance reviews
and field examinations. The form is published on IRS.gov on the “Charities and
Nonprofits” homepage and may be emailed, faxed, or mailed to the EO
Classifications Unit. Refer to EO Examination Classification Alert dated 08-302010, for Online Referral Form 13909.
(3) If fraud is detected, (1) discuss with your manager and the fraud technical
advisor, (2) complete Form 11661, Fraud Development Recommendation, and
(3) refer to IRM 4.70.13.13, Fraud and Abusive Transaction Procedures.
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D.
Other Filings and Tax Compliance
D.1. Other Considerations
(1) Be alert to any foreign bank accounts. Organizations may be required to file
FinCEN Form 114, Report of Foreign Bank and Financial Accounts, annually,
before June 30th.
(2) Look for any prohibited tax shelter transactions at any time during the tax year.
The organization may be required to file Form 8886-T, Disclosure by TaxExempt Entity regarding Prohibited Tax Shelter Transactions.
(3) Check to see whether the organization complied with backup withholding rules
for reporting payments to vendors and reportable gaming (gambling) winnings
to prize winners, as may be found in an agricultural organization.
(4) Refer to the questions on Form 990, Part V, Statements Regarding Other IRS
Filings & Tax Compliance, to provide information on the above issues.
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This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.