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Part 4. Examining Process

Chapter 76. Exempt Organizations Examination Guidelines

Section 13. Civic Leagues, Social Welfare Organizations, and Local Association of Employees - IRC 501(c)(4)

4.76.13  Civic Leagues, Social Welfare Organizations, and Local Association of Employees - IRC 501(c)(4)

4.76.13.1  (03-01-2003)
Introduction

  1. This IRM section contains specific examination guidelines for an organization recognized as exempt from income tax under IRC section 501(a) as an organization described in IRC section 501(c)(4). It provides examination techniques effective in identifying and developing issues commonly encountered during the examination of an IRC section 501(c)(4) organization.

  2. These guidelines provide specific assistance for the examination of IRC section 501(c)(4) organizations, but are not all-inclusive. They are intended to supplement the guidelines contained in IRM sections 4.75.2 through 4.75.6. The intent is not to restrict the examiner in identifying issues or using examination techniques not included herein.

  3. This IRM does not contain detailed technical information regarding IRC section 501(c)(4) organizations. The examiner should review the technical information contained in IRM 7.25.4.

4.76.13.2  (03-01-2003)
Background Information

  1. IRC section 501(c)(4) provides for exemption of two very different types of organizations with their own distinct qualification requirements. They are:

    1. "Social welfare organizations" -- Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, and

    2. "Local associations of employees" the membership of which is limited to the employees of a designated person(s) in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.

  2. IRC section 501(c)(4)(B), which is applicable to all section 501(c)(4) organizations, requires that no net earnings inure to the benefit of any private shareholder or individual with respect to such organization. IRC section 4958 also applies to section 501(c)(4) organizations. See IRM 4.76.13.8.1.

  3. An organization is considered to be operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the community. See Treas. Reg. section 1.501(c)(4)-1(a)(2)(i).

  4. Promotion of social welfare does not include any of the following per Treas. Reg. section 1.501(c)(4)-1(a)(2)(ii):

    1. Direct or indirect participation or intervention in a political campaign on behalf of or in opposition to any candidate for public office,

    2. Operating a social club for the pleasure, benefit or recreation of its members,

    3. Carrying on a business with the general public in a manner similar to organizations operated for profit.

  5. Certain veterans' organizations may qualify for exemption under section 501(c)(4) because their activities promote social welfare, not because of the composition of their membership. However, the composition of their membership will determine whether or not they are eligible for charitable contributions. See IRM 4.76.26, Veterans Organizations, IRC section 501(c)(19).

  6. Certain homeowners' associations may qualify under IRC section 501(c)(4) as well, if operated in a manner which promotes the social welfare of the community, rather than the private interests of its members.

4.76.13.3  (03-01-2003)
Organizational Requirements - Social Welfare Organizations

  1. IRC section 501(c)(4) provides that social welfare organizations must not be organized for profit, and are operated exclusively for the promotion of social welfare.

4.76.13.3.1  (03-01-2003)
Examination Guidelines

  1. In order to determine if the organizational requirements are met, read the organizing documents and bylaws to determine if

    1. The organization meets the "not organized for profit" requirement, and

    2. The net earnings of the organization are devoted exclusively to charitable or educational activities.

4.76.13.4  (03-01-2003)
Operational Requirements - Social Welfare Organizations

  1. To qualify as a social welfare organization under IRC section 501(c)(4), an organization must be operated exclusively for the promotion of social welfare. An organization is considered to be operated exclusively for the promotion of social welfare if it is primarily engaged in activities which in some way promote the common good and general welfare of the community.

  2. Political activities, operation of a social club for members, and the conduct of business with the general public in a manner generally similar to for-profit organizations are not considered to be activities for the promotion of social welfare. Therefore, an organization which is primarily engaged in these nonqualifying activities, does not qualify as a social welfare organization under IRC section 501(c)(4).

  3. Social activities for the benefit, pleasure, or recreation of members do not promote accomplishment of social welfare purposes and thus are not qualifying social welfare activities. However, such social activities do not preclude exemption under IRC section 501(c)(4) so long as those social activities, along with any other activities that do not promote social welfare purposes, are not the primary activities of the organization.

  4. Treas. Reg. section 1.501(c)(4)-1(a)(2)(ii) specifically provides that an organization will not qualify for exemption as a civic organization described in IRC section 501(c)(4) if its primary activity is the operation of a social club for the benefit, pleasure, or recreation of its members.

  5. The conduct of business with the general public in a manner similar to for-profit organizations does not promote the accomplishment of social welfare purposes. However, such conduct of business with the general public on a for profit basis, does not preclude exemption under IRC section 501(c)(4) so long as such business with the general public, along with any other activities that do not promote social welfare purposes, are not the primary activities of the organization.

4.76.13.4.1  (03-01-2003)
Examination Guidelines

  1. In order to determine if an organization is operated exclusively for the promotion of social welfare, it will be necessary to identify, review, and analyze the following:

    1. Organizing document and bylaws for stated purposes which are inconsistent with the furtherance of social welfare purposes. Any such nonexempt purposes could be reflected in nonqualifying activities in actual operation,

    2. Minutes of meetings, publications of the organization, disbursements, and other available documentation to determine the activities of the organization, and whether such activities promote the common good and general welfare of the community,

  2. Also determine whether the organization:

    1. Conducts activities that are benefiting a private group of individuals, as opposed to promoting the general welfare of the community,

    2. Is carrying on a business with the general public in a manner similar to organizations operated for profit,

    3. Is operating a social club for the benefit, pleasure or recreation of its members,

    4. Intervenes or participates in political campaigns for or in opposition to a candidate for public office,

    5. Lobbys to influence legislation which is not germane to, or in furtherance of qualifying social welfare purposes,

    6. Conducts their activities primarily to promote the social welfare of the community as a whole.

    7. Has unrelated business income, and if so, whether it has been properly reported on Form 990-T.

  3. Review the organizing document and bylaws to determine if the organization is a membership organization, and if so, what rights, privileges, services, and activities are offered to members.

  4. Determine if nonexempt social club type services are included in the membership package of benefits. This could, for example, include a bar and restaurant for members.

  5. Also review the minutes, pamphlets, brochures and cash receipts to determine the types of activities, and income from activities the organization carries on for its members.

  6. Review fund-raising activities to determine the extent to which the organization is carrying on business activities with the general public in a manner similar to for-profit organizations.

  7. If the organization continues to qualify under IRC section 501(c)(4), for any activities determined not to be in furtherance of social welfare purposes, determine whether the income and directly connected expenses of those activities are properly reflected on Form 990-T.

4.76.13.4.2  (03-01-2003)
Legislative and Political Activities

  1. An IRC section 501(c)(4) organization's attempts to influence legislation are considered to be activities that further section 501(c)(4) social welfare purposes so long as such legislation is germane to the accomplishment of its social welfare purposes.

  2. In contrast, an organization whose primary activity is lobbying to advance the financial interests of its members, as opposed to promoting the social welfare of the community, does not qualify for IRC section 501(c)(4) status.

  3. The promotion of social welfare does not include participation or intervention in political campaigns of candidates for public office.

  4. However, an IRC 501(c)(4) organization may intervene in political campaigns without jeopardizing its exempt status provided it is primarily engaged in other activities which further the promotion of social welfare.

4.76.13.4.2.1  (03-01-2003)
Examination Guidelines

  1. Review minutes, publications, activities, and disbursements to identify any political or legislative activities or expenditures.

  2. If the organization has any legislative activities, determine whether the activities further social welfare purposes as opposed to the specific interests of a particular industry or profession, or serve other nonexempt purposes.

  3. If the organization has any political activities or expenditures, analyze all of the activities to determine if the primary activity is the promotion of social welfare as opposed to nonexempt political activities.

  4. If the organization has any political expenditures, determine whether Form 1120-POL filing, and reporting requirements have been satisfied.

4.76.13.5  (03-01-2003)
Local Associations of Employees

  1. To qualify as a local association of employees under IRC section 501(c)(4) the organization must:

    1. Be local in character, its membership must be limited to employees of a designated employer(s) in a particular locality, and

    2. Devote its net earnings exclusively to charitable, educational, or recreational purposes.

  2. For purposes of the local requirement, Treas. Reg. section 1.501(c)(4)-1(b) refers to the definition of local in Treas. Reg. section 1.501(c)(12)-1(b). For this purpose, business limited only by the borders of a state would not be local.

4.76.13.5.1  (03-01-2003)
Examination Guidelines

  1. Review the organizing document, bylaws, publications, and brochures to determine the membership requirements, and whether membership is properly limited to employees of a designated employer(s) in a particular locality.

  2. Review minutes, publications, brochures, and expenditures to determine whether net earnings are being properly used for charitable, educational, and recreational purposes.

  3. Review expenditures to check for use of funds for non-qualifying purposes such as the payment of retirement, medical, or similar benefits. Use for such purposes is neither charitable, educational or recreational.

4.76.13.6  (03-01-2003)
Veterans' Organizations

  1. Veterans' organizations can be described under IRC section 501(c)(4) not because of the composition of their membership, but because they are engaged primarily in activities which promote social welfare purposes. This is in contrast to IRC section 501(c)(19) war veterans' organizations which are required to meet specific requirements concerning the composition of their membership.

  2. Deductibility of contributions to war veterans organizations pursuant to IRC section 170(c)(3) does, however, require that membership be composed of war veterans.

  3. Unlike IRC section 501(c)(19) veterans' organizations, the provision of social and recreational activities for members of an IRC section 501(c)(4) veterans' organization is not an exempt purpose activity even if such members are veterans.

  4. Patriotic activities are considered to promote the common good and general welfare of the community.

  5. See IRM 4.76.26 for additional guidelines regarding the examination of and issues common to veterans organizations.

4.76.13.6.1  (03-01-2003)
Examination Guidelines

  1. Interview appropriate organization officials, tour facility, review minutes, receipts and expenditures to determine if activities of the organization include social and recreational activities for members, or other nonexempt activities.

  2. If the organization has a bar for members, determine if it is a separate corporation. Such a separate corporation may qualify under IRC section 501(c)(7). Request a copy of the exemption letter to verify exempt status.

  3. If there is a related separate entity, inspect copy of the Form 990 for such entity, and determine whether the examination should be expanded to include such entity.

  4. Analyze cash receipts and supporting documents to identify any unusual or potentially taxable sources of income, operation of a banquet hall, sale of liquor for consumption off premises, etc.

  5. To determine if the organization is eligible to receive deductible contributions, review the organizing document and bylaws to determine membership requirements, and review the membership records to determine if deductibility requirements have been satisfied.

4.76.13.7  (03-01-2003)
Homeowners' Associations

  1. A homeowners' association is an organization that consists of all lot owners in a development that enforces covenants for preserving the architecture and appearance of the development. It also generally owns and maintains certain common green areas and sidewalks.

  2. These organizations generally are supported by dues and assessments from the members.

  3. To be described in IRC section 501(c)(4) a homeowners' association must:

    1. Serve a "community," an area bearing a reasonably recognizable relationship to an area ordinarily identified as a governmental subdivision or unit thereof,

    2. Not perform exterior maintenance on private dwellings, and

    3. Open the facilities maintained by the association to the general public rather than restricting access to such facilities only to its members.

  4. Depending on the activities, and the choice of the organization, a homeowners' association may also qualify for the elective exemption under IRC section 528.

4.76.13.7.1  (03-01-2003)
Examination Guidelines

  1. Inspect the property and facilities for indications of restricting access by the general public to property and facilities owned and maintained by the association (No Trespassing Signs, gates blocking access).

  2. If access to the organization's facilities is restricted, question the officers concerning the possibility of a separate organization holding title to the restricted access facilities. For example, a clubhouse which serves as a gathering place for social and recreational programs and activities of the members of the association could be a separate IRC section 501(c)(7) organization. Secure a copy of the exemption letter to verify its status.

  3. Read the covenants and minutes of association meetings, and review disbursements and other financial records to determine if the association is performing exterior maintenance on private dwellings.

4.76.13.8  (03-01-2003)
Inurement Prohibition

  1. Pursuant to IRC section 501(c)(4)(B), an organization cannot qualify under section 501(c)(4) as a social welfare organization or as a " local association of employees" unless no part of the net earnings inures to the benefit of any private shareholders or individuals (insiders).

4.76.13.8.1  (03-01-2003)
Examination Guidelines

  1. Review minutes, expenditures, and financial records for indications of questionable transactions with insiders, officers, trustees, and key employees which may result in prohibited inurement.

  2. Determine whether IRC section 4958 excess benefit transaction provisions apply to questionable insider transactions revealed by examination. See IRM 7.27.30 for a discussion of IRC 4958, Taxes on Excess Benefit Transactions.


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