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Part 4. Examining Process

Chapter 76. Exempt Organizations Examination Guidelines

Section 14. Labor, Agricultural, and Horticulture Organizations – IRC 501(c)(5)

4.76.14  Labor, Agricultural, and Horticulture Organizations – IRC 501(c)(5)

4.76.14.1  (03-18-2002)
Introduction

  1. This IRM contains specific examination guidelines for organizations recognized as exempt from income tax under IRC section 501(a) as an organization described in IRC section 501(c)(5). It provides examination techniques effective in identifying and developing issues frequently encountered during examinations of IRC 501(c)(5) organizations.

  2. These guidelines provide specific assistance for the examination of an IRC 501(c)(5) organization and are not all–inclusive. The purpose is to supplement the guidelines contained in IRM 4.75.10 through IRM 4.75.13. The intent is not to restrict the examiner in identifying issues or using examination techniques not included herein.

  3. This IRM does not contain detailed technical information regarding IRC 501(c)(5) organizations. The examiner should review the technical information in contained in IRM 7.25.5.

4.76.14.2  (03-18-2002)
Background Information

  1. IRC section 501(c)(5) provides for the exemption of organizations:

    1. Whose purpose is the betterment of the 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. Having no net earnings inuring to the benefit of any member; and

    3. Whose principal activity, with certain exceptions, is not to receive, hold, invest or disburse or otherwise manage funds associated with savings or investment plans or programs, including pension or other retirement savings plans or programs.

  2. Organizations exempt under IRC section 501(c)(5) fall into two general categories:

    1. Labor organizations

    2. Agricultural organizations and horticultural organizations

  3. Although labor and agricultural and horticultural organizations may each qualify for exemption under IRC section 501(c)(5), the requirements for recognition of tax exemption and issues commonly found in each of these types of organizations differ. This IRM contains separate guidelines for examination of each.

4.76.14.3  (03-18-2002)
Labor Organizations

  1. A Labor organization 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.

4.76.14.3.1  (03-18-2002)
Membership Requirements

  1. A labor organization is a membership organization made up primarily of employees or representatives of employees.

  2. If most of the members are entrepreneurs or independent contractors, the organization does not qualify for exemption.

4.76.14.3.1.1  (03-18-2002)
Examination Guidelines - Membership Requirements

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

    1. What are the membership requirements?

    2. Does the organization have different classes of memberships?

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

    4. Are the business owners allowed to be members of or receive benefits from the organization?

    5. Do the employer(s) withhold and pay member dues from members' salaries to the labor organization?

  2. Review the articles of organization to determine the written membership requirements.

  3. Review membership solicitation materials to determine requirements, benefits, and different classes of memberships.

  4. Review the dues accounts in the cash receipts journal and supporting documents. If the employer(s) withholds and pays dues to the labor organization from member's salaries, check any separate payments to detect payments from entrepreneurs or independent contractors.

  5. Check dues solicitations issued by the labor organization. Verify they contain a statement of nondeductibility of contributions required by IRC section 6113.

4.76.14.3.2  (03-18-2002)
Inurement

  1. The net earnings of an IRC 501(c)(5) organization may not inure to the benefit of any member. However, benefits provided to the members of a labor organization to improve their working conditions are not prohibited inurement.

  2. Examples of permitted benefits are:

    1. Death, sick, accident and similar benefits

    2. Payment of legal expenses (if the action is related to the member's employment)

    3. Financial assistance to members during strikes and lockouts

  3. Examples of benefits that may result in inurement are:

    1. Payment of personal expenses of members or employees

    2. Loans to members or employees

    3. Personal use of the organization's property

4.76.14.3.2.1  (03-18-2002)
Examination Guidelines - Inurement

  1. Inquire about member and employee benefits during the initial interview.

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

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

  4. During the tour of the organization's facilities identify the persons using 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.

  5. Review the cash receipts journal for payments from individuals that may be repayment of loans.

  6. 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 payment of personal expenses.

  7. Compare assets shown on the organization's books to assets noted in your tour of the organization's facilities. Research discrepancies. Discrepancies could indicate the use of assets for personal purposes.

  8. Analyze changes in assets. Disposition of assets to officials or members at less than fair market value could indicate inurement.

  9. Review Form LM-2 or LM-3, Labor Organization Annual Report and compare the information with the information on the Form 990 Return for unexplained discrepancies.

4.76.14.3.3  (03-18-2002)
Unrelated Business Income

  1. Labor organizations often have unrelated business income from the following sources:

    1. Rental of debt financed property

    2. Commercial advertising in the organizations publications

    3. Associate member dues

    4. Provision of goods and services to others

4.76.14.3.3.1  (03-18-2002)
Examination Guidelines - Unrelated Business Income

  1. Tour facilities to identify offices or areas rented to other entities.

  2. Read newsletters and other publications to check for taxable advertising.

  3. Check revenues from sales to ascertain whether the organization is conducting a business operation, e.g. a labor temple with a bar or catering facility.

  4. 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).

4.76.14.3.4  (03-18-2002)
Compensation

  1. Officers and employees of IRC 501(c)(5) labor organizations receive various forms of compensation. Underreporting of compensation has been an issue in many examinations of labor organizations.

  2. Additional compensation results from the failure to include or properly include the correct taxable amount in wages. Likely sources include:

    1. Bonuses

    2. Expense reimbursements under a non-accountable plan

    3. Employer provided vehicles

    4. Taxable fringe benefits

  3. An accountable plan has two main requirements:

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

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

      Note:

      See Treas. Reg. section 1.62-2(c) for additional requirements of an accountable plan.

4.76.14.3.4.1  (03-18-2002)
Examination Guidelines - Compensation

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

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

    1. Holiday bonuses

    2. Performance related bonuses

    3. Non-cash bonuses, e.g. gift certificates

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

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

  5. Inspect vouchers and other documentation provided by employees.

  6. Check the disbursement journal for payments made to employees in addition to payroll checks. Take special note of:

    1. Payments for the same amount made each month.

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

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

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

    1. Club dues

    2. Deferred Compensation (Nonqualified Arrangements)

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

    4. Employer Provided Meals and Lodging

    5. Benefit Plans (Employee Contributions)

4.76.14.3.5  (03-18-2002)
Payments to Members

  1. Payment of certain benefits by IRC 501(c)(5) labor organizations to their members or their members' families do not constitute proscribed inurement. These benefits include:

    1. Strike fund benefits and lockout benefits

    2. Payment for sick, accident, and death benefits

    3. Lost time payments to union officials

4.76.14.3.5.1  (03-18-2002))
Strike Fund Benefits and Lockout Benefits

  1. Strike fund benefits may be wages subject to FICA, FUTA, and federal income tax withholding if the labor organization directs the member's activity. (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 in accordance with the union's constitution and not as remuneration for services performed by an employee for his employer. (Rev. Rul. 68-424, 1968-2 C.B. 419)

  3. Strike fund benefits may be excludable from the member's income as a gift based on the form and amount of the payment, the member's need, etc. (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)

  4. Lockout benefits are treated like strike fund benefits. (Rev. Rul. 58-139, 1958-1 C.B. 14)

4.76.14.3.5.1.1  (03-18-2002))
Examination Guidelines - Strike Fund Benefits and Lockout Benefits

  1. Review the organization's constitution, articles, bylaws, etc. for the terms and conditions under which strike fund benefits and lockout benefits are paid.

  2. Check the organization's minutes for any references indicating the intent of the payment.

  3. Examine the disbursement journals to ascertain whether the members received the same amount.

  4. Inspect any documentation provided by the members.

  5. Review Forms W-2 and 1099 to determine whether payments were reported to the members.

4.76.14.3.5.2  (03-18-2002)
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.

    1. Payments for lost time while conducting negotiations for the union are wages subject to FICA, FUTA, and federal income tax withholding. (Rev. Rul. 68-539, 1968-2 C.B. 422)

    2. Payments for lost time while attending the union's annual convention are reportable as income by the recipient, but are not wages subject to FICA, FUTA, and federal income tax withholding. (Rev. Rul. 78-209, 1978-1 C.B. 25)

4.76.14.3.5.2.1  (03-18-2002)
Examination Guidelines - Lost Time Payments

  1. Read the organization's constitution or other documents governing payments to members for lost wages.

  2. Examine the disbursement journals for payments made to members and determine the reason for them.

  3. Check Forms W-2 and 1099 to determine whether the payments were reported to the member.

4.76.14.3.6  (03-18-2002))
Legislative Activities

  1. IRC 501(c)(5) labor organizations may participate in lobbying activities if the legislation is germane to the accomplishment of their exempt purpose.

4.76.14.3.6.1  (03-18-2002)
Examination Guidelines - Legislative Activities

  1. Review personal service and employment contracts, minutes and publications to determine if the organization engages in lobbying activities.

  2. If the organization engaged in lobbying activities determine whether the legislation is related to the organization's exempt purpose.

4.76.14.3.7  (03-18-2002)
Political Activities

  1. A labor organization which otherwise qualifies for exemption under IRC section 501(c)(5) will not be disqualified merely because it engages in some political activity.

  2. IRC section 527(f) imposes a tax on the direct political expenditures of organizations exempt from tax under IRC section 501(a) including labor organizations described in IRC section 501(c)(5).

  3. A separate segregated fund maintained by an exempt labor organization to conduct its political activities is treated as a separate organization subject to IRC section 527.

4.76.14.3.7.1  (03-18-2002)
Examination Guidelines - Political Activities

  1. Interview the officer's and 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.

  2. Analyze the following accounts for possible political expenditures:

    1. Legal fees

    2. Bonuses

    3. Printing

    4. Advertising

    5. Entertainment

  3. Analyze the disbursement journals, bank statements, canceled checks and other supporting documents to identify transfers of funds to a separate segregated political fund.

  4. Determine whether a political committee set up by an IRC 501(c)(5) labor organization is engaged in both political campaign and voter education or registration activities. Trace funds used for these latter purposes to their ultimate use to verify they were not used for political campaign purposes. Such use could constitute an indirect political expenditure.

4.76.14.4  (03-18-2002)
Agricultural and Horticultural Organizations

  1. Agricultural and horticultural organizations are associations of persons who have combined to promote the interests of persons engaged in raising livestock, harvesting crops or aquatic resources, cultivating useful or ornamental plants, or similar pursuits.

4.76.14.4.1  (03-18-2002)
Membership Requirements

  1. An agricultural or horticultural organization is a membership organization primarily made up of persons seeking to better the conditions of those engaged in agricultural pursuits.

  2. All the organization's members do not have to be engaged in agricultural pursuits.

4.76.14.4.1.1  (03-18-2002)
Examination Guidelines - Membership Requirements

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

    1. What are the membership requirements?

    2. Does the organization have different classes of memberships?

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

    4. What benefits are the various classes of members entitled to?

  2. Review the articles of organization to determine the written membership requirements.

  3. Review membership solicitation materials to determine requirements, benefits, and different classes of memberships.

  4. Check dues solicitations issued by the organization. Verify they contain a statement of nondeductibility of contributions required by IRC 6113.

4.76.14.4.2  (03-18-2002)
Inurement

  1. No part of the net earnings of an IRC 501(c)(5) organization may inure to the benefit of any member. (Treas. Reg. 1.501(c)(5)-1(a)(1)

  2. The refund of excess dues in the same proportion as the dues are paid does not constitute inurement (Rev. Rul. 81-60, 1981-1 C.B. 335)

  3. The provision of welfare, aid, and financial assistance to the members of an agricultural or horticultural organization exempt from tax under IRC section 501(c)(5) constitutes inurement.

4.76.14.4.2.1  (03-18-2002)
Examination Guidelines - Inurement

  1. Inquire about member benefits during the initial interview.

  2. Review the organizational documents, membership solicitation materials, minutes, etc. to identify any benefits provided to members.

  3. 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.

  4. Review records related to the use of the organization's assets to ascertain whether related entities, members, or other persons are using the facilities for nonexempt purposes.

  5. Analyze changes in assets. Disposition of assets to officials or members at less than fair market value could indicate inurement.

  6. 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

4.76.14.4.3  (03-18-2002)
Unrelated Business Income

  1. Agricultural and horticultural organizations frequently have unrelated business income from the following sources:

    1. Rental of debt financed property

    2. Winter storage fees

    3. Commercial advertising in the organizations publications

    4. Provision of goods or services to others

  2. IRC section 512(d) excludes associate member dues from unrelated business income classification for exempt agricultural and horticultural organizations if such dues do not exceed $100.

    Note:

    The $100 is indexed for inflation for tax years beginning in calendar years after 1995.

4.76.14.4.3.1  (03-18-2002)
Examination Guidelines - Unrelated Business Income

  1. Tour facilities to identify possible sources of rental income and winter storage fees.

  2. Read newsletters and other publications to check for taxable advertising.

  3. Check revenues from sales. Determine whether the organization is conducting a business operation.

4.76.14.4.4  (03-18-2002)
Legislative Activities

  1. IRC 501(c)(5) agricultural and horticultural organizations may participate in legislative activity that is germane to the accomplishment of their exempt purpose.

  2. Expenditures for lobbying made by IRC 501(c)(5) agricultural and horticultural organizations may be subject to the requirements of IRC section 6033(e).

  3. IRC section 6033(e) imposes a notice requirement and proxy tax on the lobbying expenditures of certain agricultural and horticultural organizations.

4.76.14.4.4.1  (03-18-2002)
Examination Guidelines - Legislative Activities

  1. Review lobbying expenditures to verify the lobbying is related to the organization's exempt purpose.

  2. Review the minutes, newsletters, web sites, and correspondence to identify legislative activity.

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

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

  5. Determine whether an agricultural or horticultural organization is subject to the reporting requirements of IRC section 6033(e).

  6. Review dues statements of agricultural and horticultural organizations subject to such requirements to determine whether amounts used for lobbying were properly reported.

  7. Inspect Form 990-T of agricultural and horticultural organizations that elected not to or failed to provide such notification to verify the proxy tax under IRC section 6033(e)(2)(A) was properly calculated.

4.76.14.4.5  (03-18-2002)
Political Activities

  1. An agricultural or horticultural organization that otherwise qualifies for exemption under IRC section 501(c)(5) will not be disqualified merely because it engages in some political activity.

  2. IRC section 527(f) imposes a tax on the direct political expenditures of organizations exempt from tax under IRC section 501(a) including agricultural and horticultural organizations described in IRC section 501(c)(5).

  3. A separate segregated fund maintained by an IRC 501(c)(5) agricultural and horticultural organization to conduct its political activities shall be treated as a separate organization subject to IRC section 527.

  4. Political expenditures made by IRC 501(c)(5) agricultural or horticultural organizations may be subject to the requirements of IRC section 6033(e).

4.76.14.4.5.1  (03-18-2002)
Examination Guidelines - Political Activities

  1. Interview the officers and 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 .

  2. Analyze the following accounts for possible political expenditures:

    1. Legal fees

    2. Bonuses

    3. Printing

    4. Advertising

    5. Entertainment

  3. Analyze the disbursement journals, bank statements, canceled checks and other supporting documents to identify transfers of funds to a separate segregated political fund.

  4. Determine whether a political committee set up by an IRC 501(c)(5) agricultural and horticultural engaged in both political campaign and voter education or registration activities. Trace funds used for these latter purposes to their ultimate use to verify they were not used for political campaign purposes. Such use could constitute an indirect political expenditure.

4.76.14.5  (03-18-2002)
IRC Section 527 Filing and Notice Requirements

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

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

    Caution:

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

4.76.14.6  (03-18-2002)
IRC Section 162(e) and IRC Section 6033(e) – Notification Requirements

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

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

  3. Labor organizations described in IRC section 501(c)(5) are not subject to the requirements under IRC section 6033(e) or the related proxy tax because they are deemed to be an organization, substantially all of the dues of which are not deductible without regard to IRC section 162(e).

4.76.14.7  (03-18-2002)
Violations of Other Federal Statutes

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

    Note:

    If possible violations of these statutes are found, the examiner will prepare a Form 5666, TEGE Referral Information Report, and forward it to EO Classification.


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