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Part 4. Examining Process

Chapter 76. Exempt Organizations Examination Guidelines

Section 24. Corporations Organized to Finance Crop Operations IRC 501(c)(16)

4.76.24  Corporations Organized to Finance Crop Operations IRC 501(c)(16)

4.76.24.1  (01-01-2003)
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)(16). It provides examination techniques effective in identifying and developing issues commonly encountered during the examination of an IRC 501(c)(16) organization.

  2. These guidelines provide specific assistance for the examination of an IRC section 501(c)(16) organization and are not all-inclusive. The purpose is to supplement the guidelines contained in IRM sections 4.75.10 through 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)(16) organizations. The examiner should review the technical information contained in IRM 7.25.16.

4.76.24.2  (01-01-2003)
Background Information

  1. IRC section 501(c)(16) provides exemption from Federal income tax for corporations that are organized by a farmers' cooperative marketing or purchasing association exempt under IRC section 521 for the purpose of financing the ordinary crop operations of members or other producers. The financing corporation must be operated in conjunction with the marketing or purchasing association.

4.76.24.3  (01-01-2003)
Examination Guidelines

  1. Determine whether the organizing farmers' cooperative is an association or corporation concurrently exempt under IRC section 521. If the farmers' cooperative is exempt under IRC section 521:

    1. Obtain copy of its determination letter.

    2. Inspect the farmers' cooperative annual tax return.

  2. Inspect the governing instruments and evaluate the actual operations to determine whether:

    1. The organizing IRC 521 organizations, or members, hold substantially all of the voting stock.

    2. Nonvoting preferred stock, if issued, does not have the right to participate in the profits of the organization, on dissolution or otherwise, beyond the fixed dividend rate.

  3. Verify that the dividend rate on all stocks does not exceed the greater of:

    1. The legal rate of interest in the State of incorporation or

    2. Eight percent per annum on the value of the consideration for which the stock was issued.

  4. Determine the purpose of, the necessity for, and the reasonableness of reserves. Ascertain whether the organization has accumulated and maintained a reserve required by State law or a reasonable reserve for any necessary purpose, such as the erection of buildings required in the business operation.

  5. If the examiner identifies any problems or concerns regarding the farmers' cooperative, he should consider requesting involvement by SB/SE or LMSB.


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