part4-389

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 members 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 members 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 organizations 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 organizations employment contracts,
    Forms W-2 and other employment records to determine the number and duties
    of the organizations employees and the reasonableness of salaries and benefits.

  4. During the tour of the organizations 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 organizations books
    to assets noted in your tour of the organizations 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 organizations 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 members 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 unions 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
    members income as a gift based on the form and amount of the payment, the
    members 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 organizations constitution, articles,
    bylaws, etc. for the terms and conditions under which strike fund benefits
    and lockout benefits are paid.

  2. Check the organizations 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 unions
      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 organizations 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 organizations 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 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) 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 organizations 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 organizations employment contracts,
    Forms W–2 and other employment records to determine the number and duties
    of the organizations employees and the reasonableness of salaries and benefits.

  4. Review records related to the use of the organizations
    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 organizations 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 organizations 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.

Law Offices of Darrin T. Mish, PA

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