part4-397

This IRM 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)(14). It provides
examination techniques effective in identifying and developing issues commonly
encountered during the examination of an IRC 501(c)(14) organization.

These guidelines provide specific assistance for
the examination of an IRC 501(c)(14) organization and are not all-inclusive.
The purpose is to supplement the examination 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.

This IRM does not contain detailed technical information
regarding IRC 501(c)(14) organizations. The examiner should review the technical
information contained in IRM 7.25.14.

Credit unions are democratically controlled, mutual
entities created for the purpose of encouraging thrift and providing a source
of credit for its members.

To qualify as a credit union exempt from federal
income tax under IRC section 501(c)(14)(A), a credit union must be formed
and operated under a state credit union law, without capital stock and, thus,
have state defined characteristics, operate without profit and for the mutual
benefit of its members. (See Rev. Rul. 69-282, 1969-1 C.B. 155 clarified by
Rev. Rul. 72-37, 1972-1 C.B. 152.)

Inspect the governing instruments and evaluate
the actual operations to determine if the credit union is organized and operated
for mutual purposes and without profit.

Review minutes of the board of directors, newsletters
and other publications for members to determine if the credit union is operated
for mutual purposes.

Review state laws dealing with organizations incorporated
as credit unions to determine whether the organization is in compliance with
state laws.

Review the articles of organization and bylaws
to determine membership requirements. Determine whether the organization has
a written, enforced common bond among their members, such as a charter provision
requiring members to have the same occupation or employer, or to live within
a well-defined neighborhood, community or rural district.

Credit unions are authorized to receive the savings
of members either as a deposit or as payment for shares. Review the bylaws
to determine:

.

Determine if each member is entitled to one vote,
regardless of the number of shares owned.

Review activities to determine whether:

Conduct a sample review of loan agreements to
determine whether:

IRC section 501(c)(14)(B) provides
exemption from Federal income tax for corporations or associations without
capital stock organized before September 1, 1957, and operated for mutual
purposes and without profit for the purpose of providing reserve funds for,
and insurance of shares or deposits in:

Exemption under IRC section 501(c)(14)(B)
requires an organization to insure shares or deposits in its member organizations
and contains a specific restriction against issuance of capital stock.

IRC section 501(c)(14)(C) provides exemption for
corporations or associations organized before September 1, 1957, and operated
for mutual purposes and without profit for the purpose of providing reserve
funds for associations or banks described in paragraph 22.4(1) items a, b,
or c. These organizations are exempt, however, only if 85 percent or more
of the income is attributable to providing such reserve funds and to investments.
If an organization meets the requirements of paragraph 22.4(2), the income
percentage restriction of IRC(c)(14)(C) will not apply.

An organization exempt under IRC section 501(c)(14)
must be operated without profit and for the mutual benefit of members. The
net earnings can not inure to the benefit of any member.

Examples of activities that may indicate inurement
include:

A state-chartered credit union may have unrelated
business taxable income. Sources of unrelated business income often found
during the examination of credit unions are: