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
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
The maximum number of shares, which a member can
The conditions under which shares may be paid in,
transferred, or withdrawn; and
The conditions under which deposits may be received
Determine if each member is entitled to one vote,
regardless of the number of shares owned.
Review activities to determine whether:
The organization meets the short term, unsecured
credit needs of its members.
Loans are made only to members of the credit union.
The credit union organization issues stock certificates.
The credit union carries on activities not normally
conducted by any financial institutions or any other activities that would
indicate that the organization is not a credit union operating for mutual
purposes or has unrelated business income.
Conduct a sample review of loan agreements to
Loans are made only to members,
Members submit applications in writing to the credit
committee stating the purpose of the loan,
Loans are repayable in installments, and
The credit union gives special consideration to
officers or employees on loans or interest.
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:
Domestic building and loan associations,
Cooperative banks without capital stock organized
and operated for mutual purposes without profit,
Mutual savings banks not having capital stock represented
by shares, or
Mutual savings banks described in IRC section 591(b).
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
Issuance of stock certificates,
Loans to nonmembers,
Loans made without the approval of the credit committee,
Payment of personal expenses of members or employees,
Write off of loan to officers or employees.
Inspect balance sheet to identify sources of outstanding
stock, including preferred stock.
Compare loan agreements to membership list.
Review minutes of loan or credit committee for
Review cash disbursements to verify that expenses
paid on behalf of officers and employees had a business purpose.
Analyze all loans written off as uncollectable
to determine the reasons for the write off to assure officers or employees
are not receiving a personal benefit.
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:
Debt financed rental income
Credit life and disability insurance
The Services current position
is that credit life and disability insurance issued by a credit union as an
added service to guarantee the payment of outstanding member loans is not
directly related to its exempt purposes and is unrelated business income.
If this issue is discovered during an examination, the examiner should conduct
research to determine whether there have been any new developments in this
Review cash receipts journal to identify any unusual
sources of income. Income from any activities not normally conducted by a
financial institution should be considered unusual and may be subject to the
unrelated business income tax provisions described in IRC section 511.
Review newsletters, pamphlets and other materials
to determine if the credit union offers credit life and disability insurance
as an added service to guarantee the payment of outstanding member loans.
Review assets and liabilities to identify acquisition
indebtedness. Review cash receipts journal to identify income from such acquisition.