part4-399
- 4.76.24.1
Introduction - 4.76.24.2
Background Information - 4.76.24.3
Examination Guidelines
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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. -
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. -
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.
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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.
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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:-
Obtain copy of its determination letter.
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Inspect the farmers cooperative annual tax return.
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Inspect the governing instruments and evaluate
the actual operations to determine whether:-
The organizing IRC 521 organizations, or members,
hold substantially all of the voting stock. -
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.
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Verify that the dividend rate on all stocks does
not exceed the greater of:-
The legal rate of interest in the State of incorporation
or -
Eight percent per annum on the value of the consideration
for which the stock was issued.
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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. -
If the examiner identifies any problems or concerns
regarding the farmers cooperative, he should consider requesting involvement
by SB/SE or LMSB.
