26 C.F.R. PART 1—INCOME TAXES (CONTINUED)
Title 26 - Internal Revenue
Authority: 26 U.S.C. 7805, unless otherwise noted.
Sections 1.504–1 and 1.504–2 also issued under 26 U.S.C. 504(b). Sec. 1.514(c)–2 also issued under 26 U.S.C. 514(c)(9)(E)(iii). Sec. 1.527–9 also issued under 26 U.S.C. 527(h)(2)(B)(i). Sec. 1.585–5 through 1.585–8 also issued under 26 U.S.C. 585(b)(3). Sec. 1.597–1 through 1.597–7 also issued under 26 U.S.C. 597 and 1502. Sec. 1.597–8 also issued under 26 U.S.C. 597. Source: T.D. 6500, 25 FR 11737, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, unless otherwise noted.
General Rule (a) In general; proof of exemption. (1) Section 501(a) provides an exemption from income taxes for organizations which are described in section 501 (c) or (d) and section 401(a), unless such organization is a feeder organization (see section 502), or unless it engages in a transaction described in section 503. However, the exemption does not extend to unrelated business taxable income of such an organization (see part III (Section 511 and following), subchapter F, chapter 1 of the Code). (2) An organization, other than an employees' trust described in section 401(a), is not exempt from tax merely because it is not organized and operated for profit. In order to establish its exemption, it is necessary that every such organization claiming exemption file an application form as set forth below with the district director for the internal revenue district in which is located the principal place of business or principal office of the organization. Subject only to the Commissioner's inherent power to revoke rulings because of a change in the law or regulations or for other good cause, an organization that has been determined by the Commissioner or the district director to be exempt under section 501(a) or the corresponding provision of prior law may rely upon such determination so long as there are no substantial changes in the organization's character, purposes, or methods of operation. An organization which has been determined to be exempt under the provisions of the Internal Revenue Code of 1939 or prior law is not required to secure a new determination of exemption merely because of the enactment of the Internal Revenue Code of 1954 unless affected by substantive changes in law made by such Code. (3) An organization claiming exemption under section 501(a) and described in any paragraph of section 501(c) (other than section 501(c)(1) shall file the form of application prescribed by the Commissioner and shall include thereon such information as required by such form and the instructions issued with respect thereto. For rules relating to the obtaining of a determination of exempt status by an employees' trust described in section 401(a), see the regulations under section 401. (b) Additional proof by particular classes of organizations. (1) Organizations mentioned below shall submit with and as a part of their applications the following information: (i) Mutual insurance companies shall submit copies of the policies or certificates of membership issued by them. (ii) In the case of title holding companies described in section 501(c)(2), if the organization for which title is held has not been specifically notified in writing by the Internal Revenue Service that it is held to be exempt under section 501(a), the title holding company shall submit the information indicated herein as necessary for a determination of the status of the organization for which title is held. (iii) An organization described in section 501(c)(3) shall submit with, and as a part of, an application filed after July 26, 1959, a detailed statement of its proposed activities. (2) In addition to the information specifically called for by this section, the Commissioner may require any additional information deemed necessary for a proper determination of whether a particular organization is exempt under section 501(a), and when deemed advisable in the interest of an efficient administration of the internal revenue laws, he may in the cases of particular types of organizations prescribe the form in which the proof of exemption shall be furnished. (3) An organization claiming to be specifically exempted by section 6033(a) from filing annual returns shall submit with and as a part of its application a statement of all the facts on which it bases its claim. (c) Private shareholder or individual defined. The words private shareholder or individual in section 501 refer to persons having a personal and private interest in the activities of the organization. (d) Requirement of annual returns. For the annual return requirements of organizations exempt under section 501(a), see section 6033 and §1.6033–1. (e) Certain Puerto Rican pension, etc., trusts. Effective for taxable years beginning after December 31, 1973, section 1022(i)(1) of the Employee Retirement Income Security Act of 1974 (ERISA) (88 Stat. 942) provides that trusts under certain Puerto Rican pension, etc., plans (as defined under P.R. Laws Ann. tit. 13, section 3165, and the articles thereunder), all of the participants of which are residents of the Commonwealth of Puerto Rico, are to be treated only for purposes of section 501(a) as trusts described in section 401(a). The practical effect of section 1022(i)(1) is to exempt these trusts from U.S. income tax on income from their U.S. investments. For purposes of section 1022(i)(1), the term residents of the Commonwealth of Puerto Rico means bona fide residents of Puerto Rico, and persons who perform labor or services primarily within the Commonwealth of Puerto Rico, regardless of residence for other purposes, and the term participants is restricted to current employees who are not excluded under the eligibility provisions of the plan. [T.D. 6500, 25 FR 11737, Nov. 26, 1960, as amended by T.D. 7428, 41 FR 34619, Aug. 16, 1976; T.D. 7859, 47 FR 54298, Dec. 2, 1982] (a) A corporation described in section 501(c)(2) and otherwise exempt from tax under section 501(a) is taxable upon its unrelated business taxable income. For taxable years beginning before January 1, 1970, see §1.511–2(c)(4). Since a corporation described in section 501(c)(2) cannot be exempt under section 501(a) if it engages in any business other than that of holding title to property and collecting income therefrom, it cannot have unrelated business taxable income as defined in section 512 other than income which is treated as unrelated business taxable income solely because of the applicability of section 512(a)(3)(C); or debt financed income which is treated as unrelated business taxable income solely because of section 514; or certain interest, annuities, royalties, or rents which are treated as unrelated business taxable income solely because of section 512(b) (3)(B)(ii) or (13). Similarly, exempt status under section 501(c)(2) shall not be affected where certain rents from personal property leased with real property are treated as unrelated business taxable income under section 512(b)(3)(A)(ii) solely because such rents attributable to such personal property are more than incidental when compared to the total rents received or accrued under the lease, or under section 512(b)(3)(B)(i) solely because such rents attributable to such personal property exceed 50 percent of the total rents received or accrued under the lease. (b) A corporation described in section 501(c)(2) cannot accumulate income and retain its exemption, but it must turn over the entire amount of such income, less expenses, to an organization which is itself exempt from tax under section 501(a). [T.D. 6500, 25 FR 11737, Nov. 26, 1960, as amended by T.D. 7658, 45 FR 33972, May 21, 1980] (a) Organizational and operational tests. (1) In order to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt. (2) The term exempt purpose or purposes, as used in this section, means any purpose or purposes specified in section 501(c)(3), as defined and elaborated in paragraph (d) of this section. (b) Organizational test—(1) In general. (i) An organization is organized exclusively for one or more exempt purposes only if its articles of organization (referred to in this section as its articles) as defined in subparagraph (2) of this paragraph: ( ( (ii) In meeting the organizational test, the organization's purposes, as stated in its articles, may be as broad as, or more specific than, the purposes stated in section 501(c)(3). Therefore, an organization which, by the terms of its articles, is formed for literary and scientific purposes within the meaning of section 501(c)(3) of the Code shall, if it otherwise meets the requirements in this paragraph, be considered to have met the organizational test. Similarly, articles stating that the organization is created solely to receive contributions and pay them over to organizations which are described in section 501(c)(3) and exempt from taxation under section 501(a)) are sufficient for purposes of the organizational test. Moreover, it is sufficient if the articles set for the purpose of the organization to be the operation of a school for adult education and describe in detail the manner of the operation of such school. In addition, if the articles state that the organization is formed for charitable purposes, such articles ordinarily shall be sufficient for purposes of the organizational test (see subparagraph (5) of this paragraph for rules relating to construction of terms). (iii) An organization is not organized exclusively for one or more exempt purposes if its articles expressly empower it to carry on, otherwise than as an insubstantial part of its activities, activities which are not in furtherance of one or more exempt purposes, even though such organization is, by the terms of such articles, created for a purpose that is no broader than the purposes specified in section 501(c)(3). Thus, an organization that is empowered by its articles to engage in a manufacturing business, or to engage in the operation of a social club does not meet the organizational test regardless of the fact that its articles may state that such organization is created for charitable purposes within the meaning of section 501(c)(3) of the Code. (iv) In no case shall an organization be considered to be organized exclusively for one or more exempt purposes, if, by the terms of its articles, the purposes for which such organization is created are broader than the purposes specified in section 501(c)(3). The fact that the actual operations of such an organization have been exclusively in furtherance of one or more exempt purposes shall not be sufficient to permit the organization to meet the organizational test. Similarly, such an organization will not meet the organizational test as a result of statements or other evidence that the members thereof intend to operate only in furtherance of one or more exempt purposes. (v) An organization must, in order to establish its exemption, submit a detailed statement of its proposed activities with and as a part of its application for exemption (see paragraph (b) of §1.501(a)–1). (2) Articles of organization. For purposes of this section, the term articles of organization or articles includes the trust instrument, the corporate charter, the articles of association, or any other written instrument by which an organization is created. (3) Authorization of legislative or political activities. An organization is not organized exclusively for one or more exempt purposes if its articles expressly empower it: (i) To devote more than an insubstantial part of its activities to attempting to influence legislation by propaganda or otherwise; or (ii) Directly or indirectly to participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of or in opposition to any candidate for public office; or (iii) To have objectives and to engage in activities which characterize it as an action organization as defined in paragraph (c)(3) of this section. The terms used in subdivisions (i), (ii), and (iii) of this subparagraph shall have the meanings provided in paragraph (c)(3) of this section. An organization's articles will not violate the provisions of paragraph (b)(3)(i) of this section even though the organization's articles expressly empower it to make the election provided for in section 501(h) with respect to influencing legislation and, only if it so elects, to make lobbying or grass roots expenditures that do not normally exceed the ceiling amounts prescribed by section 501(h)(2) (B) and (D). (4) Distribution of assets on dissolution. An organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt purpose. An organization's assets will be considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a provision in the organization's articles or by operation of law, be distributed for one or more exempt purposes, or to the Federal Government, or to a State or local government, for a public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of the court will best accomplish the general purposes for which the dissolved organization was organized. However, an organization does not meet the organizational test if its articles or the law of the State in which it was created provide that its assets would, upon dissolution, be distributed to its members or shareholders. (5) Construction of terms. The law of the State in which an organization is created shall be controlling in construing the terms of its articles. However, any organization which contends that such terms have under State law a different meaning from their generally accepted meaning must establish such special meaning by clear and convincing reference to relevant court decisions, opinions of the State attorney-general, or other evidence of applicable State law. (6) Applicability of the organizational test. A determination by the Commissioner or a district director that an organization is described in section 501(c)(3) and exempt under section 501(a) will not be granted after July 26, 1959 (regardless of when the application is filed), unless such organization meets the organizational test prescribed by this paragraph. If, before July 27, 1959, an organization has been determined by the Commissioner or district director to be exempt as an organization described in section 501(c)(3) or in a corresponding provision of prior law and such determination has not been revoked before such date, the fact that such organization does not meet the organizational test prescribed by this paragraph shall not be a basis for revoking such determination. Accordingly, an organization which has been determined to be exempt before July 27, 1959, and which does not seek a new determination of exemption is not required to amend its articles of organization to conform to the rules of this paragraph, but any organization which seeks a determination of exemption after July 26, 1959, must have articles of organization which meet the rules of this paragraph. For the rules relating to whether an organization determined to be exempt before July 27, 1959, is organized exclusively for one or more exempt purposes, see 26 CFR (1939) 39.101(6)–1 (Regulations 118) as made applicable to the Code by Treasury Decision 6091, approved August 16, 1954 (19 FR 5167; C.B. 1954–2, 47). (c) Operational test—(1) Primary activities. An organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. (2) Distribution of earnings. An organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals. For the definition of the words private shareholder or individual, see paragraph (c) of §1.501(a)–1. (3) Action organizations. (i) An organization is not operated exclusively for one or more exempt purposes if it is an action organization as defined in subdivisions (ii), (iii), or (iv) of this subparagraph. (ii) An organization is an action organization if a substantial part of its activities is attempting to influence legislation by propaganda or otherwise. For this purpose, an organization will be regarded as attempting to influence legislation if the organization: (a) Contacts, or urges the public to contact, members of a legislative body for the purpose of proposing, supporting, or opposing legislation; or (b) Advocates the adoption or rejection of legislation. The term legislation, as used in this subdivision, includes action by the Congress, by any State legislature, by any local council or similar governing body, or by the public in a referendum, initiative, constitutional amendment, or similar procedure. An organization will not fail to meet the operational test merely because it advocates, as an insubstantial part of its activities, the adoption or rejection of legislation. An organization for which the expenditure test election of section 501(h) is in effect for a taxable year will not be considered an action organization by reason of this paragraph (c)(3)(ii) for that year if it is not denied exemption from taxation under section 501(a) by reason of section 501(h). (iii) An organization is an action organization if it participates or intervenes, directly or indirectly, in any political campaign on behalf of or in opposition to any candidate for public office. The term candidate for public office means an individual who offers himself, or is proposed by others, as a contestant for an elective public office, whether such office be national, State, or local. Activities which constitute participation or intervention in a political campaign on behalf of or in opposition to a candidate include, but are not limited to, the publication or distribution of written or printed statements or the making of oral statements on behalf of or in opposition to such a candidate. (iv) An organization is an action organization if it has the following two characteristics: (a) Its main or primary objective or objectives (as distinguished from its incidental or secondary objectives) may be attained only by legislation or a defeat of proposed legislation; and (b) it advocates, or campaigns for, the attainment of such main or primary objective or objectives as distinguished from engaging in nonpartisan analysis, study, or research and making the results thereof available to the public. In determining whether an organization has such characteristics, all the surrounding facts and circumstances, including the articles and all activities of the organization, are to be considered. (v) An action organization, described in subdivisions (ii) or (iv) of this subparagraph, though it cannot qualify under section 501(c)(3), may nevertheless qualify as a social welfare organization under section 501(c)(4) if it meets the requirements set out in paragraph (a) of §1.501(c)(4)–1. (d) Exempt purposes—(1) In general. (i) An organization may be exempt as an organization described in section 501(c)(3) if it is organized and operated exclusively for one or more of the following purposes: (a) Religious, (b) Charitable, (c) Scientific, (d) Testing for public safety, (e) Literary, (f) Educational, or (g) Prevention of cruelty to children or animals. (ii) An organization is not organized or operated exclusively for one or more of the purposes specified in subdivision (i) of this subparagraph unless it serves a public rather than a private interest. Thus, to meet the requirement of this subdivision, it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests. (iii) Since each of the purposes specified in subdivision (i) of this subparagraph is an exempt purpose in itself, an organization may be exempt if it is organized and operated exclusively for any one or more of such purposes. If, in fact, an organization is organized and operated exclusively for an exempt purpose or purposes, exemption will be granted to such an organization regardless of the purpose or purposes specified in its application for exemption. For example, if an organization claims exemption on the ground that it is educational, exemption will not be denied if, in fact, it is charitable. (2) Charitable defined. The term charitable is used in section 501(c)(3) in its generally accepted legal sense and is, therefore, not to be construed as limited by the separate enumeration in section 501(c)(3) of other tax-exempt purposes which may fall within the broad outlines of charity as developed by judicial decisions. Such term includes: Relief of the poor and distressed or of the underprivileged; advancement of religion; advancement of education or science; erection or maintenance of public buildings, monuments, or works; lessening of the burdens of Government; and promotion of social welfare by organizations designed to accomplish any of the above purposes, or (i) to lessen neighborhood tensions; (ii) to eliminate prejudice and discrimination; (iii) to defend human and civil rights secured by law; or (iv) to combat community deterioration and juvenile delinquency. The fact that an organization which is organized and operated for the relief of indigent persons may receive voluntary contributions from the persons intended to be relieved will not necessarily prevent such organization from being exempt as an organization organized and operated exclusively for charitable purposes. The fact that an organization, in carrying out its primary purpose, advocates social or civic changes or presents opinion on controversial issues with the intention of molding public opinion or creating public sentiment to an acceptance of its views does not preclude such organization from qualifying under section 501(c)(3) so long as it is not an action organization of any one of the types described in paragraph (c)(3) of this section. (3) Educational defined—(i) In general. The term educational, as used in section 501(c)(3), relates to: (a) The instruction or training of the individual for the purpose of improving or developing his capabilities; or (b) The instruction of the public on subjects useful to the individual and beneficial to the community. An organization may be educational even though it advocates a particular position or viewpoint so long as it presents a sufficiently full and fair exposition of the pertinent facts as to permit an individual or the public to form an independent opinion or conclusion. On the other hand, an organization is not educational if its principal function is the mere presentation of unsupported opinion. (ii) Examples of educational organizations. The following are examples of organizations which, if they otherwise meet the requirements of this section, are educational: Example 1. An organization, such as a primary or secondary school, a college, or a professional or trade school, which has a regularly scheduled curriculum, a regular faculty, and a regularly enrolled body of students in attendance at a place where the educational activities are regularly carried on. Example 2. An organization whose activities consist of presenting public discussion groups, forums, panels, lectures, or other similar programs. Such programs may be on radio or television. Example 3. An organization which presents a course of instruction by means of correspondence or through the utilization of television or radio. Example 4. useums, zoos, planetariums, symphony orchestras, and other similar organizations. (4) Testing for public safety defined. The term testing for public safety, as used in section 501(c)(3), includes the testing of consumer products, such as electrical products, to determine whether they are safe for use by the general public. (5) Scientific defined. (i) Since an organization may meet the requirements of section 501(c)(3) only if it serves a public rather than a private interest, a scientific organization must be organized and operated in the public interest (see subparagraph (1)(ii) of this paragraph). Therefore, the term scientific, as used in section 501(c)(3), includes the carrying on of scientific research in the public interest. Research when taken alone is a word with various meanings; it is not synonymous with scientific; and the nature of particular research depends upon the purpose which it serves. For research to be scientific, within the meaning of section 501(c)(3), it must be carried on in furtherance of a scientific purpose. The determination as to whether research is scientific does not depend on whether such research is classified as fundamental or basic as contrasted with applied or practical. On the other hand, for purposes of the exclusion from unrelated business taxable income provided by section 512(b)(9), it is necessary to determine whether the organization is operated primarily for purposes of carrying on fundamental, as contrasted with applied, research. (ii) Scientific research does not include activities of a type ordinarily carried on as an incident to commercial or industrial operations, as, for example, the ordinary testing or inspection of materials or products or the designing or construction of equipment, buildings, etc. (iii) Scientific research will be regarded as carried on in the public interest: (a) If the results of such research (including any patents, copyrights, processes, or formulae resulting from such research) are made available to the public on a nondiscriminatory basis; (b) If such research is performed for the United States, or any of its agencies or instrumentalities, or for a State or political subdivision thereof; or (c) If such research is directed toward benefiting the public. The following are examples of scientific research which will be considered as directed toward benefiting the public, and, therefore, which will be regarded as carried on in the public interest: (1) Scientific research carried on for the purpose of aiding in the scientific education of college or university students; (2) scientific research carried on for the purpose of obtaining scientific information, which is published in a treatise, thesis, trade publication, or in any other form that is available to the interested public; (3) scientific research carried on for the purpose of discovering a cure for a disease; or (4) scientific research carried on for the purpose of aiding a community or geographical area by attracting new industry to the community or area or by encouraging the development of, or retention of, an industry in the community or area. Scientific research described in this subdivision will be regarded as carried on in the public interest even though such research is performed pursuant to a contract or agreement under which the sponsor or sponsors of the research have the right to obtain ownership or control of any patents, copyrights, processes, or formulae resulting from such research. (iv) An organization will not be regarded as organized and operated for the purpose of carrying on scientific research in the public interest and, consequently, will not qualify under section 501(c)(3) as a scientific organization, if: (a) Such organization will perform research only for persons which are (directly or indirectly) its creators and which are not described in section 501(c)(3), or (b) Such organization retains (directly or indirectly) the ownership or control of more than an insubstantial portion of the patents, copyrights, processes, or formulae resulting from its research and does not make such patents, copyrights, processes, or formulae available to the public. For purposes of this subdivision, a patent, copyright, process, or formula shall be considered as made available to the public if such patent, copyright, process, or formula is made available to the public on a nondiscriminatory basis. In addition, although one person is granted the exclusive right to the use of a patent, copyright, process, or formula, such patent, copyright, process, or formula shall be considered as made available to the public if the granting of such exclusive right is the only practicable manner in which the patent, copyright, process, or formula can be utilized to benefit the public. In such a case, however, the research from which the patent, copyright, process, or formula resulted will be regarded as carried on in the public interest (within the meaning of subdivision (iii) of this subparagraph) only if it is carried on for a person described in subdivision (iii)(b) of this subparagraph or if it is scientific research described in subdivision (iii)(c) of this subparagraph. (v) The fact that any organization (including a college, university, or hospital) carries on research which is not in furtherance of an exempt purpose described in section 501(c)(3) will not preclude such organization from meeting the requirements of section 501(c)(3) so long as the organization meets the organizational test and is not operated for the primary purpose of carrying on such research (see paragraph (e) of this section, relating to organizations carrying on a trade or business). See paragraph (a)(5) of §1.513–2, with respect to research which constitutes an unrelated trade or business, and section 512(b) (7), (8), and (9), with respect to income derived from research which is excludable from the tax on unrelated business income. (vi) The regulations in this subparagraph are applicable with respect to taxable years beginning after December 31, 1960. (e) Organizations carrying on trade or business—(1) In general. An organization may meet the requirements of section 501(c)(3) although it operates a trade or business as a substantial part of its activities, if the operation of such trade or business is in furtherance of the organization's exempt purpose or purposes and if the organization is not organized or operated for the primary purpose of carrying on an unrelated trade or business, as defined in section 513. In determining the existence or nonexistence of such primary purpose, all the circumstances must be considered, including the size and extent of the trade or business and the size and extent of the activities which are in furtherance of one or more exempt purposes. An organization which is organized and operated for the primary purpose of carrying on an unrelated trade or business is not exempt under section 501(c)(3) even though it has certain religious purposes, its property is held in common, and its profits do not inure to the benefit of individual members of the organization. See, however, section 501(d) and §1.501(d)–1, relating to religious and apostolic organizations. (2) Taxation of unrelated business income. For provisions relating to the taxation of unrelated business income of certain organizations described in section 501(c)(3), see sections 511 to 515, inclusive, and the regulations thereunder. (f) Applicability of regulations in this section. The regulations in this section are, except as otherwise expressly provided, applicable with respect to taxable years beginning after July 26, 1959. For the rules applicable with respect to taxable years beginning before July 27, 1959, see 26 CFR (1939) 39.101(6)–1 (Regulations 118) as made applicable to the Code by Treasury Decision 6091, approved August 16, 1954 (19 FR 5167; C.B. 1954–2, 47). [T.D. 6500, 25 FR 11737, Nov. 26, 1960, as amended by T.D. 6525, 26 FR 189, Jan. 11, 1961; T.D. 6939, 32 FR 17661, Dec. 12, 1967; T.D. 7428, 41 FR 34620, Aug. 16, 1976; T.D. 8308, 55 FR 35587, Aug. 31, 1990] (a) Civic organizations—(1) In general. A civic league or organization may be exempt as an organization described in section 501(c)(4) if— (i) It is not organized or operated for profit; and (ii) It is operated exclusively for the promotion of social welfare. (2) Promotion of social welfare—(i) In general. An organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community. An organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements. A social welfare organization will qualify for exemption as a charitable organization if it falls within the definition of charitable set forth in paragraph (d)(2) of §1.501(c)(3)–1 and is not an action organization as set forth in paragraph (c)(3) of §1.501(c)(3)–1. (ii) Political or social activities. The promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office. Nor is an organization operated primarily for the promotion of social welfare if its primary activity is operating a social club for the benefit, pleasure, or recreation of its members, or is carrying on a business with the general public in a manner similar to organizations which are operated for profit. See, however, section 501(c)(6) and §1.501(c)(6)–1, relating to business leagues and similar organizations. A social welfare organization that is not, at any time after October 4, 1976, exempt from taxation as an organization described in section 501(c)(3) may qualify under section 501(c)(4) even though it is an action organization described in §1.501(c)(3)–1(c)(3)(ii) or (iv), if it otherwise qualifies under this section. For rules relating to an organization that is, after October 4, 1976, exempt from taxation as an organization described in section 501(c)(3), see section 504 and §1.504–1. (b) Local associations of employees. Local associations of employees described in section 501(c)(4) are expressly entitled to exemption under section 501(a). As conditions to exemption, it is required (1) that the membership of such an association be limited to the employees of a designated person or persons in a particular municipality, and (2) that the net earnings of the association be devoted exclusively to charitable, educational, or recreational purposes. The word local is defined in paragraph (b) of §1.501(c)(12)–1. See paragraph (d) (2) and (3) of §1.501(c)(3)–1 with reference to the meaning of charitable and educational as used in this section. [T.D. 6500, 25 FR 11737, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, as amended by T.D. 8308, 55 FR 35588, Aug. 31, 1990] (a) The organizations contemplated by section 501(c)(5) as entitled to exemption from income taxation are those which: (1) Have no net earnings inuring to the benefit of any member, and (2) Have as their objects the betterment of the conditions of those engaged in such pursuits, the improvement of the grade of their products, and the development of a higher degree of efficiency in their respective occupations. (b)(1) General rule. An organization is not an organization described in section 501(c)(5) if the principal activity of the organization is to receive, hold, invest, disburse or otherwise manage funds associated with savings or investment plans or programs, including pension or other retirement savings plans or programs. (2) Exception. Paragraph (b)(1) of this section shall not apply to an organization which— (i) Is established and maintained by another labor organization described in section 501(c)(5) (determined without regard to this paragraph (b)(2)); (ii) Is not directly or indirectly established or maintained in whole or in part by one or more— (A) Employers; (B) Governments or agencies or instrumentalities thereof; or (C) Government controlled entities; (iii) Is funded by membership dues from members of the labor organization described in this paragraph (b)(2) and earnings thereon; and (iv) Has not at any time after September 2, 1974 (the date of enactment of the Employee Retirement Income Security Act of 1974, Pub. L. 93–406, 88 Stat. 829) provided for, permitted or accepted employer contributions. (3) Example. The principles of this paragraph (b) are illustrated by the following example: Example. Trust A is organized in accordance with a collective bargaining agreement between labor union K and multiple employers. Trust A forms part of a plan that is established and maintained pursuant to the agreement and which covers employees of the signatory employers who are members of K. Representatives of both the employers and K serve as trustees. A receives contributions from the employers who are subject to the agreement. Retirement benefits paid to K's members as specified in the agreement are funded exclusively by the employers' contributions and accumulated earnings. A also provides information to union members about their retirement benefits and assists them with administrative tasks associated with the benefits. Most of A's activities are devoted to these functions. From time to time, A also participates in the renegotiation of the collective bargaining agreement. A's principal activity is to receive, hold, invest, disburse, or otherwise manage funds associated with a retirement savings plan. In addition, A does not satisfy all the requirements of the exception described in paragraph (b)(2) of this section. (For example, A accepts contributions from employers.) Therefore, A is not a labor organization described in section 501(c)(5). (c) Organizations described in section 501(c)(5) and otherwise exempt from tax under section 501(a) are taxable upon their unrelated business taxable income. See part II (section 511 and following), subchapter F, chapter 1 of the Code, and the regulations thereunder. [T.D. 6500, 25 FR 11737, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, as amended by T.D. 8726, 62 FR 40449, July 29, 1997] A business league is an association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit. It is an organization of the same general class as a chamber of commerce or board of trade. Thus, its activities should be directed to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons. An organization whose purpose is to engage in a regular business of a kind ordinarily carried on for profit, even though the business is conducted on a cooperative basis or produces only sufficient income to be self-sustaining, is not a business league. An association engaged in furnishing information to prospective investors, to enable them to make sound investments, is not a business league, since its activities do not further any common business interest, even though all of its income is devoted to the purpose stated. A stock or commodity exchange is not a business league, a chamber of commerce, or a board of trade within the meaning of section 501(c)(6) and is not exempt from tax. Organizations otherwise exempt from tax under this section are taxable upon their unrelated business taxable income. See part II (section 511 and following), subchapter F, chapter 1 of the Code, and the regulations thereunder. (a) The exemption provided by section 501(a) for organizations described in section 501(c)(7) applies only to clubs which are organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, but does not apply to any club if any part of its net earnings inures to the benefit of any private shareholder. In general, this exemption extends to social and recreation clubs which are supported solely by membership fees, dues, and assessments. However, a club otherwise entitled to exemption will not be disqualified because it raises revenue from members through the use of club facilities or in connection with club activities. (b) A club which engages in business, such as making its social and recreational facilities available to the general public or by selling real estate, timber, or other products, is not organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, and is not exempt under section 501(a). Solicitation by advertisement or otherwise for public patronage of its facilities is prima facie evidence that the club is engaging in business and is not being operated exclusively for pleasure, recreation, or social purposes. However, an incidental sale of property will not deprive a club of its exemption. (a) A fraternal beneficiary society is exempt from tax only if operated under the lodge system or for the exclusive benefit of the members so operating. Operating under the lodge system means carrying on its activities under a form of organization that comprises local branches, chartered by a parent organization and largely self-governing, called lodges, chapters, or the like. In order to be exempt it is also necessary that the society have an established system for the payment to its members or their dependents of life, sick, accident, or other benefits. [T.D. 6500, 25 FR 11737, Nov. 26, 1960, as amended by T.D. 7061, 35 FR 14770, Sept. 23, 1970] To be described in section 501(c)(9) an organization must meet all of the following requirements: (a) The organization is an employees' association, (b) Membership in the association is voluntary, (c) The organization provides for the payment of life, sick, accident, or other benefits to its members or their dependents or designated beneficiaries, and substantially all of its operations are in furtherance of providing such benefits, and (d) No part of the net earnings of the organization inures, other than by payment of the benefits referred to in paragraph (c) of this section, to the benefit of any private shareholder or individual. [T.D. 7750, 45 FR 1721, Jan. 7, 1981] (a) Membership—(1) In general. The membership of an organization described in section 501(c)(9) must consist of individuals who become entitled to participate by reason of their being employees and whose eligibility for membership is defined by reference to objective standards that constitute an employment-related common bond among such individuals. Typically, those eligible for membership in an organization described in section 501(c)(9) are defined by reference to a common employer (or affiliated employers), to coverage under one or more collective bargaining agreements (with respect to benefits provided by reason of such agreement(s)), to membership in a labor union, or to membership in one or more locals of a national or international labor union. For example, membership in an association might be open to all employees of a particular employer, or to employees in specified job classifications working for certain employers at specified locations and who are entitled to benefits by reason of one or more collective bargaining agreements. In addition, employees of one or more employers engaged in the same line of business in the same geographic locale will be considered to share an employment-related bond for purposes of an organization through which their employers provide benefits. Employees of a labor union also will be considered to share an employment-related common bond with members of the union, and employees of an association will be considered to share an employment-related common bond with members of the association. Whether a group of individuals is defined by reference to a permissible standard or standards is a question to be determined with regard to all the facts and circumstances, taking into account the guidelines set forth in this paragraph. Exemption will not be denied merely because the membership of an association includes some individuals who are not employees (within the meaning of paragraph (b) of this section), provided that such individuals share an employment-related bond with the employee-members. Such individuals may include, for example, the proprietor of a business whose employees are members of the association. For purposes of the preceding two sentences, an association will be considered to be composed of employees if 90 percent of the total membership of the association on one day of each quarter of the association's taxable year consists of employees (within the meaning of paragraph (b) of this section). (2) Restrictions—(i) In general. Eligibility for membership may be restricted by geographic proximity, or by objective conditions or limitations reasonably related to employment, such as a limitation to a reasonable classification of workers, a limitation based on a reasonable minimum period of service, a limitation based on maximum compensation, or a requirement that a member be employed on a full-time basis. Similarly, eligibility for benefits may be restricted by objective conditions relating to the type or amount of benefits offered. Any objective criteria used to restrict eligibility for membership or benefits may not, however, be selected or administered in a manner that limits membership or benefits to officers, shareholders, or highly compensated employees of an employer contributing to or otherwise funding the employees' association. Similarly, eligibility for benefits may not be subject to conditions or limitations that have the effect of entitling officers, shareholders, or highly compensated employees of an employer contributing to or otherwise funding the employees' association to benefits that are disproportionate in relation to benefits to which other members of the association are entitled. See §1.501(c)(9)–4(b). Whether the selection or administration of objective conditions has the effect of providing disproportionate benefits to officers, shareholders, or highly compensated employees generally is to be determined on the basis of all the facts and circumstances. (ii) Generally permissible restrictions or conditions. In general the following restrictions will not be considered to be inconsistent with §1.501(c)(9)–2(a)(2)(i) or §1.501(c)(9)–4(b): (A) In the case of an employer-funded organization, a provision that excludes or has the effect of excluding from membership in the organization or participation in a particular benefit plan employees who are members of another organization or covered by a different plan, funded or contributed to by the employer, to the extent that such other organization or plan offers similar benefits on comparable terms to the excluded employees. (B) In the case of an employer funded-organization, a provision that excludes from membership, or limits the type or amount of benefits provided to, individuals who are included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers, if there is evidence that the benefit or benefits provided by the organization were the subject of good faith bargaining between such employee representatives and such employer or employers. (C) Restrictions or conditions on eligibility for membership or benefits that are determined through collective bargaining, by trustees designated pursuant to a collective bargaining agreement, or by the collective bargaining agents of the members of an association or trustees named by such agent or agents. (D) The allowance of benefits only on condition that a member or recipient contribute to the cost of such benefits, or the allowance of different benefits based solely on differences in contributions, provided that those making equal contributions are entitled to comparable benefits. (E) A requirement that a member (or a member's dependents) meet a reasonable health standard related to eligibility for a particular benefit. (F) The provision of life benefits in amounts that are a uniform percentage of the compensation received by the individual whose life is covered. (G) The provision of benefits in the nature of wage replacement in the event of disability in amounts that are a uniform percentage of the compensation of the covered individuals (either before or after taking into account any disability benefits provided through social security or any similar plan providing for wage replacement in the event of disability). (3) Examples. The provisions of this section may be illustrated by the following examples: Example 1. Pursuant to a collective bargaining agreement entered into by X Corporation and W, a labor union which represents all of X Corporation's hourly-paid employees, the X Corporation Union Benefit Plan is established to provide life insurance benefits to employees of X represented by W. The Plan is funded by contributions from X, and is jointly administered by X and W. In order to provide its non-unionized employees with comparable life insurance benefits, X also establishes and funds the X Corporation Life Insurance Trust. The Trust will not be ineligible for exemption as an organization described in section 501(c)(9) solely because membership is restricted to those employees of X who are not members of W. Example 2. The facts are the same as in Example 1 except that the life insurance benefit provided to the non-unionized employees of X differs from the life insurance benefit provided to the unionized employees of X pursuant to the collective bargaining agreement. The trust will not be ineligible for exemption as an organization described in section 501(c)(9) solely because the life insurance benefit provided to X's nonunionized employees is not same as the life insurance benefit provided to X's unionized employees. Example 3. S corporation established a plan to provide health benefits to all its employees. In accordance with the provisions of the plan each employee may secure insurance coverage by making an election under which the employee agrees to contribute periodically to the plan an amount which is determined solely by whether the employee elects a high option coverage or a low option coverage and on whether the employee is unmarried or has a family. As an alternative, the employee may elect high or low options, self only or self and family, coverage through a local prepaid group medical plan. The contributions required of those electing the prepaid group medical plan also vary with the type of coverage selected, and differ from those required of employees electing insurance. The difference between the amount contributed by employees electing the various coverages and the actual cost of purchasing the coverage is made up through contributions by S to the plan, and under the plan, S provides approximately the same proportion of the cost for each coverage. To fund the plan, S established an arrangement in the nature of a trust under applicable local law and contributes all employee contributions, and all amounts which by the terms of the plan it is required to contribute, to the trust. The terms of the plan do not provide for disproportionate benefits to the employees of S and will not be considered inconsistent with §1.501(c)(9)–2(a)(2)(i). Example 4. The facts are the same as in Example 3 except that, for those employees or former employees covered by Medicare, the plan provides a distinct coverage which supplements Medicare benefits. Eligibility for Medicare is an objective condition relating to a type of benefit offered, and the provision of separate coverage for those eligible for Medicare will not be considered inconsistent with §1.501(c)(9)–2(a)(2)(i). (b) Meaning of employee. Whether an individual is an employee is determined by reference to the legal and bona fide relationship of employer and employee. The term employee includes the following: (1) An individual who is considered an employee: (i) For employment tax purposes under subtitle C of the Internal Revenue Code and the regulations thereunder, or (ii) For purposes of a collective bargaining agreement, whether or not the individual could qualify as an employee under applicable common law rules. This would include any person who is considered an employee for purposes of the Labor Management Relations Act of 1947, 61 Stat. 136, as amended, 29 U.S.C. 141 (1979). (2) An individual who became entitled to membership in the association by reason of being or having been an employee. Thus, an individual who would otherwise qualify under this paragraph will continue to qualify as an employee even though such individual is on leave of absence, works temporarily for another employer or as an independent contractor, or has been terminated by reason of retirement, disability or layoff. For example, an individual who in the normal course of employment is employed intermittently by more than one employer in an industry characterized by short-term employment by several different employers will not, by reason of temporary unemployment, cease to be an employee within the meaning of this paragraph. (3) The surviving spouse and dependents of an employee (if, for purposes of the 90-percent test of §1.501(c)(9)–2(a)(1) they are considered to be members of the association). (c) Description of voluntary association of employees—(1) Association. To be described in section 501(c)(9) and this section there must be an entity, such as a corporation or trust established under applicable local law, having an existence independent of the member-employees or their employer. (2) Voluntary. Generally, membership in an association is voluntary if an affirmative act is required on the part of an employee to become a member rather than the designation as a member due to employee status. However, an association shall be considered voluntary although membership is required of all employees, provided that the employees do not incur a detriment (for example, in the form of deductions from pay) as the result of membership in the association. An employer is not deemed to have imposed involuntary membership on the employee if membership is required as the result of a collective bargaining agreement or as an incident of membership in a labor organization. (3) Of employees. To be described in this section, an organization must be controlled— (i) By its membership, (ii) By independent trustee(s) (such as a bank), or (iii) By trustees or other fiduciaries at least some of whom are designated by, or on behalf of, the membership. Whether control by or on behalf of the membership exists is a question to be determined with regard to all of the facts and circumstances, but generally such control will be deemed to be present when the membership (either directly or through its representative) elects, appoints or otherwise designates a person or persons to serve as chief operating officer(s), administrator(s), or trustee(s) of the organization. For purposes of this paragraph an organization will be considered to be controlled by independent trustees if it is an employee welfare benefit plan, as defined in section 3(1) of the Employee Retirement Income Security Act of 1974 (ERISA), and, as such, is subject to the requirements of parts 1 and 4 of subtitle B, title I of ERISA. Similarly, a plan will be considered to be controlled by its membership if it is controlled by one or more trustees designated pursuant to a collective bargaining agreement (whether or not the bargaining agent of the represented employees bargained for and obtained the right to participate in selecting the trustees). (4) Examples. The provisions of this section may be illustrated by the following examples: Example 1. X, a labor union, represents all the hourly-paid employees of Y Corporation. A health insurance benefit plan was established by X and Y as the result of a collective bargaining agreement entered into by them. The plan established the terms and conditions of membership in, and the benefits to be provided by, the plan. In accordance with the terms of the agreement, Y Corporation is obligated to establish a trust fund and make contributions thereto at specified rates. The trustees, some of whom are designated by X and some by Y, are authorized to hold and invest the assets of the trust and to make payments on instructions issued by Y Corporation in accordance with the conditions contained in the plan. The interdependent benefit plan agreement and trust indenture together create a voluntary employees' beneficiary association over which the employees posses the requisite control through the trustees designated by their representative, X. Example 2. Z Corporation unilaterally established an educational benefit plan for its employees. The purpose of the plan is to provide payments for job-related educational or training courses, such as apprenticeship training programs, for Z Corporation employees, according to objective criteria set forth in the plan. Z establishes a separate bank account which it uses to fund payments to the plan. Contributions to the account are to be made at the discretion of and solely by Z Corporation, which also administers the plan and retains control over the assets in the fund. Z Corporation's educational benefit plan and the related account do not constitute an association having an existence independent of Z Corporation and therefore do not constitute a voluntary employees' beneficiary association. Example 3. A, an individual, is the incorporator and chief operating officer of Lawyers' Beneficiary Association (LBA). LBA is engaged in the business of providing medical benefits to members of the Association and their families. Membership is open only to practicing lawyers located in a particular metropolitan area who are neither self-employed nor partners in a law firm. Membership in LBA is solicited by insurance agents under the control of X Corporation (owned by A) which, by contract with LBA, is the exclusive sales agent. Medical benefits are paid from a trust account containing periodic contributions paid by the members, together with proceeds from the investment of those contributions. Contribution and benefit levels are set by LBA. The members of LBA do not hold meetings, have no right to elect officers or directors of the Association, and no right to replace trustees. Collectively, the subscribers for medical benefits from LBA cannot be said to control the association and membership is neither more than nor different from the purchase of an insurance policy from a stock insurance company. LBA is not a voluntary employees' beneficiary association. Example 4. U corporation unilaterally established a plan to provide benefits to its employees. In accordance with the provisions of the plan, each employee may secure insurance or benefit coverage by making an election under which the employee agrees to contribute to the plan an amount which is determined solely by whether the employee elects a high option coverage or a low option coverage and on whether the employee elects self only or self and family coverage. The difference between the amount contributed by employees electing the various coverages and the actual cost of the coverage is made up through contributions by U to the plan. To fund the plan, U established an arrangement in the nature of a trust under applicable local law and contributed all employee contributions, and all amounts which by the term of the plan it was required to provide to the plan, to the trust. The trust constitutes an employee welfare benefit plan within the meaning of, and subject to relevant requirements of, ERISA. It will be considered to meet the requirements of §1.501(c)(9)–2(c)(3). [T.D. 7750, 46 FR 1723, Jan. 7, 1981] (a) In general. The life, sick, accident, or other benefits provided by a voluntary employees' beneficiary association must be payable to its members, their dependents, or their designated beneficiaries. For purposes of section 501(c)(9), dependent means the member's spouse; any child of the member or the member's spouse who is a minor or a student (within the meaning of section 151(e)(4)); any other minor child residing with the member; and any other individual who an association, relying on information furnished to it by a member, in good faith believes is a person described in section 152(a). Life, sick, accident, or other benefits may take the form of cash or noncash benefits. A voluntary employees' beneficiary association is not operated for the purpose of providing life, sick, accident, or other benefits unless substantially all of its operations are in furtherance of the provision of such benefits. Further, an organization is not described in this section if it systematically and knowingly provides benefits (of more than a de minimis amount) that are not permitted by paragraphs (b), (c), (d), or (e) of this section. (b) Life benefits. The term life benefits means a benefit (including a burial benefit or a wreath) payable by reason of the death of a member or dependent. A life benefit may be provided directly or through insurance. It generally must consist of current protection, but also may include a right to convert to individual coverage on termination of eligibility for coverage through the association, or a permanent benefit as defined in, and subject to the conditions in, the regulations under section 79. A life benefit also includes the benefit provided under any life insurance contract purchased directly from an employee-funded association by a member or provided by such an association to a member. The term life benefit does not include a pension, annuity or similar benefit, except that a benefit payable by reason of the death of an insured may be settled in the form of an annuity to the beneficiary in lieu of a lump-sum death benefit (whether or not the contract provides for settlement in a lump sum). (c) Sick and accident benefits. The term sick and accident benefits means amounts furnished to or on behalf of a member or a member's dependents in the event of illness or personal injury to a member or dependent. Such benefits may be provided through reimbursement to a member or a member's dependents for amounts expended because of illness or personal injury, or through the payment of premiums to a medical benefit or health insurance program. Similarly, a sick and accident benefit includes an amount paid to a member in lieu of income during a period in which the member is unable to work due to sickness or injury. Sick benefits also include benefits designed to safeguard or improve the health of members and their dependents. Sick and accident benefits may be provided directly by an association to or on behalf of members and their dependents, or may be provided indirectly by an association through the payment of premiums or fees to an insurance company, medical clinic, or other program under which members and their dependents are entitled to medical services or to other sick and accident benefits. Sick and accident benefits may also be furnished in noncash form, such as, for example, benefits in the nature of clinical care services by visiting nurses, and transportation furnished for medical care. (d) Other benefits. The term other benefits includes only benefits that are similar to life, sick, or accident benefits. A benefit is similar to a life, sick, or accident benefit if: (1) It is intended to safeguard or improve the health of a member or a member's dependents, or (2) It protects against a contingency that interrupts or impairs a member's earning power. (e) Examples of other benefits. Paying vacation benefits, providing vacation facilities, reimbursing vacation expenses, and subsidizing recreational activities such as athletic leagues are considered other benefits. The provision of child-care facilities for preschool and school-age dependents are also considered other benefits. The provision of job readjustment allowances, income maintenance payments in the event of economic dislocation, temporary living expense loans and grants at times of disaster (such as fire or flood), supplemental unemployment compensation benefits (as defined in section 501(c)(17)(D)(i) of the Code), severance benefits (under a severance pay plan within the meaning of 29 CFR 2510.3–2(b)) and education or training benefits or courses (such as apprentice training programs) for members, are considered other benefits because they protect against a contingency that interrupts earning power. Personal legal service benefits which consist of payments or credits to one or more organizations or trusts described in section 501(c)(20) are considered other benefits. Except to the extent otherwise provided in these regulations, as amended from time to time, other benefits also include any benefit provided in the manner permitted by paragraphs (5) et seq. of section 302(c) of the Labor Management Relations Act of 1947, 61 Stat. 136, as amended, 29 U.S.C. 186(c) (1979). (f) Examples of nonqualifying benefits. Benefits that are not described in paragraphs (d) or (e) of this section are not other benefits. Thus, other benefits do not include the payment of commuting expenses, such as bridge tolls or train fares, the provision of accident or homeowner's insurance benefits for damage to property, the provision of malpractice insurance, or the provision of loans to members except in times of distress (as permitted by §1.501(c)(9)–3(e)). Other benefits also do not include the provision of savings facilities for members. The term other benefits does not include any benefit that is similar to a pension or annuity payable at the time of mandatory or voluntary retirement, or a benefit that is similar to the benefit provided under a stock bonus or profit-sharing plan. For purposes of section 501(c)(9) and these regulations, a benefit will be considered similar to that provided under a pension, annuity, stock bonus or profit-sharing plan if it provides for deferred compensation that becomes payable by reason of the passage of time, rather than as the result of an unanticipated event. Thus, for example, supplemental unemployment benefits, which generally become payable by reason of unanticipated layoff, are not, for purposes of these regulations, considered similar to the benefit provided under a pension, annuity, stock bonus or profit-sharing plan. (g) Examples. The provisions of this section may be further illustrated by the following examples: Example 1. V was organized in connection with a vacation plan created pursuant to a collective bargaining agreement between M, a labor union, which represents certain hourly paid employees of T corporation, and T. The agreement calls for the payment by T to V of a specified sum per hour worked by T employees who are covered by the collective bargaining agreement. T includes the amounts in the covered employees' wages and withholds income and FICA taxes. The amounts are paid by T to V to provide vacation benefits provided under the collective bargaining agreement. Generally, each covered employee receives a check in payment of his or her vacation benefit during the year following the year in which contributions were made by T to V. The amount of the vacation benefit is determined by reference to the contributions during the prior year to V by T on behalf of each employee, and is distributed in cash to each such employee. If the earnings on investments by V during the year preceding distribution are sufficient after deducting the expenses of administering the plan, each recipient of a vacation benefit is paid an amount, in addition to the contributions on his or her behalf, equal to his/her ratable share of the net earnings of V during such year. The plan provides a vacation benefit that constitutes an eligible other benefit described in section 501(c)(9) and §1.501(c)(9)–3(e). Example 2. The facts are the same as in Example 1, except that each covered employee of T is entitled, at his or her discretion, to contribute up to an additional $1,000 each year to V, which agrees in respect of such sum to pay interest at a stated rate from the time of contribution until the time at which the contributing employee's vacation benefit is distributed. In addition, each employee may elect to leave all or a portion of his/her distributable benefit on deposit past the time of distribution, in which case interest will continue to accrue. Because the plan more closely resembles a savings arrangement than a vacation plan, the benefit payable to the covered employees of T is not a vacation benefit and is not an eligible other benefit described in section 501(c)(9) and §1.501(c)(9)–3 (d) or (e). [T.D. 7750, 46 FR 1724, Jan. 7, 1981] (a) General rule. No part of the net earnings of an employees' association may inure to the benefit of any private shareholder or individual other than through the payment of benefits permitted by §1.501(c)(9)–3. The disposition of property to, or the performance of services for, a person for less than the greater of fair market value or cost (including indirect costs) to the association, other than as a life, sick, accident or other permissible benefit, constitutes prohibited inurement. Generally, the payment of unreasonable compensation to the trustees or employees of the association, or the purchase of insurance or services for amounts in excess of their fair market value from a company in which one or more of the association's trustees, officers or fiduciaries has an interest, will constitute prohibited inurement. Whether prohibited inurement has occurred is a question to be determined with regard to all of the facts and circumstances, taking into account the guidelines set forth in this section. The guidelines and examples contained in this section are not an exhaustive list of the activities that may constitute prohibited inurement, or the persons to whom the association's earnings could impermissibly inure. See §1.501(a)–1(c). (b) Disproportionate benefits. For purposes of subsection (a), the payment to any member of disproportionate benefits, where such payment is not pursuant to objective and nondiscriminatory standards, will not be considered a benefit within the meaning of §1.501(c)(9)–3 even though the benefit otherwise is one of the type permitted by that section. For example, the payment to highly compensated personnel of benefits that are disproportionate in relation to benefits received by other members of the association will constitute prohibited inurement. Also, the payment to similarly situated employees of benefits that differ in kind or amount will constitute prohibited inurement unless the difference can be justified on the basis of objective and reasonable standards adopted by the association or on the basis of standards adopted pursuant to the terms of a collective bargaining agreement. In general, benefits paid pursuant to standards or subject to conditions that do not provide for disproportionate benefits to officers, shareholders, or highly compensated employees will not be considered disproportionate. See §1.501(c)(9)–2(a) (2) and (3). (c) Rebates. The rebate of excess insurance premiums, based on the mortality or morbidity experience of the insurer to which the premiums were paid, to the person or persons whose contributions were applied to such premiums, does not constitute prohibited inurement. A voluntary employees' beneficiary association may also make administrative adjustments strictly incidental to the provision of benefits to its members. (d) Termination of plan or dissolution of association. It will not constitute prohibited inurement if, on termination of a plan established by an employer and funded through an association described in section 501(c)(9), any assets remaining in the association, after satisfaction of all liabilities to existing beneficiaries of the plan, are applied to provide, either directly or through the purchase of insurance, life, sick, accident or other benefits within the meaning of §1.501(c)(9)–3 pursuant to criteria that do not provide for disproportionate benefits to officers, shareholders, or high
Title 26: Internal Revenue
PART 1—INCOME TAXES (CONTINUED)
Section Contents
Exempt Organizations
§ 1.501(a)-1 Exemption from taxation.
§ 1.501(c)(2)-1 Corporations organized to hold title to property for exempt organizations.
§ 1.501(c)(3)-1 Organizations organized and operated for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or for the prevention of cruelty to children or animals.
§ 1.501(c)(4)-1 Civic organizations and local associations of employees.
§ 1.501(c)(5)-1 Labor, agricultural, and horticultural organizations.
§ 1.501(c)(6)-1 Business leagues, chambers of commerce, real estate boards, and boards of trade.
§ 1.501(c)(7)-1 Social clubs.
§ 1.501(c)(8)-1 Fraternal beneficiary societies.
§ 1.501(c)(9)-1 Voluntary employees' beneficiary associations, in general.
§ 1.501(c)(9)-2 Membership in a voluntary employees' beneficiary association; employees; voluntary association of employees.
§ 1.501(c)(9)-3 Voluntary employees' beneficiary associations; life, sick, accident, or other benefits.
§ 1.501(c)(9)-4 Voluntary employees' beneficiary associations; inurement.
§ 1.501(c)(9)-5 Voluntary employees' beneficiary associations; recordkeeping requirements.
§ 1.501(c)(9)-6 Voluntary employees' beneficiary associations; benefits includible in gross income.
§ 1.501(c)(9)-7 Voluntary employees' beneficiary associations; section 3(4) of ERISA.
§ 1.501(c)(9)-8 Voluntary employees' beneficiary associations; effective date.
§ 1.501(c)(10)-1 Certain fraternal beneficiary societies.
§ 1.501(c)(12)-1 Local benevolent life insurance associations, mutual irrigation and telephone companies, and like organizations.
§ 1.501(c)(13)-1 Cemetery companies and crematoria.
§ 1.501(c)(14)-1 Credit unions and mutual insurance funds.
§ 1.501(c)(15)-1 Mutual insurance companies or associations.
§ 1.501(c)(16)-1 Corporations organized to finance crop operations.
§ 1.501(c)(17)-1 Supplemental unemployment benefit trusts.
§ 1.501(c)(17)-2 General rules.
§ 1.501(c)(17)-3 Relation to other sections of the Code.
§ 1.501(c)(18)-1 Certain funded pension trusts.
§ 1.501(c)(19)-1 War veterans organizations.
§ 1.501(c)(21)-1 Black lung trusts—certain terms.
§ 1.501(c)(21)-2 Same—trust instrument.
§ 1.501(d)-1 Religious and apostolic associations or corporations.
§ 1.501(e)-1 Cooperative hospital service organizations.
§ 1.501(h)-1 Application of the
§ 1.501(h)-2 Electing the expenditure test.
§ 1.501(h)-3 Lobbying or grass roots expenditures normally in excess of ceiling amount.
§ 1.501(k)-1 Communist-controlled organizations.
§ 1.502-1 Feeder organizations.
§ 1.503(a)-1 Denial of exemption to certain organizations engaged in prohibited transactions.
§ 1.503(b)-1 Prohibited transactions.
§ 1.503(c)-1 Future status of organizations denied exemption.
§ 1.503(d)-1 Cross references.
§ 1.503(e)-1 Special rules.
§ 1.503(e)-2 Requirements.
§ 1.503(e)-3 Effective dates.
§ 1.503(e)-4 Disallowance of charitable deductions for certain gifts made before January 1, 1970.
§ 1.503(f)-1 Loans by employers who are prohibited from pledging assets.
§ 1.504-1 Attempts to influence legislation; certain organizations formerly described in section 501(c)(3) denied exemption.
§ 1.504-2 Certain transfers made to avoid section 504(a).
§ 1.505(c)-1T Questions and answers relating to the notification requirement for recognition of exemption under paragraphs (9), (17) and (20) of Section 501(c) (temporary).
Private Foundations
§ 1.507-1 General rule.
§ 1.507-2 Special rules; transfer to, or operation as, public charity.
§ 1.507-3 Special rules; transferee foundations.
§ 1.507-4 Imposition of tax.
§ 1.507-5 Aggregate tax benefit; in general.
§ 1.507-6 Substantial contributor defined.
§ 1.507-7 Value of assets.
§ 1.507-8 Liability in case of transfers.
§ 1.507-9 Abatement of taxes.
§ 1.508-1 Notices.
§ 1.508-2 Disallowance of certain charitable, etc., deductions.
§ 1.508-3 Governing instruments.
§ 1.508-4 Effective date.
§ 1.509(a)-1 Definition of private foundation.
§ 1.509(a)-2 Exclusion for certain organizations described in section 170(b)(1)(A).
§ 1.509(a)-3 Broadly, publicly supported organizations.
§ 1.509(a)-4 Supporting organizations.
§ 1.509(a)-5 Special rules of attribution.
§ 1.509(a)-6 Classification under section 509(a).
§ 1.509(a)-7 Reliance by grantors and contributors to section 509(a) (1), (2), and (3) organizations.
§ 1.509(b)-1 Continuation of private foundation status.
§ 1.509(c)-1 Status of organization after termination of private foundation status.
§ 1.509(d)-1 Definition of support
§ 1.509(e)-1 Definition of gross investment income.
Taxation of Business Income of Certain Exempt Organizations
§ 1.511-1 Imposition and rates of tax.
§ 1.511-2 Organizations subject to tax.
§ 1.511-3 Provisions generally applicable to the tax on unrelated business income.
§ 1.511-4 Minimum tax for tax preferences.
§ 1.512(a)-1 Definition.
§ 1.512(a)-2 Definition applicable to taxable years beginning before December 13, 1967.
§ 1.512(a)-3 [Reserved]
§ 1.512(a)-4 Special rules applicable to war veterans organizations.
§ 1.512(a)-5T Questions and answers relating to the unrelated business taxable income of organizations described in paragraphs (9), (17) or (20) of Section 501(c) (temporary).
§ 1.512(b)-1 Modifications.
§ 1.512(c)-1 Special rules applicable to partnerships; in general.
§ 1.513-1 Definition of unrelated trade or business.
§ 1.513-2 Definition of unrelated trade or business applicable to taxable years beginning before December 13, 1967.
§ 1.513-3 Qualified convention and trade show activity.
§ 1.513-4 Certain sponsorship not unrelated trade or business.
§ 1.513-5 Certain bingo games not unrelated trade or business.
§ 1.513-6 Certain hospital services not unrelated trade or business.
§ 1.513-7 Travel and tour activities of tax exempt organizations.
§ 1.514(a)-1 Unrelated debt-financed income and deductions.
§ 1.514(a)-2 Business lease rents and deductions for taxable years beginning before January 1, 1970.
§ 1.514(b)-1 Definition of debt-financed property.
§ 1.514(c)-1 Acquisition indebtedness.
§ 1.514(c)-2 Permitted allocations under section 514(c)(9)(E).
§ 1.514(d)-1 Basis of debt-financed property acquired in corporate liquidation.
§ 1.514(e)-1 Allocation rules.
§ 1.514(f)-1 Definition of business lease.
§ 1.514(g)-1 Business lease indebtedness.
Farmers' Cooperatives
§ 1.521-1 Farmers' cooperative marketing and purchasing associations; requirements for exemption under section 521.
§ 1.522-1 Tax treatment of farmers' cooperative marketing and purchasing associations exempt under section 521.
§ 1.522-2 Manner of taxation of cooperative associations subject to section 522.
§ 1.522-3 Patronage dividends, rebates, or refunds; treatment as to cooperative associations entitled to tax treatment under section 522.
§ 1.522-4 Taxable years affected.
§ 1.527-1 Political organizations; generally.
§ 1.527-2 Definitions.
§ 1.527-3 Exempt function income.
§ 1.527-4 Special rules for computation of political organization taxable income.
§ 1.527-5 Activities resulting in gross income to an individual or political organization.
§ 1.527-6 Inclusion of certain amounts in the gross income of an exempt organization which is not a political organization.
§ 1.527-7 Newsletter funds.
§ 1.527-8 Effective date; filing requirements; and miscellaneous provisions.
§ 1.527-9 Special rule for principal campaign committees.
Homeowners Associations
§ 1.528-1 Homeowners associations.
§ 1.528-2 Organized and operated to provide for the acquisition, construction, management, maintenance and care of association property.
§ 1.528-3 Association property.
§ 1.528-4 Substantiality test.
§ 1.528-5 Source of income test.
§ 1.528-6 Expenditure test.
§ 1.528-7 Inurement.
§ 1.528-8 Election to be treated as a homeowners association.
§ 1.528-9 Exempt function income.
§ 1.528-10 Special rules for computation of homeowners association taxable income and tax.
Corporations Used To Avoid Income Tax on Shareholders
§ 1.531-1 Imposition of tax.
§ 1.532-1 Corporations subject to accumulated earnings tax.
§ 1.533-1 Evidence of purpose to avoid income tax.
§ 1.533-2 Statement required.
§ 1.534-1 Burden of proof as to unreasonable accumulations generally.
§ 1.534-2 Burden of proof as to unreasonable accumulations in cases before the Tax Court.
§ 1.534-3 Jeopardy assessments in Tax Court cases.
§ 1.535-1 Definition.
§ 1.535-2 Adjustments to taxable income.
§ 1.535-3 Accumulated earnings credit.
§ 1.536-1 Short taxable years.
§ 1.537-1 Reasonable needs of the business.
§ 1.537-2 Grounds for accumulation of earnings and profits.
§ 1.537-3 Business of the corporation.
Personal Holding Companies
§ 1.541-1 Imposition of tax.
§ 1.542-1 General rule.
§ 1.542-2 Gross income requirement.
§ 1.542-3 Stock ownership requirement.
§ 1.542-4 Corporations filing consolidated returns.
§ 1.543-1 Personal holding company income.
§ 1.543-2 Limitation on gross income and personal holding company income in transactions involving stocks, securities, and commodities.
§ 1.544-1 Constructive ownership.
§ 1.544-2 Constructive ownership by reason of indirect ownership.
§ 1.544-3 Constructive ownership by reason of family and partnership ownership.
§ 1.544-4 Options.
§ 1.544-5 Convertible securities.
§ 1.544-6 Constructive ownership as actual ownership.
§ 1.544-7 Option rule in lieu of family and partnership rule.
§ 1.545-1 Definition.
§ 1.545-2 Adjustments to taxable income.
§ 1.545-3 Special adjustment to taxable income.
§ 1.547-1 General rule.
§ 1.547-2 Requirements for deficiency dividends.
§ 1.547-3 Claim for credit or refund.
§ 1.547-4 Effect on dividends paid deduction.
§ 1.547-5 Deduction denied in case of fraud or wilful failure to file timely return.
§ 1.547-6 Suspension of statute of limitations and stay of collection.
§ 1.547-7 Effective date.
Foreign Personal Holding Companies
§ 1.551-1 General rule.
§ 1.551-2 Amount included in gross income.
§ 1.551-3 Deduction for obligations of the United States and its instrumentalities.
§ 1.551-4 Information in return.
§ 1.551-5 Effect on capital account of foreign personal holding company and basis of stock in hands of shareholders.
§ 1.552-1 Definition of foreign personal holding company.
§ 1.552-2 Gross income requirement.
§ 1.552-3 Stock ownership requirement.
§ 1.552-4 Certain excluded banks.
§ 1.552-5 United States shareholder of excluded bank.
§ 1.553-1 Foreign personal holding company income.
§ 1.554-1 Stock ownership.
§ 1.555-1 General rule.
§ 1.555-2 Additions to gross income.
§ 1.556-1 Definition.
§ 1.556-2 Adjustments to taxable income.
§ 1.556-2T Adjustments to taxable income (temporary).
§ 1.556-3 Illustration of computation of undistributed foreign personal holding company income.
Deduction for Dividends Paid
§ 1.561-1 Deduction for dividends paid.
§ 1.561-2 When dividends are considered paid.
§ 1.562-1 Dividends for which the dividends paid deduction is allowable.
§ 1.562-2 Preferential dividends.
§ 1.562-3 Distributions by a member of an affiliated group.
§ 1.563-1 Accumulated earnings tax.
§ 1.563-2 Personal holding company tax.
§ 1.563-3 Dividends considered as paid on last day of taxable year.
§ 1.564-1 Dividend carryover.
§ 1.565-1 General rule.
§ 1.565-1T General rule (temporary).
§ 1.565-2 Limitations.
§ 1.565-3 Effect of consent.
§ 1.565-4 Consent dividends and other distributions.
§ 1.565-5 Nonresident aliens and foreign corporations.
§ 1.565-6 Definitions.
Banking Institutions
§ 1.581-1 Banks.
§ 1.581-2 Mutual savings banks, building and loan associations, and cooperative banks.
§ 1.581-3 Definition of bank prior to September 28, 1962.
§ 1.582-1 Bad debts, losses, and gains with respect to securities held by financial institutions.
§ 1.584-1 Common trust funds.
§ 1.584-2 Income of participants in common trust fund.
§ 1.584-3 Computation of common trust fund income.
§ 1.584-4 Admission and withdrawal of participants in the common trust fund.
§ 1.584-5 Returns of banks with respect to common trust funds.
§ 1.584-6 Net operating loss deduction.
§ 1.585-1 Reserve for losses on loans of banks.
§ 1.585-2 Addition to reserve.
§ 1.585-3 Special rules.
§ 1.585-4 Reorganizations and asset acquisitions.
§ 1.585-5 Denial of bad debt reserves for large banks.
§ 1.585-6 Recapture method of changing from the reserve method of section 585.
§ 1.585-7 Elective cut-off method of changing from the reserve method of section 585.
§ 1.585-8 Rules for making and revoking elections under §§1.585–6 and 1.585–7.
§ 1.586-1 Reserve for losses on loans of small business investment companies, etc.
§ 1.586-2 Addition to reserve.
Mutual Savings Banks, Etc.
§ 1.591-1 Deduction for dividends paid on deposits.
§ 1.592-1 Repayment of certain loans by mutual savings banks, building and loan associations, and cooperative banks.
§ 1.593-1 Additions to reserve for bad debts.
§ 1.593-2 Additions to reserve for bad debts where surplus, reserves, and undivided profits equal or exceed 12 percent of deposits or withdrawable accounts.
§ 1.593-3 Taxable years affected.
§ 1.593-4 Organizations to which section 593 applies.
§ 1.593-5 Addition to reserves for bad debts.
§ 1.593-6 Pre-1970 addition to reserve for losses on qualifying real property loans.
§ 1.593-6A Post-1969 addition to reserve for losses on qualifying real property loans.
§ 1.593-7 Establishment and treatment of reserves for bad debts.
§ 1.593-8 Allocation of pre-1952 surplus to opening balance of reserve for losses on qualifying real property loans.
§ 1.593-10 Certain distributions to shareholders by a domestic building and loan association.
§ 1.593-11 Qualifying real property loan and nonqualifying loan defined.
§ 1.594-1 Mutual savings banks conducting life insurance business.
§ 1.595-1 Treatment of foreclosed property by certain creditors.
§ 1.596-1 Limitation on dividends received deduction.
§ 1.597-1 Definitions.
§ 1.597-2 Taxation of Federal financial assistance.
§ 1.597-3 Other rules.
§ 1.597-4 Bridge Banks and Agency Control.
§ 1.597-5 Taxable Transfers.
§ 1.597-6 Limitation on collection of income tax.
§ 1.597-7 Effective date.
§ 1.597-8 Transitional rules for Federal financial assistance.
Bank Affiliates
§ 1.601-1 Special deduction for bank affiliates.
Natural Resources
§ 1.611-0 Regulatory authority.
§ 1.611-1 Allowance of deduction for depletion.
§ 1.611-2 Rules applicable to mines, oil and gas wells, and other natural deposits.
§ 1.611-3 Rules applicable to timber.
§ 1.611-4 Depletion as a factor in computing earnings and profits for dividend purposes.
§ 1.611-5 Depreciation of improvements.
§ 1.612-1 Basis for allowance of cost depletion.
§ 1.612-2 Allowable capital additions in case of mines.
§ 1.612-3 Depletion; treatment of bonus and advanced royalty.
§ 1.612-4 Charges to capital and to expense in case of oil and gas wells.
§ 1.612-5 Charges to capital and to expense in case of geothermal wells.
§ 1.613-1 Percentage depletion; general rule.
§ 1.613-2 Percentage depletion rates.
§ 1.613-3 Gross income from the property.
§ 1.613-4 Gross income from the property in the case of minerals other than oil and gas.
§ 1.613-5 Taxable income from the property.
§ 1.613-6 Statement to be attached to return when depletion is claimed on percentage basis.
§ 1.613-7 Application of percentage depletion rates provided in section 613(b) to certain taxable years ending in 1954.
§ 1.613A-0 Limitations on percentage depletion in the case of oil and gas wells; table of contents.
§ 1.613A-1 Post-1974 limitations on percentage depletion in case of oil and gas wells; general rule.
§ 1.613A-2 Exemption for certain domestic gas wells.
§ 1.613A-3 Exemption for independent producers and royalty owners.
§ 1.613A-4 Limitations on application of §1.613A–3 exemption.
§ 1.613A-5 Election under section 613A(c)(4).
§ 1.613A-6 Recordkeeping requirements.
§ 1.613A-7 Definitions.
§ 1.614-0 Introduction.
§ 1.614-1 Definition of property.
§ 1.614-2 Election to aggregate separate operating mineral interests under section 614(b) prior to its amendment by Revenue Act of 1964.
§ 1.614-3 Rules relating to separate operating mineral interests in the case of mines.
§ 1.614-4 Treatment under the Internal Revenue Code of 1939 with respect to separate operating mineral interests for taxable years beginning before January 1, 1964, in the case of oil and gas wells.
§ 1.614-5 Special rules as to aggregating nonoperating mineral interests.
§ 1.614-6 Rules applicable to basis, holding period, and abandonment losses where mineral interests have been aggregated or combined.
§ 1.614-7 Extension of time for performing certain acts.
§ 1.614-8 Elections with respect to separate operating mineral interests for taxable years beginning after December 31, 1963, in the case of oil and gas wells.
§ 1.615-1 Pre-1970 exploration expenditures.
§ 1.615-2 Deduction of pre-1970 exploration expenditures in the year paid or incurred.
§ 1.615-3 Election to defer pre-1970 exploration expenditures.
§ 1.615-4 Limitation of amount deductible.
§ 1.615-5 Time for making election with respect to returns due on or before May 2, 1960.
§ 1.615-6 Election to deduct under section 615.
§ 1.615-7 Effect of transfer of mineral property.
§ 1.615-8 Termination of section 615.
§ 1.615-9 Notification under Tax Reform Act of 1969.
§ 1.616-1 Development expenditures.
§ 1.616-2 Election to defer.
§ 1.616-3 Time for making election with respect to returns due on or before May 2, 1960.
§ 1.617-1 Exploration expenditures.
§ 1.617-2 Limitation on amount deductible.
§ 1.617-3 Recapture of exploration expenditures.
§ 1.617-4 Treatment of gain from disposition of certain mining property.
Exclusions From Gross Income
§ 1.621-1 Payments to encourage exploration, development, and mining for defense purposes.
Sales and Exchanges
§ 1.631-1 Election to consider cutting as sale or exchange.
§ 1.631-2 Gain or loss upon the disposal of timber under cutting contract.
§ 1.631-3 Gain or loss upon the disposal of coal or domestic iron ore with a retained economic interest.
§ 1.632-1 Tax on sale of oil or gas properties.
Mineral Production Payments
§ 1.636-1 Treatment of production payments as loans.
§ 1.636-2 Production payments retained in leasing transactions.
§ 1.636-3 Definitions.
§ 1.636-4 Effective dates of section 636.
Continental Shelf Areas
§ 1.638-1 Continental Shelf areas.
§ 1.638-2 Effective date.
§§ 1.639-1.640 [Reserved]
Exempt Organizations
top
§ 1.501(a)-1 Exemption from taxation.
top
§ 1.501(c)(2)-1 Corporations organized to hold title to property for exempt organizations.
top
§ 1.501(c)(3)-1 Organizations organized and operated for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or for the prevention of cruelty to children or animals.
top
§ 1.501(c)(4)-1 Civic organizations and local associations of employees.
top
§ 1.501(c)(5)-1 Labor, agricultural, and horticultural organizations.
top
§ 1.501(c)(6)-1 Business leagues, chambers of commerce, real estate boards, and boards of trade.
top
§ 1.501(c)(7)-1 Social clubs.
top
§ 1.501(c)(8)-1 Fraternal beneficiary societies.
top
§ 1.501(c)(9)-1 Voluntary employees' beneficiary associations, in general.
top
§ 1.501(c)(9)-2 Membership in a voluntary employees' beneficiary association; employees; voluntary association of employees.
top
§ 1.501(c)(9)-3 Voluntary employees' beneficiary associations; life, sick, accident, or other benefits.
top
§ 1.501(c)(9)-4 Voluntary employees' beneficiary associations; inurement.
top