[Code of Federal Regulations]

[Title 26, Volume 7]

[Revised as of April 1, 2005]

From the U.S. Government Printing Office via GPO Access

[CITE: 26CFR1.501(c)(12)-1]



[Page 28]

 

                       TITLE 26--INTERNAL REVENUE

 

    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 

                               (CONTINUED)

 

General Rule--Table of Contents

 

Sec. 1.501(c)(12)-1  Local benevolent life insurance associations, 

mutual irrigation and telephone companies, and like organizations.



    (a) An organization described in section 501(c)(12) must receive at 

least 85 percent of its income from amounts collected from members for 

the sole purpose of meeting losses and expenses. If an organization 

issues policies for stipulated cash premiums, or if it requires advance 

deposits to cover the cost of the insurance and maintains investments 

from which more than 15 percent of its income is derived, it is not 

entitled to exemption. On the other hand, an organization may be 

entitled to exemption, although it makes advance assessments for the 

sole purpose of meeting future losses and expenses, provided that the 

balance of such assessments remaining on hand at the end of the year is 

retained to meet losses and expenses or is returned to members.

    (b) The phrase of a purely local character applies to benevolent 

life insurance associations, and not to the other organizations 

specified in section 501(c)(12). It also applies to any organization 

seeking exemption on the ground that it is an organization similar to a 

benevolent life insurance association. An organization of a purely local 

character is one whose business activities are confined to a particular 

community, place, or district, irrespective, however, of political 

subdivisions. If the activities of an organization are limited only by 

the borders of a State it cannot be considered to be purely local in 

character.

    (c) For taxable years of a mutual or cooperative telephone company 

beginning after December 31, 1974, the 85 percent member-income test 

described in paragraph (a) of this section is applied without taking 

into account income received or accrued from another telephone company 

for the performance of communication services involving the completion 

of long distance calls to, from, or between members of the mutual or 

cooperative telephone company. For example, if, in one year, a 

cooperative telephone company receives $85x from its members for 

telephone calls, $15x as interest income, and $20x as credits under long 

distance interconnection agreements with other telephone companies for 

the performance of communication services involving the completion of 

long distance calls to, from, or between the cooperative's members 

(whether or not the credits may be offset, in whole or in part, by 

amounts due the other companies under the interconnection agreements), 

the member-income fraction is calculated without taking into account, 

either in the numerator or denominator, the $20x credits received from 

the other telephone companies. In this example, the 85 percent member-

income test is satisfied because at least 85 percent

[GRAPHIC] [TIFF OMITTED] TC14NO91.158





of the cooperative's total income is derived from member income.



[T.D. 6500, 25 FR 11737, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, as 

amended at 44 FR 59523, Oct. 16, 1979]