Rev. Rul. 81-60

1981-1 C.B. 335, 1981-8 I.R.B. 43.

                       Internal Revenue Service
                                 Revenue Ruling

                          AGRICULTURAL; REFUND OF DUES

                          Published: February 23, 1981

26 CFR 1.501(c)(5)-1: Labor, agricultural, and horticultural organizations

  Agricultural; refund of dues. The refund of excess dues to members of an exempt agricultural organization in the same proportion as the dues are paid does not disqualify the organization from exemption under section 501(c)(5) of the Code.

ISSUE

  Does a refund of excess dues to members of an agricultural organization in the same proportion as dues are paid disqualify the organization from exemption from federal income tax under section 501(c)(5) of the Internal Revenue Code?

FACTS

  The organization is a local association of farmers exempt from federal income tax as an agricultural organization under section 501(c)(5) of the Code.  The organization's income is derived from member assessments based upon the acreage involved in the organization's programs.  Disbursements are for the organization's exempt activities and miscellaneous costs of administration. Amounts left at the end of the year are refunded to members in the same proportion as dues were paid.

LAW AND ANALYSIS

  Section 501(c)(5) of the Code provides for the exemption from federal income tax of labor, agricultural, or horticultural organizations.

  Section 1.501(c)(5)-1 of the Income Tax Regulations provides that the organizations listed in section 501(c)(5) of the Code are entitled to exemption if they have no net earnings inuring to the benefit of any members and if they have as their objectives 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.

  There are no published rulings or decisions on the question of whether a refund of dues constitutes inurement under section 501(c)(5).  However, it is well established that a business league or other organization exempt under section 501(c)(6) may refund part of the dues or contributions previously paid to the organization for its activities.  Such refunds are treated as reductions in dues.

  In King County Insurance Association, 37 B.T.A. 288 (1938), acq. 1938-1 C.B. 17, the court held that refunds made to members did not affect an association's status as an exempt business league, since such refunds served merely to reduce the amount of dues that otherwise would have had to be contributed by members.

  Refunds by a section 501(c)(6) organization must be made out of funds paid by those receiving the refunds.  In Michigan Mobile Home and Recreational Vehicle Institute, 66 T.C. 770 (1976), for example, a business league was denied exemption because it made rebates to its members who exhibited at a trade show sponsored by the organization while denying rebates to nonmember exhibitors, although members and nonmembers were charged the same rates for exhibition space.  In contrast, a similar organization that sponsored a trade show and made rebates to all exhibitors, whether or not members, did not jeopardize its tax exempt status under section 501(c)(6).  See Rev. Rul. 77-206, 1977-1 C.B. 149.

  Thus, consistent with the rationale of King County and Rev. Rul. 77- 206, the pro rata refund of excess dues to members does not constitute inurement under section 1.501(c)(5)-1 of the regulations.

  However, the same limitation applicable to section 501(c)(6) organizations, that all money refunded may come only from dues and other amounts contributed by the class of members receiving the refund, is equally applicable to section 501(c)(5) agricultural organizations.

HOLDING

  The refund of excess dues to members in the same proportion as dues are paid does not disqualify the organization from exemption under section 501(c)(5) of the Code.

Rev. Rul. 81-60, 1981-1 C.B. 335, 1981-8 I.R.B. 43.