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
member income 85x 85
________________ = ______________ = ___ = 85%
total income 85x + 15x 100
of the cooperative's total income is derived
from member income. [Reg. §1.501(c)(12)-1.]
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