Foreign cooperative institution denied credit-union exemption

Plain-English summary

A nonprofit financial institution organized in a foreign country applied for exemption as a state-chartered credit union under section 501(c)(14). It translated the foreign law governing its operations but did not translate its articles, bylaws, financial statements, or other supporting documents as required. The translated law allowed broader cooperative investment and development activities than the mutual purposes of a credit union. The institution also was not organized under a state credit-union law and did not show that it met all nonterritorial requirements of the Federal Credit Union Act. The IRS denied exemption, and the determination became final after the institution did not file a protest.

Ruling snapshot

• Question: Does the foreign cooperative investment institution qualify as a tax-exempt credit union under section 501(c)(14)?
• Outcome: Denied
• Key authorities: IRC § 501(c)(14); Rev. Rul. 69-282; Rev. Rul. 69-283; Rev. Rul. 72-37

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Contact Person:

Number: 201416009
Release Date: 4/18/2014 Identification Number:

Contact Number:

Date: January 23, 2014
Employer Identification Number:

Form Required To Be Filed:

Tax Years:
UIL: 501.14-00

Dear

This is our final determination that you do not qualify for exemption from Federal income tax as
an organization described in Internal Revenue Code section 501(c)(14). Recently, we sent you
a letter in response to your application that proposed an adverse determination. The letter

explained the facts, law and rationale, and gave you 30 days to file a protest. Since we did not
receive a protest within the requisite 30 days, the proposed adverse determination is now final.

You must file Federal income tax returns on the form and for the years listed above within 30
days of this letter, unless you request an extension of time to file. File the returns in accordance
with their instructions, and do not send them to this office. Failure to file the returns timely may
result in a penalty.

We will make this letter and our proposed adverse determination letter available for public
inspection under Code section 6110, after deleting certain identifying information. Please read
the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, follow the
instructions in Notice 437. If you agree with our deletions, you do not need to take any further
action.

If you have any questions about this letter, please contact the person whose name and
telephone number are shown in the heading of this letter. If you have any questions about your
Federal income tax status and responsibilities, please contact IRS Customer Service at

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1-800-829-1040 or the IRS Customer Service number for businesses, 1-800-829-4933. The
IRS Customer Service number for people with hearing impairments is 1-800-829-4059.

Sincerely,

Karen Schiller
Acting Director, Exempt Organizations
Rulings and Agreements

Enclosure
Notice 437
Redacted Proposed Adverse Determination Letter
Redacted Final Adverse Determination Letter

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
Date: December 19, 2013 Contact Person:
Identification Number:
UIL: 501.14-00
Contact Number:
FAX Number:
Employer Identification Number:
Legend:

Foreign Country

Foreign Law

Foreign Government Bank
Foreign Language

Date 1

Date 2

Dear

We have considered your application for recognition of exemption from Federal income tax
under Internal Revenue Code § 501(a). Based on the information provided, we have concluded
that you do not qualify for exemption under Code § 501(c)(14). The basis for our conclusion is
set forth below.

FACTS

You are a nonprofit financial institution incorporated under Foreign Country general corporations
law on Date 1. You operate under Foreign Law (Law), which created a fund to promote the
social and economic development of Foreign Country through business using a cooperative
structure. You state that you also operate under uniform bylaws adopted by Foreign Country.

You applied for recognition under § 501(a) as a § 501(c)(14) state-chartered credit union on
Date 2. You submitted documents supporting this application. However, those documents
were in Foreign Language. You provided no translation of those documents. When asked to
provide translations of these documents, you provided a translation of the Law but failed to
translate any other documents, including your Articles of Incorporation, Bylaws, and financial
statements.

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In your initial application, you state that you were created by the Law “to promote the social and
economic development of [Foreign Country] through business using a cooperative structure.”
The Law controls your operations. Specifically, the Law states that:

• You are a “non-lucrative corporation” incorporated under Foreign Country's general
corporations law;

• Your purpose is to be an investment and development vehicle for certain cooperative
enterprises;

• Your members are cooperative enterprises that contribute to you and Foreign
Government Bank. Nine members compose your board of directors, four of which are
from Foreign Government Bank and five of which represent the cooperative enterprises
that are your members; and

• Cooperative enterprises are entities organized under Foreign Country law, including
cooperative credit and savings unions; subsidiaries or affiliates organized or owned by
one or more cooperative credit and savings unions; insurance cooperatives; the Foreign
Government Bank; and other cooperatives.

• Any securities, instruments, certificates, stocks, shares or other evidence of investment
participation you issue is exempt from Foreign Country securities law.

In addition to providing an investment vehicle for your members, the Law permits you to
“assume an active role in the design, gestation, organization, and capitalization of cooperative
enterprises”; to conduct “pertinent studies and analyses” of those organizations; and to “invest
in projects proposed by third parties” consistent with your policies.

Additionally, you state that the Law defines your loan terms, including the loan’s purpose,
security, and rate of interest; securities that qualify as legal investments; and the distribution of
dividends on your shares, if any.

You provide no evidence indicating that you are operated under Foreign Country credit union
law and do not state whether you conform to the requirements of the Federal Credit Union Act.

LAW
I.R.C. § 501(a) exempts organizations described in § 501(c) from federal income taxation.

I.R.C. § 501(c)(14)(A) describes credit unions without capital stock organized and operated for
mutual purposes and without profit.

Rev. Rul. 69-282, 1969-1 C.B. 155, determined that an organization that did not operated under
the state law governing credit unions did not qualify as a credit union under § 501(c)(14)(A).

The ruling states that state law determines whether organizations are credit unions for purposes
of exemption from federal income taxation under § 501(c)(14).

Rev. Rul. 69-283, 1969-1 C.B. 156, determined that an organization formed by a group of
individuals at a United States military base in a foreign country that met all but the territorial
requirements of the Federal Credit Union Act, would be regarded as a credit union under §
501(c)(14)(A). The organization formed to accumulate savings and provide a source of credit at

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reasonable rates. The organization restricted membership to United States military personnel
and civilians employed at the installation and provided services only to its members. Its
purposes and method of operation conformed to the provisions of the Act. However, the Act
applies only to the several States, the District of Columbia, the several Territories and
possessions of the United States, the Panama Canal Zone, and the Commonwealth of Puerto
Rico (the “territorial requirement”). The organization was not located in one of these countries.
The ruling states that, if an organization is not governed by the law of any of the States, its
status as a credit union cannot be determined under State law. Nonetheless, if the organization
meets all but the territorial requirements of the Act, it will be regarded as a credit union for
purposes of exemption under § 501(c)(14)(A). Accordingly, the organization qualified for
recognition under § 501(c)(14)(A) because it met all but the territorial requirements of the Act.

Rev. Rul. 72-37, 1972-1 C.B. 152, clarifies that, to qualify as a credit union, the organization
must operate without profit and for the mutual benefit of its members as required by the Federal
statute, in addition to being chartered under a state credit union law as specified in Rev. Rul. 69-
282.

Section 9.01 of Rev. Proc. 2013-4, 2013-1 C.B. 126 (updated annually), provides that all
requests for letter rulings and determinations must be submitted in English. Additionally, all
documents submitted in support of such requests must be in English, or accompanied by an
English translation.

In La Caisse Populaire Ste-Marie (St. Mary’s Bank) v. United States, 425 F. Supp. 512 (D.N.H.
1976), aff'd, 563 F.2d 505 (1st Cir. 1977), the United States District Court for the District of New
Hampshire determined that St. Mary’s operated for “mutual purposes” because “[b]oth
borrowers and savers alike are required to be members of the institution and participate in the
earnings of the institution by receiving dividends declared on capital shares.”

RATIONALE

You do not qualify for recognition as a state-chartered credit union under § 501(c)(14)(A). First,
you failed to show that you are organized and operated without capital stock, without profit, and
for mutual purposes because you failed to provide English translations of your supporting
documents, including your Articles of Incorporation, Bylaws, and financial statements. Rev. Rul.
72-37; Rev. Proc. 2013-1, § 9.01. Nonetheless, assuming that the Law is a valid substitute for a
translation of your Articles of Incorporation, the Law allows you to operate for purposes other
than mutual purposes. See Rev. Rul. 72-37. A credit union is operated for “mutual purposes” if
“[b]oth borrowers and savers alike are required to be members of the institution and participate
in the earnings of the institution by receiving dividends declared on capital shares.” La Caisse
Populaire Ste. Marie (St. Mary’s Bank) v. United States, 425 F. Supp. 512 (D.N.H. 1976), aff’d,
563 F.2d 505 (1st Cir. 1977). However, the Law allows you to “assume an active role in the
design, gestation, organization, and capitalization of cooperative enterprises”; to conduct
“pertinent studies and analyses” of these organizations; and to “invest in projects proposed by
third parties” consistent with your policies. These purposes are broader than the “mutual
purposes” described in § 501(c)(14). Accordingly, you are operated for purposes other than
“mutual purposes” within the meaning of § 501(c)(14)(A).

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Additionally, you failed to show that you operate under a state law governing credit unions. A
credit union recognized under § 501(c)(14)(A) must operate under the state law governing credit
unions. Rev. Rul. 69-282. You are organized and operated in Foreign Country, which is not a
State. Accordingly, you cannot be organized under a state law governing credit unions.
Nonetheless, you may still be recognized under § 501(c)(14)(A) if you meet all but the territorial
requirements of the Federal Credit Union Act (Act). Rev. Rul. 69-283. However, you failed to
provide information showing that you meet the requirements of the Act. Therefore, you are not
a state-chartered credit union within the meaning of § 501(c)(14)(A).

CONCLUSION

You fail to meet the requirements of § 501(c)(14) and do not qualify for recognition under that
section. You have the right to file a protest if you believe this determination is incorrect. To
protest, you must submit a statement of your views and fully explain your reasoning. You must
submit the statement, signed by one of your officers, within 30 days from the date of this letter.
We will consider your statement and decide if the information affects our determination.

Your protest statement should be accompanied by the following declaration:

Under penalties of perjury, I declare that I have examined this protest statement, including
accompanying documents, and, to the best of my knowledge and belief, the statement
contains all the relevant facts, and such facts are true, correct, and complete.

You also have a right to request a conference to discuss your protest. This request should be
made when you file your protest statement. An attorney, certified public accountant, or an
individual enrolled to practice before the Internal Revenue Service may represent you. If you
want representation during the conference procedures, you must file a proper power of attorney,
Form 2848, Power of Attorney and Declaration of Representative, if you have not already done
so. For more information about representation, see Publication 947, Practice before the IRS
and Power of Attorney. All forms and publications mentioned in this letter can be found at
www.irs.gov, Forms and Publications.

If you do not intend to protest this determination, you do not need to take any further action. If
we do not hear from you within 30 days, we will issue a final adverse determination letter. That
letter will provide information about filing tax returns and other matters.

Please send your protest statement, Form 2848 and any supporting documents to this address:

Internal Revenue Service

1111 Constitution Ave, N.W.
Washington, DC 20224

You may also fax your statement using the fax number shown in the heading of this letter. If
you fax your statement, please call the person identified in the heading of this letter to confirm
that he or she received your fax.

If you have any questions, please contact the person whose name and telephone number are
shown in the heading of this letter.

Sincerely,

Karen Schiller
Acting Director, Exempt Organizations
Rulings and Agreements