While tax exempt status is usually associated with charities and religious organizations, it is also available to labor unions. Section 501(c)(5) of the Internal Revenue Code allows tax exemption for labor, agricultural, and horticultural organizations. To be considered exempt, unions must meet two requirements: 1) the objective of the organization must be the betterment of the conditions of those engaged in the pursuits of labor and the development of a higher degree of efficiency in their respective occupations; and 2) the net earnings of the organization must not be used to benefit the groups membership. Generally speaking, an organization is not exempt under Section 501(c)(5) if its main objective is to receive, hold, invest, disburse, or otherwise manage funds associated with savings or investment plans.
An important distinction to make, however, deals with whether a union sets up a fund to pay its members while they are on strike. It may seem that such a fund goes against the exempt purposes of a labor organization because it furnishes a monetary benefit on its members. Nonetheless, the IRS has categorized strike funds as a union activity that furthers the exempt purposes of a labor organization under Section 501(c)(5). Other examples of activities furthering exempt purposes might include:
- Publishing a newspaper that contains matters only concerning organized labor activities;
- A legal defense fund for law enforcement officers;
- Maintaining a labor temple that provides a home for multiple labor unions in the community;
- An association of teachers that bargains collectively, processes grievances for members, and sponsors continuing education seminars and courses;
- Establishing a dispatch hall that allocates work assignments among eligible union members; and
- Creating an organization that conducts and supports litigation of common interests to union members.
Even though strike funds and the various enumerated activities are encouraged, they might still violate Section 501(c)(5) under certain circumstances and cause a union to lose its tax exempt status. For instance, if a union’s strike fund is controlled by a private individual or individuals who run the labor organization, this could violate Section 501(c)(5). Likewise, the creation of a savings plan established pursuant to a collective bargaining agreement would not further the exempt purposes of a labor organization.
While a labor organization that sets up a strike fund is eligible for exempt status, this does not mean the benefits themselves are categorized as tax deductible for individual members. The IRS has noted that benefits paid to individual by a union as strike or lockout benefits, including both cash and the fair market value of other property, are typically to be included in one’s income as compensation. A union member may only exclude these benefits from their income when the facts clearly show that the union intended them as gifts.
For more information on the exemption requirements for labor organizations, visit the IRS’ webpage on Life Cycle of a Labor Organization.