[Federal Register Volume 60, Number 245 (Thursday, December 21, 1995)]
[Proposed Rules]
[Pages 66228-66229]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30830]



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DEPARTMENT OF THE TREASURY
26 CFR Part 1

[EE-53-95]
RIN 1545-AT95


Requirements for Tax Exempt Section 501(c)(5) Organizations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of Proposed Rulemaking.

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SUMMARY: This document contains proposed regulations clarifying certain 
requirements of section 501(c)(5). The requirements are being clarified 
to provide needed guidance to organizations as to the requirements an 
organization must meet in order to be exempt from tax as an 
organization described in section 501(c)(5).

DATES: Written comments and requests for a public hearing must be 
received by March 20, 1996.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (EE-53-95), room 5228, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. In the alternative, submissions may be hand delivered between 
the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (EE-53-95), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW., 
Washington, DC.

FOR FURTHER INFORMATION CONTACT: Robin Ehrenberg, (202) 622-6080 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This notice of proposed rulemaking clarifies the scope of the 
exemption provided in section 501(c)(5) of the Internal Revenue Code 
for labor, agricultural and horticultural organizations.
    An income tax exemption for labor organizations was first provided 
in the Corporation Excise Tax Act of 1909, Public Law No. 61-5, 36 
Stat. 11, 112-118, and has been in effect continuously since that time. 
A labor organization is an entity that is organized ``to protect and 
promote the interests of labor.'' Portland Cooperative Labor Temple 
Association v. Commissioner, 39 B.T.A. 450 (1939), acq., 1939-1 C.B. 
28. The principal purpose of the organization must be to better the 
working conditions of people engaged in a common pursuit. See, Treas. 
Reg. Sec. 1.501(c)(5)-1. Organizations meeting this requirement have 
traditionally engaged in collective action directed toward the workers' 
common objective of improving working conditions. They include labor 
unions that negotiate with employers on behalf of workers for improved 
wages, fringe benefits, hours and similar working conditions, and 
certain union-controlled organizations, like strike funds, that provide 
benefits to workers that enhance the union's ability to bargain 
effectively. See Rev. Rul. 67-7 (1967-1 C.B. 137). They do not include 
strike funds that provide income to union members but are not 
controlled by unions. See Rev. Rul. 76-420 (1976-2 C.B. 153). Such an 
organization will not pay the strike benefits ``with the objective of 
bettering conditions of employment, but by reason of its contractual 
agreements with the workers.''
    Labor organizations may also meet the requirements of section 
501(c)(5) by providing benefits that directly improve working 
conditions or compensate for unpredictable hazards that interrupt work. 
Examples of such benefits include operating a dispatch hall to match 
union members with work assignments and providing industry stewards who 
represent employees with grievances against management. See Rev. Rul. 
75-473 (1975-2 C.B. 213); Rev. Rul. 77-5 (1977-1 C.B. 148). On the 
other hand, managing saving and investment plans for workers, including 
retirement plans, does not bear directly on working conditions. See 
Rev. Rul. 77-46 (1977-1 C.B. 147). Accordingly, section 501(c)(5) has 
not been applied to organizations that manage retirement savings plans 
as their principal activity.
    Nevertheless, in Morganbesser v. United States, 984 F.2d 560 (2d 
Cir. 1993), the court held that a trust managing a pension benefit plan 
pursuant to a collective bargaining agreement qualified as a labor 
organization described in section 501(c)(5). The IRS and the Treasury 
Department believe that this decision is contrary to existing law, and 
the IRS is issuing an action on decision reflecting its view that the 
Morganbesser court erred in its holding. These proposed regulations are 
a clarification of the existing legal standard.

    Like labor organizations, agricultural and horticultural 
organizations must also better the conditions of those engaged in a 
common pursuit in order to be described in section 501(c)(5). See 
Sec. 1.501(c)(5)-1. There is no authority indicating that the law is to 
be interpreted differently for agricultural and horticultural 
organizations than for labor organizations. Accordingly, the proposed 
regulations clarify the law as it applies to all section 501(c)(5) 
organizations.

    Certain organizations have taken the position in refund actions 
that they are labor organizations described in section 501(c)(5) even 
though their principal activity was to manage retirement savings plans 
for workers. In addition, some such foreign organizations have claimed 
exemption from withholding on dividend, interest and similar income 
that they have earned. The IRS will continue to oppose these claims for 
refund and exemption from withholding.

    A health plan is not a retirement savings plan. Thus, the IRS will 
continue to follow Rev. Rul. 62-17 (1962-1 C.B. 87) (regarding a labor 
organization providing health benefits) even in circumstances where a 
majority of the organization's members are retired. Furthermore, the 
IRS will continue to recognize that negotiating the terms of a 
retirement plan and other postretirement benefits and designating one 
or more representatives to the board of a multiemployer pension trust 
are proper activities for a labor organization. The proposed 
regulations are not intended to apply to or affect 

[[Page 66229]]
any other provision of federal law, including provisions of the 
Employee Retirement Income Security Act of 1974 (ERISA) administered by 
the Secretary of Labor.

Explanation of Provisions

    The proposed regulations add a new paragraph to Sec. 1.501(c)(5)-1 
providing that an organization is not an organization within the 
meaning of section 501(c)(5) if the organization's principal activity 
is to manage savings or investment plans or programs, including 
retirement savings plans.

Proposed Effective Date

    These regulations are proposed to be effective December 21, 1995.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in EO 12866. Therefore, 
a regulatory assessment is not required. It also has been determined 
that section 553(b) of the Administrative Procedure Act (5 U.S.C. 
chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do 
not apply to these regulations, and, therefore, a Regulatory 
Flexibility Analysis is not required. Pursuant to section 7805(f) of 
the Internal Revenue Code, this notice of proposed rulemaking will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) that are submitted timely to the IRS. All 
comments will be available for public inspection and copying. A public 
hearing may be scheduled if requested in writing by a person that 
timely submits written comments. If a public hearing is scheduled, 
notice of the date, time, and place for the hearing will be published 
in the Federal Register.

Drafting Information

    The principal author of these regulations is Robin Ehrenberg, 
Office of Associate Chief Counsel (Employee Benefits and Exempt 
Organizations). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 1.501(c)(5)-1 is amended by:
    1. Redesignating paragraph (b) as paragraph (c).
    2. Adding a new paragraph (b) to read as follows:


Sec. 1.501(c)(5)-1  Labor, agricultural, and horticultural 
organizations.

* * * * *
    (b)(1) An organization is not an organization described in section 
501(c)(5) if the principal activity of the organization is to receive, 
hold, invest, disburse, or otherwise manage funds associated with 
savings or investment plans or programs, including pension or other 
retirement savings plans or programs.

    (2) Example. Trust A is organized in accordance with a 
collective bargaining agreement between a labor union and multiple 
employers. Representatives of both the employers and the union serve 
as trustees. Trust A receives funds from the employers who are 
subject to the agreement, invests the funds and uses the funds and 
accumulated earnings to pay pension benefits to union members as 
specified in the agreement. It also provides information to union 
members about their retirement benefits and assists them with 
administrative tasks associated with the benefits. Most of Trust A's 
activities are devoted to these functions. From time to time, Trust 
A also participates in the renegotiation of the collective 
bargaining agreement. Because Trust A's principal activity is to 
manage funds associated with a pension plan, it is not an 
organization described in section 501(c)(5).
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 95-30830 Filed 12-20-95; 8:45 am]
BILLING CODE 4830-01-U