[Federal Register Volume 62, Number 145 (Tuesday, July 29, 1997)]
[Rules and Regulations]
[Pages 40447-40449]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-19814]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8726]
RIN 1545-AT95


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

AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.

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

DATES: These regulations are effective on December 21, 1995.
FOR FURTHER INFORMATION CONTACT: Robin Ehrenberg, (202) 622-6080 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    On December 21, 1995, the IRS published in the Federal Register (60 
FR 66228) a notice of proposed rulemaking under section 501(c)(5). The 
proposed regulations clarified that organizations whose principal 
activity is administering retirement plans are not section 501(c)(5) 
organizations.

[[Page 40448]]

    A public hearing was held on June 5, 1996. Written comments were 
received. After consideration of all of the comments, the proposed 
regulations under section 501(c)(5) are adopted as revised by this 
Treasury Decision. The comments and revisions are discussed below.

Explanation of Revisions and Summary of Comments

    Section 501(c)(5) describes certain labor, agricultural and 
horticultural organizations. Section 401(a) sets forth the requirements 
for exemption for qualified employee benefit pension trusts. Section 
501(a) exempts from federal income taxes organizations described in 
section 401(a) or section 501(c). Thus, section 401(a) and section 
501(c)(5) should be read as enactments of Congress in pari materia, 
taken together as one consistent body of law. Pacific Co. v.  Johnson, 
285 U.S. 480, 495 (1932).
    The Treasury and IRS believe that section 501(c)(5) should be 
interpreted in a manner consistent with the Employee Retirement Income 
Security Act of 1974, Pub. L. No. 93-406, 88 Stat. 829 (1974) (ERISA), 
as amended. ERISA was enacted as a ``comprehensive and reticulated 
statute'' to regulate retirement plans and trusts, ``the product of a 
decade of Congressional study of the Nation's private employee benefit 
system.'' Mertens versus Hewitt Assoc., 508 U.S. 248, 251 (1993), 
citing Nachman versus PBGC, 46 U.S. 359, 361 (1980). Congress intended 
that pension trusts satisfy the comprehensive requirements of section 
401(a), as amended by ERISA, in order to be tax exempt. See S. Rep. No. 
383, 93d Cong., 1st Sess. at 33, reprinted in 1974-3 C.B. (Supp.) 112; 
H. Rep. No. 807, 93d Cong., 1st Sess. at 33, reprinted in 1974-3 C.B. 
(Supp.) 236, 266.
    Accordingly, Treasury and the IRS continue to believe that an 
organization whose principal purpose is managing employer-sponsored 
retirement plans is not an exempt labor organization described in 
section 501(c)(5). (However, an employer-sponsored pension trust may 
nevertheless qualify for exemption under section 501(a) if it meets the 
requirements of section 401(a).) Morganbesser versus United States, 984 
F.2d 560 (2d Cir. 1993), nonacq. 1995-2 C.B. 2.; In re Morganbesser, 
AOD CC-1995-016 (Dec. 26, 1995).
    Consistent with ERISA and interpreting section 401(a) and section 
501(c)(5) as part of a consistent whole, these regulations provide a 
general rule that an organization is not described in section 501(c)(5) 
if its principal activity 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. However, to the extent that ERISA provides special rules for 
certain types of retirement savings plans, it is appropriate to take 
those rules into account in interpreting provisions of the Code 
relating to such plans, including section 501(c)(5).
    As noted by one commentator, ERISA excepts certain dues-financed 
plans from Parts 2 and 3 of Title I of ERISA (vesting, funding and 
certain other qualification requirements). Those pension trusts 
sponsored by labor organizations for their members, which accept no 
employer contributions, do not qualify for exemption under section 
401(a) because they are not maintained by an employer. Section 401(a), 
Rev. Rul. 80-306, 1980-2 C.B. 131. Accordingly, the regulations provide 
that an organization (including a pension trust) may qualify as an 
organization described in section 501(c)(5) if it meets all of the 
following requirements:
    (1) The organization is established and maintained by another labor 
organization described in section 501(c)(5) (determined without 
reference to the tests in Treas. Reg. Sec. 1.501(c)(5)-1(b)(2));
    (2) The organization is not directly or indirectly established or 
maintained in whole or in part by any employer or by any government (or 
any agency, instrumentality or controlled entity thereof);
    (3) The organization is funded by membership dues paid to the labor 
organization establishing and maintaining the organization and earnings 
thereon; and
    (4) After September 2, 1974 (the date of enactment of ERISA, 88 
Stat. 829), the organization's governing documents have not permitted 
or provided for nor did the organization accept, any contribution from 
any employer or from any government (or any agency, instrumentality or 
controlled entity thereof). Treas. Reg. Sec. 1.501(c)(5)-1(b)(2).
    Treas. Reg. Sec. 1.892-2T(c) governs the tax status of a pension 
trust that is wholly owned and controlled by a foreign sovereign.

Scope

    These regulations solely address the tax exempt status of 
organizations under section 501(c)(5) whose principal activity is to 
receive, hold, invest, disburse, or otherwise manage funds associated 
with savings or investment plans or programs. Other Code sections and 
tax principles apply to the tax exempt status of these organizations 
and the tax consequences of these arrangements to employers and 
participants in these arrangements.
    One commentator requested that the IRS clarify that the regulations 
do not apply to health and welfare benefits not specifically mentioned 
in the regulations, such as retiree health benefits, death benefits, 
and group legal services. The regulations address only savings or 
investment plans or programs, (including pension or other retirement 
savings plans or programs) and do not address other types of benefits. 
Cf. Rev. Rul. 62-17, 962-1 C.B. 87.

Special Analyses

    It has been determined that this Treasury Decision 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) 
does not apply to these regulations, and because the notice of proposed 
rulemaking preceding the regulations was issued prior to March 29, 
1996, the Regulatory Flexibility Act, (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Internal Revenue Code, the 
notice of proposed rulemaking preceding these regulations was submitted 
to the Chief Counsel for Advocacy of the Small Business Administration 
for comment on its impact on small business.

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.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is 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:

[[Page 40449]]

    1. Redesignating paragraph (b) as paragraph (c).
    2. Adding a new paragraph (b).
    The addition reads as follows:


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

* * * * *
    (b)(1) General rule. 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) Exception. Paragraph (b)(1) of this section shall not apply to 
an organization which--
    (i) Is established and maintained by another labor organization 
described in section 501(c)(5) (determined without regard to this 
paragraph (b)(2));
    (ii) Is not directly or indirectly established or maintained in 
whole or in part by one or more--
    (A) Employers;
    (B) Governments or agencies or instrumentalities thereof; or
    (C) Government controlled entities;
    (iii) Is funded by membership dues from members of the labor 
organization described in this paragraph (b)(2) and earnings thereon; 
and
    (iv) Has not at any time after September 2, 1974 (the date of 
enactment of the Employee Retirement Income Security Act of 1974, Pub. 
L. 93-406, 88 Stat. 829) provided for, permitted or accepted employer 
contributions.
    (3) Example. The principles of this paragraph (b) are illustrated 
by the following example:

    Example. Trust A is organized in accordance with a collective 
bargaining agreement between labor union K and multiple employers. 
Trust A forms part of a plan that is established and maintained 
pursuant to the agreement and which covers employees of the 
signatory employers who are members of K. Representatives of both 
the employers and K serve as trustees. A receives contributions from 
the employers who are subject to the agreement. Retirement benefits 
paid to K's members as specified in the agreement are funded 
exclusively by the employers' contributions and accumulated 
earnings. A also provides information to union members about their 
retirement benefits and assists them with administrative tasks 
associated with the benefits. Most of A's activities are devoted to 
these functions. From time to time, A also participates in the 
renegotiation of the collective bargaining agreement. A's principal 
activity is to receive, hold, invest, disburse, or otherwise manage 
funds associated with a retirement savings plan. In addition, A does 
not satisfy all the requirements of the exception described in 
paragraph (b)(2) of this section. (For example, A accepts 
contributions from employers.) Therefore, A is not a labor 
organization described in section 501(c)(5).
* * * * *
Michael P. Dolan,
Acting Commissioner of Internal Revenue.
    Approved: July 8, 1997.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 97-19814 Filed 7-28-97; 8:45 am]
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