Internal Revenue Service
Rev. Rul. 77-46
1977-1 C.B. 147
Labor union members' savings plan. A nonprofit organization established
under a collective bargaining agreement between a union and an employers'
association to enable members of the union to save money by having a set
amount withheld from their pay and deposited in a bank account, the funds
to be paid to them annually with any interest remaining after payment of
administration expenses, fails to qualify for tax exemption under section
501(c)(5) of the Code.
Rev. Rul. 77-46
Advice has been requested whether the nonprofit organization described
below qualifies for exemption from Federal income tax under section
501(c)(5) of the Internal Revenue Code of 1954.
The organization was established pursuant to a collective bargaining
agreement between a union and an employers' association to enable the
members of the union to save money through a savings plan. The organization
is administered by equal numbers of employer and union representatives.
A set sum, established by the collective bargaining agreement, is withheld
from each union member's pay and deposited in a bank account. The funds on
deposit earn interest that is used to offset the organization's
administrative expenses. The funds deposited during the course of the year,
plus any interest that remains after the administrative expenses have been
paid, are paid to the members annually on a fixed date.
Section 501(c)(5) of the Code provides for the exemption from Federal
income tax of labor organizations.
Section 1.501(c)(5)-1 of the Income Tax Regulations provides that labor
organizations entitled to exemption from Federal income tax are those which
have no net earnings inuring to the benefit of any members, and have as
their objects the betterment of the conditions of those engaged in such
pursuits, the improvement of the grade of their products, and the
development of a higher degree of efficiency in their respective
An organization that is engaged exclusively in activities appropriate for
an exempt labor organization may itself qualify for exemption under section
501(c)(5) of the Code. Portland Cooperative Labor Temple Association v.
Commissioner, 39 B.T.A. 450 (1939), acq., 1939-1 (Part 1) C.B. 28.
In order for an organization to qualify as an exempt labor organization, it
is necessary that its activities be those commonly or historically
recognized as characteristic of labor organizations, or be closely related
and necessary to accomplishing the principal purposes of exempt labor
Historically, labor organizations were primarily organized to negotiate
wages, hours, and working conditions. Additionally, labor organizations
were organized as mutual benefit organizations that provided death,
sickness, and accident benefits to members.
A review of the legislative history in this area, however, fails to show
that labor organizations were exempted from Federal income taxation because
they provided savings plans for employees. Additionally, savings plans that
disburse money on an annual basis are not closely related to a labor
organization's principal activities of negotiating wages, hours, and
working conditions nor are such savings plans closely related and necessary
to providing the mutual benefits characteristically associated with labor
Accordingly, because the described organization fails to provide a benefit
for which labor organizations have traditionally been exempted from Federal
income taxation, and since the organization's activities are not closely
related and necessary to accomplishing the principal activities of labor
organizations, it fails to qualify for exemption from Federal income tax
under section 501(c)(5) of the Code.