Statement of Bruce Hopkins, Attorney, Polsinelli Shalton Welte Suelthaus, P.C., Kansas City, Missouri

Testimony Before the Full Committee
of the House Committee on Ways and Means

April 20, 2005

Tax exemption for these organizations is traceable to the Revenue Act of 1913 and can be found in earlier laws. Therefore, we are rapidly approaching the centennial of these rules.

I have also been asked to provide the Committee with my view of the present-day state of the statutory law of tax-exempt organizations.

Further, I have been asked to provide a summary of the law concerning tax-exempt labor organizations.

Summary of Testimony

My testimony essentially centers on four points:

1. The statutory law concerning tax-exempt organizations has evolved over the decades in a disorderly, unplanned fashion. Congress has not been sufficiently explicit about the rules governing tax-exempt organizations.

2. Congress made major revisions in this law in 1917, 1950, and 1969. Overall, Congress has frequently modified and expanded the law concerning the exempt sector. Nearly 30 tax acts have brought some revision and/or addition to this area of the law.

3. The state of the federal tax law today is that it is unbalanced and uneven.

4. Many aspects of today's statutory law of tax-exempt organizations are unclear. As the sector has grown, this situation has fostered or facilitated misunderstandings and abuses by certain tax-exempt organizations and tax law planners. Federal tax statutory law that addresses the gaps in the present-day overall statutory regime would provide a full legal structure that would address this problem. This, in turn would facilitate the ability of the IRS to provide meaningful guidance within that framework.

As background, I have been in the private practice of law for 35 years, representing charitable and other tax-exempt organizations. I have taught in two law schools, and continue to present at conferences and seminars around the country. I have written several books, including The Law of Tax-Exempt Organizations (8^th ed., annually supplemented). I write a monthly newsletter on exempt organizations law subject, Bruce R. Hopkins' Nonprofit Counsel.

Summary of Statutory Law Evolution

Tax exemption for charitable organizations began in 1913, when Congress enacted the first constitutional federal income tax. There have, of course, been many major pieces of tax legislation since then. The following acts are of major consequence: establishment of the concept of federal income tax exemption in 1913; enactment of the charitable contribution deductions in 1917, 1921, and 1932; enactment of the unrelated business rules in 1950; and enactment of the public charity and private foundation definitions and rules in 1969.

Thus, the statutory law of tax-exempt organizations was initiated in 1913, and given major boosts in 1950 and 1969. Indeed, today’s statutory structure (along with the charitable giving rules) was shaped substantially by the 1969 legislation.

In somewhat of a second-tier categorization of important exempt charitable organizations legislation, the limitations on legislative activities were enacted in 1934, the prohibition on political campaign activities was adopted in 1954, public charity lobbying rules were enacted in 1976, excise taxes on legislative and political expenditures were enacted in 1987, and the excess benefit transactions (intermediate sanctions) rules were enacted in 1996.

Nearly every tax act of any consequence since then (particularly in 1974, 1976, 1982, 1984, 1986, 1987, 1993, 1996, 1997, 2000, 2002, 2003, and 2004) has added to this body of law. (Additional legislation that would have augmented this collection of law, passed in 1992, 1995, and 1998, was vetoed.)

Below, I have provided the Committee with the history and evolution of this statutory law, summarizing each of the 28 acts. Also, I traced the history of these acts by year and Internal Revenue Code sections. This history illustrates the fact that the statutory law of tax-exempt organizations has indeed evolved in a disorderly fashion.

Another factor shaping the evolution of the federal statutory law of tax-exempt organizations is Congressional reaction to positions taken by the IRS. In the attached statement, I have provided 18 instances where statutory exempt organizations law was created in response to a policy position of the agency.

State of the Statutory Law

Today, the tax-exempt sector of the United States is confronted with a dazzling array of federal tax law reform proposals. These are found in a recent report from the staff of the Joint Committee on Taxation, a paper prepared last year by the staff of the Senate Committee on Finance, the Administration’s fiscal year 2006 proposed budget, and the interim report recently published by Independent Sector's Panel on the Nonprofit Sector.

Some of these proposals are referenced below. Before addressing them, however, I note that many of these proposals are reflective of the inadequate state of the federal statutory tax law of tax-exempt organizations. There are many more gaps in this body of law than there should be. The Department of the Treasury, the Internal Revenue Service, and the courts, from time to time, attempt to fill these voids but the absence of a full and balanced statutory regime contributes to the need for many of the reforms being advocated at this time.

The state of the federal statutory law of tax-exempt organizations can best be described in words that may be somewhat redundant: disparate, irregular, unbalanced, and uneven. This aspect of the tax law (other than the charitable giving rules) consists of the following 20 elements:

1. Criteria for exemption
2. Organizational test
3. Operational test
4. Public charities and private foundations
5. Private inurement
6. Private benefit
7. Intermediate sanctions
8. Legislative activities
9. Political activities
10. Commerciality
11. Unrelated business
12. Tax-exempt subsidiaries
13. For-profit subsidiaries
14. Exempt organizations in partnerships
15. Exempt organizations in other joint ventures
16. Internet use
17. Reporting requirements
18. Disclosure requirements
19. Corporate governance principles
20. Fundraising

Of these 20 elements, only six of them are generally adequate reflected in existing statutory law: the subjects of public charities and private foundations, the intermediate sanctions rules, the law as to attempts to influence legislation, the unrelated business rules, tax-exempt subsidiaries (often supporting organizations), and the reporting requirements.

By contrast, the statutory law concerning the income, gift, and estate tax charitable giving rules is far more complete and balanced, enabling the IRS to issue timely and meaningful guidance.

These gaps in the exempt organizations statutory law cannot be properly filled by tax regulations and rulings. Treasury and the IRS try this from time to time and often trigger litigation over whether the department and agency have the authority to promulgate the rules. Some examples of these attempts are the regulations concerning the facts-and-circumstances test for qualifying as a publicly supported charitable organization, and the advertising and travel tour regulations in the unrelated business context.

In fact, two law changes made by the IRS years ago reverberate in controversy today. Back in 1959, the IRS promulgated what was then radically new regulations defining what is charitable, educational, and the scientific. Before these rules, the definition of charitable and the like was quite narrow. Also, in 1969, the IRS ruled that promotion of health is a stand-alone definition of what is charitable, setting in motion today's ongoing debate over the scope of that term.

The IRS lacks the capability to promulgate sufficient regulations in this area and, to a large degree, should not be placed in that position. Indeed, these holes in the statutory structure create an environment where the IRS issues private letter rulings containing questionable, incorrect, and even ludicrous statements. Here are some examples of IRS private letter rulings that fit these criteria:

1. Ruling purporting to state the "traditional attributes of a charity" (none of which are correct) (Exemption Denial and Revocation Letter 20044044E).

2. Ruling that an exempt organization's website is evidence of unwarranted commerciality (Ex. Den. and Rev. Ltr. 20044045E),

3. Ruling stating that "avoidance of regulation" is nonexempt activity (Priv. Ltr. Rul. 200452036).

4. Ruling applying private benefit standard to social welfare organizations (Ex. Den. and Rev. Ltr. 20044008E).

5. Ruling applying commerciality doctrine to social welfare organizations (Priv. Ltr. Rul. 200501020).

6. Technical advice memorandum declaring that charities must devote assets of for-profit subsidiary to charitable ends (Tech. Adv. Mem. 200437040).

Ideally, then, the full statutory design would be established by Congress and then the IRS could provide meaningful guidance within that framework.

As noted, these voids are mirrored in the reform proposals being advocated in various quarters. For example, proposals to add law concerning tax exemption for hospitals, credit counseling agencies, fraternal beneficiary societies, donor-advised funds, and to some extent supporting organizations reflect the paucity of law concerning the criteria for tax-exempt status.

Here are some proposals for the Committee’s consideration:

1. Create law spelling out the criteria for tax-exempt status. For example, legislation could address what is charitable, educational, and scientific. Other categories of exemption, however, could also benefit from this type of clarification, such as social welfare organizations (IRC § 501(c)(4) entities), labor organizations (IRC § 501(c)(5) entities, and business leagues (IRC § 501(c)(6) entities). It is in this setting that law could be created stating criteria for exemption for hospitals, donor-advised funds, fraternal beneficiary societies, and the like.

It may be noted that, as an example of this imbalance, the statutory law spelling out the criteria for exemption for multi-parent title-holding companies (IRC § 501(c)(25)), of which there are few, is three times the size of the statutory law concerning the bulk of the tax-exempt sector: entities referenced in IRC § 501(c)(3)-(7).

2. Develop law outlining an organizational test for at least the principal categories of tax-exempt organizations.

3. Spell out the elements of the private inurement doctrine, including the criteria for determining the reasonableness of compensation, lending arrangements, rental arrangements, and sales transactions.

4. Codify a version of the private benefit doctrine, in the process clarifying whether the doctrine applies to tax-exempt organizations other than charitable entities.

5. Amplify the political activities rules, both for charitable entities and other forms of tax-exempt organizations, particularly social welfare organizations (IRC § 501(c)(4) entities), labor organizations (IRC § 501(c)(5) entities), and associations (business leagues) (IRC § 501(c)(6) entities).

6. Codify a version of the commerciality doctrine, in the process clarifying whether the doctrine applies to tax-exempt organizations other than charitable entities.

7. Enact rules concerning the use of for-profit subsidiaries by tax-exempt organizations.

8. Enact rules concerning the involvement of tax-exempt organizations in partnerships and other joint ventures.

9. Develop statutory law concerning exempt organizations' use of the Internet, such as for advocacy, unrelated business, and fundraising purposes.

10. In the context of reporting and disclosure, consider whether the proposals for a five-year review filing with the IRS, an annual notice requirement for small organizations, and certification as to compliance with the unrelated business rules for large exempt organizations.

11. Enactment of federal law corporate governance principles.

12. Federal law concerning charitable fundraising.

This type of statutory law is required to eliminate the imbalances in the present law and to provide the IRS with a complete regulatory framework within which to provide guidance in the form of regulations, revenue rulings, private determinations, and more.

History and Evolution of Statutory Law

The original statutory tax exemption for nonprofit organizations in U.S. law for charitable organizations was part of the Tariff Act of 1894.[1] The provision stated that “nothing herein contained shall apply to . . . corporations, companies, or associations organized and conducted solely for charitable, religious, or educational purposes.”[2]

After ratification of the Sixteenth Amendment by the states in 1913, which provided Congress with the authority to enact an income tax, Congress enacted the Revenue Act of 1913, exempting from federal income tax “any corporation or association organized and operated exclusively for religious, charitable, scientific, or educational purposes, no part of the net income of which inures to the benefit of any private shareholder or individual.”[3]

The federal income charitable contribution deduction was enacted when Congress passed the Revenue Act of 1917.[4] The Revenue Act of 1921 brought the estate tax charitable contribution deduction, which was made retroactive to 1917.[5] The gift tax charitable contribution deduction can into being as part of the Revenue Act of 1932.[6]

In the Revenue Act of 1918, the enumeration of tax-exempt charitable organizations was expanded to include those organized “for the prevention of cruelty to children or animals.”[7] The Revenue Act of 1921 further expanded the statute to exempt “any community chest, fund or foundation” and added “literary” groups to the list of exempt entities.[8] The Revenue Acts of 1924,[9] 1926,[10] 1928,[11] and 1932[12] did not provide for any changes in the law of exempt organizations.

The Revenue Act of 1934 carried forward the tax exemption requirements as stated in the prior revenue measures and added the rule that “no substantial part” of the activities of an exempt charitable organization can involve the carrying on of “propaganda” or “attempting to influence legislation.”[13] The Revenue Acts of 1936[14] and 1938[15] brought forward these rules, as did the Internal Revenue Code of 1939.[16]

Tax-exempt organizations were required to file annual information returns, beginning in 1944. This requirement came into the federal tax law as part of the Tax Revenue Act of 1943.[17]

The unrelated business rules were enacted as part of the Revenue Act of 1950.[18] These rules tax the net income of charitable and other tax-exempt organizations when they regularly carry on businesses that are not substantially related to the achievement of exempt purposes. This was a radical addition to the law, in part because it introduced the concept that some or all otherwise tax-exempt organizations could be taxed. This would lead to many more federal taxes on or in connection with “tax-exempt” organizations.

The rules for charitable and like organizations, as stated in the tax exemption law provision that remains in use today,[19] came into being as a consequence of enactment of the Internal Revenue Code of 1954.[20] The previous rules were retained and two additions to the statute were made: The listing of exempt organizations was amplified to include entities that are organized and operated for the purpose of “testing for public safety,” and organizations otherwise described in the provision became forbidden to “participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of any candidate for public office.”

Enactment of the Revenue and Expenditure Control Act of 1968 brought rules concerning cooperative hospital service organizations.[21] These rules were amended by provisions of the Tax Reform Act of 1976, the Revenue Act of 1988, and the Taxpayer Relief Act of 1997. The rules pertaining to cooperative service organizations of operating educational organizations were enacted in 1974[22] (as was statutory law concerning political organizations[23]).

The Tax Reform Act of 1969[24] -- the most significant of the modern tax acts from the standpoint of the law of tax-exempt organizations -- introduced a stupendous array of exempt organizations laws, including the exemption recognition application rules, rules differentiating public charities from private foundations, imposing taxes on various aspects of the operations of private foundations, and revising the unrelated debt-financed property rules.[25]

The Tax Reform Act of 1976 brought law concerning declaratory judgment rules for charitable organizations, lobbying by public charities (the expenditure test), and amateur sports organizations.[26]

The Tax Equity and Fiscal Responsibility Act of 1982 amended the law concerning amateur sports organizations.[27] The Tax Reform Act of 1984 brought the church audit rules, changes in the U.S. instrumentalities rules, and the child care organizations rules.[28] The Deficit Reduction Act of 1984 brought the tax-exempt entity leasing rules.[29]

The Tax Reform Act of 1986 changed the Internal Revenue Code formal reference to the Code of 1986 (which, as amended, is its status today).[30] This act also introduced the law concerning provision of commercial-type insurance, liquidations of for-profit entities into tax-exempt organizations, and multiparent title-holding corporations; also, it revised the exempt entity leasing rules.

The Revenue Act of 1987 brought taxes on public charities for engaging in excessive lobbying and political campaign activities, as well as fundraising disclosure requirements for noncharitable organizations.[31] Enactment of the Omnibus Budget Reconciliation Act of 1993 introduced rules concerning the nondeductibility of expenses for lobbying and political campaign activities, and disclosure rules as to these activities for associations.[32] The 1993 legislation also introduced law in the charitable giving arena, concerning substantiation requirements and quid pro quo contributions.

Legislation known as the Taxpayer Bill of Rights 2, enacted in 1996, added the intermediate sanctions rules, expanded the penalties for failure to timely file complete annual information returns, expanded the contents of these returns, revised disclosure rules, and added the private inurement language to the law pertaining to tax-exempt social welfare organizations.[33] The Small Business Job Protection Act of 1996 added revisions to the unrelated business rules, exemption opportunities for charitable risk pools and state tuition programs, and the ability of exempt charitable organizations to own stock in small business corporations.[34]

The enactment of the Taxpayer Relief Act of 1997 caused several changes and additions to the law of exempt organizations, including various modifications of the unrelated business income rules.[35]

The Victims of Terrorism Tax Relief Act of 2001 brought rules concerning the provision of assistance by charitable organizations to individuals who are victims of terrorism and clarified the law concerning exempt organization-funded disaster relief programs.[36]

The Jobs and Growth Tax Relief Reconciliation Act of 2003 changed the tax rates for dividends and capital gains, which has had an impact on charitable giving and rules pertaining to the administration of charitable remainder trusts.[37]

The Military Family Tax Relief Act of 2003 introduced rules by which the tax-exempt status of charitable organizations could be suspended if designated as supporting or engaging in terrorist activity.[38] The Working Families Tax Relief Act of 2004 extended the rules concerning charitable contributions of computer technology and equipment used for educational purposes.[39]

The American Jobs Creation Act of 2004 introduced rules concerning the treatment of charitable contributions of patents and other forms of intellectual property, rules concerning the treatment of charitable contributions of motor and other vehicles, increasing reporting for noncash contributions, an exclusion from unrelated business income for gain or loss on the sale or exchange of certain brownfield properties, and extended the IRS user fee program.[40]

References by Present-Law Internal Revenue Code Sections

The following provisions of the Internal Revenue Code, concerning tax-exempt charitable organizations, are correlated by the year of enactment:

1913

Tax exemption for charitable organizations created, with inclusion of private inurement doctrine (predecessor to IRC § 501(c)(3)).

1917

Income tax charitable contribution deduction enacted (predecessor to IRC § 170).

1918

Tax exemption for charitable organizations expanded (predecessor to IRC § 501(c)(3)).

1921

Estate tax charitable contribution deduction enacted (predecessor to IRC § 2055). Tax exemption for charitable organizations expanded again (predecessor to IRC § 501(c)(3)).

1932

Gift tax charitable contribution deduction enacted (predecessor to IRC § 2522).

1934

Addition to law of prohibition on substantial legislative activities by exempt charitable organizations (predecessor to IRC § 501(c)(3)).

1944

Tax-exempt organizations become required to file annual information returns (predecessor to IRC § 6033).

1950

Unrelated business income rules enacted (predecessor to IRC §§ 511-514).

1954

Tax exemption for charitable organizations expanded again (IRC § 501(c)(3)). Addition to law of prohibition on political campaign activities by exempt charitable organizations (id.).

1968, 1974, 1976, 1988, 1997

Enactment of rules concerning tax-exempt charitable cooperative entities (IRC § 501(e), (f)).

1969

Enactment of exemption notice rules (IRC § 508), definitions of public charities and private foundations (IRC § 509), the private foundation rules (IRC §§ 507, 4940-4948), expansion of the debt-financed income rules (IRC § 514), and introduction of the planned giving rules (such as for charitable remainder trusts (IRC § 664)).

1976

Enactment of declaratory judgment rules for charitable organizations (IRC § 7428), public charity lobbying rules (IRC §§ 501(h), 4911), and rules concerning amateur sports organizations (IRC § 501(c)(3)).

1982

Addition of rules concerning amateur sports organizations (IRC § 501(j)).

1984

Enactment of church audit rules (IRC § 7611), the child care organizations rules (IRC § 501(k)), and the tax-exempt entity leasing rules (IRC § 168(h)).

1986

Enactment of the commercial-type insurance rules (IRC § 501(m)), liquidations of charitable and other exempt organizations (IRC § 337), and revision of exempt entity leasing rules.

1987

Enactment of excise taxes on public charities for excessive lobbying (IRC § 4912) and for political campaign activity (IRC § 4955).

1993

Enactment of general charitable gift substantiation rules (IRC § 170(f)(8)) and quid pro quo contributions rules (IRC § 6115).

1996

Enactment of the intermediate sanctions rules (IRC § 4958) and extension of the doctrine of private inurement to exempt social welfare organizations (IRC § 501(c)(4) entities). The unrelated business rules (IRC §§ 512, 513) were revised, rules concerning charitable risk pools (IRC § 501(n)) and prepaid tuition plans (IRC § 529) were enacted, and charitable organizations were accorded the ability to own stock in small business corporations (IRC § 512(e)).

1997

The unrelated business income rules were modified again and the corporate sponsorship rules (IRC § 513(i)) were enacted

2001

Congress clarified rules for providing assistance by charitable organizations to victims of terrorism and natural disasters.

2003

Tax rates for dividends and capital gains lowered (affecting the charitable remainder trust distribution ordering rules). The tax exemption suspension rules (IRC § 501(p)) were enacted.

2004

Enactment of rules concerning the treatment of charitable contributions of patents and other forms of intellectual property (IRC § 170(m)), rules concerning the treatment of charitable contributions of motor and other vehicles (IRC § 170(f)(12)), increasing reporting for noncash contributions (IRC § 170(f)(11)), an exclusion from unrelated business income for gain or loss on the sale or exchange of certain brownfield properties (IRC § 512(b)(19)), and extension of the IRS user fee program (IRC § 7528).

Other Law

The foregoing statutory framework has been augmented and expanded over the decades by court opinions, Department of the Treasury Regulations, and Internal Revenue Service public and private determinations. Indeed, in some instances, the statutory law was enacted in response to the position of a court, the Treasury Department, or the IRS.

In the tax-exempt organizations context, for example, Congress has added 18 provisions to the Internal Revenue Code to overturn an IRS position. They are:

1. Enactment of law in 1950 (IRC § 513(a)(3)) to exempt from unrelated business income tax sales of items acquired by gift, to overrule IRS position that nonprofit thrift shops were not tax-exempt.

2. Enactment of cooperative hospital service organization rules in 1968 (IRC § 501(e)), to overrule IRS position that cooperatives could not qualify for tax exemption by reason of IRC § 501(c)(3).

3. Enactment of cooperative service organization of educational organizations rule in 1974 (IRC § 501(f)), to overrule IRS position that this type of entity could not qualify for tax exemption by reason of IRC § 501(c)(3).

4. Enactment of definition of term agricultural in 1976 (IRC § 501(g)), to overrule IRS position that the term, for purposes of IRC § 501(c)(5), does not encompass the harvesting of aquatic resources.

5. Enactment of public entertainment rules in 1976 (IRC § 513(d)((2)), to overrule IRS (and courts') position that horse racing at exempt agricultural organizations' fairs was nonexempt activity.

6. Enactment of trade show rules in 1976 (IRC § 513(d)(3)), to overrule IRS position that order-taking and selling at these shows was nonexempt activity.

7. Enactment of law in 1976 (IRC § 513(e)) to allow exempt hospitals to provide certain services to other exempt hospitals, to overrule IRS position that these services were nonexempt functions.

8. Enactment of law in 1978 concerning securities lending transactions (IRC § 513(b)(1)), to overrule IRS position that securities lending by exempt organizations was unrelated business.

9. Enactment of law in 1978 (IRC § 513(f)) to exempt bingo games from unrelated business rules, to overrule IRS position to the contrary.

10. Enactment of special rules for amateur sports organizations in 1982 (IRC § 501(j)), to overrule IRS position that these organizations could not qualify for tax exemption by reason of IRC § 501(c)(3).

11. Enactment of child-care center rules in 1984 (IRC § 501(k)), to overrule IRS position that day care and like organizations could not be exempt educational entities because of too much private benefit.

12. Enactment of rules in 1986 (IRC § 513(h)) to allow charitable organizations to distribute low-cost articles in fundraising context, to overrule IRS position that charities were selling these articles.

13. Enactment of charitable deduction rule for certain payments to institutions of higher education in 1988 (IRC § 170(l)), to overrule IRS position that no portion of these payments was deductible as charitable gifts.

14. Enactment of a rule in 1993 that tax-exempt title-holding companies (IRC § 501(c)(2) and (25) entities can generate a certain amount of unrelated business taxable income, to overrule IRS position that these entities could not have any active unrelated business income.

15. Enactment of rules in 1996 (IRC § 512(d)) to exempt certain associate member dues from unrelated business income taxation, to overrule IRS attempt to tax many forms of these dues.

16. Enactment of rules in 1996 (IRC § 512(b)(17)) concerning foreign source income taxable as unrelated business income, to overrule IRS position that certain forms of this income were nontaxable dividends.

17. Enactment of rules in 1997 concerning revenue received by tax-exempt organizations from controlled subsidiaries (IRC §§ 512(b)(13), 318), to overrule IRS position that these rules did not extend to revenue from second-tier subsidiaries.

18. Enactment of corporate sponsorship rules in 1997 (IRC § 513(i)) to overrule IRS position that payments by corporate sponsors were forms of unrelated business income.

Some amendments to the Internal Revenue Code in this context were added at the request of the IRS. Examples of this are the intermediate sanctions rules (IRC § 4958) and the commercial-type insurance rules (IRC § 501(m)).

Tax Exemption for Labor Organizations

There is relatively little law on the federal tax exemption for labor organizations. This category of exemption, in present-day IRC § 501(c)(5), was first added to the statutory law in 1909 (Corporation Excise Tax Act of 1909, 36 Stat. 11). The statute provides merely that tax exemption is available for "labor" organizations. No criteria for exemption are provided – an instance of the need for statutory criteria for exemption if the federal statutory law in this context is to be brought into balance.

The tax regulations amplify this aspect of exempt organizations law. There it is provided that an exempt labor organization is an entity that has as its objects the betterment of the working conditions of its members and development among its members of a higher degree of efficiency in their occupations, and does not cause its net earnings to inure to the benefit of a member (Reg. § 1.501(c)(5)-1(a)). This category of exemption is not available for organizations that have as their principal activity the investing and management of funds associated with savings or investment plans, including retirement savings programs (Reg. § 1.501(c)(5)-1(b)). The regulations make it clear that exempt labor organizations are nonetheless subject to the unrelated business rules (Reg. § 1.501(c)(5)-1(c)).

There are a few court opinions and IRS revenue rulings on the subject. This law amplifies somewhat the concept of the exempt labor organization. One court held that 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)).

Labor organizations 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, such as strike funds, that provide benefits to workers that enhance the union's ability to effectively bargain (Rev. Rul. 67-7, 1967-1 C.B. 137), and publishers of labor newspapers. Exempt labor organizations do not include strike funds that provide income to union members but are not controlled by unions (Rev. Rul. 76-420, 1976-2 C.B. 153).

Labor organizations may also meet the requirements for exemption by providing benefits that directly improve working conditions or compensate for unpredictable hazards that interrupt work. Examples of these benefits include operating a dispatch hall to match union members with work assignments and providing industry stewards who represent employees with grievances against management (Rev. Rul. 75-473, 1975-2 C.B. 213; Rev. Rul. 77-5, 1977-1 C.B. 148). Conversely, managing saving and investment plans for workers, including retirement plans, does not bear directly on working conditions (Rev. Rul. 77-46, 1977-1 C.B. 147). Accordingly, the IRS does not accord exemption to organizations that manage retirement savings as their principal activity (cf. Morganbesser v. United States, 984 F.2d 560 (2d Cir. 1993), which led to promulgation of the above-referenced Reg. § 1.501(c)(5)-1(b)).

[2] The income tax law enacted in 1894 was declared unconstitutional by the U.S. Supreme Court in Pollock v. Farmer’s Loan & Trust Co., 158 U.S. 601 (1895), overruled on other grounds in State of S.C. v. Baker, 485 U.S. 505 (1988). Congress first created the office of the Commissioner of Internal Revenue and enacted an income tax in 1862, to finance Civil War expenses; that tax was repealed in 1872.

[3] 38 Stat. 114, 166.

[4] 40 Stat. 300.

[5] 42 Stat. 227.

[6] 47 Stat. 169.

[7] 40 Stat. 1076.

[8] 42 Stat. 227.

[9] 43 Stat. 282.

[10] 44 Stat. 40.

[11] 45 Stat. 813.

[12] 47 Stat. 193.

[13] 48 Stat. 700.

[14] 49 Stat. 1674.

[15] 52 Stat. 481.

[16] 53 Stat. 1.

[17] 58 Stat. 21.

[18] 64 Stat. 906.

[19] IRC § 501(c)(3).

[20] 68A Stat. 163.

[21] 82 Stat. 269.

[22] 88 Stat. 235.

[23] 88 Stat. 2108.

[24] 83 Stat. 487.

[25] While, as discussed, there was law pertaining to, and law practices concerning, tax-exempt organizations before 1969, enactment of the Tax Reform Act of 1969 ushered in the contemporary bases of this area of the law (other than the unrelated business law structure) and the modern exempt organizations law practice).

[26] 90 Stat. 1520.

[27] 96 Stat. 324.

[28] 98 Stat. 494.

[29] Id.

[30] 100 Stat. 1951.

[31] 101 Stat. 1330.

[32] 107 Stat. 312.

[33] 110 Stat. 1452.

[34] 110 Stat. 1755.

[35] 111 Stat. 788.

[36] 115 Stat. 2427.

[37] 117 Stat. 752.

[38] 117 Stat. 1335.

[39] 118 Stat. 1166.

[40] 118 Stat. 1418.