Employee bargaining association denied charitable exemption

Plain-English summary

An unincorporated employee association sought exemption under IRC § 501(c)(3) after its prior IRC § 501(c)(5) group exemption was automatically revoked. Its primary activities were negotiating and enforcing collective bargaining agreements for school district employees and resolving member grievances. It also operated a scholarship fund and held social events, but those activities occupied only a small fraction of its time. The IRS found that the association principally served the private employment interests of its dues-paying members rather than a charitable class or the public. Because its collective bargaining work was a substantial noncharitable and noneducational purpose, the IRS denied exemption.

Ruling snapshot

• Question: Does an employee association that primarily negotiates contracts and handles grievances qualify under IRC § 501(c)(3)?
• Outcome: Denied because its substantial collective bargaining activities primarily benefited members
• Key authorities: IRC § 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(d)(1)(ii); Rev. Rul. 61-170; Rev. Rul. 69-175; Rev. Rul. 71-505; Better Business Bureau of Washington, D.C., Inc. v. United States

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 06/11/2025
Tax Exempt and Government Entities Employer ID number:

                                                          Form you must file:

                                                          Tax years:

                                                          Person to contact:
                                                          Name:
                                                          ID number:

Release Number: 202536030 Telephone:
Release Date: 9/5/2025
UIL Code: 501.00-00, 501.03-00, 501.03-12, 501.03-30

Dear :

This letter is our final determination that you don't qualify for exemption from federal income tax under Internal
Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3). Recently, we sent
you a proposed adverse determination in response to your application. The proposed adverse determination
explained the facts, law, and basis for our conclusion, and it gave you 30 days to file a protest. Because we
didn't receive a protest within the required 30 days, the proposed determination is now final.

Because you don't qualify as a tax-exempt organization under IRC Section 501(c)(3), donors generally can't
deduct contributions to you under IRC Section 170.

We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c), by
sending them a copy of this final letter along with the proposed determination letter.

You must file the federal income tax forms for the tax years shown above within 30 days from the date of this
letter unless you request an extension of time to file. For further instructions, forms, and information, visit
www.irs.gov.

We'll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection after deleting certain identifying information, as required by IRC Section 6110. Read the
enclosed Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our
proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how
to notify us. If you agree with our deletions, you don't need to take any further action.

If you have questions about this letter, you can call the contact person shown above. If you have questions
about your federal income tax status and responsibilities, call our customer service number at 800-829-1040
(TTY 800-829-4933 for deaf or hard of hearing) or customer service for businesses at 800-829-4933.

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Letter 437

Redacted Letter 4034
Redacted Letter 4038

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S

Department of the Treasury
Internal Revenue Service

Date:
04/25/2025

Employer ID number:

Person to contact:

Name:
ID number:
Telephone:
Fax:

Legend: UIL:
B = Date 501.00-00
C = Date 501.03-00
D = School District 501.03-12
E = Scholarship Fund 501.03-30

Dear :

We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 501(a). We determined that you don’t qualify for exemption under IRC Section 501(c)(3).
This letter explains the reasons for our conclusion. Please keep it for your records.

Issues

Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below.

Facts

You were formed as an unincorporated association and submitted an unsigned version of your Constitution. The
most recent revision of this Constitution is B. Your Constitution states that you are formed to:

1. Bring associations of professional, secretarial and paraprofessional/aide into relations of mutual
   assistance and cooperation,
2. Obtain for your membership the rights, privileges and renumeration to which they are entitled,
3. Raise the standards of the teaching profession by securing and maintaining the conditions essential to
   the best professional service, and
4. Promote the welfare of the children of the community and provide an education atmosphere and
   programs which will equip them to make their way into society.

Your Constitution also includes language that is substantially similar to the sample Section 501(c)(3) purpose
and dissolution clause language provided in the Instructions to Form 1023.

You were previously exempt under Section 501(c)(5) under a group exemption. Your exemption under Section
501(c)(5) was automatically revoked on C because you did not file a Form 990 annual information return for
three consecutive years.

Your primary activity is the creation and enforcement of collective bargaining agreements (CBA) between your
members and the D. Your negotiating team is elected to represent your members in negotiations. Your
membership is open to professional, secretarial, and paraprofessional/aide persons employed by D.

You also spend a substantial percentage of your time resolving grievances between your members and the D. If
a member feels that the terms of the CBA have been violated they can file a grievance. You work with the D to
resolve any grievances on behalf of your members. This is funded through your militancy fund that is
maintained for use in teacher defense and/or contract negotiations.

A small fraction of your time is dedicated to:

• Operating the E, a fund that grants scholarships to graduating seniors,
• Retirement and Christmas parties, and
• Monthly meetings.

You state all of these activities further the betterment of your members by obtaining for your membership the
rights, privileges, and renumeration to which they are entitled.

Your activities are primary funded through membership dues. Your primary expenses include union fees,
payroll, professional fees, occupancy fees, social events, donations, welfare, dues and subscriptions, phone
expense, and insurance.

Law

IRC 501(c)(3) describes organizations organized and operated exclusively for the purposes described in that
Section and no part of the net earnings of which inures to the benefit of any private shareholder or individual.
The exempt purposes listed in IRC 501(c)(3) are religious, charitable, scientific, testing for public safety,
literary, or educational purposes, or to foster national or international amateur sports competition (but only if no
part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to
children or animals.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that, in order to be exempt as an organization described
in section 501(c)(3) of the Code, an organization must be both organized and operated exclusively for one or
more of the purposes specified in such section. If an organization fails to meet either the organizational test or
the operational test, it is not exempt.

Treas. Reg. Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as “operated exclusively”
for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such
exempt purposes specified in section 501(c)(3) of the Code. An organization will not be so regarded if more
than an insubstantial part of its activities is not in furtherance of an exempt purpose.

Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) states that an organization is not organized or operated exclusively
for exempt purposes unless it serves a public rather than private interests.

In Revenue Ruling 61-170, 1961-2 C.B. 112, an association composed of professional private duty nurses and
practical nurses which supported ad operated a nurses’ registry primarily to afford greater employment
opportunities for its members was not entitled to exemption under IRC Section 501(c)(3). Although the public
received some benefit from the organization’s activities, the primary benefit of these activities was to the
organization’s members.

In Rev. Rul. 69-175, 1969-1 C.B. 149, an organization formed by parents of pupils attending a private school to
provide school bus transportation for its members’ children was not found to be exempt under IRC Section
501(c)(3). It was found in this ruling that when a group of individuals associate to provide a service for
themselves, they are serving a private rather that a public interest.

In Rev. Rul. 71-505, 1971-2 C.B. 232, a city bar association that established and enforced standards of conduct
for its members, promulgated minimum fee payment schedules, advocated for comparable pay for lawyers in
the armed forces, and directed other programs to make the practice of law more profitable for its members was
no entitled to exemption under IRC Section 501(c)(3). It was found in this ruling that such activities
substantially furthered noncharitable and noneducational purposes within the meaning of Section 501(c)(3).

In Better Business Bureau of Washington. D.C., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court
of the United Stated interpreted the requirement in IRC Section 501(c)(3) that an organization be “operated
exclusively” by indicating that an organization must be devoted to exempt purposes exclusively. The presence
of a single non-exempt purposes, if more than insubstantial in nature, will destroy the claim to exemption
regardless of the number and importance of truly exempt purposes.

Application of law

IRC Section 501(c)(3) and Treas. Reg. Section 1.501(c)(3)-1(a)(1) set forth two main tests for an organization
to be recognized as exempt. An organization must be both organized and operated exclusively for purposes
described in Section 501(c)(3). Based on the information you provided, you fail the operational test.

Like the organization described in Rev. Rul. 71-505, you have substantial noncharitable and noneducational
purposes and activities and, therefore, are not operated exclusively for exempt purposes. You are formed to
negotiate and enforce collective bargaining agreements between your members and the D. Your membership is
open to professional, secretarial, and paraprofessional/aide persons employed by D. This limited membership
does not represent a charitable class, and your contract negotiations and enforcement do not further charitable or
educational purposes.

You are not formed for a public interest as required by Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii). Instead, like
the organizations in Rev. Rul. 61-170 and Rev. Rul. 69-175, you are formed to serve the private interests of
your dues-paying members by negotiating and enforcing collective bargaining agreements with the D.

Qualification for exemption under IRC Section 501(c)(3) requires that an organization operate exclusively for
exempt purposes. Exclusivity with respect to Section 501(c)(3) does not mean “solely” or “without exception.”
but rather contemplates that any non-exempt activities be only incidental and less than substantial. See Treas.
Reg. Section 1.501(c)(3)-1(a)(1). This requirement is affirmed in Better Business Bureau Inc., where the court
held that the presence of a single non-exempt purpose, if substantial in nature, will preclude exemption
regardless of the number or importance of truly exempt purpose. While you may offer charitable scholarships to
graduating seniors, you primarily conduct collective bargaining activities on behalf of your members. By doing
so, you are serving substantial private interest of your members rather than a public interest.

Conclusion

An organization that operates primarily for the benefit of its members or a particular group of employees does
not qualify for exemption from federal income tax under IRC 501(c)(3). An organization described in IRC
501(c)(3) must operate for the benefit of the public and be organized and operated exclusively for one of the
purposes described in IRC 501(c)(3). Conducting collective bargaining activities on behalf of your members
does not further one of the purposes described in IRC 501(c)(3) and does not confer a public benefit as required
under IRC 501(c)(3)

If you agree

If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from
you within 30 days, we'll issue a final adverse determination letter. That letter will provide information on
your income tax filing requirements.

If you don't agree

You have a right to protest if you don’t agree with our proposed adverse determination. To do so, send us a
protest within 30 days of the date of this letter. You must include:

• Your name, address, employer identification number (EIN), and a daytime phone number
• A statement of the facts, law, and arguments supporting your position
• A statement indicating whether you are requesting an Appeals Office conference
• The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization or your authorized representative
• The following declaration:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I have examined this request, or this modification to the
request, including accompanying documents, and to the best of my knowledge and belief, the request
or the modification contains all relevant facts relating to the request, and such facts are true, correct,
and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven’t
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We'll review your protest statement and decide if you gave us a basis to reconsider our determination. If so,
we’ll continue to process your case considering the information you provided. If you haven’t given us a basis
for reconsideration, we’ll send your case to the Appeals Office and notify you. You can find more information
in Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status.

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court later because the
law requires that you use the IRC administrative process first (IRC Section 7428(b)(2)).

Where to send your protest

Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address:

U.S. mail: Street address for delivery service:

Internal Revenue Service Internal Revenue Service
EO Determinations Quality Assurance EO Determinations Quality Assurance
Mail Stop 6403 550 Main Street, Mail Stop 6403
PO Box 2508 Cincinnati, OH 45202
Cincinnati, OH 45201

You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you
fax your statement, please contact the person listed at the top of this letter to confirm that they received it.

You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-
pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at
the top of this letter.

Contacting the Taxpayer Advocate Service

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your
taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you’ve tried but haven’t
been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS
will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K