IRS denies 501(c)(3) status to a collective bargaining organization serving its members

Plain-English summary

An organization representing employees of a school district applied for recognition as a charity under Section 501(c)(3). Its membership was limited to district employees who also belonged to related state and national organizations, and its main activity was collective bargaining over salaries and employment conditions. The IRS denied exemption because the articles did not limit the organization to exempt purposes and did not dedicate its assets to exempt purposes upon dissolution. The IRS also found that negotiating labor contracts, handling grievances, and advancing members' employment interests primarily benefited a limited private group rather than the public. Those activities were a substantial non-exempt purpose, so the organization failed both the organizational and operational tests. The organization did not protest within 30 days, making the adverse determination final.

Ruling snapshot

• Question: Does an employee collective bargaining organization qualify for exemption under IRC Section 501(c)(3)?
• Outcome: denied (final adverse determination; failed the organizational and operational tests and primarily served members' private interests)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 61-170; Rev. Rul. 67-367; Rev. Rul. 69-175; Rev. Rul. 75-286; Better Business Bureau of Washington, D.C., Inc. v. United States

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
IRS Tax Exempt and Government Entities

Date:
08/18/2025
Employer ID number:

Form you must file:

Tax years:

Release Number: 202552038
Release Date: 12/26/2025
UIL Code: 501.03-00, 501.03-05, 501.33-00

Person to contact:
Name:
ID number:
Telephone:

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:
07/01/2025

Employer ID number:

Person to contact:
Name:
ID number:
Telephone:
Fax:

Legend:
B = Date
C = State
D = Name
E = Name
F = Name
G = Profession
H = Name

UIL:
501.03-00
501.03-05
501.33-00

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 incorporated on B in the State of C. Your Articles of Incorporation state that you are a local division
of D, which is the state division of E. You serve as the bargaining unit for your district and seek to serve your
members by negotiating for improved benefits and salaries. Your Articles of Incorporation do not include
provisions in the event of dissolution.

Your Constitution states that your objective is to promote the best interests of education, to improve the
professional status of your members, and to cooperate with D and E for the purposes of mutual profession
advancement. Your Membership is restricted to employees of F, so long as they are also enrolled as active
members of D and E.

Your Bylaws state that your objectives are to:

• Advance professional rights and to enhance professional responsibilities to further consistent
  development and improvement of the profession and its practitioners,

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

2

• Create a deeper sense of dignity and importance of the G profession,

• Initiate and encourage programs that focus on improvement of the educational opportunities offered to
  the youth of F,

• Represent all certified professional employees of F, following the guidelines of D and as identified by
  the H as their collective bargaining unit, and

• Cooperate with the E and D for the purpose of mutual professional advancement.

Your bylaws state the only permanent committee is the Negotiating Committee, made up of the President, Vice
President, and at least one representative from each school being represented. Your Negotiating Committee will
represent you before the school board for collective bargaining negotiations relating to salaries and other
employment conditions.

Your sole source of income is from membership fees, while your primary expense is annual disbursements to D
and E.

Law

IRC Section 501(c)(3) exempts from federal income tax corporations organized and operated exclusively for
charitable, educational, and other purposes, provided that no part of the net earnings inures to the benefit of any
private shareholder or individual. The term charitable includes relief of the poor and distressed.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) provides that, in order to be exempt as an organization
described in IRC Section 501(c)(3), 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(b)(1)(i) provides that an organization is organized exclusively for one or
more exempt purposes only if its articles of organization:

(a) Limit the purposes of such organization to one or more exempt purposes; and
(b) Do not expressly empower the organization engage, otherwise than as an insubstantial part of its
activities, in activities that in themselves are not in furtherance of one or more exempt purposes.

Treas. Reg. Section 1.501(c)(3)-1(b)(4) holds that an organization is not organized exclusively for one or more
exempt purposes unless its assets are dedicated to an exempt purpose. An organization’s assets will be
considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a
provision in the organization’s articles or operation of law, be distributed for one or more exempt purposes.

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 IRC Section 501(c)(3). An organization will not be so regarded if more than an
insubstantial part of its activities is not in furtherance of an exempt purpose. The existence of a substantial
nonexempt purpose, regardless of the number or importance of exempt purposes, will cause failure of the
operational test.

Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated exclusively
for exempt purposes unless it serves a public rather than a private interest. To meet this requirement, an

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

3

organization must establish that it is not organized or operated for the benefit of private interests such as
designated individuals, the creator or the creator's family, shareholders of the organization, or persons
controlled, directly or indirectly, by such private interests.

Revenue Ruling 61-170, 1961-2 CB 112, an association composed of professional private duty nurses and
practical nurses that operates a nurses' registry primarily to afford greater employment opportunities for its
members doesn't qualify for 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.

Rev. Rul. 67-367, 1967-2 CB 188, held that a nonprofit organization whose sole activity is the operation of a
‘scholarship’ plan for making payments to pre-selected, specifically named individuals does not qualify for
exemption from Federal income tax under IRC Section 501(c)(3).

Rev Rul. 69-175, 1969-1 CB 149, describes an organization formed by the parents of pupils attending a private
school to provide school bus transportation for its members’ children. 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 than a public
interest and will not be held as exempt under IRC Section 501(c)(3).

Rev. Rul. 75-286, 1975-2 C.B. 210, held that an organization formed by the residents of a city block to beautify
and preserve the block did not qualify for exemption under IRC Section 501(c)(3). The restricted nature of the
organization’s membership and the limited area in which its improvements were made indicated that the
organization was organized and operated to serve private interests by enhancing the value of its member’s
property rights.

In Better Business Bureau of Washington D.C. Inc. vs United States, 326 U.S. 279 (1945), the Supreme Court
held that the presence of a single non-exempt purpose, if substantial in nature, will destroy the exemption
regardless of the number or 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 qualify for exempt status. An organization must be both organized and operated exclusively for purposes
described in Section 501(c)(3). Based on the information provided in your application and supporting
documentation, you fail the organizational and operational tests.

Your Articles of Incorporation do not limit your purposes to those described in Treas. Reg. Section 1.501(c)(3)-
1(b)(1)(i). They also do not dedicate your assets, upon dissolution to an exempt purpose as described in Treas.
Reg. Section 1.501(c)(3)-1(b)(4). Therefore, you fail the organizational test.

You indicated that you are operated as a union. Your mission is to protect and advance the employment status
of your members through collective bargaining negotiations. As described in Treas. Reg. 1.501(c)(3)-(1)(c)(1),
you are not operated exclusively for Section 501(c)(3) purposes because you operate primarily for the private
benefit of your members.

You are similar to the organizations described in Rev. Rul. 61-170 and Rev. Rul. 69-175. Your primary purpose
is to represent your members in labor contract negotiations, grievances, and other labor matters. Providing these

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

4

services provides a direct benefit to your members and any benefit to the public is incidental to the benefit to
your members as described in Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii).

You are like the organizations described in Rev. Rul. 75-286, and Rev. Rul. 67-367. You are formed with the
primary purpose of providing a direct benefit to a limited group of individuals. As described in Better Business
Bureau, this substantial non-exempt purpose of promoting your members employment interests serves the
private interest of your members and destroys your claim for exemption.

Conclusion

Based on the information submitted, you are neither organized nor operated exclusively for one or more
purposes described in IRC Section 501(c)(3). Your organizing document does not limit your purposes or
dedicate your assets to one or more exempt purposes described in Section 501(c)(3). You are formed primarily
to serve the private interests of your members instead of the interests of the public. Therefore, you fail to qualify
for exemption under Section 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.

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

5

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