Hatch and Ryan Ask IRS to Clarify Tax-Exempt Status of “Worker Centers”

Activities of Some Organizations Call Into Question 501(c)(3) Status

WASHINGTON – Senate Finance Committee Chairman Orrin Hatch (R-Utah) and House Ways and Means Chairman Paul Ryan (R-Wis.) today sent a letter to Internal Revenue Service (IRS) Commissioner John Koskinen asking for the agency to clarify the tax status of organizations known as “worker centers”.  The letter follows concerns that some worker centers have engaged in conduct similar to labor organizations, which would disqualify the organizations to receive tax-exemption under section 501(c)(3) because their benefits accrue to specific employees instead of the general public, suggesting they should be organized as 501(c)(5) organizations and donations to them should not qualify for tax deduction.

“Organizations with the purpose of advocating on behalf of employees for better working conditions and increased wages do not qualify for tax-exemption under § 501(c)(3) because their benefits accrue to specific employees instead of the general public,” the chairmen wrote.  “Some worker centers engage in similar conduct, such as advocating for discrete groups of workers.  This activity seems directed at pursuing a private benefit rather than providing a public service, and, thus, does not satisfy the requirements for § 501(c)(3) status.”

The full text of the letter is below and a signed copy is available here.

April 15, 2015

The Honorable John Koskinen

Commissioner

Internal Revenue Service

1111 Constitution Avenue, NW

Washington, DC 20224

Dear Commissioner Koskinen,

As the Chairmen of the Senate Finance Committee and House Ways and Means Committee, we are writing regarding the tax status of organizations known as “worker centers.”  Worker centers are typically small organizations that provide services to their members such as job training, education, and legal assistance.  Most file as § 501(c)(3) charitable organizations, and, in many cases, this designation may be appropriate. 

Some worker centers, however, engage in activities that may call into question their § 501(c)(3) status.  For example, some worker centers engage in protests and pickets against targeted businesses and attempt to negotiate with individual employers on behalf of specific employees—sometimes even without those employees’ consent.[1]  This conduct may disqualify those worker centers for one of two reasons—first, the worker centers’ activities accrue to the benefit of private individuals, rather than the general public; and, second the activities closely resemble those traditionally conducted by labor organizations.

The IRS has found that organizations with the purpose of advocating on behalf of employees for better working conditions and increased wages do not qualify for tax-exemption under § 501(c)(3) because their benefits accrue to specific employees instead of the general public.[2]  As discussed above, some worker centers engage in similar conduct, such as advocating for discrete groups of workers.  This activity seems directed at pursuing a private benefit rather than providing a public service, and, thus, does not satisfy the requirements for § 501(c)(3) status.

Second, if the Department of Labor determines that specific worker centers should be treated as labor organizations, the IRS should consider whether those worker centers’ tax exempt status would more appropriately fall under Internal Revenue Code § 501(c)(5) instead of § 501(c)(3).   The House Committee on Education and the Workforce has written the Department of Labor to ask it to review worker centers’ filing requirements and the status of certain worker centers that engage in traditional union activities such as conducting labor disputes and negotiating with employers on behalf of employees.[3]

We request that the IRS undertake a similar review to determine whether:

(1)   a worker center should be ineligible for § 501(c)(3) status if its activities are primarily intended to benefit a private party; and

(2)     a group should lose its § 501(c)(3) designation if it is determined to be a “labor organization” by the Department of Labor.

Thank you for your attention to this matter.

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