Friday, August 11, 2023

Can You Smell What The Rock is Donating? (or, The Tax-Exempt Status of Strike Funds)

As many of you know, The Writers’ Guild of America (WGA) has been on strike since May 2; the Screen Actors Guild/American Federation of Television and Radio Artists (SAG-AFTRA) joined them on strike on July 14.  The WGA and SAG-AFTRA strikes don’t just impact wealthy movie stars; the strikes impact a lot of folks who are affirmatively not rich.  As a result, there is a great deal of struggle happening among the rank-and-file workers in the entertainment industry. With this backdrop, I recently read that The Rock, Seth McFarland, and a host of other well-known entertainers have made sizeable donations to the various emergency strike funds.  Which got me thinking about the tax-exempt status of emergency strike funds.  Here’s are the funds that I found that are providing benefits to entertainment industry workers during the strike – I’m sure there are others.

Although they provide assistance to many during the strikes, most of these funds are not what one traditionally would refer to as a “strike fund.” Obviously, there is a lot of variation here, but a traditional strike fund is a reserve funded by union dues and held by the union itself or a controlled affiliate from which union members receive some sort of substitute pay for when they are on strike.  It is typically not an emergency need grant, as strike fund payments are often available to all union members regardless of, and without a demonstration of, hardship (although one can assume that for most union members, even a week without pay would cause a hardship.)  For example, the UAW’s website indicates that weekly strike assistance of $500 per week plus Thanksgiving and Christmas bonuses is available to union members that are in good standing and actively participating in the strike.  Most of the funds listed above appear more to charitable emergency funds, not strike funds.  The only ones that appear to be true strike funds are the WGA West and East funds that are behind the member log in.

Revenue Ruling 67-7 specifically states that providing a strike fund for members is within the exempt purposes of a labor union exempt under Code Section 501(c)(5). In that Revenue Ruling, the union established a controlled subsidiary to run its strike fund. The IRS granted the subsidiary a derivative exemption, citing Portland Cooperative Labor Temple Association v. Commissioner, 39 B.T.A. 450 (1939), acquiescence, C.B. 1939-1, 28. Interestingly, the Revenue Ruling notes that Section 501(c)(5) labor unions are subject to an inurement prohibition with regard to its members (a labor union has “no net earnings inuring to the benefit of any member”), but does not address this issue with regard to the provision of strike fund benefits to members. Then comes Revenue Ruling 76-420, which specifically provides that a strike fund must be under the control of a union.  An independent strike funds, which solicited form the membership of other unions but was not itself a union, cannot qualify as a labor union strike fund. 

While a labor union can run a strike fund for its own members, it is difficult for a true union strike fund to raise money from sources other than union dues. Clearly, contributions to Section 501(c)(5) labor unions are not tax-deductible under Code Section 170(c). Thus, the large private donations from various entertainers are not going to true strike funds but are really going to emergency hardship funds governed by the standard rules for charities under the “relief for the poor and distress” language of Treas. Reg. 1.501(c)(3)-1(d)(2).  From the applicable 1999 EO CPE Text:

Emergency hardship organizations typically provide loans or grants in the form of funds, services and/or goods for basic necessities to needy individuals who have encountered financial hardship for reasons beyond their control. Therefore, emergency hardship assistance is comparable to disaster relief assistance in that individuals may need short term or long term assistance depending on the facts and circumstances. For example, a family may need short term financial help to meet basic necessities on account of a crime they have suffered.

(emphasis added.)

Interestingly enough, that “basic necessities” language I highlighted is referenced, directly or indirectly in the grant language for some of the funds (e.g., ECF says “basic living expenses”) and the SAG-AFTRA Foundation specifically references “IRS guidelines which pertain to providing emergency financial assistance grants to individuals.”   I am somewhat curious about the requirement of an indefinite chartable class and potential private benefit issues for those emergency funds affiliated with the unions – some of the guidance dealing with the employer scholarship, disaster and hardship funds may provide the roadmap or a problem. For example, Ohio Teamsters Education and Safety Trust Fund  and Local Union 712 IBEW Scholarship Trust Fund both held that a scholarship funds for union members and their families were not tax-exempt under Section 501(c)(3), although that may have been primarily due to the fact that those funds were required as part of a collective bargaining agreement.

In any event, let’s hope that these strikes come to a close sooner rather than later, so that these questions are all merely academic exercises for people like me to go down rabbit holes.

In solidarity, eww

https://lawprofessors.typepad.com/nonprofit/2023/08/can-you-smell-what-the-rock-is-donating-or-the-tax-exempt-status-of-strike-funds.html

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