Federal Rules Discourage Many Foundations From Making Direct Grants to Labor Unions

Foundations have made few grants to labor unions over the years, partly because giving money to a labor organization involves jumping over a pair of imposing regulatory hurdles.

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One hurdle is an Internal Revenue Code requirement that foundation grants be used for charitable purposes. Grantees cannot use foundation money to engage in partisan political or legislative activity or to benefit individuals.

While some union activities are indeed charitable, grant makers have tended to steer clear of giving money directly to labor organizations for fear that the grants will be used for partisan purposes, many observers say.

The other hurdle requires foundations to keep careful track of how grants made to non-charitable groups are spent. Foundations must exercise what is known as “expenditure responsibility” if they make a grant to a union or other organization that is not registered as a public charity under Section 501(c)(3) of the tax code. Unions, although tax-exempt, are classified under a different part of the code.

Expenditure responsibility requires the foundation to obtain detailed accounts from the grantee of how a grant is to be used. At the end of the year in which the grant is made, the foundation must tell the Internal Revenue Service exactly how the money was spent and how much of the award, if any, remains unspent.

“Foundations have to be sure that the funds are spent solely for the purpose for which the grant is given,” says Milton Cerny, a Washington lawyer who represents tax-exempt organizations. “That’s juxtaposed against a traditional grant to a public charity, where all the foundation has to do is give the grant.”

The rules on making grants to unions vary slightly by type of foundation. Community foundations, which raise money from many donors and are classified as charities, don’t have to exercise expenditure responsibility over grants in the same way that private foundations do.

Private grant makers may make awards to grassroots coalitions that include unions as long as the coalition is classified by the Internal Revenue Service as a charity and the grant has not been earmarked for a specific political or legislative purpose.

Sometimes it is difficult to determine whether a grant to a labor organization may pose a problem, experts say.

Consider a union that is concerned about the plight of people who live in poverty but are nonetheless employed.

If the union asked a foundation for a grant to organize minimum-wage employees to increase their pay to $6.25 an hour — perhaps even through the process of collective bargaining — the foundation might be allowed to make such a grant under the law, says Thomas R. Asher, a Massachusetts lawyer who represents non-profit groups and has written on foundation support of grassroots advocacy work. The grant maker could argue that the people benefiting from the grant were the working poor, not the union or its established members, he says.

But it would be wiser if the grant maker asked the union to work with a charity — even one set up and controlled by the union itself — to help the impoverished workers, Mr. Asher says.

That way, he says, the foundation could avoid the perception that its grant was being used to benefit the union and its members directly.

In other cases, grants to a union may pose no problem at all, Mr. Asher says. He points to this scenario:

A labor union is operating in an area with an unemployment rate of 40 per cent and many hungry children. The union wants to open a surplus-food-distribution center. It asks a private foundation for a grant to buy bread, cheese, and milk and distribute the food to the needy.

If the union doesn’t use the grant for lobbying and the foundation exercises the required oversight, Mr. Asher says, then the foundation should not face a federal tax-law problem.