LABORERS' INT'L UNION OF NORTH AMERICA v. COMMISSIONER

MEMORANDUM FINDINGS OF FACT AND OPINION

LARO, JUDGE: Respondent determined that petitioner had unrelated business taxable income (UBTI) under section 511(a)¹ which resulted in the following deficiencies in its Federal income tax and additions thereto:

                 Addition to tax

     Year    Deficiency    sec. 6651(a)

     ____    __________    ____________

     1987    $ 348,590     $ 87,148

     1988     195,821      48,955

     1989     153,612      38,403

     1990     193,902      48,476

     1993     361,042  *202     90,261

     1994     359,321      89,830

     1995     427,903      106,976

     1996     433,685      108,421

Following respondent's concession that petitioner is not liable for the additions to tax, and our prior holding that respondent failed to determine timely deficiencies for 1987, 1988, and 1989 we are left to decide whether petitioner received UBTI in 1990 and in 1993 through 1996, inclusive.

FINDINGS OF FACT ²

Petitioner is a labor union whose principal office was in Washington, D.C., when the petition was filed. During the subject years, petitioner was a tax-exempt labor organization under section 501(c)(5). Petitioner is an accrual method taxpayer that uses the calendar year for purposes of its consolidated Federal income tax return.

Petitioner is affiliated with other unions. The National Postal Mail Handlers Union (Mail Handlers) is affiliated with petitioner*203 under an "Agreement of Affiliation". Mail Handlers is a separate, autonomous division of petitioner with many affiliated local unions. Unlike other formerly independent national unions that have become subordinate bodies of petitioner, the national identity of Mail Handlers was retained. Mail Handlers and its affiliated local unions were not integrated into petitioner's organizational structure.

Mail Handlers has two categories of members, regular and associate members. Upon payment of a fee to Mail Handlers, associate members are entitled to participate in Mail Handlers' health plan. The primary reason that individuals become Mail Handlers' associate members is to participate in its health plan. The associate members of Mail Handlers are not members of, associates of, or otherwise affiliated with petitioner. Mail Handlers' associate members are not entitled to any right, privilege, or benefit from petitioner. In the subject years, petitioner did not provide any benefit or service to Mail Handlers' associate members.

Mail Handlers collects dues from its associate members through a national uniform billing program. Mail Handlers retains part of those dues and remits the rest to local*204 unions.

For all years in issue, petitioner did not itself operate, sponsor, or provide the insurance program operated by the Mail Handlers' health plan. ³

Petitioner raises funds to cover its cost of operation by levy of a "per capita tax" on its own members and on affiliated unions. Per capita taxes are the traditional way that national and international unions fund their activities to accomplish their exempt purposes. During the subject years, petitioner levied a per capita tax on Mail Handlers. The tax was calculated with reference to the number of regular and associate members of Mail Handlers. These per capita taxes were set at different rates for the associate and regular members. During the years in issue, petitioner engaged in the following activities: Serving as the voice of its regular members in the labor movement at large and operating a substantial legislative department that lobbies Congress and Federal*205 agencies for legislation and regulations that will benefit its regular members and affiliated bodies. Petitioner also engaged in coordinating the legal strategy and efforts for its affiliates and providing direct legal services where appropriate, maintaining professionally staffed departments for research, education, international affairs public relations, membership, jurisdiction, organizing, construction, maintenance, and service trades, and others that work for the direct benefit of all its affiliated bodies and regular members, acting as an appellate body to resolve internal disputes among the affiliated bodies and between regular members and affiliated bodies, and negotiating and administering national collective bargaining agreements in numerous industries that provide job opportunities for regular members, and that are serviced by local union and district councils in coordination with the Mail Handlers. The above-listed activities benefited Mail Handlers during the years in issue.

OPINION

We must decide whether the income received by petitioner in the form of the per capita tax imposed on Mail Handlers and calculated with reference to the number of associate members in Mail*206 Handlers constitutes UBTI under sections 511 through 513. Petitioner is a section 501(c)(5) exempt organization. Section 511(a) imposes a tax on the UBTI of exempt organizations. In relevant part, section 511(a) provides:

   SEC.511(a). Charitable, etc., Organizations Taxable at

   Corporation Rates.

     (1) Imposition of tax. -- There is hereby imposed for each

   taxable year on the unrelated business taxable income (as

   defined in section 512) of every organization described in

   paragraph (2) a tax computed as provided in section 11. In

   making such computation for purposes of this section, the term

   "taxable income" as used in section 11 shall be read as

   "unrelated business taxable income".

     (2) Organizations subject to tax. --

        (A) Organizations described in sections 401(a) and

     501(c). -- The tax imposed by paragraph (1) shall apply in

     the case of any organization (other than a trust described

     in subsection (b) or an organization described in section

     501(c)(1)) which is exempt, except as provided in*207 this part

     or part II (relating to private foundations), from taxation

     under this subtitle by reason of section 501(a).

Section 512 defines UBTI as follows:

   SEC. 512. UNRELATED BUSINESS TAXABLE INCOME.

     (a) Definition. -- For purposes of this title --

     (1) General rule. -- Except as otherwise provided in this

   subsection, the term "unrelated business taxable income" means

   the gross income derived by any organization from any unrelated

   trade or business (as defined in section 513) regularly carried

   on by it, less the deductions allowed by this chapter which are

   directly connected with the carrying on of such trade or

   business, * * *.

Section 513 defines the term "unrelated trade or business". In relevant part, that section provides:

   SEC. 513. UNRELATED TRADE OR BUSINESS.

     (a) General Rule. -- The term "unrelated trade or business"

   means, in the case of any organization subject to the tax

   imposed by section 511, any trade or business the conduct of

   which is not substantially related (aside from the need*208 of such

   organization for income or funds or the use it makes of the

   profits derived) to the exercise or performance by such

   organization of its charitable, educational, or other purpose or

   function constituting the basis for its exemption under section

   501 * * *.

In summary, sections 511 through 513 require an otherwise tax-exempt organization to pay tax on its UBTI. Sec. 511(a)(1). UBTI is an organization's gross income, less allowable deductions, produced from (1) any trade or business (2) regularly carried on by the organization (3) which is not substantially related (aside from generating revenue) to the organization's tax-exempt purposes. Secs. 512(a)(1) and 513(a); United States v. Am. Bar Endowment, 477 U.S. 105, 109-110, 91 L. Ed. 2d 89, 106 S. Ct. 2426 (1986); United States v. Am. Coll. of Physicians, 475 U.S. 834, 838-839, 89 L. Ed. 2d 841, 106 S. Ct. 1591 (1986). This tax is designed to restrain unfair competition by otherwise tax-exempt organizations engaged in profit- making activities without unnecessarily discouraging benevolent enterprise. United States v. Am. Coll. of Physicians, supra at 837-838. Where an activity does not possess the characteristics of*209 a trade or business within the meaning of section 162, such as when an organization sends out low-cost articles incidental to the solicitation of charitable contributions, the unrelated business income tax does not apply since the organization is not in competition with taxable organizations. Sec. 1.513-1(b), Income Tax Regs.

On the record before us, we can find no activity performed by petitioner that competes with taxable organizations. One section 501(c)(5) organization, such as petitioner, levying a "per capita tax" on another section 501(c)(5) organization so that the first organization may perform its exempt functions simply is not conducting a trade or business as that term is defined for the purposes of section 162. Petitioner does not provide insurance or services in competition with taxable entities.

Respondent argues "petitioner's collection of income from the associate membership of Mail Handlers constitutes a trade or business." Respondent's argument is flawed. First, as a factual matter, petitioner does not collect any income from the associate membership of Mail Handlers. Mail Handlers collects dues from its associate members. It is irrelevant*210 to the issue before us that receipt of that income by Mail Handlers may well be UBTI to Mail Handlers. Mail Handlers is not before the Court. Second, other than the services petitioner provides its members and affiliated unions in furtherance of its exempt purposes, petitioner provides no goods or services for a profit and therefore cannot be in an unrelated trade or business. Although respondent correctly observes that courts have found that the collection of associate dues in exchange for access to a health insurance program constitutes a trade or business, see, e.g., Am. Postal Workers Union v. United States, 288 U.S. App. D.C. 249, 925 F.2d 480, 483 (D.C. Cir. 1991), petitioner does not provide access to the Mail Handlers' health plan.

Respondent further argues:

   In substance, the income petitioner receives is a portion of the

   associate member dues retained by Mail Handlers. The income may

   not have come to petitioner directly from the associate members,

   but each dollar petitioner collects from Mail Handlers is

   generated from the unrelated trade or business activity of

   providing access to health insurance. This is the same unrelated

 *211   trade or business activity that generates UBTI to Mail Handlers

   and its Local Unions. The portion of associate member dues that

   is forwarded to petitioner, therefore, should retain its

   character as UBTI when it is passed along to petitioner. The

   associate member dues paid to Mail Handlers and then to

   petitioner remain associate member dues for access to health

   insurance. * * * Respondent contends that the character of the

   income does not change when the income is apportioned between

   petitioner, Mail Handlers, and Mail Handlers' Local Unions.

We again find respondent's argument and factual analysis flawed. We have found, and respondent cites, no authority for the novel proposition that the character of the income does not change "when the income is apportioned between petitioner, Mail Handlers, and Mail Handlers' Local Unions." Nor do we find that petitioner, Mail Handlers, and Mail Handlers' Local Unions were in a joint enterprise that "apportioned" dues received by Mail Handlers from Mail Handlers' associate members. The proper characterization of the income of parties not before the Court is, in the instant case, *212 not relevant to the proper characterization of petitioner's receipts of per capita taxes.

We conclude that the receipt of per capita taxes calculated with reference to the number of associate members of Mail Handlers is not UBTI to petitioner. Accordingly, for the reasons set out above,

Decision will be entered for petitioner.