*1 reliability to be met a standard of tablished “clearly which is drug-detecting dogs LEAGUE, LOUISIANA CREDIT UNION contends unattainable.” defendant Plaintiff-Appellant, dog require that “would that a somehow we it is
be to alert when reason- trained that are on student’s ably drugs certain America, STATES of UNITED not visible person, although drugs are Defendant-Appellee. aroma.”1 only by be detected can No. 81-3134. opin- has our misconstrued The defendant ion. that the defendant say We did Appeals, Court of States establish there is reasonable must Fifth Circuit. present certainty contraband there is proba- or cars even that lockers Dec. ble believe contraband will be cause to Instead, we remanded case found. evaluation of the
the district court for an dogs so that the trial court
reliability dog’s alert
might determine whether suspicion
fact to a gives rise reasonable is currently present.
contraband can is the kind determination that
This concerning
be the basis evidence made on oth- performance, perhaps by dogs’
er If a alerts a hundred dog methods. on ninety and there no contraband
times occasions, conceivably alert those then an
might arouse reasonable suspicion. hand, dog occasionally
On the other if al- formerly,
alerts because contraband longer, present, say we cannot
though no fully developed record that absence has not met the test. The defendant dog of times alerts when
number no longer present,
contraband is well when it on a number times alerts substance, are all harmless factors
perfectly reliability. go into determination point
It at this inappropriate would say precisely
us what suspicion a reasonable justifying
create of a record on this
search in absence
subject findings the district court dogs’ reliability.
concerning suspicion, “persons” absent form individualized mentions but refers some The defendant question when a further we at 482 which deals with the further did not reach dog justified had alert- after a the cars we search would be and the lockers. Since searches person. dogs ed on a could not sniff the children held that
527 *2 GOLDBERG,
Before WILLIAMS GARWOOD, Judges. Circuit GOLDBERG, Judge: Circuit taxability in- This case involves the *3 generated by revenue-producing come league. activities of a held that the revenue The district court unrelated business tax- question constituted subject therefore was able income and affirm. taxation. We AND PROCEDURAL I. FACTS HISTO- RY
A. Facts Louisiana Credit taxpayer-appellant, (“LCUL” “League”), or Union league exempt taxation 501(c)(6)of the Internal Reve- under section Code;1 consists of both membership nue credit federally state and chartered unions. organized‘to repre- serve LCUL development cred- body sentative for Among it unions in the state Louisiana. in its charter are the stated following: (a) and devel- To cause Louisiana; credit unions opment of promote, sponsor, develop ed- (b) To for cred- training programs ucational and officials; it union of credit (c) publicize importance To benefits; union services and favor- (d) promote legislative activity To unions; able to credit (e) cooperation among credit To foster unions; Metairie, Barreca, La., Joseph A. William (f) league headquarters; To maintain Henzke, Jr., Lehrfeld, Leonard J. Wash- D.C., plaintiff-appellant. for ington, provide operational advisory To (g) Bernstein, A. Paup, Michael L. Robert unions. services to credit Ilardi, Jr., Div., of Jus- Anthony Dept, Tax membership in part by is supported tice, D.C., defendant-appel- Washington, payable by dues. maximum dues lee. greater of five credit union are the member gross income of the member’s percent $750. Rev- are to the Internal wise indicated.
1. All section references amended, other- enue unless Code engages in LCUL also several revenue- In return for its activities behalf of CUNA/CUMIS, producing activities that generated have LCUL receives commis litigation. both operating upon percentage income and this sions based premi Specifically, serves as a middleman ums received by the insurer from the credit between member credit unions and com- unions and their members. These commis insurance, mercial collec- commonly vendors debt sions are 5% V/2%on initial tion, purchases and electronic data services. and 2lh% or 5% on ren In return for adminis- its endorsement and ewals.4 assistance,
trative the League receives fees 2. Debt Collection from the companies providing the services the member credit unions. The Adjustment A contract with the Central support opera- uses these general fees (“CAB”), collector, provides Bureau a debt importance tions. Because of these another source of revenue LCUL. The *4 matter, activities to the resolution of this agreement requires League promote we describe in some them detail. making the services of CAB credit by un- availability. ions aware of their In return 1.Insurance efforts, League for its receives five One source of revenue for is the percent LCUL amounts collected on delin- quent amounts it union pursuant Ordinarily receives to contracts credit accounts. Society with CUNA Mutual member credit unions enter into Insurance collection LCUL, service contracts with which provide Society, CUMIS Insurance Inc.2 the credit union will turn over to several of insur CUNA/CUMIS offers lines any unpaid ance accounts need of col- coverage for both credit unions and lection. These collection service contracts individuals who are of credit members the League assign authorize the delin- unions.3 essentially CUNA/CUMIS is collector; quent accounts to a mutual company marketing only credit accordingly assigns the accounts referred to unions. At two other companies least exist it by its members to CAB. LCUL receives that serve exclusively; credit unions addi percent fee five all its amounts col- tionally, large general such com lected; thirty percent CAB retains as its Prudential, panies Hancock, as John own commission and remits the balance to Metropolitan compete for the credit union union.5 credit market. Under its exclusive contract with CUNA/CUMIS, provides active its Processing 3. Data support and official endorsement insurance programs CUNA/CUMIS offered source of is the League’s Another funds to credit agreement unions and credit union members. with the Computing Louisiana The League (“LCC”). also assists in the solicitation of Corporation agreed pre- LCC purchases coverage from new membership. pare package computer programs its acronym insurance, group insurance, 2. CUNA is an for Credit Union Na- life and individual Association, league coverage. tional disability state and credit credit unions. ty Mutual CUNA Insurance Socie- years issue, 4.For LCUL received the by policyholders. is owned is CUMIS an following amounts from its insurance endorse- acronym for Union Credit Mutual Insurance ments: Society; CUMIS is owned For CUNA. 98% convenience, organizations the two bewill re- End of Fiscal Year Amount ferred to as CUNA/CUMIS. $89,281.66 3/31/75 $89,918.24 3/31/76 required by 3. The credit to ob- unions law $93,735.77 3/31/77 bond, fidelity coverage tain a and such is avail- only through able erages CUNA/CUMIS. cov- Other following 5.LCUL received the amounts from credit offi- offered to unions include an during years CAB in issue: bond, liability protec- cers’ and directors’ loan End of Fiscal Year Amount coverage, comprehensive “package tion 5,285.19 $ $10,043.42 3/31/75 protection.” CUNA/CUMIS availa- makes 3/31/76 ble to the of credit members unions automobile $11,861.00 3/31/77 ities constituted in return for the credit unions use marketing subject entity as- and was tax-exempt exclusive endorsement All software relat- League. 511(a).11 sistance of the Accord- under I.R.C. processing jointly ing to credit union judgment ingly, granted the court favor LCUL ordinari- owned LCC and LCUL. now appeals of the IRS. The promotes through rep- field ly LCC services this court. recommend resentatives. LCUL staffers the credit unions utilize LCC’s data II. APPEAL ISSUES ON computer-assist- when a processing services organiza- certain circumstances an accounting system necessary. ed becomes Under processing granted contracts an from tax may data tion generally with its credit unions member a tax ex- under I.R.C. section 501. Such all their provide satisfy will provisions, Code emption is limited other needs. The cur- processing data however, impose tax on the “unrelat- twenty-seven per cents credit rently collects income” of otherwise ed business taxable monthly process- member account for union I.R.C. organizations. See only eighteen or ing, of which it remits The income of or- 511-514. §§ nineteen to LCC to cover its service cents from the ganization taxable if arises eight or LCUL nets nine charges. Thus regular any involvement organization’s per cents member account month per activities.6 data function. I.R.C. related to *5 organization’s need for 513(a). The History B. Procedural not cre- purposes does funds to further this refund suit originally brought relationship. ate substantial the 3, 1978, States on October in the United Id. the Court for Eastern District District tax-exempt is a appellant The League’s The amended com- Louisiana. the of section league meeting criteria Internal Revenue plaint alleged that the 501(c)(6).12 operating income is derived Its (“IRS”) wrongfully had assessed Service from its members from two sources: dues $77,092.67 tax pay- and in income collected promo- and its endorsement and fees from Code under the Internal Revenue ments insurance, and debt processing, tion data governing the unrelated business provisions issue here is the services. At collection tax-exempt organizations;7 the income of resulting taxability of and characterization amount, sought of that League repayment League’s the in- by the produced revenue Both moved for sum- interest. sides surance, collection data debt processing, mary judgment. activities. League’s the The district court held that each of these district court held The insurance, collection, process- and data debt trade or business activities constituted or busi- ing activities constituted “trades League. regularly carried on9 regularly that were carried nesses”8 addition, ac- the court determined related to the and were substantially related tivities were not tax-exempt func- League’s of the exercise as a business function tion.10 the court concluded concluded, Therefore, the league. court generated by these three activ- net revenue contracts, processing 8. Louisiana 6. Under data Credit Union (E.D.La.1980). years following amounts received issue: 9. Id. at 940. Amount of Fiscal Year End at 940-41. Id. $18,411.86 3/31/75 $35,444.27 Id. at 942. 3/31/76 $46,150.00 3/31/77 parties agree 12. The has been IRS, granted status 511-514. §§ 7. See I.R.C. validity is not issue. question tax-exempt organizations. income from the activities in tain The term sub- business taxable income and “unrelated business taxable income” is ject to 512(a) taxation. defined in section “the in- gross by any organization any come derived from League challenges the district court’s unrelated trade or business ... regularly First, holding every respect. it, carried on less deductions allowed that its ac- receipts asserts from insurance chapter which are directly connected tivities do not all. constitute income at with the carrying on of such trade or busi- it Next contends that its insurance debt ness,” computed with some modifications collection activities do not rise to the level pertinent here. “Unrelated trade or business; that, failing trade it business” is defined in yet another Code insurance, collection, claims debt section, section 513: and data activities are substan- [A]ny trade or business conduct tially to its Final- related function. (aside not substantially ly, points legislative his- organization such the need of tory unrelated business income tax income or funds or the use it makes provisions support its assertion that no derived) profits to the exercise or tax bemay imposed showing such without a performance by such of its competition of direct between the tax-ex- charitable, educational, purpose or other empt organization entity. taxable or function constituting the basis for its We shall address arguments each these exemption under section 501 in turn. deemed “unrelated” for III. THE GUIDING LIGHT: STATUTO- tax on unrelated business income. I.R.C. 513(a).
RY AND REGULATORY BACK- § GROUND The term “trade or business” carries us further into definitional maze complexity legislation is so 513(c) Code. states that term Section “the pervasive tempted that one is to observe any activity ‘trade or business’ includes ghostwritten by Henry that most of *6 production which is carried on for the Clay. The tax unrelated business income goods per- income from the sale of or the provisions exception. 501(a) are no Section regulations formance services.” The provides the basic for tax barely this statement amplify noting organizations described section pur- or term “trade business” for 501(c)(6).13 exemption provided by The tax poses of section 513 has same limited, meaning however, 501(a) section is section that it does in the more familiar context of 501(b), which tax- cautions that otherwise section Treas.Reg. 1.513-l(b). 162. § exempt organizations may subject be to tax to through some extent. 514 Sections quoted par are definitions not amplify 501(b), govern they convoluted, ticularly technical or but taxation of business income of they imagina same token leave much institutions. Thankfully, regulations tion. provide 511(a)(1) imposes analytical
Section
an
framework in
exam
which to
1.513-l(a)
“unrelated business taxable income” of cer-
ine the issues.14 Section
of the
501(c)(6)
exempt organiza-
regula
lists
§
I.R.C.
14. We
not the first to turn to these
guidance.
leagues,
Hosp.
tions
chambers of com-
tions for
See Hi-Piains
“[b]usiness
trade,
merce,
boards,
Cir.1982);
real-estate
boards of
or
A. Nontaxable come? League’s in- Having concluded that income, we in fact payments the fees received from surance characterizing In re- now determine whether promotions nontaxable must its insurance respect activi- v. 15. With data Port- 1037, sistent with Code. Commissioner ties, Co., 156, or the “no does make trade land U.S. 101 S.Ct. Cement 450 argument, apparently conceding (1981). business” L.Ed.2d 67 140 point. 532 generated by or activity. trade business motive is most profit important criteri-
In
order
develop
cogent
finding
standard for
on for the
that a given course of
determining
activity
activity
when an
constitutes
trade
rises
or business.”
business,
Commissioner,
level
aof
trade or
v.
we follow the Lamont
380
provided
(2d Cir.1964) (emphasis
roadmap
regula-
added).
the Code and
See also
Commissioner,
v.
tions.
Hirsch
315
731
F.2d
Cir.1963);
Trading
International
Co. v.
plain
The
of
language
the statute directs
Commissioner,
(7th Cir.1960).
17.Oklahoma qualify participation organization exempt as a trade or under tive” would tural from taxation log- policies Virtually 501(c)(5) identical that endorsed business. organization applied Dental ic were in San Antonio District certain insurance carrier. granted continuing Society regard a tax- to its with to fees received the insurer access sponsor- files, exempt organization membership in return for its one letter of endorse- issued ment, payment plan insignia ship to its bank available and allowed its name and used on brochures sent to mem- members. return, organiza- paid carrier bers. 91-172, percent premiums Pub.L. No. Tax Act of tion five it collected. Reform premium 83 Stat. 541. The district court held that re- from a trade or business bates were derived adopt “active/passive” no control 19. Even were we to because the exercised possible and San of Oklahoma Cattlemen’s over the financial result of the insur- distinction Society, would be distinguished Dental we Antonio District ance activities. The court organization’s distinguisha- passive compelled find two cases of the in- those endorsement surance, bar. As facts from the matter at ble on their which it not consider a trade or did noted, business, involvement, court in this case active such the district from more regard policies to insurance as actual sales of collection *9 summarize, To reject League’s approach we the final inquiry. Unless the only insurance; collection, contention that participation League’s “active” debt enterprise in an warrants its treatment as a data activities substantially function, or purposes trade business for of the unre- exempt related the income Instead, lated they produce business income tax. we will be taxed unrelated adopt making 513(a); for “profit motive” test income. See I.R.C. § determination, 1.513-l(a). or Treas.Reg. 513(a) trade for we be- Section § lieve plainly such a standard to be consonant with of states the need of the Code amplifying organization for income does constitute regulations. The district court found that substantial relationship. Be- had profit that, however, motive for its activ- yond pro- statute itself engaged ities a trade or business vides no definition of substantial relation- 513(c). under section We affirm that we ship, again find- and so turn once to the ing. pertinent regulations.20 INQUIRY: V. THE SECOND REGU- A. The Relationship” “Substantial Test LARLY CARRIED ON? Resolution of the substantial relationship of tax-exempt organiza requires
Income issue “an examination the rela- tion is tionship taxable unrelated business income between the business activities if it is generated by generate particular a trade or business which income in regularly question carried on accomplishment . . . and the substantially (other and not organization’s than exempt purposes.” Treas. through production funds) Reg. 1.513-l(d)(l). regulations go § organization’s performance of its type relationship to describe Treas.Reg. 1.513-l(a). qualifies functions. We as “substantial”: § have found that LCUL’s insurance and debt Trade or business “related” to ex- collection activities constitute trade or sense, purposes, in empt the relevant purposes business for of section 513. The where the conduct of business activi- computation second step ties has to the relationship causal achieve- is determining taxable (other of exempt purposes ment than whether trade or regularly business is through production income); and it 1.513-l(c). carried on. Treas.Reg. See § related,” “substantially purposes for does argue its activi 513, only if relationship the causal regular, good reason, ties are not and with is a substantial one. the con- for the record indicates that or duct trade business from which a endorsement and administration of these particular gross amount of de- income is programs was ongoing and continuous. pur- rived to be related to Clearly the League’s trade business ac poses granted, for which tivity is “regularly carried on” for goods or distribution of of the unrelated business income tax. performance services which the must gross income is derived INQUIRY: VI. THE FINAL SUBSTAN- importantly accomplish- contribute to the TIALLY RELATED TO EXEMPT purposes. ment those FUNCTIONS? “In Treas.Reg. 1.513-l(d)(2). determin- Having regu- ascertained that LCUL was important- whether activities contribute business, ly accomplishment in trade or we now larly exempt pur- of an ' “considerably (E.D.La.1981). hardly debt collection was more exten- Thus falls exempt organiza- any exception “passive” sive than the within asserted tions considered in the Oklahoma Cattlemen’s activities. and San Antonio cases.” Louisiana Credit Un- ion supra See note *10 are critical to find- particular elements in the activities al pose, the size and extent of relationship ing the substantial to in relation involved must be considered league’s a activities and between business exempt and of the func- the nature extent (1) the unique the nature of purposes: its Treas. they to serve.” purport tion which organizational the func- activities vis-a-vis 1(d)(3). Reg. § 1.513— tion, (2) benefits capacity the League’s the tax- regulations make organization’s members. are received factor exempt function critical The stat- equation. relationship substantial Unique of Activities Character promote ed of the to purpose for the activities a busi In order un- development of credit substantially to its be league ness to Louisiana, bring in order to about ions function, be activities must those greater in the activities participation unique organization’s way such credit unions of attention is the distinctiveness of purpose. It thrift, management, and personal money rela that cements the substantial activity This statement prudent use credit. services the two. Such as tionship between however, in interpreted, purpose must training legisla programs, educational exemp- light League’s underlying of the advertising lobbying, and institutional tive league tion as a business under test, clearly uniqueness because satisfy 1.501(c)(6)-l Treas.Reg. 501(c)(6). § purposes the business they advance follows: league defines business as in itself. It is the league entity as an league is an association A business if must be served institutional ends that common business in- persons having some substantially relat is to be deemed activity terest, promote which is to purpose Educational, legislative, and advertis ed. engage interest and such common suitable activities peculiarly ing services ordinarily of a kind regular in a business they further because league Thus, its ac- profit on for .... carried that unites business interest common improve- directed to the tivities should be Treas.Reg. See the association’s members. one or conditions of ment of business bar, 1.501(c)(6)-l. In the case at § distinguished more lines of business maintenance publication and serv- performance particular from the compiling service all library of a looseleaf persons. ices for individual legal and other statutes, regulations, League’s tax-exempt purpose, Thus the operation pertinent materials regula- league illuminated the business exemplify sort union would credit tions, promote is to the common unique service advancing the interest of members service, provided function. Such In order union movement. credit fee, subscription for a League members to be relat- League’s activities relationship unique would bear a ed must benefit purpose, to this develop promoting the League’s purpose of than in their group as a rather members Pre Louisiana. unions in ment of credit capacities. individual to such service alternative access sumably scope limited, and its narrow would be relationship” de The “substantial to member useful singularly would make it in necessarily a fact-based termination league activity Any unions. credit noted, recently As this court has quiry. its mem oriented toward’ distinctively so “require a section 513 regulations under substantial seemingly would bear a bers case-by-case identification relationship purpose. activity how the analysis purpose, purpose and an exami to that contributes Qua Members Accrue to 2. Benefits on which nation of scale Members Hospital v. conducted.” Hi-Plains relationship be Cir.1982); evaluating see of busi- factu- tween the activities Treas.Reg. 1.513-l(d)(2). Two also *11 ness league, capacity relationship in which benefits tial exists between such activi- are received the organization’s organization’s purposes. members ties and the Activ- unique is as important as the character of ities that serve the interests the individu- of organization’s produce activities. For a substan- al member credit unions individual exist, relationship any tial to direct benefits benefits insufficient fulfill substan- flowing league’s relationship from a business activities tial test. must capaci- inure its members in their reiterate, relationship To a substantial
ties as members the organization. for the unrelated busi- exists league’s uniquely when business relevant provisions ness income tax when a business inherently activities produce group benefits league engages unique in activities to its members, qua that accrue its members exempt purpose, gener- and those activities relationship substantial exists within the inherently group ate benefits redound meaning of section 513. advantage qua to the of its members mem- inherently mind,
This distinction group between With this in turn bers. standard we benefits and individual benefits is analo- to the facts of the case at bar. gous to aggregate/entity concept famil- B. LCUL’s Activities iar partnership taxation.21 Just as a member of a partnership may enjoy bene- League argues that each of the three separate capacities partner fits his as and promotions activities at issue in- here— non-partner, so may a member of the LCUL surance, collection, debt data process- and enjoy League benefits both as a member intrinsically important to fur- —is and as an Only individual credit union. therance of the credit union movement and those activities that benefit the credit un- substantially therefore is related to its ex- ions in capacities League their members empt sepa- function. We will discuss each can be substantially considered related to rately. function. group This benefit standard also accords with re- I. Insurance Endorsement quirement league that a business seek to LCUL asserts that its endorsement improve conditions of an entire line of of coverage CUNA/CUMIS insurance con perform business rather than discrete serv- initiation, importantly tributes for Treas.Reg. ices individuals. See growth,, stability and credit unions in 1.501(c)(6)-l. When the activities of a § Louisiana and therefore is re league are directed toward the lated to its Basically, function. achievement of the common business inter- League’s argument that by encouraging members, est the benefits that accrue purchase the use and of insurance credit inherently group to members are bene- unions, strengthens the credit union fits. reducing movement by the likelihood of distinguish
To benefits received by credit union failure from unforseen events. qua members members from those The district court found that “the connec accruing to the credit unions in indi- their tion between furtherance the credit capacities, segre- vidual it is league selling movement insur gate the tangential.” interests of credit unions as a is at ance best Louisiana group from those of the credit unions as Union Credit separate pro- entities. Because (E.D.La.1981). educational agree. We grams, activities, lobbying and advertising Insurance endorsement administration services serve common business interest not the sort of unique satis members, test, and because the bene- relationship fies the substantial nor resulting fits therefrom accrue to the mem- are inherently its benefits group-related. roles, bers in their membership a substan- than merely advising Rather its members of 707(a) (payments partner Mertens, 21. See I.R.C. J. Law of Federal Income Taxation acting capacity partner); generally (J. Doheny 1975). see 35.24 ed. ¶ observed that certain further because availability desirability coverage generally, credit the League’s unions utilized debt collec- members purchase policies promoted services, produced the benefits were tion carrier, dis- particular CUNA/CUMIS. We inherently group benefits. believe observed that LCUL’s insurance trict court We findings to be correct. have no these rev- generate little more than activities did credit that the individual unions that doubt provide enue their assign claims collection convenient services *12 CUNA/CUMIS greatly League’s from the services. benefit of its marketing and administration Nevertheless, exemption is LCUL’s tax League’s Because the insurance programs. league on the notion that a business based fundraising ac- basically is endorsement of all common business interest promotes it tivity, definition unrelated business is perform and does particu- its members not We 513(a). section therefore under persons. Treas. lar services for individual trade holding affirm the below that LCUL’s 1.501(c)(6)-l. Because the benefits Reg. § insurance endorsement or business of debt collection activities accrue of LCUL’s substantially related promotion was unions, credit these activities only to certain Accord, exempt function. Professional its of a performance of services constitute Commissioner, 78 T.C. Insurance v. Agents for members nature individual commercial (1982); Long 246 Gasoline Retailers Island promotion than the common rather T.C.M. Association v. 43 inherently group with ben- business interest 60-228, 1960-1 (CCH) (1982); Rev.Rul. 815 73-386,1973-2 efits. also Rev.Rul. C.B. See 200.22 C.B. (exempt provided that league business 191 job injury prospective employers 2. histories Debt Collection Services business); engaged in unrelated trade its involvement argues that 68-267, (exempt 1968-1 284 Rev.Rul. C.B. protects the integrity in debt collection operated that re- league coupon unions is sub member credit and therefore for demption service members stantially exempt purpose.23 related business). Accordingly, unrelated trade primary court that The district found holding we affirm the district court’s that was to purpose of the debt collection service are League’s debt collection activities League. for the The court money earn any way League authority by member is in related credit unions 22. The cases cited receives; proposition its insurance endorse- for that to the insurance rebates LCUL fact, substantially ments related business activi- are that dues are deter- the evidence indicates ty part inapposite. most solely by gross for the to the income mined reference upon union, v. relies missioner, Texas Mobile Home Ass’n Com- $750 credit with a of each individual Cir.1963), (5th F.2d 691 Furthermore, King all members floor. County Reunion, Campbell Cowboy Big Spring engaged in Association were Insurance Cir.1954), proposition F.2d for and thus shared in the insurance business may exempt support itself an association industry-wide resulted when the benefits that through fees.” These cases are not “user servicing “public all Association took over point simple involved reason policies. We it much business” find easier qualification ex- initial for tax associations’ relationship perceive the substantial status; empt the unrelated business income exempt case sales of an insurance supra note was not issue in either case. See composed agents insurance by a when activities are carried on than similar receipt argues The further composed league In- of credit unions. because insurance commissions is nontaxable Agents dependent Insurance members, it serves reduce the dues of its (D.Nev.1979), (CCH) 9601 79-2 U.S. Tax Cas. ¶ citing King County Ass’n Insurance v. Commis- distinguishable for the same reason. sioner, County, (1938). King B.T.A. prior enact- which we note was decided argues that the de- also income tax, held ment of unrelated business income services is rived from its debt collection nontaxable a trade association’s royalty pursuant I.R.C. as a from taxation commissions, the from which reduced argument 512(b)(2). find to be with- We case, sug- no evidence members’ dues. gests our merit. out payable the amount of dues exempt pur- unions, participating credit we affirm pose. district holding court’s is not substantially related to LCUL’s exempt Processing
3. Data
Activities
513(a).
function
See
81-75,
(in-
also Rev.Rul.
1981-1
C.B.
Finally,
asserts
by tax-exempt
come received
providing credit
process
unions
data
league
from
translation service is
growth
services it
fosters
income);
unrelated business taxable
Rev.
credit union
and thereby
movement
contrib
56-466,
(income
1957—
Clearly, Congress
no
was concerned that
This court is
means
first
to
operated by
interpret
commercial businesses
tax-ex-
to be asked
the importance of
empt organizations
competi-
enjoy
competition
would
unfair
in
context of the
tax,
tive
But
advantage.
weighty
other
consid-
unrelated business income
nor is it the
legislative
erations influenced
of the unrelated
passage
explore
history
first
business income tax as well. Revenue ob-
guidance
Among
search
its task.
jectives
played major
issue,
role in
shaping
courts
have addressed this
two
statutory
design.30 Congress
recognized
authority
lines of
developed.
have
One
ownership
unrelated businesses
has
group
prevention
courts
found
institutions
narrowed
tax
competition
primary
unfair
to be the
pur
base, causing a substantial
loss of revenue.
of sections
pose
Hope
511-513. See
School
Furthermore,
States,
Congress
elimi-
sought
also
v. United
541
(1971).
language
If the
L.Ed.2d 457
income tax. See Clar
States,
context,
clear in its
it
217 v.
sufficiently
Post No.
United
statute
ence LaBelle
dismissed,
Hochfelder,
Ernst v.
cert.
Ernst &
Cir.1978),
425
270
controls.
712,
L.Ed.2d 716
1040,
200-201, 214,
1375,
58
185,
99 S.Ct.
96 S.Ct.
1384-
439 U.S.
U.S.
American Veterans
v.
(1979); Disabled
1385, 1391,
(1976).
668
47 L.Ed.2d
States,
states: competition Congressional was a concern enacted, when provisions the relevant were primary objective adoption it evidences other well. Such
the unrelated business income tax was to evil, conscious is not ambiguity inherently competition eliminate source of unfair is nothing for there untoward in Congress’ placing unrelated business activi- to leave certain flexibility decision exempt ties certain organizations upon Unanticipated statute.34 the same tax basis as situations are sure nonexempt experience legislative business endeavors with which to arise with a new com- However, pete .... in general, any concept Congress ac- increases. in its wisdom of a tivity has left the IRS and the courts the on carried for the of income responsibility grappling with these novel possesses and which otherwise the charac- circumstances. This court may exercise its required teristics “trade constitute or interstitial imagination determine wheth business” the meaning within of section er a set given corresponds of facts which, addition, 162—and is not sub- legislative framework constructed Con stantially performance of gress. Our determination is not made in exempt presents sufficient void, rather but evolves from due considera functions — competition likelihood of unfair to be statute, legislative tion of history, within the of the policy tax. and the relevant authorities. critical “[T]he question under the statute is not the ques regulations the statute and establish tion competition, of unfair but whether presumption conclusive conduct constitutes an trade or an unrelated ‘trade or organi- ” zation unfair business.’ Clarence LaBelle Post No. competition constitutes 270, against taxable entities engaged similar Cir.1978) J., Further inquiry compe- (Lay, activities. into concurring), cert. dis missed, question tition therefore become unneces- U.S. 99 S.Ct. sary. 716 (1979). L.Ed.2d Accordingly, we con clude the presence or absence of com argues imposition petition between nonexempt of the unrelated business cannot organizations does not determine whether justified without showing unfair unrelated trade business is to be competition between and a tax taxed.35 able entity similar activities. We showing conclude that no such is re VIII. CONCLUSION quired. regula Neither the Code nor the proof tions mandates Congress provided actual threat has incentives in the ened competition before the unrelated busi- form exemptions of income tax for certain possible sponsorship It define in bill exact- debt insurance and collec- ly every going programs place competitive case that is to be covered. We tion did not it in have drawn so there a certain taxpaying enterprises. situation vis-a-vis In- amount discretion for the deed, determination of likely compe- it seems these facts questions of fact as to whether or not a actually tition does exist at some level. LCUL purview certain matter comes within the broker, operates type receiving as a fees in the bill. serving return for as a middleman between Cong.Rec. (1950) (statement supplier A consumer. middle- Lynch). Mr. charge man can lower fees than a taxable one profit. in order to achieve same net Ac- degree 35. Even if we were to assume that some *17 cordingly, supplier who with a deals tax-ex- competition justify of unfair is empt potential advantage broker has a over imposing tax, the unrelated not; competitors charge who do he can either appellant carry LCUL as would the burden of product enjoy larger margin less for his or proving competition. the nonexistence of such profit. potentially anticompetitive con- Agents See Professional Insurance v. Commis- sequences supplier may sioner, 246, at the flow from (1982). level judg- 78 T.C. 264-65 In our ment, league. status as a LCUL’s prove has failed its GARWOOD, Judge, specially Circuit con- particular- activities it has determined to be ly The tax for busi- desirable. curring: leagues recognizes
ness the benefit majority opinion. I concur in the I write public corporate from derives activities merely separately my to reflect under is to aid those when intended activities standing majority does not hold to are But private gain. not conducted for irrelevant, determining for purposes if en- when an otherwise exempt organization the income at issue is taxable under section sake, gages in trade or business for its own the exempt organization’s whether and not for the mutual benefit of its mem- bers, Congress imposes upon prof- giving rise is function to the income active^ ar- thereby. has gained Here, merely as the opposed passive. fashion, gued, activity any in orbital correctly (see, e.g., majority observes that subserves its is related to its interests 19), was clearly note LCUL’s involvement function. This carried argument, charitable That or “active.” “trade business” for conclusion, logical completely would imports purposes these some element of unrelat- exception without subvert part “activity” exempt organi on ed income tax. the reasons set For seems to be inferable plainly zation opinion, forth in this we conclude 513(c) sections in the engaged regular conduct 512(a)(1).* insurance, collection, process- debt and data that are ing businesses to its function. Conse- the income from those businesses
quently, Accordingly, under section
taxable hereby and
judgment of the district court is things all
AFFIRMED. may Competition also in more direct earned on for of income from exist goods performance LCUL and taxable entities. The sense between League or the serv- the sale engaged pro- (Emphasis added.) the business ices.” moting policies collec- the insurance and debt emphasized appropriate words is None of companies its mem- tion services of certain passive income-producing purely function. to a unions. Its services were similar ber credit 512(a)(1) plain makes Section broker; League helped agent or those of an exempt organization must the derive income a market for the and debt create insurance business,” or but from the “trade programs. The indicates that collection record “trade must be that also such or business” one ones, organizations, including taxable other by” “regularly carried on selling marketing of insur- involved in the organization. collection to financial ance and debt services rule, general reflected such decisions Presumably organizations these institutions. Commissioner, Trading as International Co. selling interest in these services would have an to (7th Cir.1960), relied on LCUL, however, possess- members. LCUL’s Agents Tax in Professional Insurance Court competitive advantage brokers es over other (1982), that nor- T.C. special relationship with its virtue of its expense taxpayer mally corporate whatever Therefore, court as the district members. profit is a-“trade or incurs with intent earn a out, pointed “the active endorsement 162, logically expense section business” under in debt collec- involvement [and] respect- applies to section 162 determinations likely competi- tion .. would involve it . corporations indisput- profit” that are sufficiently “for marketplace more than tive ably carrying generally trade the tax.” Union invocation of Louisiana Credit business, but not 511-513 deter- v. United to sections (E.D.La.1981). respecting nonprofit corporations, n. 6 minations LCUL, purposes corporate such as whose 513(c) first sentence of states: *The are of kind. functions another section, ‘trade of this the term “For any which is or business’ includes