                          T.C. Memo. 2001-171



                        UNITED STATES TAX COURT



  LABORERS’ INTERNATIONAL UNION OF NORTH AMERICA, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 910-00.                           Filed July 9, 2001.



     Stephen M. Feldhaus, Jasper G. Taylor III, and Richard L.

Hunn, for petitioner.

     Stephanie L. Caden and Elizabeth S. Henn, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:   Respondent determined that petitioner had

unrelated business taxable income (UBTI) under section 511(a)1




     1
       Section references are to the Internal Revenue Code in
effect for the years in issue.
                                  - 2 -

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         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 FACT2

     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 under an “Agreement of Affiliation”.      Mail Handlers is



     2
         Some of the facts have been stipulated and are so found.
                               - 3 -

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 unions.

     For all years in issue, petitioner did not itself operate,
                                - 4 -

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 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



     3
       Respondent concedes that the activities of Mail Handlers
are not attributable to petitioner.
                                - 5 -

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 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.--
                               - 6 -

               (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 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 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
                               - 7 -

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 (1986); United States

v. Am. Coll. of Physicians, 475 U.S. 834, 838-839 (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 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.
                               - 8 -

     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 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, 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 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
                              - 9 -

     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, 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.
