                  T.C. Memo. 1999-75



                UNITED STATES TAX COURT



   EDUCATION ATHLETIC ASSOCIATION, INC., Petitioner
    v. COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 6396-98X.            Filed March 10, 1999.



     E is an entity exempt from Federal income tax under
sec. 501(a), I.R.C., as an organization described in sec.
501(c)(3), I.R.C. E's exempt activity involves primarily
the promoting of athletic education. On its Form 1023,
Application for Recognition of Exemption, E checked sec.
509(a)(2), I.R.C., as the reason it was not a private
foundation. E's sole source of income for the 1993,
1994, and 1995 years was from the sale of pickle cards, a
game of chance authorized by Nebraska statute. E paid and
reported unrelated business income tax for 1993. When E
transmitted its Forms 990-T, Exempt Organization Business
Income Tax Return, for the years 1993, 1994, and 1995, E
enclosed a check and attached a letter stating that the
check was being delivered as an offer in settlement of R's
audit of E's 1993 taxable year. R cashed the check.
Subsequently, R determined that E did not meet the exception
requirements of sec. 509(a)(2), I.R.C., and was therefore a
private foundation.

      1. Held: the sale of pickle cards is an unrelated
trade or business and income generated therefrom constitutes
unrelated business taxable income to E. See secs. 512(a),
513(a), I.R.C.; Secs. 1.513-1(a) through (d), Income Tax.
Regs.
                                - 2 -


          2. Held, further, respondent's determination that
     petitioner is not a publicly supported organization
     described in sec. 509(a)(2), I.R.C., and is therefore a
     private foundation, is sustained.

          3.   Held, further, respondent's cashing of
     petitioner's check submitted with a letter purportedly
     offering to compromise petitioner's unrelated business
     income tax liability for 1993 does not constitute a valid
     offer in compromise. See sec. 7122, I.R.C.; Botany Worsted
     Mills v. United States, 278 U.S. 282, 288-289 (1929); sec.
     301.7122-1(d), Proced. & Admin. Regs.



     Truman Clare, for petitioner.

     William I. Miller, for respondent.



                          MEMORANDUM OPINION

     NIMS, Judge:   Respondent determined that petitioner

qualified for exemption from Federal income tax under section

501(a) as an organization described in section 501(c)(3).

Respondent further determined that petitioner does not qualify

for the exception from private foundation categorization

contained in section 509(a)(2).    Petitioner challenges

respondent's determination by invoking the jurisdiction of this

Court for a declaratory judgment pursuant to section 7428.

     Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code in effect for the years in

issue.   All Rule references are to the Tax Court Rules of

Practice and Procedure.    All dollar amounts are rounded to the

nearest dollar.
                                - 3 -


     This case was submitted on the stipulated record pursuant to

Rule 122.    The evidentiary facts and representations contained in

the administrative record are assumed to be true.     See Rule

217(b)(1).

                              Background

     At the time the petition was filed, petitioner's principal

office was located in Omaha, Nebraska.      Petitioner was organized

and incorporated on January 18, 1971, under Nebraska law as a

nonprofit organization primarily to promote athletic education.

     On its Form 1023, Application for Recognition of Exemption,

petitioner checked section 509(a)(2) as the reason it was not a

private foundation.

     On August 22, 1984, the District Director issued a favorable

determination letter stating that petitioner was an organization

exempt from Federal income taxation under section 501(c)(3).      The

letter also stated that petitioner was reasonably expected to be

a publicly supported organization under sections 509(a)(1) and

170(b)(1)(A)(vi).   The ruling stated that petitioner would be

treated as a nonprivate foundation during an advance ruling

period ending December 31, 1989.

     Petitioner's sole source of support for its 1993, 1994, and

1995 years was income from the sale of pickle cards to liquor

establishments in Nebraska.    Pickle cards are a game of chance

authorized by Nebraska statute.    See Neb. Rev. Stat. secs. 9-301

through 9-356 (1997 & Supp. 1997).      Certain section 501(c)(3),
                                - 4 -


(4), (5), (7), (8), (10) or (19) organizations may apply for a

license to conduct a lottery by the sale of pickle cards.       Id. at

sec. 9-326 (1997).

     A licensed manufacturer of pickle cards sells or supplies

the pickle cards to licensed distributors, who then sell them to

licensed organizations.    Id. at secs. 9-307 (1997), 9-313 (1997),

9-331 (Supp. 1997), 9-332 (Supp. 1997), 9-340 (1997).    Only

licensed organizations may sell the pickle cards to licensed

pickle card operators.    The pickle cards may be sold to the

public only (1) by licensed organizations or (2) by licensed

pickle card operators.    See Neb. Rev. Stat. secs. 9-328 (1997),

9-329.02 (Supp. 1997), 9-329.03 (Supp. 1997), 9-340.02 (1997), 9-

345.01 (1997).   Petitioner was a licensed organization under

Nebraska law.

     On September 27, 1996, petitioner submitted to respondent

Forms 990-T, Exempt Organization Business Income Tax Return, for

the years 1993, 1994, and 1995.    Petitioner reported its income

from the sale of pickle cards as unrelated business taxable

income (UBTI).   Petitioner's gross receipts from its pickle card

sales for 1993, 1994, and 1995 were $70,251, $57,944, and

$26,675, respectively.    Petitioner reported and paid unrelated

business income tax (UBIT) in the amount of $3,825 for 1993.

Petitioner further reported that it did not have UBIT liability

for 1994 and 1995.
                               - 5 -


     When it transmitted its Forms 990-T for 1993, 1994, and 1995

and paid the tax liability for 1993, petitioner attached a letter

stating in pertinent part:

          Enclosed is [a] check * * * in the amount of $573.75
     for payment in full of all assessed taxes and penalties for
     calendar year 1993. It is my understanding that there were
     no taxes or penalties for 1994 and 1995. This check is
     being delivered to you as an offer in settlement in
     connection with the above-referenced tax audit and dispute.
     It is a condition precedent for the delivery of this check
     to the Internal Revenue Service that it agree to the above.

     After receiving the Forms 990-T for 1993, 1994, and 1995,

respondent cashed the check but did not propose additional taxes

and did not issue a notice of deficiency.

     On January 28, 1998, respondent made a determination that

petitioner was a private foundation under section 509(a),

effective January 1, 1993.   However, petitioner's section

501(c)(3) status remained undisturbed.

                             Discussion

     The sole issue for decision is whether respondent correctly

determined that petitioner, an exempt organization under section

501(c)(3), is not a publicly supported organization described in

section 509(a)(2) and therefore is a private foundation.

Although the case was submitted on the stipulated record pursuant

to Rule 122, petitioner bears the burden of proof as to whether

it is a publicly supported organization as described in section

509(a)(2).   See Rule 217(c)(2)(A).
                                 - 6 -


     Section 509 provides in pertinent part:

          (a) General Rule.--For purposes of this title, the term
     "private foundation" means a domestic * * * organization
     described in section 501(c)(3) other than--

       *       *       *         *       *       *       *

               (2)   an organization which--

                    (A) normally receives more than one-third of
               its support in each taxable year from any
               combination of--

                          (i) gifts, grants, contributions, or
                     membership fees, and

                           (ii) gross receipts from admissions,
                     sales of merchandise, performance of
                     services, or furnishing of facilities, in an
                     activity which is not an unrelated trade or
                     business (within the meaning of section 513)
                     * * *

                    (B) normally receives not more than one-
               third of its support in each taxable year from
               the sum of--

                           (i)   gross investment income * * * and

                          (ii) the excess (if any) of the amount
                     of the unrelated business taxable income (as
                     defined in section 512) over the amount of
                     the tax imposed by section 511.

     Respondent contends that petitioner is not a publicly

supported organization pursuant to section 509(a)(2) because it

received all of its support from pickle card sales which is an

unrelated trade or business; petitioner must therefore be

characterized as a private foundation.    Thus, our determination

hinges upon whether the pickle card sales constitute an unrelated

trade or business.
                               - 7 -


     Section 511(a) imposes a tax on the unrelated business

taxable income of certain tax-exempt organizations, including

section 501(c)(3) organizations.   Section 512(a)(1) defines

"unrelated business taxable income" as gross income derived by

any organization from any unrelated trade or business, regularly

carried on by it, less allowable deductions.

     Section 513(a) defines the term "unrelated trade or

business" as,

     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 * * * [Emphasis added.]

Section 513(a)(1) through (3) contains exceptions to the above

general rule, but none of the exceptions are applicable in this

case.   Therefore, income generated from the pickle card sales

must be considered UBTI if:

     (1) it is income from trade or business, (2) such trade or
     business is regularly carried on by the organization, and
     (3) the conduct of such trade or business is not
     substantially related (other than through the production of
     funds) to the organization's performance of its exempt
     functions. [Sec. 1.513-1(a), Income Tax Regs.; emphasis
     added.]

     For purposes of section 513, the term "trade or business"

has "the same meaning it has in section 162, and generally

includes any activity carried on for the production of income

from the sale of goods or performance of services."   Sec. 1.513-

1(b), Income Tax Regs.   The term "trade or business" is not
                                 - 8 -


precisely defined in the Internal Revenue Code or the regulations

promulgated thereunder; however, it is well established that in

order for an activity to be considered a taxpayer's trade or

business for purposes of section 162, the activity must be

conducted "with continuity and regularity" and "the taxpayer's

primary purpose for engaging in the activity must be for income

or profit."    Commissioner v. Groetzinger, 480 U.S. 23, 35,

(1987).    When a corporate taxpayer is involved, "the

determinative factor in resolving the trade or business issue is

whether the activity was engaged in with the intent to earn a

profit."    Professional Ins. Agents v. Commissioner, 78 T.C. 246,

262 (1982).

     In this case, petitioner's sole source of income was derived

from the sale of pickle cards.    Petitioner needed to make a

profit from the pickle card sales in order to fund operations.

Furthermore, petitioner's gross receipts from its pickle card

sales for 1993, 1994, and 1995 were $70,251, $57,944, and

$26,675, respectively.    To produce these revenues, petitioner

must have conducted the pickle card sales with continuity and

regularity.    Therefore, we hold that petitioner was engaged in a

trade or business of selling pickle cards and regularly carried

on such sales.

     Petitioner argues that its sale of pickle cards is not an

unrelated trade or business because, under Nebraska law, only

exempt organizations may sell pickle cards, and therefore

petitioner does not compete with for-profit entities.
                                 - 9 -


Petitioner's line of reasoning has been rejected in an analogous

situation by the United States Court of Appeals for the Eighth

Circuit, the Court of Appeals to which this case would normally

be appealable.    In Clarence LaBelle Post No. 217, VFW v. United

States, 580 F.2d 270, 271 (8th Cir. 1978), the taxpayer, a

section 501(c)(4) organization, argued that income from an

unrelated trade or business may be taxed under section 511(a)

only if the trade or business competes with a taxpaying entity.

Since the taxpayer's bingo operation did not compete with

taxpaying entities, the taxpayer argued that it was not subject

to tax.   Id.    After examining the legislative history of section

513 and the regulations thereunder, the Court of Appeals held

that the tax on unrelated business income is not limited to

income earned by a trade or business whose operations compete

with taxpaying entities.     Id. at 274; accord Louisiana Credit

Union League v. United States, 693 F.2d 525, 541-542 (5th Cir.

1982) ("The regulations under section 513 bolster our conclusion

that competition is not essential to the taxability of unrelated

business income.").    See also Smith-Dodd Businessman's

Association, Inc. v. Commissioner, 65 T.C. 620, 624 (1975), where

we stated that "unfair competition plays a relatively

insignificant role in the application of the amended unrelated

business tax".

     Although section 513(f) legislatively overrides the decision

in Clarence LaBelle Post No. 217, VFW v. United States, supra, by

creating a special exemption for bingo games from the definition
                              - 10 -


of "unrelated trade or business", we have recognized that the

reasoning of that case remains sound.    See Julius M. Israel Lodge

of B'nai B'rith No. 2113 v. Commissioner, T.C. Memo. 1995-439

n.6, affd. 98 F.3d 190 (5th Cir. 1996).      Therefore, the fact that

petitioner did not compete with for-profit entities with respect

to pickle card sales is not controlling.

     Section 1.513-1(d)(2), Income Tax Regs., provides in part

that a trade or business is "related" to an exempt purpose "only

where the conduct of the business activities has causal

relationship to the achievement of exempt purposes (other than

through the production of income); and it is 'substantially

related,' * * * only if the causal relationship is a substantial

one."   To be considered "substantially related" to exempt

purposes, the regulations require that income generated by the

trade or business must "contribute importantly" to the

achievement of the exempt purpose.     Id.   This determination

depends "upon the facts and circumstances involved."      Id.

     In this case, pickle card sales did not contribute in the

manner contemplated by section 513 and the regulations

thereunder.   Petitioner argues that since all proceeds from the

sales were used to further petitioner's exempt activities, the

income from pickle card sales is not UBTI.     Petitioner's

argument ignores the plain language of section 513(a) and the

regulations thereunder, which, it bears repeating, provide that

mere production of income to fund an exempt organization's

activities is insufficient to establish a substantial causal
                               - 11 -


relationship between the trade or business and the exempt

activity.   It follows that income generated from pickle card

sales was derived from an unrelated trade or business.

     Accordingly, pickle card sales income is UBTI for purposes

of section 512(a).    Since all of petitioner's gross receipts were

derived from pickle card sales and the sale of pickle cards

constitute UBTI to petitioner, we sustain respondent's

determination that petitioner is not a publicly supported

organization described in section 509(a)(2), and is therefore a

private foundation.

     We note petitioner's assertion that respondent accepted a

purported offer in compromise, in response to which respondent

allegedly agreed that the pickle card sales were not unrelated

business income (UBI) and is therefore barred from asserting that

the pickle card sales were UBTI.   A fair reading of the contents

of the letter attached to petitioner's check leads us to conclude

that the letter merely constituted a settlement offer to resolve

the dispute resulting from the IRS audit of petitioner's 1993,

1994, and 1995 years.   In any event, petitioner's so-called offer

in compromise does not comply with the specific requirements of

section 7122 and the regulations thereunder, and must also fail

for that reason.   See Botany Worsted Mills v. United States, 278

U.S. 282, 288-289 (1929).
                             - 12 -


     All contentions not addressed are either not germane or

unpersuasive.

     To reflect the foregoing,

                                        Decision will be

                                   entered for respondent.
