and BNA
Article
LABORERS' INTERNATIONAL UNION OF NORTH AMERICA,
Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.
Release Date: JANUARY 24, 2000
UNITED STATES TAX COURT
PETITION
The petitioner hereby petitions for a redetermination of the deficiencies set
forth by the Commissioner of Internal Revenue in his notice of deficiency
(bearing symbols Southeast Key District (EP/EO)) dated October 26, 1999. As the
basis for its case, the petitioner alleges as follows:
1. The petitioner is a tax exempt international labor union with its principal
office at 905 16th Street, N.W., Washington, DC 20006. The petitioner's taxpayer
identification number is [TIN omitted]. The returns for the periods here
involved were filed with the Office of the Internal Revenue Service at
Philadelphia, Pennsylvania.
2. The notice of deficiency (a copy of which is attached and marked Exhibit A)
was mailed to the petitioner (according to the date placed thereon by the
Commissioner) on October 26, 1999 and was issued by the Southeast Key District
Office (EP/EO) of the Internal Revenue Service at Baltimore, Maryland.
3. The deficiencies as determined by the Commissioner are in income taxes and
additions to tax for the calendar years 1987, 1988, 1989, 1990, 1993, 1994,
1995, and 1996 (all eight years, plus calendar years 1991 and 1992, collectively
referred to as the "years in issue"), in the following amounts, all of
which are in dispute:
Tax Year
Deficiency
Additions to Tax
________
__________
________________
1987
$
348,590
$
87,148
1988
$
195,821
$
48,995
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
4. The determinations of tax and additions to tax set forth in the notice of
deficiency are based upon the following errors:
4.a. The Commissioner erred in determining that the amounts of per capita tax
per associate member of the National Postal Mail Handlers Union (the "Mail
Handlers Union"), levied by the petitioner on the Mail Handlers Union (the
"Per Capita Tax"), treated by the Commissioner as received by the
petitioner from the Mail Handlers Union during the years in issue (the "Per
Capita Tax Receipts"), constituted unrelated business taxable income.
4.b. The Commissioner erred in determining that the Per Capita Tax Receipts were
income from an activity that constituted a trade or business.
4.c. The Commissioner erred in determining that the Per Capita Tax Receipts were
income from a trade or business regularly carried on.
4.d. The Commissioner erred in determining that the Per Capita Tax Receipts were
income from a business that was not substantially related to the petitioner's
tax-exempt purposes.
4.e. The Commissioner erred in determining that the associate member category
was formed or availed of for the principal purpose of producing unrelated
business taxable income.
4.f. The Commissioner erred in determining that the amount of gross income
received by the petitioner from the Mail Handlers Union constituted unrelated
business taxable income.
4.g. The Commissioner erred in determining that the Per Capita Tax Receipts
represented the amount of associate dues collected by the Mail Handlers Union
and passed through to the petitioner.
4.h. The Commissioner erred in determining that there was an aggregate gross
portion of associate member dues received by the petitioner and constituting
unrelated business taxable income.
4.i. The Commissioner erred in determining an addition to tax for failure to
file a tax return for each of the years in issue.
4.j. Alternatively, the Commissioner erred in determining that the petitioner's
failure to file a tax return for each of the years in issue was not "due to
reasonable cause and not due to willful neglect."
4.k. The Commissioner erred in determining that the proposed deficiencies and
additions to tax for the petitioner's taxable years 1987, 1988, and 1989 were
not barred by the statute of limitations provided for in Section 6501 of the
Internal Revenue Code of 1986, as amended and in effect for the years in issue
(the "Code").
4.l. Alternatively, the Commissioner erred in not allowing net operating losses
of $ 240,537 for calendar year 1992, carried back and carried forward as allowed
by applicable provisions of the Code.
5. The facts upon which the petitioner relies, as the basis of its case, are as
follows (with all statements relating at least to the years in issue, unless
otherwise indicated):
5.a. The petitioner is now and was during the years in issue an international
labor union.
5.b. The petitioner was granted tax-exempt status, under Section 101(l), the
predecessor to Section 501(c)(5) of the Code by ruling dated September 24, 1940.
5.c. For the years in issue, the petitioner maintained its books and records and
filed its consolidated federal income tax returns using the accrual method of
accounting and a calendar year ending December 31.
5.d. The National Association of Post Office and Railway Mail Laborers
was founded in 1912. Its name was subsequently changed to the National
Association of Post Office Mail Handlers, Watchmen, Messengers and Group
Leaders. The National Association of Post Office Mail Handlers, Watchmen,
Messengers and Group Leaders was chartered by the American Federation of Labor
on November 11, 1937, and received its notification of tax exempt status under
what is now Section 501(c)(5) of the Code from the Internal Revenue Service on
December 19, 1958. Its name was subsequently changed to the National Postal Mail
Handlers Union.
5.e. The National Postal Mail Handlers Union Health Benefit Plan is a Federal
Government-wide health insurance plan operated since 1963 by the Mail Handlers
Union and its predecessor under 5 U.S.C. sections 8901, et seq., pursuant to
which the National Postal Mail Handlers Health Benefit Plan is entitled to offer
health benefits to all federal employees. Under applicable provisions of federal
law, in order for non-postal federal employees to participate in the National
Postal Mail Handlers Union Health Benefit Plan, they must become "associate
members" of the Mail Handlers Union. In compliance with federal law, the
Mail Handlers Union created an associate member category, and these associate
members pay dues to the local unions affiliated with the Mail Handlers Union.
5.f. As of 1968, the Mail Handlers Union had approximately 20,000 regular
members who were employed throughout the United States by the United States Post
Office department in mail handler and related occupations. At this time, the
petitioner was a strong and highly respected labor organization, with more than
500,000 members.
5.g. In 1968, the Mail Handlers Union and the petitioner entered into
negotiations for the purpose of exploring a formal affiliation between the Mail
Handlers Union and the petitioner. As a result of these negotiations, an
Agreement of Affiliation was entered into between the petitioner and the Mail
Handlers Union.
5.h. The Agreement of Affiliation was approved by the General Executive Board of
the petitioner on April 19, 1968, and was ratified by the members of the Mail
Handlers Union at a Special Convention held on April 19-20, 1968. The petitioner
issued a charter affiliation to the Mail Handlers Union pursuant to article III.
A of the Agreement of Affiliation.
5.i. Following the execution of the Agreement of Affiliation, the Mail Handlers
Union refused to implement the Agreement of Affiliation. Three separate lawsuits
then followed seeking either to implement, or to enjoin implementation of, the
Agreement of Affiliation. The third and last of these law suits was dismissed on
July 23, 1969. Following this dismissal, the Agreement of Affiliation was
implemented and the Mail Handlers Union was established as a separate division
of the petitioner.
5.j. Following the implementation of the Agreement of Affiliation, the
petitioner and the Mail Handlers Union were, and remained during all the years
in issue, separate and distinct organizations, each with a separate
Constitution, with separate Conventions of their respective members, and with
the filing of separate returns with the United States Department of Labor and
with the filing of separate federal and state tax returns.
5.k. The Mail Handlers Union, at its quadrennial National Convention in 1972,
established a per capita tax due to the petitioner with respect to the regular
members of the Mail Handlers Union of $ 1.55 per month, in recognition of the
services and support the petitioner provided to the Mail Handlers Union and its
regular members and affiliated local unions. At the time there was no per capita
tax levied or paid with respect to the associate members of the Mail Handlers
Union.
5.l. A controversy arose in 1973 concerning the per capita tax paid to the
petitioner with respect to the regular members of the Mail Handlers Union, and
the Mail Handlers Union only remitted $ 0.55 per month to the petitioner with
respect to the regular members of the Mail Handlers Union throughout the 1970s.
The 1976 Constitution of the Mail Handlers Union similarly provided for a $ 1.55
per capita tax payable to the petitioner with respect to regular members,
although again only $ 0.55 was paid to the petitioner. Subsequent negotiations
between the petitioner and the Mail Handlers Union led to the execution of a
Memorandum of Agreement dated April 16, 1981 between the petitioner and the Mail
Handlers Union (the "Memorandum of Agreement").
5.m. The Memorandum of Agreement delegated certain responsibilities to the
National Director of the Mail Handlers Union, and further dealt with the per
capita tax then being paid by the Mail Handlers Union to the petitioner with
respect to regular members of the Mail Handlers Union. At the time of the
execution of the Memorandum of Agreement, there was still no per capita tax
being levied by the petitioner nor paid by the Mail Handlers Union with respect
to the associate members of the Mail Handlers Union. The Memorandum of Agreement
dealt specifically with the then current per capita tax levied with respect to
regular members of the Mail Handlers Union, and also with the precise amount of
any prospective increases in this per capita tax. As of the date the Memorandum
of Agreement was executed, the petitioner had received no per capita tax from
the Mail Handlers Union derived in any way with respect to associate members.
5.n. The regular members of the Mail Handlers Union are all employees of the
United States Postal Service. These regular members enjoy political rights
within the Mail Handlers Union such as voice and vote at local union meetings
and the right to participate and vote in the election of officers of local
unions of the Mail Handlers Union and of the Mail Handlers Union itself
Associate members of the Mail Handlers Union enjoy none of these rights. Both
regular and associate members pay dues to their local unions pursuant to their
Local Union Constitutions and pursuant to the Constitution of the Mail Handlers
Union. Neither regular nor associate members pay dues to the Mail Handlers
Union. Neither regular nor associate members pay dues, assessments, or
initiation fees to the petitioner.
5.o. As of the date of the Memorandum of Agreement, the Mail Handlers Union paid
the petitioner a per capita tax measured solely by the number of regular members
of the Mail Handlers Union. As stated in Section 3 of the Memorandum of
Agreement, the per capita tax paid by the Mail Handlers Union to the petitioner
was $ 0.55 per regular member, which was twenty percent (20%) of the $ 2.75 per
capita tax paid with respect to regular members of other local unions affiliated
with the petitioner. Principally because the Mail Handlers Union had been an
independent union, and because it retained responsibility for a number of the
functions classically associated with national union activity, the Mail Handlers
Union and the petitioner had agreed that the per capita tax payable by the Mail
Handlers Union with respect to its regular members would be, at that time,
substantially lower than the per capita tax applicable with respect to regular
members of other local unions affiliated with the petitioner. The Memorandum of
Agreement carefully circumscribed the ability of the petitioner to raise the per
capita tax paid with respect to the regular members of the Mail Handlers Union.
The Memorandum of Agreement did not mention the issue of a per capita tax
payable with respect to associate members of the Mail Handlers Union, since the
petitioner was not at that time levying a per capita tax with respect to
associate members of the Mail Handlers Union.
5.p. The Memorandum of Agreement established a mathematical formula, effective
through 1984, to determine the amount of any allowable levy by the petitioner of
the per capita taxes payable by the Mail Handlers Union with respect to its
regular members. At the Eighteenth National Convention of the petitioner in late
1981, its delegates voted to increase the per capita tax rate to $ 4.00 per
regular member per month effective January 1, 1982. Pursuant to the mathematical
formula provided for in the Memorandum of Agreement, this action increased the
per capita tax that the Mail Handlers Union would pay to the petitioner with
respect to its regular members, beginning with the month of January, 1982, from
$ 0.55 to $ 0.80 per regular member. The per capita tax payable by the Mail
Handlers Union with respect to its regular members was thus substantially lower
than the per capita taxes paid by other local unions affiliated with the
petitioner with respect to their regular members.
5.q. The petitioner held its Eighteenth National Convention on September 14-18,
1981. At the meeting of the General Executive Board of the Petitioner, the
General President of the petitioner reported that he had received a number of
reports and complaints concerning the conduct and actions taken at the recent
National Conference of the Mail Handlers Union. The General President advised
that he had appointed a committee to conduct a full examination of these matters
and to report back with a recommendation to the General Executive Board of the
petitioner. The committee reported to the General Executive Board that if the
petitioner was going to maintain a relationship with the Mail Handlers Union,
and to protect the petitioner against liability, it would cost more money than
the petitioner was currently receiving, i.e., a $ 0.55 per capita tax per
regular member of the Mail Handlers Union.
5.r. The next several years did not resolve the petitioner's concerns that it
would need more money from the Mail Handlers Union if it was going to maintain
the relationship and to protect the petitioner against liability. In 1984, the
petitioner informed the Mail Handlers Union that the petitioner intended to levy
a per capita tax of $ 0.50 per year with respect to associate members of the
Mail Handlers Union. A dispute ensued, which led to a lawsuit filed by the Mail
Handlers Union in the Spring of 1984 against the petitioner alleging violations
of the Labor-Management Reporting and Disclosure Act of 1959, breach of
contract, and other related claims. This lawsuit was dismissed with prejudice on
November 18, 1985.
5.s. On December 12, 1985, the General Executive Board of the of the petitioner
at a Special Meeting voted to authorize its General President to impose an
immediate trusteeship over the Mail Handlers Union. On December 16, 1985, after
the trusteeship was imposed, the same plaintiffs who filed the lawsuit earlier
in the year filed a new lawsuit against the petitioner seeking injunctive relief
against the trusteeship.
5.t. At the petitioner's Nineteenth National Convention held on September 8-12,
1986, the petitioner substantially increased to $ 4.00 per month the per capita
tax paid with respect to regular members of the Mail Handlers Union. In
addition, for the first time, the petitioner's Constitution was amended to
provide that the Mail Handlers Union pay, effective January 1, 1987, a per
capita tax of $ 3.60 per year with respect to each associate member of the Mail
Handlers Union (defined as the "Per Capita Tax" in paragraph 4.a.
above). Out of the $ 4.00 per month per capita taxes payable with respect to
regular members of the Mail Handlers Union, $ 2.75 was placed in a special
Collective Bargaining Administration Fund to pay for the cost of negotiating and
executing collective bargaining agreements on behalf of the Mail Handlers Union
during the trusteeship.
5.u. During the pendency of a lawsuit filed against the Mail Handlers Union by
the petitioner involving allegations of certain financial irregularities, issues
relating to the administration of the collective bargaining agreement with the
United States Postal Service, and other matters, the petitioner and the Mail
Handlers Union entered into an agreement, dated October 21, 1992, to settle
between themselves certain financial issues with respect to unpaid Per Capita
Tax.
5.v. The lawsuit referred to in paragraph 5.u. above was dismissed pursuant to a
Consent Order dated November 5, 1993, which decreed that the future relationship
of the petitioner and the Mail Handlers Union would be governed by the
Constitution of the petitioner, as amended by the Twentieth National Convention
of the petitioner, and by the Constitution of the Mail Handlers Union, as
approved by an Order of the Court dated November 29, 1990, and as amended at the
National Convention of the Mail Handlers Union held in August 1992, and by any
amendments to either Constitution that may be made in the future.
5x. The petitioner is engaged principally in providing services and support for
its affiliated bodies and members, including but not limited to:
(i) serving as the voice of its regular members in the labor movement at large,
(ii) operating a substantial legislative department that lobbies Congress and
Federal agencies for legislation and regulations that will benefit its regular
members and affiliated bodies,
(iii) coordinating the legal strategy and efforts for its affiliates and
providing direct legal services where appropriate,
(iv) 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,
(v) negotiating and administering national collective bargaining agreements in
numerous industries that provide job opportunities for regular members, and that
are serviced by local unions and district councils in coordination with the Mail
Handlers Union.
(vi) maintaining a fund that pays the death benefit to the legal heir of
deceased regular member,
(vii) conducting national and regional conferences to train, educate, and
coordinate local union officers and regular members in all facets of union
affairs,
(viii) sponsoring a national political action program that provides financial
and other assistance to political candidates at the federal, state, and local
level, and
(ix) making available to affiliated bodies and regular members substantial
services, information, and benefits through its participation in the AFL-CIO's
various departments, such as those dealing with the building and construction
trades, public employment, industrial workers, metal trades, maritime trades,
organizing, and others.
5.y. The services and support provided by the petitioner to its regular members
and to its subordinate bodies, including the Mail Handlers Union and its regular
members and affiliated local unions, are the types of activities traditionally
associated with the exempt purposes and activities of labor organizations. In
addition, by virtue of their affiliation with the petitioner, the petitioner's
subordinate bodies are protected from raids on their membership by other unions
which are affiliated with the AFL-CIO. This protection has been particularly
important to the Mail Handlers Union, given its relatively small size as
compared to other similar unions. The petitioner does not charge separate fees
for its services. Instead, the petitioner funds its operations using a per
capita tax based on the number of members of each subordinate body. Thus, the
per capita taxes levied by the petitioner, including the Per Capita Tax, are
used to provide the services and support which together form the sole basis for
the petitioner's existence. All per capita payments made to the petitioner by
the Mail Handlers Union are made in recognition of the services and support
provided by the petitioner to the Mail Handlers Union and to its regular members
and affiliated local unions. At no time during the years in issue did the
petitioner provide services to or on behalf of the associate members of the Mail
Handlers Union.
5.z. All of the activities carried on by the petitioner are directly related to
it exempt purposes and functions and are not commercial activities. The
petitioner is not engaged in any type of the competition with private
enterprises that Congress intended to tax under the rules for unrelated business
taxable income. Moreover, the profit objective which is necessary in order for
an activity of a tax-exempt organization to be considered a trade or business is
not present in this case. The petitioner provides its services and support to
the Mail Handlers Union and to its regular members not out of a desire to make a
profit, but rather to fulfill its Constitutional mandate to perform functions
for subordinate bodies and their regular members. The Per Capita Tax received by
the petitioner from the Mail Handlers Union with respect to its associate
members is not derived from a trade or business.
5.aa. The petitioner did not establish the Mail Handlers Union Health Benefit
Plan, nor did it establish the category of associate members, which was
established by the Mail Handlers Union prior to its becoming affiliated with the
petitioner in order to accommodate participation of certain non-postal worker
federal employees in the National Postal Mail Handlers Union Health Benefit
Plan. The petitioner does not, and did not during the years in issue, engage in
the business of providing the National Postal Mail Handlers Union Health Benefit
Plan to the associate members of the Mail Handlers Union. Any trade or business
that exists with respect to the category of associate members of the National
Postal Mail Handlers Union Health Benefit Plan occurs, if it all, at the level
of the Mail Handlers Union. The petitioner neither is engaged in a trade or
business, nor is any such trade or business "regularly carried on,"
with respect to the Per Capita Tax.
5.bb. The petitioner and the Mail Handlers Union are separate and distinct
entities with separate offices, separate officers (although, since 1996, as a
part of an internal reform of the petitioner suggested by the Government, the
President of the Mail Handlers Union has been entitled to serve on an ex-officio
basis as a member of the General Executive Board of the petitioner), separate
books and records, separate funding sources, separate legal liabilities, and
separate functions. The receipt of unrelated business taxable income, if any, by
the Mail Handlers Union should not affect whether the receipt of Per Capita Tax
by the petitioner (i) constitutes a trade or business, (ii) constitutes a trade
or business "regularly carried on," or (iii) is not substantially
related to the petitioner's performance of its exempt functions.
5.cc. Income received by the petitioner from the Mail Handlers Union in the form
of Per Capita Tax is substantially related to the exempt functions of the
petitioner. The services and support provided by the petitioner to the Mail
Handlers Union and to its local unions and regular members are the types of
activities traditionally associated with the exempt purposes and functions of a
labor organization. The petitioner does not and did not during the years in
issue provide services to the associate members of the Mail Handlers Union.
Thus, the Per Capita Tax is used to fund the services and support of the
petitioner which together form the sole basis for the petitioner's existence.
The Per Capita Tax is "substantially related" to the petitioner's
performance of its exempt functions.
5.dd. The associate member category has been availed of by the petitioner for
the principal purpose of furthering the petitioner's exempt purposes. The
petitioner receives Per Capita Tax in connection with services and support
provided to the Mail Handlers Union and to its regular members and affiliated
local unions which the petitioner is Constitutionally mandated to provide. These
services and support are all traditional international union services and
support, similar to the types of services and support that the petitioner
provides to its other subordinate local unions and regular members. The fact
that the petitioner, due to the unique relationship between the petitioner and
the Mail Handlers Union, has chosen to fund its services and support by levying
a combination of reduced per capita taxes with respect to regular members of the
Mail Handlers Union, and another per capita tax with respect to its associate
members, does not change the fact that the levies are made to enable the
petitioner to further its exempt functions. Thus, in the unique case of the
petitioner, it has availed itself of the associate member category for the
principal purpose of furthering its exempt purposes.
5.ee. The petitioner timely filed its Form 990 for 1987 on April 1, 1988, its
Form 990 for 1998 on April 18, 1989 and its Form 990 for 1989 on April 16, 1990.
5.ff. The petitioner disclosed all respective Per Capita Tax Receipts on its
1987, 1988, and 1989 Forms 990.
5.gg. In the alternative, if the Court determines that any deficiency exists for
any of the years in issue, the petitioner's failure to file a taxable return
with respect to Per Capita Tax Receipts was due to reasonable cause and was not
due to willful neglect. Since the petitioner was not during the years in issue
engaged in the business of providing a benefit or other services to associate
members, since the petitioner received a per capita tax and did not receive
associate member dues, and since the petitioner used the Per Capita Tax Receipts
to provide traditional international union services and support that it was
Constitutionally mandated to provide, the petitioner was reasonable in its
belief for all of the years in issue that its Per Capita Tax Receipts should not
be treated as unrelated business taxable income.
WHEREFORE, the petitioner prays that the Court:
1. Determine that the Commissioner erred as alleged in paragraph 4;
2. Determine that no deficiencies in income tax or additions to tax exist for
the years in issue; and
3. Grant the petitioner such other and further relief as may be just and proper.
Dated January 24, 2000.
Stephen M. Feldhaus
Fulbright & Jaworski L.L.P.
801 Pennsylvania Avenue, N.W.
Washington, DC 20004-2615
202/662-4520
Jaser G. Taylor III
Fulbright & Jaworski L.L.P.
1301 McKinney, Suite 5100
Houston, TX 77010-3095
713/651-5670
Counsel for the Petitioner
[ADMITTED U.S. TAX COURT]
Stephen M. Feldhaus
T.C. Bar No. FS0028
[ADMITTED U.S. TAX COURT]
Jasper G. Taylor III
T.C. Bar No. TJ0421
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