Opinion ID: 411167
Heading Depth: 2
Heading Rank: 1

Heading: The Substantial Relationship Test

Text: 50 Resolution of the substantial relationship issue requires an examination of the relationship between the business activities which generate the particular income in question ... and the accomplishment of the organization's exempt purposes. Treas.Reg. Sec. 1.513-1(d)(1). The regulations go on to describe the type of relationship that qualifies as substantial: 51 Trade or business is related to exempt purposes, in the relevant sense, 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, for purposes of section 513, only if the causal relationship is a substantial one. Thus, for the conduct of trade or business from which a particular amount of gross income is derived to be substantially related to purposes for which exemption is granted, the production or distribution of the goods or the performance of the services from which the gross income is derived must contribute importantly to the accomplishment of those purposes. 52 Treas.Reg. Sec. 1.513-1(d)(2). In determining whether activities contribute importantly to the accomplishment of an exempt purpose, the size and extent of the activities involved must be considered in relation to the nature and extent of the exempt function which they purport to serve. Treas.Reg. Sec. 1.513-1(d)(3). 53 The regulations make the League's tax-exempt function a critical factor in the substantial relationship equation. The stated purpose of the League is to promote the organization and development of credit unions in Louisiana, in order to bring about greater participation in the activities of such credit unions by way of attention to personal thrift, money management, and the prudent use of credit. This statement of purpose must be interpreted, however, in light of the League's underlying tax exemption as a business league under section 501(c)(6). Treas.Reg. Sec. 1.501(c)(6)-1 defines a business league as follows: 54 A business league is an association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit .... Thus, its activities should be directed to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons. 55 Thus the League's tax-exempt purpose, as illuminated by the business league regulations, is to promote the common business interest of its members in advancing the credit union movement. In order for the League's activities to be substantially related to this purpose, they must benefit its members as a group rather than in their individual capacities. 56 The substantial relationship determination is necessarily a fact-based inquiry. As this court has recently noted, the regulations under section 513 require a case-by-case identification of the exempt purpose, an analysis of how the activity contributes to that purpose and an examination of the scale on which the activity is conducted. Hi-Plains Hospital v. United States, 670 F.2d 528, 531 (5th Cir.1982); see also Treas.Reg. Sec. 1.513-1(d)(2). Two factual elements in particular are critical to finding the necessary substantial relationship between a business league's activities and its purposes: (1) the unique nature of the activities vis-a-vis the organizational function, and (2) the capacity in which benefits are received by the organization's members.
57 In order for the activities of a business league to be substantially related to its exempt function, those activities must be unique to the organization's tax-exempt purpose. It is the distinctiveness of the activity that cements the substantial relationship between the two. Such services as educational and training programs, legislative lobbying, and institutional advertising clearly satisfy this uniqueness test, because they advance the purposes of the business league as an entity in itself. It is the institutional ends that must be served if the activity is to be deemed substantially related. Educational, legislative, and advertising services are peculiarly suitable activities for a business league because they further the common business interest that unites the association's members. See Treas.Reg. Sec. 1.501(c)(6)-1. In the case at bar, the publication and maintenance by the League of a looseleaf library service compiling all the statutes, regulations, and other legal materials pertinent to the operation of a credit union would exemplify the sort of service unique to the League's tax-exempt function. Such a service, provided to League members for a subscription fee, would bear a unique relationship to the League's purpose of promoting the development of credit unions in Louisiana. Presumably alternative access to such a service would be limited, and its narrow scope would make it singularly useful to member credit unions. Any business league activity so distinctively oriented toward its members seemingly would bear a substantial relationship to its purpose.
58 In evaluating the relationship between the activities and purposes of a business league, the capacity in which benefits are received by the organization's members is as important as the unique character of the organization's activities. For a substantial relationship to exist, any direct benefits flowing from a business league's activities must inure to its members in their capacities as members of the organization. Thus, when a business league's uniquely relevant activities produce inherently group benefits that accrue to its members qua members, a substantial relationship exists within the meaning of section 513. 59 This distinction between inherently group benefits and individual benefits is analogous to the aggregate/entity concept familiar in partnership taxation. 21 Just as a member of a partnership may enjoy benefits in his separate capacities as partner and non-partner, so may a member of the LCUL enjoy benefits both as a League member and as an individual credit union. Only those activities that benefit the credit unions in their capacities as League members can be considered substantially related to the League's exempt function. This group benefit standard also accords with the requirement that a business league seek to improve the conditions of an entire line of business rather than perform discrete services for individuals. See Treas.Reg. Sec. 1.501(c)(6)-1. When the activities of a business league are directed toward the achievement of the common business interest of its members, the benefits that accrue to its members are inherently group benefits. 60 To distinguish benefits received by League members qua members from those accruing to the credit unions in their individual capacities, it is necessary to segregate the interests of the credit unions as a group from those of the credit unions as separate entities. Because educational programs, lobbying activities, and advertising services serve the common business interest of League members, and because the benefits resulting therefrom accrue to the members in their membership roles, a substantial relationship exists between such activities and the organization's purposes. Activities that serve the interests of the individual member credit unions produce individual benefits insufficient to fulfill the substantial relationship test. 61 To reiterate, a substantial relationship exists for purposes of the unrelated business income tax provisions when a business league engages in activities unique to its exempt purpose, and those activities generate inherently group benefits that redound to the advantage of its members qua members. With this standard in mind, we turn to the facts of the case at bar.