PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

NATIONAL LEAGUE OF POSTMASTERS
OF THE UNITED STATES,
Petitioner-Appellant,

v.

                                                                     No. 95-2646
COMMISSIONER OF THE INTERNAL
REVENUE SERVICE,
Respondent-Appellee.

AMERICAN FARM BUREAU FEDERATION,
Amicus Curiae.

Appeal from the United States Tax Court.
(Tax Ct. No. 93-8032)

Argued: April 3, 1996

Decided: June 14, 1996

Before ERVIN, Circuit Judge, LAY, Senior Circuit Judge of the
United States Court of Appeals for the Eighth Circuit, sitting by
designation, and TRAXLER, United States District Judge for the
District of South Carolina, sitting by designation.

_________________________________________________________________

Affirmed by published opinion. Senior Judge Lay wrote the opinion,
in which Judge Ervin and Judge Traxler joined.

_________________________________________________________________

COUNSEL

ARGUED: James vanRoden Springer, DICKSTEIN, SHAPIRO &
MORIN, L.L.P., Washington, D.C., for Appellant. Edward T. Perel-
muter, Tax Division, UNITED STATES DEPARTMENT OF JUS-
TICE, Washington, D.C., for Appellee. ON BRIEF: M. J. Mintz,
Lawrence D. Garr, DICKSTEIN, SHAPIRO & MORIN, L.L.P.,
Washington, D.C., for Appellant. Loretta C. Argrett, Assistant Attor-
ney General, Gary R. Allen, Richard Farber, Tax Division, UNITED
STATES DEPARTMENT OF JUSTICE, Washington, D.C., for
Appellee. John J. Rademacher, General Counsel, AMERICAN
FARM BUREAU FEDERATION, Park Ridge, Illinois; Jerry L.
Oppenheimer, Evan M. Tager, Donald M. Falk, Michael I. Gilman,
MAYER, BROWN & PLATT, Washington, D.C., for Amicus Curiae.

_________________________________________________________________

OPINION

LAY, Senior Circuit Judge:

The National League of Postmasters ("the League") is a tax-exempt
labor organization under 26 U.S.C. § 501(c)(5). The Commissioner
determined deficiencies in the League's federal income taxes from
1987 to 1990 on the basis that dues and service fees the League
received in relation to certain members, known as"League Benefit
Members" ("LBMs"), were not "substantially related" to any of the
League's tax-exempt purposes. See 26 U.S.C.§ 513(a). The Tax
Court upheld the Commissioner. We affirm.

Factual Background

In August of 1987, the League formed a new class of membership
called "League Benefit Members" ("LBMs"). The League maintains
that the dues and service charges related to LBMs, unlike a former
class of membership, "Limited Benefit Members," are tax-exempt.1
_________________________________________________________________
1 Historically, the League's membership was limited to active and
retired postmasters. In 1978, the League added a new membership cate-
gory, "Limited Benefit Members," open to other active and retired fed-
eral employees. The sole benefit to Limited Benefit Members was
participation in the League's health insurance plan, the Postmaster Bene-
fits Plan, under the Federal Employees Health Benefits Program. This
category of membership raised a substantial amount of revenue for the

                     2
From 1987 to 1990, LBMs received several benefits, including
access to the League's health insurance plan; a quarterly newsletter;
certain employment-related group legal services (if the member did
not otherwise have access to binding arbitration); and the right to par-
ticipate in the League's travel, credit card, eyewear, and long-term
care insurance programs. At the same time, the League expanded the
focus of its legislative and administrative lobbying from issues related
solely to postal services to include issues concerning "the overall
working conditions and retirement benefits of all Members." J.A. 77-
78. In addition, the League provided that the new class of LBMs, who
accounted for roughly half of the League's total membership, could
elect one member to the League's executive board, otherwise com-
posed of nine active postmasters.2 The elected LBM representative
was also the only LBM delegate out of five hundred total delegates
to the League's annual national convention.3
_________________________________________________________________
League through dues and service fees on the health insurance plan. In the
mid-1980s, the Commissioner challenged the exempt status of labor
organizations' provision of health insurance to persons who were not
otherwise members of the labor organization. See, e.g., American Postal
Workers Union v. United States, 

(D.C. Cir. 1991) (uphold-
ing Commissioner). At that time, the League conceded the taxability of
the dues and service fees from its Limited Benefit Members and paid its
tax deficiency. The League also abolished the category of Limited Bene-
fit Members in favor of "League Benefit Members" who received an
expanded package of benefits.

2 To accommodate the new LBM board member, the League increased
the size of the executive board from nine to ten members and the number
of votes required to transact business from six to seven.

3 The new class of LBMs were not eligible to participate in the
League's state branches or its affiliated retiree organizations, through
which national delegates were elected and social and professional pro-
grams for postmasters were implemented. They also did not receive the
Postmasters Advocate, the League's monthly magazine, as a benefit of
membership. Furthermore, they were unable to utilize the League's "ad-
verse action counseling," which trained postmasters in resolving
personnel-related disputes. The League explains that active postmaster
members received these benefits because they paid substantially higher
dues than LBMs. The League, however, is not a collective bargaining
agent for postmasters or any of its other classes of members.

                    3
Before the Tax Court, the League stipulated that its activities with
respect to the LBMs constituted a "trade or business" and were "regu-
larly carried on" during the years in question. See 26 U.S.C.
§ 512(a)(1). The Commissioner stipulated that income from the
League's activities with respect to the other members, essentially
active and retired postmasters, was tax exempt. Thus, the only issue
presented in this case is whether the League conducted its activities
with respect to LBMs in a manner "substantially related" to the
League's tax-exempt purposes such that the income derived from
those activities is tax exempt. See 26 U.S.C. § 513(a).

Discussion

An otherwise tax-exempt organization must pay tax on"unrelated
business taxable income." 26 U.S.C. § 511(a)(1). Unrelated business
taxable income is an organization's gross income, less allowable
deductions, produced from (1) any trade or business (2) regularly car-
ried on by the organization (3) which is not substantially related
(aside from generating revenue) to the organization's tax-exempt pur-
poses. See 26 U.S.C. §§ 512(a)(1), 513(a); United States v. American
Bar Endowment, 

, 109-10 (1986); United States v. Amer-
ican College of Physicians, 

, 838-39 (1986).4 This tax is
designed to restrain unfair competition by otherwise tax-exempt orga-
nizations engaged in profit-making activities without unnecessarily
discouraging benevolent enterprise. 

The League's tax-exempt purposes are defined in part by regula-
tion, which provides that a tax-exempt labor organization must have
as its object "the betterment of the conditions" of those engaged in
labor. See 26 C.F.R. § 1.501(c)(5)-1(a)(2); Morganbesser v. United
States, 

, 562 (2d Cir. 1993). In addition, as the District
_________________________________________________________________
4 Under the regulations, the substantial relationship test is whether
income-generating activities have a substantial"causal relationship to the
achievement of exempt purposes" or "contribute importantly to the
accomplishment of those purposes." 26 C.F.R.§ 1.513-1(d)(2). The regu-
lations further provide that "[w]hether activities productive of gross
income contribute importantly to the accomplishment of any purpose for
which an organization is granted exemption depends in each case upon
the facts and circumstances involved." 

                    4
of Columbia Circuit did in American Postal Workers Union v. United
States, 

, 482 (D.C. Cir. 1991), we also look to the
League's articles of incorporation, which define the League's pur-
poses as follows:

          Section 1. Provide a vehicle through which members may
          assist one another in matters connected with their career
          employment in the United States Postal Service;

          Section 2. Advance the proficiency of personnel in provid-
          ing postal service promptly, reliably and efficiently to indi-
          viduals and businesses in all areas of the nation;

          Section 3. Consult with the management of the United
          States Postal Service on policies which concern the welfare,
          happiness and morale of employees;

          Section 4. Improve the conditions under which individual
          members work, having concern for salaries, hours of
          employment, working environment, adjustment of griev-
          ances and labor disputes;

          Section 5. Cooperate with other groups and levels of
          postal management in the achievement of common goals;

          Section 6. Encourage contact among members in social,
          operational and professional relationships; and

          Section 7. Engage in any other activity not inconsistent
          with the laws of the District of Columbia.

J.A. 67-68. The League contends that Section 4 of its statement of
purpose--"[i]mprove the conditions under which individual members
work, having concern for salaries, hours of employment, working
environment, adjustment of grievances and labor disputes"--is suffi-
ciently broad to cover non-postal federal employees. We find, how-
ever, that the League's articles, as the League's name suggests, reflect
an overriding purpose to improve the working conditions of postmas-
ters, and, to a lesser extent, other postal employees. The statement of

                    5
purpose fails to provide for the betterment of conditions for all fed-
eral employees. It is patently clear that the articles as a whole focus
on postmasters and other postal employees. Cf. American Postal

. Under basic principles of construction, the
general words in Section 4 apply only to those of the same class
(postal workers) as set forth in the other sections. However, assuming
that Section 4 can be read to encompass all federal employee mem-
bers, and that it thus constitutes a valid tax-exempt purpose, we none-
theless find the League's activities in regard to LBMs not
substantially related to any such purpose.5

First, we deem it highly dubious that the League's generalized pro-
vision of health insurance benefits to federal employee members,
including retired federal employees, is substantially related to improv-
ing the working conditions of LBMs. The Commissioner has allowed
tax-exempt treatment for the provision of health insurance to a labor
organization's members. See Rev. Rul. 62-17, 1962-1 C.B. 87, 87-88.
In the present case, however, the Tax Court found the provision of
health insurance was not substantially related to the League's exempt
purposes because the League marketed the health insurance in a com-
mercial manner, much like competitor for-profit health plans, and the
health plan was available to retired federal employees who had not
been members of the League prior to retirement. In such circum-
stances, the Tax Court found the health benefits were not substantially
related to improving the working conditions of LBMs.
_________________________________________________________________

5 The League argued to the Tax Court that its activities in regard to
LBMs were also substantially related to its sixth stated purpose: "En-
courage contact among members in social, operational and professional
relationships[.]" The Tax Court found, however, that the League "did not
attempt to encourage contact, whether for social, operational, or profes-
sional purposes, among or with LBMs during the years at issue." This
finding was based in large part on the fact that LBMs were excluded
from the League's state chapters and were not encouraged to attend the
League's national convention. The League does not press this argument
on appeal, and we find, as did the Tax Court, that Section 6 of the
League's statement of purpose provides no basis for sustaining the
League's exempt status for its income derived from the dues and service
charges related to LBMs.

                    6
Moreover, it is now clear that the "provision of insurance benefits
to persons who are not members in any other sense cannot be substan-
tially related to a [labor organization's] tax-exempt purposes."
American Postal 

. Accord National Ass'n of
Postal Supervisors v. United States, 

, 861 (Fed. Cir.
1991). In distinguishing American Postal Workers and Postal
Supervisors, the League contends the overall bundle of benefits pro-
vided to LBMs--group legal services, communications, lobbying, and
voting rights--made them bona fide League members. As such, the
League argues, their dues should be tax-exempt. We disagree.

Although it is possible that LBMs joined the League for reasons
other than to obtain access to the League's health insurance plan, the
League failed to show how many LBMs opted not to participate in the
League's health plan. In light of the history of LBMs, as the offspring
of the Limited Benefit Members whose sole benefit was the League's
health plan, see note 

, it was incumbent upon the League to
show that LBMs acted as bona fide League members in some manner
more substantial than as health benefit purchasers. Cf. Helvering v.
Taylor, 

, 515 (1935) (burden of proof on petitioner to
show invalidity of Commissioner's determination). Without such a
showing by the League, the Commissioner could reasonably suspect
that the League was evading the Commissioner's earlier decision to
tax the dues and service fees of so-called "members" whose only
membership benefit was health insurance. The League's failure to
show the number of LBMs who did not obtain the League's health
benefits belies the notion that federal employees joined the League in
order to obtain the League's other benefits or out of affinity for the
postmasters.

Moreover, we think the Tax Court properly found the other bene-
fits in the League's bundle of benefits were not substantially related
to the League's tax-exempt purposes of improving the working condi-
tions of the League's members.6 First, the Tax Court found that
_________________________________________________________________
6 The Commissioner acknowledges that the League could have estab-
lished that a portion of the dues of LBMs was substantially related to a
tax-exempt purpose, such as the legal services contract, and thereby
immunized that portion of the dues from taxation. Appellee's Br. at 24.
We agree with the Commissioner that the League failed to meet its bur-
den of proof in this regard, however, and thus we do not reverse the Tax
Court on this basis.

                    7
although some LBMs obtained assistance in employment-related dis-
putes through the group legal services contract, it was of no value to
many LBMs who either were retired, and thus had no need for
employment-related legal assistance, or were covered by binding arbi-
tration agreements, and thus were ineligible for the League's group
legal services. Second, the Tax Court found the League's newsletter
for LBMs was used primarily as an advertisement for the health and
other commercial benefits available to LBMs, rather than as a means
to communicate important labor news to federal employee members.
Cf. Illinois Ass'n of Professional Ins. Agents v. Commissioner, 

, 995 (7th Cir. 1986) (characterizing materials as taxable
advertisements rather than tax-exempt educational material). Third,
the Tax Court found any lobbying on issues of concern to federal
employees was either incidental to its lobbying efforts on behalf of
postmasters or otherwise too generalized to constitute a substantial
relationship to the working conditions of LBMs. See American Postal

-83.7 Fourth, the Tax Court found the limited
voting rights provided to the LBMs were effectively diluted by other
changes in voting which maintained the power of postmasters to con-
trol the League's agenda. See note 

. Upon our review of the
record, we find no error in the Tax Court's findings.

The League argues, however, that the Tax Court erred by examin-
ing whether its activities actually improved the working conditions of
LBMs in some tangible, quantitative manner rather than whether its
activities were designed to improve the working conditions of LBMs
or were consistent with such a purpose. Under the regulations, a tax-
_________________________________________________________________
7 The League argues generalized lobbying on behalf of federal employ-
ees is nonetheless directed toward the improvement of the working con-
ditions of LBMs and thus should support the tax-exempt status of the
dues of LBMs. It is true that federal employees could join a labor organi-
zation to promote such generalized lobbying efforts. On this record, how-
ever, there is no showing that such lobbying was substantially related to
the dues paid by LBMs or a substantial reason for League membership
on the part of LBMs. Moreover, the League could have readily estab-
lished a class of members to support the League's lobbying efforts with-
out the attendant health and other commercial benefits. Under these
circumstances, generalized lobbying cannot support the tax-exempt sta-
tus of the dues of LBMs.

                   8
payer must show that an organization's income-generating activities
have a substantial "causal relationship to the achievement of exempt
purposes" or "contribute importantly to the accomplishment of those
purposes." 26 C.F.R. § 1.513-1(d)(2) (emphasis added). Thus, to the
extent that the Tax Court looked for evidence of actual improvement
in the working conditions of LBMs, we think such an inquiry was
proper. As we read the Tax Court's opinion, however, the Tax Court
examined whether the League's conduct of its activities in regard to
LBMs evinced a primary intention on the League's part of raising
revenue, making its income taxable, or of improving the working con-
ditions of LBMs, making its income tax exempt. See American Col-
lege of 

; Independent Ins. Agents v.
Commissioner, 

, 902 (11th Cir. 1993). Because some of
the benefits, such as the group legal services contract, had no poten-
tial to improve the working conditions of many LBMs, the Tax Court
properly concluded the League failed to show it conducted its activi-
ties in regard to LBMs in a manner substantially related to its tax-
exempt purposes.

Under these circumstances, the Tax Court properly found the dues
of LBMs and related service charges not substantially related to any
of the League's tax-exempt purposes, and we affirm the Tax Court's
decision.

AFFIRMED

                    9