The opinion of the court was delivered by: BOLDT
In this civil suit the American Plywood Association, a non-profit Washington corporation formerly named Douglas Fir Plywood Association, seeks refund of federal income taxes for the year 1961 which are alleged to have been erroneously assessed and collected in the amount of $292,391.71. Jurisdiction of this court is based upon 28 U.S.C. § 1346.
Plaintiff is a trade association of softwood plywood manufacturers to which, from its organization in 1936 until 1960, the Internal Revenue Service (hereafter IRS) granted tax exemption as a qualified "business league" under 26 U.S.C. § 501(c)(6).
In 1925 twelve manufacturers produced 153 million square feet of plywood. In 1965, 174 plants produced almost 12 1/2 billion square feet. In 1961, plaintiff's members accounted for 92.7% (almost eight billion square feet) of the total volume of plywood production in the United States. Throughout the years plaintiff's basic purpose has been "to promote the common business interest of the plywood industry and apprise the public of its scope and character." (Articles of Incorporation, Ex. 1 [not reproduced herein]) Dedication to and effective promotion of that purpose has largely been responsible for the remarkable development and expansion of what is now one of the nation's major industries. As that industry has grown plaintiff's activities have expanded to meet the needs of the industry. That plaintiff's extensive achievements in behalf of the plywood industry as a whole are to the great advantage of the American public is beyond question and not challenged by defendant.
On April 26, 1961 plaintiff's by-laws were amended to provide for an increase in its membership dues "to be devoted to the promotion of DFPA grade-trademarked plywood primarily through the medium of television." (PT Order p. 3-4 [not reproduced herein]). On January 30, 1962 the Commissioner of Internal Revenue was notified of this amendment. Plaintiff's tax exempt status was re-examined by IRS in April, 1963 and on January 27, 1965 such status was revoked retroactive to the tax year ending December 31, 1961.
§ 501(c)(6) exempts from income tax "business leagues . . . not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual." The pertinent Treasury Regulation, 1.501(c)(6)-1, provides that
"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. It is an organization of the same general class as a chamber of commerce or board of trade. 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."
The Regulation has not been changed since 1929 and has the force and effect of law. Apartment Operations Assn. v. Commissioner, 136 F.2d 435, 436 (9th Cir. 1943); Retailers Credit Assn. v. Commissioner, 90 F.2d 47, 50 (9th Cir. 1937).
The Tenth Circuit in United States v. Oklahoma City Retailers Assn., 331 F.2d 328, 330-332 (10th Cir. 1964) enumerated the conditions provided by the statute and regulations which must be met to qualify as a tax-exempt business league under 501(c)(6) as follows:
"(1) It must be a business league; (2) it must not be organized for profit; (3) it must be an organization no part of the net earnings of which inures to the benefit of any private shareholder or individual; (4) it must be an association of persons, incorporated or unincorporated, having common business interests the purpose of which is to promote those common interests; (5) its activities must be directed at improving the business conditions of one or more lines of business and not particular services for individual persons; and (6) it may not engage in a business ordinarily carried on by businesses for profit. If any of these conditions are not met, the exemption is not applicable."
The rule is well established that a trade association whose main purpose justifies exemption from income tax will not forfeit tax exempt status by engaging in incidental activities which, standing alone, would be subject to taxation. Retailers Credit Assn. v. Commissioner, supra, 90 F.2d at 51-52, citing Crooks v. Kansas City Hay Dealers', 37 F.2d 83 (8th Cir. 1929), Trinidad v. Sagadra Orden, 263 U.S. 578, 68 L. Ed. 458, 44 S. Ct. 204 (1923); and see, United States v. Omaha Live Stock Traders Exchange, 366 F.2d 749 (8th Cir. 1966).
The ultimate fact as to which activities of a business league are primary and which are incidental must be determined in each case upon the particular circumstances involved and the reasonable conclusions to be drawn therefrom. United States v. Omaha Live Stock Traders, supra; General Contractors Assn. of Milwaukee v. United States, 202 F.2d 633 (7th ...