National Muffler Dealers Association, Inc v. United States

• Decision Date: 20 March 1979
• Docket Number: No. 77-1172,77-1172
• Citation: 440 U.S. 472,59 L.Ed.2d 519,99 S.Ct. 1304
• Parties: NATIONAL MUFFLER DEALERS ASSOCIATION, INC., Petitioner, v. UNITED STATES
• Court: U.S. Supreme Court

59 L.Ed.2d 519

99 S.Ct. 1304

440 U.S. 472

NATIONAL MUFFLER DEALERS ASSOCIATION, INC., Petitioner,

v UNITED STATES.

No. 77-1172.

Argued Nov. 27, 1978.

Decided March 20, 1979.

Syllabus

Petitioner is a trade organization for muffler dealers but it has confined its membership to dealers franchised by Midas International Corporation and its activities to Midas' muffler business. In a suit seeking a federal income tax refund, petitioner claimed the "business league" exemption provided by § 501(c)(6) of the Internal Revenue Code of 1954. Treas.Reg. § 1.501(c)(6)-1 states that a business league is "an organization of the same general class as a chamber of commerce or board of trade," and that a tax exempt business league's activities "should be directed to the improvement of business conditions of one or more lines of business." The District Court held that Midas muffler franchisees do not constitute a "line of business" and that petitioner was not a "business league" within the meaning of § 501(c)(6) and thus was not entitled to the claimed refund. The Court of Appeals affirmed, applying the maxim noscitur a sociis and holding that petitioner's purpose was too narrow to satisfy the "line of business" test of the Regulation. Held: Petitioner is not entitled to the tax exemption as a "business league" within the meaning of § 501(c)(6). Pp. 1306-1313.

2nd Cir., 565 F.2d 845, affirmed.

Myron P. Gordon, New York City, for petitioner.

Stuart A. Smith, Washington, D. C., for respondent.

Mr. Justice BLACKMUN delivered the opinion of the Court.

Petitioner, National Muffler Dealers Association, Inc. (Association), as its name indicates, is a trade organization for muffler dealers. The issue in this case is whether the Association, which has confined its membership to dealers franchised by Midas International Corporation (Midas), and its activities to the Midas muffler business, and thus is not "industrywide," is a "business league" entitled to the exemption from federal income tax provided by § 501(c)(6) of the Internal Revenue Code of 1954, 26 U.S.C. § 501(c)(6).¹

I

In 1971, during a contest for control of Midas, Midas muffler franchisees organized the Association under the New York Not-for-Profit Corporation Law. The Association's purpose was to establish a group to negotiate unitedly with Midas management. Its principal activity has been to serve as a bargaining agent for its members in dealing with Midas. It has enrolled most Midas franchisees as members.² The Association was successful in negotiating a new form of franchise agreement which prevents termination during its 20-year life except for cause. It also persuaded Midas to eliminate its requirement that a customer pay a service charge when a guaranteed Midas muffler is replaced. And the Association sponsors group insurance programs, holds an annual convention, and publishes a newsletter for members.

The Association sought the exemption from federal income tax which § 501(c)(6) provides for a "business league." Treasury Regulation § 1.501(c)(6)-1, 26 CFR § 1.501(c)(6)-1 (1978), states that the activities of a tax exempt business league "should be directed to the improvement of business conditions of one or more lines of business." ³ In view of that requirement, the Internal Revenue Service initially rejected the Association's exemption application, stating that § 501(c)(6) "would not apply to an organization that is not industry wide." ⁴

The Association then (in October 1972) amended its bylaws and eliminated the requirement that its members be Midas franchisees. Despite that amendment, and despite the Association's announced purpose to promote the interests of individuals "engaged in business as muffler dealers," ⁵ it neither recruited nor acquired a member who was not a Midas franchisee.⁶

In 1974, after the Internal Revenue Service had issued a final rejection of the Association's exemption application, the Association filed income tax returns for its fiscal years 1971, 1972, and 1973, and, thereafter, claims for refund of the taxes paid with those returns. The 1972 claim was formally denied. Subsequent to that denial, and after more than six months had passed since the filing of the 1971 and 1973 claims, see § 6532(a)(1) of the 1954 Code, 26 U.S.C. § 6532(a)(1), the Association brought this suit in the United States District Court for the Southern District of New York asserting its entitlement to a refund for the income taxes paid for the three fiscal years. The District Court found: "There is no evidence that [the Association] confers a benefit on the muffler industry as a whole or upon muffler franchisees as a group." App. to Pet. for Cert. 11a. It then concluded that "Midas Muffler franchisees do not constitute a 'line of business,' " and held that the Association was not a "business league" within the meaning of § 501(c)(6), and thus was not entitled to the claimed refund. App. to Pet. for Cert. at 13a-14a.

The United States Court of Appeals for the Second Circuit affirmed. 565 F.2d 845 (1977). It confronted what it called the "lexicographer's task of deciding what is meant by a 'business league'." Id., at 846. Finding no direct guidance in the statute, the court applied the maxim noscitur a sociis ("[i]t is known from its associates," Black's Law Dictionary 1209 (Rev. 4th ed. 1968)), and looked "at the general characteristics of the organizations" with which business leagues were grouped in the statute, that is, chambers of commerce and boards of trade. The court agreed with the Service's deter- mination, in § 1.501(c)(6)-1 of the regulations, that a business league is an "organization of the same general class as a chamber of commerce or board of trade." Reasoning that it was the "manifest intention" of Congress by the statute "to provide an exemption for organizations which promote some aspect of the general economic welfare rather than support particular private interests," the court concluded that the "line of business" requirement set forth in the regulations is "well suited to assuring that an organization's efforts do indeed benefit a sufficiently broad segment of the business community." 565 F.2d, at 846-847. The court noted that any success the Association might have in improving business conditions for Midas franchisees, and any advantage it might gain through tax exemption, would come at the expense of the rest of the muffler industry, and concluded that the Association's purpose was too narrow to satisfy the line-of-business test.

The court, id., at 847 n. 1, explicitly refused to follow the decision in Pepsi-Cola Bottlers' Assn. v. United States, 369 F.2d 250 (CA7 1966). There, the Seventh Circuit, by a divided vote, had upheld the exempt status of an association composed solely of bottlers of a single brand of soft drink. It did so on the ground that the line-of-business requirement unreasonably narrowed the statute.

We granted certiorari to resolve this conflict. 436 U.S. 903, 98 S.Ct. 2230, 56 L.Ed.2d 400 (1978).

II

The statute's term "business league" has no well-defined meaning or common usage outside the perimeters of § 501(c)(6). It is a term "so general . . . as to render an interpretive regulation appropriate." Helvering v. Reynolds Co., 306 U.S. 110, 114, 59 S.Ct. 423, 425, 83 L.Ed. 536, 540 (1939). In such a situation, this Court customarily defers to the regulation, which, "if found to 'implement the congressional mandate in some reasonable manner,' must be upheld." United States v. Cartwright, 411 U.S 546, 550, 93 S.Ct. 1713, 1716, 36 L.Ed.2d 528, 532 (1973), quoting United States v. Correll, 389 U.S. 299, 307, 88 S.Ct. 445, 449, 19 L.Ed.2d 537, 543 (1967).

We do this because "Congress has delegated to the [Secretary of the Treasury and his delegate, the] Commissioner [of Internal Revenue], not to the courts, the task of prescribing 'all needful rules and regulations for the enforcement' of the Internal Revenue Code. 26 U.S.C. § 7805(a)." United States v. Correll, 389 U.S., at 307, 88 S.Ct. at 449. That delegation helps ensure that in "this area of limitless factual variations," ibid., like cases will be treated alike. It also helps guarantee that the rules will be written by "masters of the subject," United States v. Moore, 95 U.S. 760, 763, 24 L.Ed. 588, 589 (1878), who will be responsible for putting the rules into effect.

In determining whether a particular regulation carries out the congressional mandate in a proper manner, we look to see whether the regulation harmonizes with the plain language of the statute, its origin, and its purpose. A regulation may have particular force if it is a substantially contemporaneous construction of the statute by those presumed to have been aware of congressional intent. If the regulation dates from a later period, the manner in which it evolved merits inquiry. Other relevant considerations are the length of time the regulation has been in effect, the reliance placed on it, the consistency of the Commissioner's interpretation, and the degree of scrutiny Congress has devoted to the regulation during subsequent re-enactments of the statute. See Commissioner v. South Texas Lumber Co., 333 U.S. 496, 501, 68 S.Ct. 695, 698, 92 L.Ed. 831, 836 (1948); Helvering v. Winmill, 305 U.S. 79, 83, 59 S.Ct. 45, 46, 83 L.Ed. 52, 55 (1938).

III

A.

The history of Treas.Reg. § 1.501(c)(6)-1 and its "line of business" requirement provides much that supports the Government's view that the Association, which is not tied to a particular community and is not industrywide, should not be exempt. The exemption for "business leagues" from federal income tax had its genesis at the inception of the modern income tax system with the enactment of the Tariff Act of October 3, 1913, 38 Stat. 114, 172. In response to a House bill which would have exempted, among others, "labor, agricultural, or horticultural organizations," the Senate Finance Committee was urged to add an exemption that would cover...