## Facts

- Associated Master Barbers & Beauticians of America, Inc. was an Illinois nonprofit corporation with its principal office in Charlotte, North Carolina.
- The organization was formed to promote unity and protection among barbers, beauticians, and hairstylists.
- The IRS had previously recognized the organization as exempt under I.R.C. § 501(c)(6) as a business league, and it filed Form 990 returns as an exempt entity.
- The organization established, administered, and operated member insurance programs, including a sick plan, a death plan, and a supplemental plan.
- A large majority of members participated in these plans.
- In many years, receipts and disbursements attributable to the insurance programs each exceeded 30% of the organization’s total receipts and disbursements.
- The IRS revoked the organization’s § 501(c)(6) exemption for the years at issue and determined income tax deficiencies.
- The IRS also treated the organization as a membership organization under I.R.C. § 277, limiting its ability to use a 1973 net operating loss carryback to offset income in 1970 and 1971.

## Issues

1. Whether the organization qualified as a tax-exempt business league under I.R.C. § 501(c)(6) and Treas. Reg. § 1.501(c)(6)-1 during the years at issue.
2. If not exempt, whether the organization was a membership organization “operated primarily to furnish services or goods to members” under I.R.C. § 277, thereby disallowing the claimed 1973 net operating loss carryback to 1970 and 1971.

## Decision

- The Tax Court held the organization did not qualify for exemption under § 501(c)(6) during the years at issue.
- The court sustained the Commissioner’s revocation of exempt status, finding the organization engaged in a regular business ordinarily carried on for profit and performed particular services for individual members through its insurance programs.
- The court held § 277 applied because the organization was operated primarily to furnish services to members.
- As a result, the court determined the organization had taxable income of $23,064.89 for the taxable year ending September 30, 1973 and was not entitled to a net operating loss carryback of $46,109.87 to 1970 and 1971.

## Legal Principles

- A § 501(c)(6) business league must primarily promote the common business interests of its members by improving business conditions in a line of business, rather than providing particular services to individual members.
- Under Treas. Reg. § 1.501(c)(6)-1, exemption is unavailable where the organization engages in a regular business ordinarily carried on for profit or performs particular services for individual persons.
- Substantial operation of member insurance programs can constitute commercial-type activity and member-specific services inconsistent with § 501(c)(6) status when those programs are a significant part of the organization’s operations.
- I.R.C. § 277 applies to a membership organization operated primarily to furnish goods or services to members, limiting the ability to use losses from member-related activities as net operating loss carrybacks against prior-year taxable income.

## Conclusion

The Tax Court held that a nonprofit trade association that substantially operated member insurance plans functioned as a commercial service provider rather than a business league improving industry conditions, justifying revocation of § 501(c)(6) exemption; as a membership organization under § 277, it could not carry back the asserted 1973 loss to offset income in earlier years.


Associated Master Barbers & Beauticians of Am., Inc. v. Commissioner, 69 T.C. 53 (1977)