## Facts

- The National League of Postmasters of the United States (League) was recognized as a tax-exempt labor organization under I.R.C. § 501(c)(5), formed to improve postmasters’ working conditions and welfare.
- In the early 1980s, the League created a new membership class, “League Benefit Members” (LBMs), open to any current or retired federal employee, not limited to postmasters.
- LBMs paid annual amounts labeled as “dues” and received limited governance rights, including electing 1 of 10 board members and sending 1 delegate out of 500 to the national convention.
- The principal benefit of LBM status was eligibility to participate in a League-sponsored group health insurance plan; the record indicated that virtually all LBMs joined to obtain health coverage.
- The IRS audited the League and concluded that LBM “dues” were, in substance, payments for insurance-related benefits offered in a commercial manner, and issued deficiency notices treating the receipts as taxable income.
- The Tax Court upheld the deficiencies, and the League appealed to the Fourth Circuit.

## Issues

1. Whether amounts paid by LBMs and labeled as “membership dues” were excludable dues of a § 501(c)(5) labor organization or taxable income from providing insurance-related benefits.
2. Whether the League’s LBM health-insurance activity was sufficiently connected to its exempt labor-organization purpose to treat LBM receipts as exempt, rather than taxable commercial receipts.

## Decision

- The Fourth Circuit affirmed the Tax Court.
- The court treated the LBM payments as taxable income because they functioned as consideration for access to health insurance rather than dues paid to participate in a labor organization.
- The court found the LBM program predominantly commercial in character, including broad eligibility beyond the League’s occupational base and marketing that resembled marketplace insurance activity.
- The court accepted the Tax Court’s findings that the League failed to show a meaningful number of LBMs paid for membership apart from enrolling in the health plan.
- Applying clear-error review to the Tax Court’s factual findings, the Fourth Circuit found no basis to disturb the characterization of the receipts.

## Legal Principles

- Tax characterization turns on substance over form; labels such as “dues” do not control when payments are, in economic reality, fees for goods or services.
- Receipts of an exempt § 501(c)(5) labor organization may be taxable when they arise from commercially marketed benefits offered primarily to obtain those benefits, especially to persons outside the organization’s traditional worker constituency.
- Minimal or diluted governance rights do not convert a benefit-driven, customer-like relationship into bona fide labor-organization membership for tax purposes.
- The taxpayer bears the burden to substantiate that amounts treated as “dues” are genuinely paid for membership participation and are sufficiently related to exempt purposes.

## Conclusion

The Fourth Circuit held that payments by League Benefit Members were taxable because they were, in substance, consideration for access to commercially offered health-insurance benefits rather than excludable membership dues tied to the League’s exempt labor-organization function.


Nat’l League of Postmasters of the U.S. v. Comm’r, 86 F.3d 59 (4th Cir. 1996)