## Facts

- National Muffler Dealers Association, Inc. was organized by Midas franchisees to negotiate collectively with Midas management for improved franchise terms during a corporate control dispute.
- Membership was originally limited to Midas franchisees, and the association’s activities were confined to Midas-related muffler business matters.
- The association sought federal income tax exemption under I.R.C. § 501(c)(6) as a “business league.”
- The IRS denied exemption on the ground that § 501(c)(6) did not cover organizations that were not industrywide.
- The association amended its bylaws to remove the Midas-only membership requirement but, in practice, did not recruit or obtain non-Midas muffler dealers as members.
- The association paid income taxes and sued for a refund in federal district court.
- The district court held the association was not a qualifying “business league,” reasoning that Midas franchisees were not a “line of business” under the governing regulation.
- The Second Circuit affirmed, construing “business league” in light of companion statutory terms and concluding the association’s purpose was too narrow under the regulation’s “line of business” test.

## Issues

1. Whether an association whose membership and activities were effectively confined to a single franchisor’s dealers qualifies as a “business league” exempt from income tax under I.R.C. § 501(c)(6).
2. Whether Treasury Regulation § 1.501(c)(6)-1—requiring that exempt business-league activities be directed to improving business conditions of a “line of business,” rather than providing particular services to individual members—reasonably implements § 501(c)(6) and warrants judicial deference.
3. Whether the Commissioner reasonably applied the regulation to deny exemption to the association.

## Decision

- The Supreme Court affirmed the judgment for the United States and held the association was not entitled to exemption under § 501(c)(6).
- The Court upheld Treasury Regulation § 1.501(c)(6)-1 as a reasonable interpretation of the statute and gave it substantial deference.
- Applying the regulation, the Court concluded the association’s Midas-centered membership and bargaining objectives did not amount to improving business conditions for a “line of business.”
- The Court emphasized that, where the statute permits multiple reasonable interpretations, selection among them is for the Commissioner rather than the courts.
- Justice Stewart, joined by Justices Rehnquist and Stevens, dissented.

## Legal Principles

- Treasury regulations interpreting the Internal Revenue Code are sustained if they implement the congressional mandate in a reasonable manner and are consistent with the statute’s text and purpose.
- In evaluating the validity of a tax regulation, relevant considerations include its longevity, consistency of administrative interpretation, and reliance by administrators and taxpayers.
- Under Treasury Regulation § 1.501(c)(6)-1, a § 501(c)(6) “business league” must be of the same general class as a chamber of commerce or board of trade and must aim to improve business conditions of one or more lines of business, not provide particular services to specific persons or firms.
- An organization focused on the economic interests of a narrow, brand-specific subset of an industry—such as franchisees of a single company—may fall outside § 501(c)(6) when its principal function resembles member-specific services (including collective negotiation of franchise terms) rather than industry-level improvement.

## Conclusion

The Court denied § 501(c)(6) exemption to an association that functioned primarily for one franchisor’s dealers and deferred to a long-standing Treasury regulation requiring business leagues to work for broader “line of business” conditions rather than delivering particularized services to a limited membership.


Nat'l Muffler Dealers Ass'n, Inc. v. United States, 440 U.S. 472 (1979)