## Facts

- The State Police Association of Massachusetts was a tax-exempt labor organization under I.R.C. § 501(c)(5), organized to represent members in employment matters and to promote fraternity among members.
- The Association published an annual yearbook, *The Constabulary*, containing photographs, articles, display advertisements, and a business directory.
- The Association operated an advertising sales program for the yearbook that generated gross receipts of $8,788,211 during the years at issue, with the Association retaining a little over 40% of the receipts.
- The Association did not pay federal income tax on the advertising-related income.
- The Commissioner issued a notice of deficiency asserting that the advertising income was unrelated business taxable income (UBTI) and that income tax was owed.
- The Association challenged (1) the timeliness of the assessment under the statute of limitations and (2) the classification of the advertising income as UBTI.
- The Tax Court sustained the deficiency; the Association appealed.

## Issues

1. Whether the Commissioner’s notice of deficiency was timely under the applicable statute of limitations, given the Association’s reporting and disclosure of the advertising activity and income.
2. Whether the Association’s yearbook advertising receipts were UBTI under I.R.C. §§ 511–513 because they were from a trade or business regularly carried on and not substantially related (apart from producing income) to the Association’s exempt purposes.

## Decision

- The First Circuit affirmed the Tax Court.
- The court held the deficiency notice was timely under the applicable limitations period.
- The court held the yearbook advertising receipts constituted UBTI taxable under I.R.C. § 511 notwithstanding the Association’s § 501(c)(5) exemption.

## Legal Principles

- Tax-exempt organizations are subject to federal income tax on UBTI: income from a trade or business regularly carried on that is not substantially related (other than through producing income) to exempt purposes. I.R.C. §§ 511–513.
- The “substantially related” inquiry focuses on the relationship between the income-generating activity itself and the organization’s exempt purposes; using profits to fund exempt activities does not make the income “related.”
- Extensive, systematic, and commercially oriented solicitation and sale of advertising can constitute a trade or business regularly carried on for UBTI purposes.
- For limitations purposes, incomplete or unclear disclosure of the relevant income-producing activity and amounts can permit the Commissioner to proceed under a longer statutory limitations period.

## Conclusion

The court upheld the IRS’s deficiency because the assessment was not time-barred and because the Association’s large-scale, regularly conducted sale of advertising for its yearbook was a commercial activity not substantially related to its labor-representation or fraternal purposes, making the advertising receipts taxable as unrelated business income.


State Police Ass’n of Mass. v. Comm’r, 125 F.3d 1 (1st Cir. 1997), cert. denied, 523 U.S. 1122 (1998)