WHEREAS, the President’s Fiscal Year 2001 Budget repeats a prior proposal (the "Proposal") to subject trade associations and other organizations exempt from federal income tax under section 501(c)(6) of the Internal Revenue Code of 1986 (the "Code") to the unrelated business income tax on net investment income in excess of $10,000;

WHEREAS, tax-exempt trade associations must maintain reasonable working capital reserves, and the Proposal would result in the imposition of tax on investment income earned on reasonable and prudent working capital reserves, and would force trade associations to reduce services or increase dues and fees payable by members;

WHEREAS, the Proposal appears to be motivated by the misconception that members of a trade association accelerate the payment of their dues in order to cause the trade association to earn tax-free investment income that would otherwise have been taxed to the members, and ignores substantial non-tax reasons why a trade association must accumulate and maintain a reasonable level of working capital, such as the need to provide for unexpected contingencies and the fact that dues are typically paid only once a year while expenses are spread throughout the year;

WHEREAS, even if the ability to earn investment income on a tax-exempt basis provides a tax benefit to a trade association and its members, this tax benefit is merely a matter of timing, since future dues (which are generally deductible by the members as business expenses) will be reduced by the amount of investment income earned by the trade association, and there will only be a tax benefit to the extent that investment income earned in a given year is not expended for the trade association’s exempt purposes until a subsequent year;

WHEREAS, the Proposal unreasonably discriminates against trade associations, in particular because it does not apply to labor, agricultural or horticultural organizations exempt from federal income tax under section 501(c)(5) of the Code, despite the fact that labor unions and other section 501(c)(5) organizations derive a greater tax benefit than trade associations from the ability to earn tax-free investment income since dues paid to labor unions are generally not fully deductible;

WHEREAS, the amount of revenue raised by the Proposal is speculative and uncertain, particularly because the Proposal would require trade associations to raise dues, which are generally deductible to the members as business expenses, and because many trade associations, if properly advised, could avoid the new tax entirely by earmarking their investment income for charitable or educational purposes; and

WHEREAS, the Proposal would increase the complexity of the tax law and the administrative burdens imposed on the Internal Revenue Service, would unreasonably discriminate against trade associations and would likely not result in any significant revenue gain for the federal government;

NOW, THEREFORE, BE IT RESOLVED that the Philadelphia Bar Association opposes any proposal that would subject the investment income of trade associations and other organizations exempt from tax under Section 501(c)(6) of the Internal Revenue Code of 1986 to the unrelated business income tax.

ADOPTED: June 29, 2000