Dutch pension fund not an exempt labor organization.

• Author: Elinsky, Peter I.

The District Court for the District of Columbia has held in Stichting Pensioenfonds Voor De Gezondheid, Geestelijke En Maatschappelijke Belangen (12/9/96), that a Dutch multi-employer pension fund was not a tax-exempt labor organization under Sec. 501(c)(5), and thus was not entitled to a refund of the $8.5 million U.S. income taxes it paid in 1993. In reaching that conclusion, the court specifically rejected the Second Circuit's decision in Morganbesser, 984 F2d 560 (1993).

The Health Worker's Fund, a Dutch multi-employer pension plan for health care workers, collects pension fund contributions, manages Its investments and pays benefits to enticed participants. The Fund's investments include common stocks of U.S. companies and mutual funds, which are held by U.S. banks and other financial institutions acting as the Fund's custodians. For the 1993 tax year, these custodians withheld and paid to the U.S. Treasury more than $8.5 million in U.S. income taxes on dividends paid on stocks and mutual funds held for the Fund. The Fund brought an action in Federal district court seeking a refund of those taxes, on the grounds that the Fund was an exempt labor organization under Sec. 501(c)(5).

The district court first noted that Sec. 501(c)(5) does not define the term "labor organization," and that the legislative history provides no additional help. Thus, the court turned to Regs. Sec. 1.501, which states:

The organizations contemplated by section 501(c)(5) as entitled to exemption from income taxation are those that:

(1) have no net earnings inuring to the benefit of any member, and

(2) have as their objects the betterment of conditions of those engaged in such pursuits, the improvement of the grade of their products, and the development of a higher degree of efficiency in their respective occupations.

The court found that although the Fund, in providing retirement benefits, has as its object the betterment of conditions of the employees, it did not have as its object the improvement of the grade of their products and the development of a higher degree-of efficiency. Therefore, the regulation, on its face, excluded the Fund from classification as a tax-exempt labor organization

The Fund had relied chiefly on Morganbesser, in which the Second Circuit held...