A non-profit trade association composed of dealers franchised by a single manufacturer isn't a "business league" and therefore isn't entitled to an exemption from federal income taxation, the Supreme Court ruled yesterday.

The case involved the National Muffler Dealers Association Inc. All of its members are dealers franchised by Midas International Corp., and its principal activity has been to serve as a bargaining agent for the members in dealing with Midas.

The Internal Revenue Service ruled that, to qualify for the exemption, an association must be a business league "of the same general class as a chamber of commerce or board of trade." The Midas association, doesn't pass its "line-of-business" test, the IRS held.

The association challenged the ruling in U.S. District Court in New York. Losing there, it appealed to the 2d U.S. Circuit Court of Appeals, which affirmed in 1979.

The appeals court held that the exemption was intended by Congress for organizations that "promote some aspect of the general economic welfare rather than support particular private interests," and that the IRS' line-of-business requirement was "well suited to assuring that an organization's efforts do, indeed benefit a sufficiently broad segment of the business community."

The 2d Circuit also said that any success the Midas association might have in improving conditions for the franchisees, and any advantage it might gain from a tax exemption, would come at the expense of the rest of the muffler industry.

The 2d Circuit's conclusion that the Midas association had too narrow a purpose to satisfy the line-of-business test was reached in explicit conflict with a 1966 decision of the 7th U.S. Circuit Court of Appeals that upheld the exempt status of an association composed solely of bottlers of Pepsi-Cola.

The Supreme Court resolved the conflict by upholding the 2d Circuit with an opinion for the majority by Justice Harry A. Balckmun. The IRS commissioner's interpretation of the 50-year-old line-of-business requirement "merits serious deference," he said.

In the dissenting opinion, Justice Potter Stewart, joined by Justices Stevens, agreed with the 7th Circuit that the IRS requirement was an unreasonable narrowing of the law. More over, he noted, the initial administrative interpretation of the law "was exactly the opposite of the one now urged."

The decision will clear IRS and court dockets of about a dozen similar cases.