UNITED STATES OF AMERICA, PETITIONER V. AMERICAN BAR ENDOWMENT;
UNITED STATES OF AMERICA, PETITIONER V. FREDERIC D. TURNER, ET UX., ET
AL.

   No. 85-599

   In the Supreme Court of the United States

   October Term, 1985

   The Solicitor General, on behalf of the United States, petitions
for a writ of certiorari to review the judgment of the United States
Court of Appeals for the Federal Circuit in these cases.

   Petition for a Writ of Certiorari to the United States Court of
Appeals for the Federal Circuit

                       PARTIES TO THE PROCEEDING

   In addition to the parties named in the caption, Arthur M. Sherwood
(and his wife), Herbert C. Broadfoot II (and his wife), and Frederick
G. Boynton are respondents.

            TABLE OF CONTENTS
   Questions Presented
   Parties to the Proceeding
   Opinions below
   Jurisdiction
   Statutes involved
   Statement
      A. American Bar Endowment
      B. Frederic D. Turner, et ux., et al.
   Reasons for granting the petition
      A. American Bar Endowment
      B. Frederic D. Turner, et ux., et al.
   Conclusion
   Appendix A
   Appendix B
   Appendix C
   Appendix D
   Appendix E

                            OPINIONS BELOW

   The opinion of the court of appeals (App., infra, 1a-23a) is
reported at 761 F.2d 1573.  The opinion of the Claims Court (App.,
infra, 25a-58a) is reported at 4 Cl. Ct. 404.

                             JURISDICTION

   The judgment of the court of appeals (App., infra, 24a) was entered
on May 10, 1985.  On July 31, 1985, the Chief Justice extended the
time within which to petition for a writ of certiorari to and
including October 7, 1985.  The jurisdiction of this Court is invoked
under 28 U.S.C. 1254(1).

                           STATUTES INVOLVED

   The relevant portions of Sections 501, 511, 512, and 513 of the
Internal Revenue Code of 1954 (26 U.S.C.), and of Sections 1.501(c)
(6)-1 and 1.513-1 of the Treasury Regulations on Income Tax (26
C.F.R.), are set out in a statutory appendix (App., infra, 59a-76a).

                          QUESTIONS PRESENTED

   1. Whether income derived by a tax-exempt professional organization
from the sale of group insurance to its members is "unrelated business
income" subject to tax under Sections 511 through 513 of the Internal
Revenue Code.

   2. Whether an insured member's assignment of his policy dividends
to the organization, when the assignment is a requirement of
purchasing the insureance, is deductible as a "charitable
contribution" under Section 170 of the Code.

                               STATEMENT

   These cases were consolidated for trial and decision in the Claims
Court and for briefing, argument and decision in the court of appeals.
 Although the cases are closely linked, they raise different legal
issues and are most conveniently discussed separately.

                       A. American Bar Endowment

   1. The American Bar Endowment is a corporation exempt from tax
under Section 501(c)(3) of the Internal Revenue Code.  /1/ Its main
purposes are to advance legal research and to promote the
administration of justice.  It accomplishes these purposes by making
grants to other charitable and educational organizations (App., infra,
26a).  All members of the American Bar Association (ABA) are members
of the Endowment without paying additional dues (C.A. App. 116).  The
ABA is exempt from tax under Section 501(c)(6) as a "business league."

   The Endowment has conducted a group insurance program for ABA
members since 1955 (App., infra, 27a).  The program offers life,
health, accident, and disability insurance underwritten by major
insurance companies.  Coverage for members' dependents is also
available under some plans (ibid.).  The life insurance plan, the most
heavily subscribed, had $2.75 billion of insurance outstanding in
1980.  More than 57,000 (or about one-fifth) of the Endowment's
members were then enrolled in one or more of the plans (C.A. App.
143).

   The Endowment administers its insurance plans with a staff of 40
(App., infra, 27a).  It actively supports and officially endorses
coverage under the plans, and solicits its members' enrollment through
aggressive advertising prepared and distributed by its staff (C.A.
App. 141, 811, 1248-1268).  The staff also performs many tasks
essential to the program's day-to-day operation, such as screening
members' applications, collecting members' premiums, and forwarding
premiums to the underwriters (id. at 141-142).  Nearly all of the
Endowment's operating budget is consumed by these activities (id. at
139).

   The Endowment's contracts with its underwriters require the latter
to calculate and refund to the Endowment annually any policy dividends
or retrospective rate credits that accrue to the group policies (C.A.
App. 120-122, 128).  These sums, which we shall refer to collectively
as "dividends," reflect the excess of the premiums paid by ABA members
over the underwriters' cost of paying claims and servicing the plans
(App., infra, 27a-30a).  In order to enroll in the program, every
insured must waive his claim to receive these dividends and must
consent to their retention by the Endowment.  This condition is stated
on the insurance application forms, and the Endowment insists on its
strict enforcement (id. at 3a-4a, 32a;  C.A. App. 440-442).  The
Endowment applies the dividends, net of its plan administration
expenses, to fund its educational projects.  Every year, it calculates
the percentage of the overall premiums that have been thus applied,
and advises its insured members that they may, in the opinion of the
Endowment's counsel, deduct corresponding portions of their own
premiums as tax-deductible charitable contributions (App., infra, 4a,
32a-33a;  C.A. App. 867-871).

   The Endowment's strategy is to maximize the policy dividends and
thus maximize its profits.  It uses its considerable leverage with the
underwriters to tailor the insurance program to that end (App., infra,
3a-4a, 27a-30a).  Because the plans are experience-rated, and because
ABA members enjoy very favorable mortality and morbidity experience,
the Endowment could, if it chose, offer insurance at very low
premiums, perhaps at premiums approaching the lowest available for
group insurance in the country (App., infra, 30a-32a).  In order to
produce the largest dollar volume of policy dividends, however, the
Endowment sets the price of its insurance at rates comparable to those
charged for other insurance products in the market (App., infra,
3a-4a, 27a-30a).  The Endowment regularly reviews the market
comparability of its prices and benefits and adjusts its premiums from
time to time to keep them competitive (ibid.).  By the same token, the
Endowment takes care not to raise its premiums above the market range,
for fear of discouraging participation (ibid.).

   The use of prevailing market rates, coupled with the favorable
mortality and morbidity experience of ABA members, has made the
Endowment's insurance operations highly profitable.  The amounts
refunded to it as dividends often exceed 40% of the premiums its
members pay (C.A. App. 560-561;  App., infra, 4a).  Income from its
insurance operations is by far the major source of its revenue (C.A.
App. 1319).  The Endowment thus serves successfully as a middleman
between its members and commercial vendors of insurance.

   2. Sections 511 through 513 of the Internal Revenue Code impose a
tax, at regular corporate rates, on the "unrelated business taxable
income" of otherwise tax-exempt organizations like the Endowment.  An
"unrelated trade or business" is one "the conduct of which is not
substantially related (aside from the need of such organization for
income or funds or the use it makes of the profits derived) to the
exercise or performance by such organization of its charitable,
educational, or other (tax-exempt) purposes" (I.R.C. Section 513(a)).
Section 513 (c) provides that "the term 'trade or business' includes
any activity which is carried on for the production of income from the
sale of goods or the performance of services."

   The Endowment's gross policy dividends from its insurance
operations during 1979-1981 aggregated almost $19 million (C.A. App.
129).  On audit, the IRS determined that those revenues, less the
Endowment's expenses of administering the insurance program were
subject to tax as "unrelated business income" (id. at 130, 139).  The
Commissioner accordingly determined tax deficiencies of approximately
$6 million for the three years (id. at 130-132).

   The Endowment paid the asserted deficiencies and, following denial
of its administrative claims for refund, instituted this refund suit
in the Claims Court.  It conceded that its insurance operations were
"regularly carried on" (I.R.C. Section 512(a)).  It likewise conceded
that the conduct of those operations was "not substantially related"
to the performance of its tax-exempt educational functions (I.R.C.
Section 513(a)).  See C.A. App. 144.  The Endowment's principal
contention was that its insurance operations did not amount to a
"trade or business," on the theory that they represented
"contributions" that ABA members made "by foregoing the advantage of
having premium refunds returned to them" (id. at 22-24).

   Following a trial, the Claims Court entered judgment for the
Endowment.  It held that the profits derived by the Endowment from its
insurance operations were immune from unrelated business income tax
because they did not arise from a "trade or business" within the
meaning of Section 513(c).  The court believed that its task in
interpreting that Section was to "distinguish between those activities
that constitute a trade or business and those that are merely
fundraising" (App., infra, 33a-34a).  The controlling test for this
purpose, the court concluded, was whether the Endowment conducted its
activities in "a competitive, commercial manner" (id. at 34a).  The
court then recited several factors that, "taken together, * * * ma(d)e
it impossible * * * to conclude that the (Endowment's) insurance
programs were operated" in a commercial or competitive way (id. at
40a).  The Endowment's insurance program, the court said, was
"label(led)" by it and "perceived" by its members as "a fundraising
activity." The Endowment's profits, the court stated, were
"astounding" and "(could) not be maintained in a competitive market."
And "the insurance program," the court observed, "was operated with
the approval and consent of the ABA membership." App., infra, 32a,
36a-38a.  In the court's view, "an enterprise that depends on the
consent of its customers for its profits is not operating in a
commercial manner and is not a trade or business" (id. at 41a).

   3. The Court of Appeals for the Federal Circuit affirmed.  It
concluded that the Claims Court had "properly found facts" and had
"applied the correct standard" to determine whether the Endowment's
insurance operations were a "trade or business" within the meaning of
Section 513(c).  See App., infra, 9a.  Based on "the persistent and
fundamental fund-raising motivation" of the Endowment's insurance
program, "the knowledgeable approval of and consent to the program by
the ABA's members," and the Endowment's "phenomenal success" in
accumulating policy dividends, the court of appeals was persuaded that
the Endowment's activities were not "competitive" or "commercial" and
thus were immune from tax.  Id. at 8a-9a.

   The court of appeals described as "inapposite" (App., infra, 10a)
decisions of the Fourth, Fifth, and Sixth Circuits holding that
profits derived by tax-exempt professional or trade associations from
the operation of group insurance plans are subject to unrelated
business income tax.  See Professional Insurance Agents v.
Commissioner, 726 F.2d 1097 (6th Cir. 1984);  Carolinas Farm & Power
Equipment Dealers v. United States, 699 F.2d 167 (4th Cir. 1983);
Louisiana Credit Union League v. United States, 693 F.2d 525 (5th Cir.
1982).  In thus reasoning, the Federal Circuit relied principally on
the fact that the organizations marketing the insurance in those cases
were "(b)usiness leagues" exempt from tax under Section 501(c)(6),
rather than charitable or educational associations exempt from tax (as
is the Endowment) under Section 501(c)(3).  The fact that the
Endowment "set out to make as much profit as possible" did not in the
court's view determine whether its insurance activities were a "trade
or business" (App., infra, 11a).  "Unlike what some other courts may
do," the court of appeals observed, "this court does not find
'profits,' or the maximization of revenue, to be the controlling basis
for a determination of whether the unrelated business tax provisions
apply" (ibid.).

                B. Frederic D. Turner, et ux., et al.

   1. The individual respondents are ABA members who bought insurance
from the Endowment (App., infra, 31a, 38a).  /2/ Each agreed, as a
condition of enrollment, that the Endowment could keep any dividends
apportioned to his policy (ibid.).  Each knew, when he wrote his
premium checks, that the Endowment would use the dividends to further
its work in the legal field.

   Respondents Turner and Sherwood signed up for life insurance in
1972.  They enrolled after reading brochures explaining that the
Endowment's insurance program raised money for educational purposes
while offering attractive insurance benefits at a reasonable cost
(C.A. App. 405-407, 414-415, 1027-1034, 1040-1047).  The brochures
principally described the "highlights" of the coverage that the
Endowment offered for sale, including the option granted to members
under 40 (as Turner and Sherwood then were) to be accepted without
medical evidence of insurability (ibid.).

   Respondent Broadfoot initially purchased life insurance in 1971
because, as he testified, "(m)y first child had recently been born and
I was interested in obtaining some life insurance" (C.A. App. 388).
He regarded the premiums charged as reasonable (id. at 402-403).  At
one time he carried a life policy through the Georgia State Bar but
discontinued it after determining that it cost more than the
Endowment's (id. at 396-399).

   Respondent Boynton purchased disability insurance in 1978 (C.A.
App. 74).  He concluded after reading the Endowment's literature that
its disability coverage was "reasonably or competitive(ly) priced"
(id. at 430).  Before applying for his policy, he examined a number of
other disability plans.  He found that two offered considerably
greater benefits than the Endowment's but were more expensive (id. at
427, 429).

   None of the individual respondents testified that, if given an
option, he would have elected to assign his policy dividends to the
Endowment.  None testified that he chose the Endowment's coverage over
a cheaper policy in order to further the Endowment's educational
goals, or that he thought the premiums charged by the Endowment
exceeded the economic value of the insurance he purchased.  Two
nonparty insureds, on the other hand, testified that they would have
opted to keep their dividends had such an election been afforded (C.A.
App. 592-593, 690-691).  One testified that he had purchased insurance
from the Endowment because he found its premiums competitive and
because he thought that the Endowment "would certainly have the clout
to deal with the insurance company" (id. at 687-688).  The other
testified that his sole motive for signing up was to obtain insurance;
 he had previously held through his state bar association a group life
policy that cost more than the Endowment's (C.A. App. 590-593, 596,
784-785).

   2. Section 170(a) of the Code provides an income tax deduction for
"charitable contribution(s)." Section 170(c)(2)(B) defines a
"charitable contribution" as "a contribution or gift" to or for the
use of an entity that is "organized and operated exclusively for
religious, charitable * * * or educational purposes." None of the
individual respondents deducted any part of the insurance premiums
that he paid the Endowment as a "charitable contribution" on his tax
return for the years at issue (C.A. App. 52-54, 64-66, 76-78, 86-89).
Thereafter, respondents were invited, and agreed, to take part in this
"test case" mounted by the ABA (id. at 409-410, 425).  Each filed an
administrative claim for refund, claiming a charitable contribution
deduction ranging from 28% to 55% of the premiums he had paid. These
percentages depended on the year and type of insurance involved, and
were derived from notices issued to respondents by the Endowment (id.
at 391-392, 407-408, 416-418, 423-424, 868-871).  Each sought a refund
of $40 or less (id. at 52-54, 64-66, 76-78, 86-89).

   When the IRS demurred, respondents instituted these refund suits in
the Claims Court.  They contended that each premium they paid to the
Endowment was a "dual payment," representing in part the purchase of
insurance and in part a charitable donation (App., infra, 48a).  The
Claims Court, following a trial, entered judgment for the United
States.  It held that none of the respondents was entitled to a
charitable contribution deduction for any portion of his premiums.

   The court began by examining the relevant legal standards.  In its
view, an insured's "mere awareness" that the Endowment's insurance
profits would be devoted to charitable purposes "is not sufficient to
establish that he made a charitable contribution" (App., infra, 52a).
Rather, "(t)o establish a dual payment, the taxpayer must demonstrate
that he bought goods or services for more than their economic value,
with the intention that the excess be used to benefit a charitable
enterprise" (id. at 49a).  Each respondent, in other words, had to
show "that an equivalent insurance product was available to him for a
lower price and that he bypassed that product because he wished to
make a charitable contribution to the Endowment" (id. at 52a (footnote
omitted)).

   Turning to the facts of each case, the Claims Court concluded that
none of the respondents had proved that his purchase of insurance from
the Endowment reflected anything other than his own economic interest
(App., infra, 52a-54a).  Three of the respondents, the court found,
had failed to establish that cheaper insurance was available to them
elsewhere (ibid.).  The fourth, while demonstrating that cheaper
insurance existed, offered no proof that he knew about it during the
tax years at issue and had elected to buy the Endowment's policy
instead (id. at 55a).  The court noted that the Endowment's
advertising was "aggressive" and "in some ways suggested (that its
insurance) may be the best deal in the market" (C.A. App. 811).  Thus,
if an ABA member "did not have the two plans side by side," he might
well be unaware that he could have obtained a policy elsewhere for
less (id. at 811-812).

   3. The court of appeals reversed and remanded.  It directed the
Claims Court to conduct "such further proceedings as are appropriate
to determine whether the relationship between the Endowment and the
(individual respondents) was predominately of a business nature or
whether the transaction did have a substantial charitable component"
(App., infra, 22a-23a).

   The Federal Circuit held that the inquiry conducted by the trial
court -- whether the respondents could have obtained comparable
insurance coverage for less money -- was "an incorrect definitization
of the proper standard" (App., infra, 19a).  The Claims Court's
approach was wrong, the court of appeals said, because it required
affirmative proof of "a charitable motivation of disinterested
generosity" (id. at 19a-20a).  The correct legal test, rather, in the
court of appeals' view, was "whether the transaction between the
Endowment and the taxpayers * * * was of a business nature and not
charitable" based on "all the pertinent circumstances" (id. at 21a
(original quotation marks omitted)).  Such a test, the court opined,
"should not be too difficult" for ABA members to pass (id. at 22a).

   Finding the record "almost completely bare" as to the nature of the
insureds' dealings with the Endowment, the court of appeals remanded
their cases with instructions.  Given "the Endowment's persistent and
public efforts to enhance its charitable funds," the court suggested,
members who bought insurance from it should be able "to present a
prima facie case" for a charitable deduction "simply (by) mak(ing) a
sworn assertion that they wanted to aid that charitable endeavor and
entered the Endowment's plan because it enabled them to do so"
(ibid.).  Under the Federal Circuit's instructions, the government on
remand would then have the burden to "controvert that position and
(to) suggest factors showing that the transaction was basically
business-oriented" (ibid.).  On July 17, 1985, the court of appeals
stayed proceedings on remand pending disposition of this petition.

                   REASONS FOR GRANTING THE PETITION

   The court of appeals has decided two important questions of federal
tax law in a way that conflicts directly with the decisions of other
courts of appeals and with well-established tax principles.  The first
question presented is related to that on which this Court recently
granted review in United States v. American College of Physicians, No.
84-1737 (July 1, 1985), also on certiorari to the Federal Circuit.
The second question presented is inextricably bound with the first,
involving the effect of the insurance purchase from the buyer's rather
than the seller's viewpoint.  The questions have considerable
administrative importance and potentially involve hundreds of millions
of dollars in revenue. Review by this Court is therefore appropriate.

                       A. American Bar Endowment

   1. a. The court of appeals' holding concerning the taxability of
the Endowment's insurance operations squarely conflicts with recent
decisions of the Fourth, Fifth and Sixth Circuits.  See Carolinas Farm
& Power Equipment Dealers v. United States, 699 F.2d 167 (4th Cir.
1983);  Louisiana Credit Union League v. United States, 693 F.2d 525
(5th Cir. 1982);  Professional Insurance Agents v. Commissioner, 726
F.2d 1097 (6th Cir. 1984).  The organization involved in each of those
cases was a tax-exempt association which, like the Endowment, drew its
members exclusively from a single trade or profession.  Each operated
a group insurance program for its members.  Like the Endowment, each
selected an insurer to underwrite its program, actively promoted and
marketed its group coverage to its members, performed day-to-day tasks
of administering the program, and received rebates of the members'
premiums from the underwriters.  Like the Endowment, each association
made sizable profits on its insurance operations, yet contended that
they did not constitute a "trade or business" within the meaning of
Section 513(c).

   In Louisiana Credit Union League v. United States, supra, the Fifth
Circuit squarely rejected that argument (693 F.2d at 531-534).  It
noted that Section 513(c) defines a "trade or business" to include
"any activity which is carried on for the production of income from
the sale of goods or the performance of services." Since the
association both sold insurance and performed services in
administering its plans, and since it "had a profit motive for its
activities," the Fifth Circuit held that it was engaged in a "trade or
business" and that its insurance profits were thus subject to
unrelated business income tax (693 F.2d at 532-534).  As the court put
it (id. at 532):

         We believe that the "profit motive" standard is the proper
      one to be applied in this case, for it is consistent with the
      plain language of section 513 as well as the accompany
      regulations.  The statute, which clearly encompasses within its
      parameters any activity "carried on for the production of
      income," first raises the issue of motive.  The regulations,
      which invoke section 162 and its "profit motive" gloss, confirm
      that motive is the key inquiry.  Thus, to determine whether a
      tax-exempt organization is carrying on a trade or business, the
      court must look to see whether that institution is engaged in
      extensive activity over a substantial period of time with the
      intent to earn a profit.

   The Fourth and Sixth Circuits, on virtually identical facts, have
reached the same conclusion for the same reasons.  See Carolinas Farm
& Power Equipment Dealers v. United States, 699 F.2d at 170 (adopting
"profit motive" test);  Professional Insurance Agents v. Commissioner,
726 F.2d at 1102 (same).

   The decision below squarely rejects both the legal standard applied
by these courts and the tax result they reached. Whereas the Fourth,
Fifth and Sixth Circuits employed a "profit motive" test for
determining the existence of a "trade or business" under Section
513(c), the Federal Circuit below declared:  "Unlike what some other
courts may do, this court does not find 'profits,' or the maximization
of revenue, to be the controlling basis for (that) determination"
(App., infra, 11a).  And whereas the Fourth, Fifth and Sixth Circuits
have held that insurance profits of exempt organizations are subject
to unrelated business income tax, the court below, on substantially
identical facts, has ruled such profits tax-free.

   b. In finding these conflicting decisions "inapposite," the Federal
Circuit (App., infra, 10a), like the Claims Court (id. at 25a-26a),
relied principally on the fact that the associations marketing the
insurance there were organized as "(b)usiness leagues" exempt from tax
under Section 501(c)(6), rather than as charitable or educational
associations exempt from tax (as is the Endowment) under Section
501(c)(3).  This is precisely the same meaningless distinction that
the respondent in United States v. American College of Physicians,
supra, urged upon this Court in unsuccessfully opposing certiorari in
that case (84-1734 Br. in Opp. 12).  The respondent there, like the
Endowment, is a professional association tax-exempt under Section
501(c)(3).  In an effort to avoid tax on its profits from the
publication of commercial advertising, it urged that Treasury
Regulations holding such activities to be an "unrelated trade or
business" should be construed to apply only to the advertising
operations of Section 501(c)(6) groups, and not to identical
advertising operations of Section 501(c)(3) groups (84-1737 Br. in
Opp. 11-13, 15).

   As we have pointed out in greater detail in our briefs in United
States v. American College of Physicians (84-1737 Reply Br. at 4-8;
U.S. Br. at 33-40), /3/ the subsection of Section 501(c) under which a
professional association happens to be organized makes absolutely no
difference in determining the taxability of its profit-motivated
activities.  The question here is whether the Endowment's insurance
operations are a "trade or business." Those words are defined in
Section 513(c), and that definition applies to all tax-exempt
organizations, regardless of the particular subsection of Section
501(c) -- there are more than twenty -- on which they base their
tax-exempt status.  Under that definition, it is the nature of the
activities conducted, not the origin of the exemption, that determines
the taxability of the profits realized.  There is, accordingly, no
statutory basis for contending that insurance operations conducted by
Section 501(c)(6) groups are a "trade or business," but that the
Endowment's substantially identical insurance operations are not a
"trade or business," simply because the Endowment chose to be
organized under Section 501(c)(3).  Indeed, such a contention would be
particularly strained here, since the Endowment is a Section 501(c)(3)
affiliate of the ABA, which is itself a Section 501(c)(6) business
league.  On the court of appeals' theory, any business league could
escape tax on its insurance operations -- operations that would be
subject to tax under the decisions of the Fourth, Fifth, and Sixth
Circuits -- simply by spinning off those operations into a Section
501(c)(3) sister corporation.  This in effect would make payment of
the unrelated business income tax elective, a result that Congress
would surely find rather surprising.

   2. a. In declining to follow the holdings of the Fourth, Fifth and
Sixth Circuits, and in rejecting the legal standard those courts
adopted, the Federal Circuit has ignored both the express language of
Section 513(c) and Congress's intention in enacting the unrelated
business income tax.  Before that law was enacted (Revenue Act of
1950, ch. 994, 64 Stat. 906 et seq.), charitable organizations that
carried on ordinary trades or businesses were able to escape tax on
their profits on the theory that the charitable "destination" of the
revenues took precedence over their commercial "source." Thus, a
nationwide vendor of macaroni (C.F. Mueller Co. v. Commissioner, 190
F.2d 120 (3d Cir. 1951)), and a commercial bathing beach facility
(Roche's Beach, Inc. v. Commissioner, 96 F.2d 776 (2d Cir. 1938)),
successfully claimed tax-exempt status simply because their business
profits went to charity.

   In 1950 Congress responded to this problem in two ways.  First, it
enacted the so-called "anti-feeder" provision (I.R.C. Section 502(a)),
under which organizations "operated for the primary purpose of
carrying on a trade or business for profit" cannot claim tax exemption
solely on the ground that their profits go to charity.  Second,
Congress enacted the "unrelated business income tax," now codified in
Sections 511 through 515 of the Code.  Those provisions generally
require any organization that otherwise qualifies for tax exemption to
pay tax at regular corporate rates on income derived "from any
unrelated trade or business * * * regularly carried on by it" (I.R.C.
Section 512(a)(1)).

   The chief impetus behind the new tax was Congress's desire to put
the business operations of tax-exempt organizations on an equal
footing with those of their taxpaying commercial counterparts.  The
House report stated that "(t)he problem at which the tax on unrelated
business income is directed * * * is primarily that of unfair
competition." H.R. Rep. 2319, 81st Cong., 2d Sess. 36 (1950).  As
amended in 1950, the Code "does not deny (a tax) exemption where the
organizations are carrying on unrelated active business enterprises,
or require that they dispose of such businesses, but merely imposes
the same tax on income derived therefrom as is borne by their
competitors" (id. at 37).

   The unrelated business income tax, as enacted in 1950, did not
include a definition of the term "trade or business." The legislative
history, however, made clear that the term "has the same meaning as it
has elsewhere in the code, as, for example, in (the predecessor of
Section 162(a))," which authorizes deductions for expenses incurred
"in carrying on any trade or business." See H.R. Rep. 2319, supra, at
109;  S. Rep. 2375, 81st Cong., 2d Sess. 106 (1950).  Under Section
162(a), "(i)t is well established that the existence of a genuine
profit motive is the most important criterion for the finding that a
given course of activity constitutes a trade or business." Lamont v.
Commissioner, 339 F.2d 377, 380 (2d Cir. 1964) (emphasis added).

   In 1967, the Treasury promulgated regulations defining a "trade or
business" for purposes of the unrelated business income tax.  Treas.
Reg. Section 1.513-1, 32 Fed. Reg. 17657 (1967).  The regulations
explained that any activity "which is carried on for the production of
income and which otherwise possesses the characteristics required to
constitute (a) "trade or business' within the meaning of section 162 *
* * presents sufficient likelihood of unfair competition to be within
the policy of the (unrelated business income) tax" (Treas. Reg.
Section 1.513-1(b)).  "Accordingly," the Treasury concluded, "for
purposes of section 513 the term 'trade or business' has the same
meaning it has in section 162, and generally includes any activity
carried on for the production of income from the sale of goods or
performance of services" (ibid.).

   In an effort to resolve the controversy spawned by these
regulations, Congress in 1969 codified the Treasury's definition of
"trade or business" (Tax Reform Act of 1969, Pub. L. No. 91-172, 83
Stat. 487 et seq.).  Congress explicitly stated its intention "to make
clear that such regulations are valid" and its determination that they
"should be placed in the tax laws." H.R. Rep. 91-413, 91st Cong., 1st
Sess. Pt. 1, at 44 (1969);  S.Rep. 91-552, 91st Cong., 1st Sess. 75
(1969).  Effectuating that aim, Congress in 1969 added to the Code a
new Section 513(c).  It provides that, "(f)or purposes of this
section, the term 'trade or business' includes any activity which is
carried on for the production of income from the sale of goods or the
performance of services."

   b. The unalloyed language of Section 513(c) makes plain the error
of the Federal Circuit.  The Endowment's insurance operations
obviously comprised both "the sale of goods" and "the performance of
services." It sold various insurance products at retail, and it
performed valuable services by putting together a group of
above-average insureds, negotiating with underwriters, assembling a
package of group policies, marketing that package to its members,
collecting its members' premiums, and discharging countless other
day-to-day administrative tasks.  Indeed, its staff of 40 ran the
business in much the same way that most insurance brokers, plan
administrators, and other financial intermediaries run theirs.
Equally obviously, the Endowment carried on its insurance operations
"for the production of income." Both courts below found that the
Endowment's insurance operations were unusually profitable and were
consciously structured to be so, since it set its retail premiums far
above its wholesale cost so as "to maximize dividends" and thus
maximize profits (App., infra, 4a).  In holding that the Endowment's
insurance activities were not a "trade or business," the Federal
Circuit simply ignored the language of the statute.

   Given the language of the statute, the Federal Circuit's notion
that the "phenomenal" and "astounding" profitability of the
Endowment's insurance operations negated their trade-or-business
status (App., infra, 8a) seems almost whimsical.  The key criterion
for assessing the existence of a "trade or business" under Section
513(c) is the presence of a profit-making motive.  One would have
thought that a motive, successfully executed, to make extraordinarily
large profits would make an activity more of a "trade or business,"
not less of one.

   This common-sense thought is consistent, not only with the
statutory language, but with the economic facts.  Economically
speaking, the Endowment's insurance operations function as a business
set up to exploit a very valuable, but virtually cost-free, asset -- a
pool of potential insureds, all ABA members, who have
far-above-average mortality and morbidity experience.  The Endowment
could elect to exploit this asset in at least two ways, depending on
its marketing strategy.  It could charge below-market premiums,
maintaining a modest level of profitability per insured but attracting
a big market share.  If it did that, many more lawyers would
presumably join the ABA and buy insurance from the Endowment, since
its premiums would be among the lowest available anywhere.  If the
Endowment chose to run its insurance business in that way, it would
make its profits (as do supermarkets) on volume, and would clearly --
even under the decision below -- have to pay unrelated business income
tax on those profits.

   Alternatively, the Endowment could elect, as it in fact did, to
charge market-level premiums, maintaining a very high level of
profitability per insured but settling for a more modest market share.
 On this approach, many lawyers might decide to buy insurance
elsewhere, the Endowment's prices being roughly equivalent to those
charged in the marketplace generally.  But the Endowment would make
lots of money on the lawyers who picked it.  That is what the
Endowment chose to do, and it should pay tax on its insurance income
just as clearly as if it had chosen the high-volume, low-mark-up
option discussed above.

   Contrary to the conclusion of the courts below, finally, it is
immaterial that the Endowment, in marketing its insurance, described
its solicitations as "fundraising," or that the funds raised were
channeled to the Endowment's educational projects (App., infra, 8a,
35a).  Whenever a charity raises money, from an unrelated business or
otherwise, its activity can be styled "fundraising," since the income
is destined for -- indeed, must, if the charity is to retain its tax
exemption, be used exclusively for -- charitable purposes.  The
profits NYU once derived from its macaroni factory (C.F. Mueller Co.
v. Commissioner, supra) could equally have been labeled "fundraising,"
for the funds financed education.  That is what prompted Congress to
enact the unrelated business income tax in 1950, determining that
tax-exempt groups should not be granted a tax subsidy at the expense
of their taxpaying competitors in the marketplace, and enacting a
statute that focuses on the source, not on the destination, of a
tax-exempt organization's income. The rationale of the courts below --
that the Endowment's insurance profits represented "charitable
fund-raising" -- simply begs the question, which is not whether the
Endowment raised funds for charitable purposes, but whether it raised
funds for those purposes by running a "trade or business." As
commentators on the Claims Court's decision have succinctly noted,
"the court's emphasis on the destination of the profits for charitable
purposes is wholly at variance with the genesis of the tax." Schwarz &
Hutton, Recent Developments in Tax-Exempt Organizations, 18 U.S.F.L.
Rev. 649, 684 (1984).

   3. The question presented has considerable administrative
importance.  Group insurance plans are popular revenue-raisers for
tax-exempt organizations.  The IRS advises that in recent years it has
issued dozens of private letter rulings responding to requests for
guidance about the application of the unrelated business income tax to
the insurance operations of tax-exempt groups.  A preliminary IRS
survey discloses 37 open or recently-closed audits involving this
issue.  Considering bar associations alone, a 1982 study by the
Endowment (C.A. App. 1188) revealed that 90% of state bars offer group
life, medical, and disability insurance, and that most large local bar
associations sell various types of insurance as well.

   The reasoning of the decision below could be pressed into service
by hundreds of educational groups, fraternal societies, business
leagues, and other tax-exempt membership associations nationwide.
Under the court of appeals' theory, any group whose members are
blessed with better-than-average health or longevity can offer group
insurance at prevailing market rates without paying tax on its
profits.  As this case illustrates, these profits tend to be large,
and the taxes at stake -- for the Endowment, over $6 million for the
three years at issue -- concomitantly substantial.

   There is, moreover, no principled basis for confining the court of
appeals' reasoning to insurance activities.  Tax-exempt associations
could operate vacation resorts, catalogue shopping centers, apartment
houses, or any other profit-motivated enterprise for their members.
So long as they contrive to make extraordinarily large profits, and
publicize to their members the charitable destination of those
profits, they would seem under the Federal Circuit's reasoning to be
as well situated as respondent to claim immunity from tax on their
business receipts.

   Aside from the revenue impact, the question presented is important
because the unrelated business income tax has a significant regulatory
function.  Congress designed the tax, not just to raise money, but to
keep the commercial endeavors of tax-exempt and non-exempt competitors
on a par.  The Endowment offers insurance at market prices and enjoys
the patronage of some 57,000 ABA members.  It competes directly with
insurance brokers, plan administrators, and underwriters nationwide
who vie for the business of those 57,000 lawyers.  The fact that the
Endowment elected to limit its market share by forbearing to
underprice its competitors does not mean, as the Claims Court thought
(App., infra, 48a), that its insurance business has "an entirely
procompetitive effect." Quite the contrary:  a tax-exempt group need
not undersell everyone else in the market to run afoul of the policy
of the unrelated business income tax.  It must be rather cold comfort
to respondent's competitors that respondent's insurance could be even
cheaper than it is.  Particularly is that so when the Endowment
exploits its standing as a charitable organization to its commercial
advantage by telling its members that their premiums are
tax-deductible.

   4. As noted earlier, the question presented here concerning the
unrelated business income tax is connected to that on which the Court
has granted certiorari in United States v. American College of
Physicians, No. 84-1737 (July 1, 1985).  The question in that case is
whether a tax-exempt group's publication of commercial advertising,
which it concedes to be a "trade or business," is "substantially
related" to its educational purposes.  The question here, by contrast,
is whether a tax-exempt group's conduct of insurance operations, which
it concedes not to be "substantially related" to its educational
purposes, is a "trade or business." The two questions, while obviously
linked, involve the construction of different statutory phrases,
appearing in different provisions of the Code, each illuminated by a
unique legislative history, and each accompanied by a long and
discrete tradition of judicial interpretation.  This Court's decision
in United States v. American College of Physicians, supra, therefore,
is most unlikely to resolve the question of statutory construction
presented here.  For the reasons outlined above, that question merits
this Court's plenary review.

                B. Frederic D. Turner, et ux., et al.

   1. Section 170 of the Code affords an income tax deduction for a
"charitable contribution," defined as "a contribution or gift" to or
for a charitable, educational, or other qualifying organization
(I.R.C. Section 170(c)(2)).  The phrase "contribution or gift" is not
further defined in the Code or Regulations.  However, Congress made
clear in the legislative history of the 1954 Code that a transfer of
property constitutes a contribution or gift "only if there (is) no
expectation of any quid pro quo." H.R. Rep. 1337, 83d Cong., 2d Sess.
A44 (1954).  For purposes of the charitable contribution deduction, in
other words, "gifts" are limited to "those contributions which are
made with no expectation of a financial return commensurate with the
amount of the gift." S.Rep. 1622, 83d Cong., 2d Sess. 196 (1954).

   Drawing upon this legislative history, the courts of appeals have
consistently denied charitable contribution deductions to taxpayers
who expect to receive, or do receive, an economic quid pro quo
commensurate with the value of the property they transfer to charity.
In Sedam v. United States, 518 F.2d 242 (1975), the Seventh Circuit
denied a charitable deduction for a donation to an old-age home, where
the "gift" was required as a condition of admitting patients.  "It is
at least clear," the court held, "that a payment is not a contribution
or gift under section 170 if it is made with the expectation of
receiving a commensurate benefit in return" (518 F.2d at 245).  In
Stubbs v. United States, 428 F.2d 885 (1970), the Ninth Circuit upheld
the denial of a charitable deduction for a developer's contribution of
land to a municipality, where the transfer was made in the hope of
obtaining favorable zoning treatment.  The "gift" did not qualify for
deduction under Section 170, the court held, because it "was in
expectation of the receipt of certain specific direct economic
benefits" (428 F.2d at 887).  Indeed, the Federal Circuit's
predecessor on previous occasions itself denied charitable deductions
where "the transferor has received, or expects to receive, a quid pro
quo sufficient to remove the transfer from the realm of deductibility
under section 170." Singer Co. v. United States, 449 F.2d 413, 423
(Ct. Cl. 1971).

   2. Consistently with these well-established principles, the Claims
Court in the instant cases held that respondents were not entitled to
deduct their insurance premiums as "charitable contributions" unless
they could show that, in purchasing insurance from the Endowment, they
had "bought goods or services for more than their economic value, with
the intention that the excess be used to benefit a charitable
enterprise" (App., infra, 49a).  Since respondents testified that they
regarded the Endowment's insurance package as "reasonably or
competitively priced" (C.A. App. 430), and since none of the
respondents proved that he knew of a less-expensive insurance package
available anywhere else, the Claims Court concluded that each had
failed to show that he "purchased (the Endowment's) insurance for
reasons other than his own economic interest" (App., infra, 54a).  In
short, because respondents failed to prove that the premiums they paid
exceeded the fair market value of the insurance they bought, they were
not entitled to charitable contribution deductions, having received,
as they had expected to receive, "a financial return commensurate with
the amount of (their) gift(s)" (S. Rep. 1622, supra, at 196).

   3. In reversing the judgment of the Claims Court, and in rejecting
the legal standard it adopted, the Federal Circuit's decision is
squarely at odds with fundamental tax principles enunciated by
Congress and confirmed by other courts of appeals.  The court below
completely ignored the economic comparability between what respondents
paid for and what they got.  Instead, it adopted a vague and
subjective standard mandating inquiry into "whether the relationship
between the Endowment and the (respondents) was predominately of a
business nature" (App., infra, 22a-23a).  Under that standard, the
Federal Circuit ruled, respondents on remand could "present a prima
facie case for the deduction * * * simply (by) mak(ing) a sworn
assertion that they wanted to aid (the Endowment's) charitable
endeavor and entered the Endowment's plan because it enabled them to
do so" (id. at 22a).  The burden of proof, the court said, would then
shift to the government to "controvert that position and suggest
factors showing that the transaction was basically busines-oriented"
(ibid.).

   The court of appeals' reasoning is multiply flawed.  It is contrary
to the numerous cases holding that "a payment is not a contribution or
gift under section 170 if it is made with the expectation of receiving
a commensurate benefit in return" (Sedam v. United States, 518 F.2d at
245).  Far from making out a prima facie case for a deduction, the
self-serving affidavit contemplated by the court of appeals is
entitled to no probative weight.  Such an affidavit would sidestep the
real question, which is not whether respondents bought insurance from
the Endowment because they "wanted to aid (its) charitable endeavor"
(App., infra, 22a), but whether they enrolled in its program with "no
expectation of any quid pro quo" (H.R. Rep. 1337, supra, at A44).  Tax
cases, moreover, are no exception to the rule, acknowledged from time
immemorial, that the plaintiff bears the burden of proof.  Helvering
v. Taylor, 293 U.S. 507, 514-515 (1935);  Welch v. Helvering, 290 U.S.
111, 115 (1933).  Indeed, even "(a)fter satisfying the procedural
burden of producing evidence to rebut the presumption in favor of the
Commissioner, the taxpayer must still carry his ultimate burden of
proof or persuasion." Rockwell v. Commissioner, 512 F.2d 882, 885 (9th
Cir. 1975).  The court of appeals' proposed affidavit procedure
encroaches impermissibly on these long-settled rules.

   Contrary to the court of appeals' belief, finally, the fact that
respondents may be said to have "approv(ed) of and consent(ed) to" the
Endowment's insurance program (App., infra, 8a) by agreeing to waive
their entitlement to policy dividends makes no difference in
determining whether they are entitled to charitable contribution
deductions.  Respondents, like all other ABA members, have absolutely
no choice in this respect.  If they will not waive their dividends,
they cannot get insurance;  it is simply part of the price of
admission.  The Endowment sets its price of admission fully cognizant
of the valuable function it performs by assembling a pool of
better-than-average insurance risks and negotiating favorable
contracts with its underwriters.  That in turn enables the Endowment
to make big profits while keeping its retail price competitive.  Many
lawyers elect to pay that price because they cannot find a better deal
elsewhere.  The simple fact of the matter is that ABA members do not
have access to the wholesale group insurance market, but must pay the
retail price, and the Endowment in this respect charges whatever the
retail market will bear.  Respondents got what they paid for --
insurance at market prices -- and they accordingly have no claim to
any charitable contributions.

   4. Because the Federal Circuit remanded the individual respondents'
cases with instructions to the Claims Court, the court of appeals'
decision on the "charitable contribution" question is interlocutory.
That issue is nevertheless suitable for this Court's immediate review.
 It presents a clear-cut question of law, resolution of which is
essential to the proper conduct of proceedings (if any) on remand.  It
is closely linked to the unrelated business income tax question
presented in American Bar Endowment, as to which the Federal Circuit's
judgment is final.  The two questions draw on a common nucleus of
facts, and the legal analysis brought to bear on the one may well
illuminate the proper approach to be taken to the other.  Indeed, in
light of the Federal Circuit's description of the Endowment's
insurance operations as "a fund-raising program" (App., infra, 2a),
the two questions, in a sense, are reverse sides of the same coin)
requiring analysis of the insurance transaction from the seller's and
the buyer's viewpoint respectively.  The charitable contribution
question has considerable importance, potentially involving $1.5
million in annual revenue and tax deductions of some 57,000 taxpayers
in these cases alone.  The court of appeals has stayed proceedings on
remand pending disposition of this petition, and considerations of
judicial economy favor resolution of the charitable contribution
question now.

                              CONCLUSION

   The petition for a writ of certiorari should be granted.

   Respectfully submitted.

   CHARLES FRIED

      Acting Solicitor General

   ROGER M. OLSEN

      Acting Assistant Attorney General

   ALBERT G. LAUBER, JR.

      Assistant to the Solicitor General

   ROBERT A. BERNSTEIN

   ROBERT S. POMERANCE

      Attorneys

   OCTOBER 1985

   /1/ Unless otherwise noted, all statutory references are to the
Internal Revenue Code of 1954 (26 U.S.C.), as in effect for the tax
periods in issue (the Code or I.R.C.).

   /2/ Respondents' wives are parties solely by virtue of having filed
joint income tax returns with their husbands for the relevant tax
years.

   /3/ We are providing copies of these briefs to counsel for
respondents in this case.

   APPENDIX