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Parties Involved:
Stichting Pensioenfonds Voor De Gezondheid, Geestelijke En Maatschappelijke Belangen
Appellant
United States of America
Appellee

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 29, 1997 Decided November 14, 1997 

No. 97-5006

STICHTING PENSIOENFONDS VOOR DE GEZONDHEID, GEESTELIJKE EN 

MAATSCHAPPELIJKE BELANGEN,

APPELLANT

v.

UNITED STATES OF AMERICA,

APPELLEE

Appeal from the United States District Court 

for the District of Columbia 

(No. 95cv01568)

K. Peter Schmidt argued the cause for appellant. With 

him on the briefs was Philip W. Horton.

Robert W. Metzler, Attorney, U.S. Department of Justice, 

argued the cause for appellee. With him on the briefs were 

Mary Lou Leary, Acting U.S. Attorney at the time the brief 

was filed, Loretta C. Argrett, Assistant Attorney General, 

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U.S. Department of Justice, and Kenneth L. Greene, Attorney.

Before: EDWARDS, Chief Judge, GINSBURG and TATEL, 

Circuit Judges.

TATEL, Circuit Judge: A Dutch pension fund jointly controlled by employers and unions and claiming to be a "labor 

organization" as described in section 501(c)(5) of the Internal 

Revenue Code challenges the Internal Revenue Service's 

denial of its application for exemption from federal income 

taxation. Because tax exemptions require unambiguous proof 

and because we can find no authority directly entitling the 

pension fund to an exemption, we affirm the district court's 

grant of summary judgment for the United States.

I

Appellant Stichting Pensioenfonds Voor de Gezondheid, 

Geestelijke en Maatschappelijke Belangen (the "Fund") is a 

Dutch pension plan formed in 1969 following negotiations 

between labor unions representing hospital workers and the 

Dutch national hospital employers' association. Soon after 

the Fund's formation, the Dutch government granted it "compulsory treatment," thus requiring all private hospitals and 

their employees to participate. The Fund has since expanded 

to include fourteen health and social welfare sectors in the 

Netherlands. The Fund has no principal place of business in 

the United States, nor does it engage in any trade or business 

here.

A board of directors controls the Fund's management and 

assets. Pursuant to Dutch law, employers and unions each 

appoint half of the board's twelve directors. The six employer directors and the six union directors enjoy equal voting 

power. If all directors are not present at a meeting, each 

side may only cast as many votes as the side with the fewer 

directors. On all policy issues, employer and union directors 

must agree, or the board may not act. Unions and employers 

also designate equal numbers of directors to all committees 

formed by the board.

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As the second largest private pension fund in the Netherlands, the Fund covered approximately one million people as 

of December 31, 1993, some of whom were union members 

and some of whom were not. About 600,000 were active 

contributing members. Some 330,000 of the remaining members were "sleepers," a Dutch idiom referring to employees 

no longer working in industry sectors covered by the Fund 

but entitled to receive pension benefits upon retirement by 

virtue of previous employment. The remaining members 

were retirees already receiving pension benefits.

Both employers and employees contribute to the Fund. 

The board of directors establishes required contribution 

rates, as well as the respective portions of the total contribution paid by employers and employees.

The Fund invests in U.S. stocks and mutual funds. In 

1993, its U.S. security custodians withheld and paid to the 

U.S. Treasury over eight million dollars in income tax. 

Claiming tax-exempt status as a labor organization under 

section 501(c)(5) of the Internal Revenue Code, see 26 U.S.C. 

§ 501(c)(5) (1994), the Fund filed a claim for this amount. 

Receiving no response from the Service, the Fund filed suit in 

the U.S. District Court for the District of Columbia.

Noting that taxpayers must prove exemptions "unambiguously," and finding that the Fund lacked "a sufficient nexus 

with a more traditional labor organization to qualify as a taxexempt labor organization itself," the district court granted 

summary judgment for the United States. Stichting Pensioenfonds Voor De Gezondheid, Geestelijke En Maatschappelijke Belangen v. United States, 950 F. Supp. 373, 374, 379 

(D.D.C. 1996). In doing so, the district court rejected the 

Fund's alternative argument that, even if not entitled to taxexempt status, it should have received a refund pursuant to 

section 7805(b) of the Code, 26 U.S.C. § 7805(b) (1994) (superceded by 28 U.S.C.A. § 7805(b)(8) (West Supp. 1997)). 

Stichting Pensioenfonds, 950 F. Supp. at 381. We review the 

district court's grant of summary judgment de novo. Tao v. 

Freeh, 27 F.3d 635, 638 (D.C. Cir. 1994).

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II

Because the Constitution confers upon Congress exclusive 

authority to collect taxes to provide for the general welfare of 

the United States, U.S. CONST. art. I, § 8, cl. 1, only Congress 

itself may create exemptions from federal tax laws. Given 

the importance of taxation and the general presumption in 

favor of taxing all sources of income, courts may not infer 

exemptions when Congress has not clearly provided for them. 

See 1 JACOB MERTENS, JR., THE LAW OF FEDERAL INCOME 

TAXATION § 3.49 (NOV. 1991). For this reason, the Supreme 

Court has consistently held for over a century that a taxpayer 

must "unambiguously" prove entitlement to an exemption: 

"Exemptions from taxation are not to be implied .... they 

must be unambiguously proved," United States v. Wells Fargo Bank, 485 U.S. 351, 354 (1988); "[T]hose who seek an 

exemption from a tax must rest it on more than a doubt or 

ambiguity. Exemptions from taxation cannot rest upon mere 

implications," United States v. Stewart, 311 U.S. 60, 71 (1940); 

"As taxation is the rule, and exemption the exception, the 

intention to create an exemption must be expressed in clear 

and unambiguous terms.... Legislation which relieves any 

species of property from its due proportion of the burdens of 

the government must be so clear that there can be neither 

reasonable doubt nor controversy in regard to its meaning,"

Yazoo & Miss. Valley R.R. Co. v. Thomas, 132 U.S. 174, 183 

(1889). As Justice Cardozo said for an unanimous court over 

sixty years ago, "Exemptions from taxation are not to be 

enlarged by implication if doubts are nicely balanced." Trotter v. Tennessee, 290 U.S. 354, 356 (1933). With this extremely high standard in mind, we search for some direct authority 

that unquestionably and conclusively entitles the Fund to the 

exemption it seeks.

We begin, of course, with the Internal Revenue Code. 

Section 501(c)(5) exempts labor, agricultural, and horticultural 

organizations from taxation. 26 U.S.C. § 501(c)(5). The 

Code neither defines the term "labor organization" nor elaborates on its meaning. The legislative history, moreover, 

provides no unambiguous guidance. The early twentiethcentury congressional debates on whether to include the term 

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"labor organization" in section 501(c)'s precursor had nothing 

to do with whether jointly controlled entities providing pension benefits should be exempt from federal taxation. Instead, the debates focused on whether the Code's exemption 

for "fraternal beneficiary societies ... providing for the payment of life, sick, accident, or other benefits to members" 

would be understood as covering all labor organizations, a 

question that Congress answered negatively when it explicitly 

exempted labor organizations. See 44 CONG. REC. 4154-55 

(1909). We agree with the district court that this legislative 

history provides "little help" in understanding the scope of 

the term "labor organization." See Stichting Pensioenfonds,

950 F. Supp. at 375.

We next turn to the Treasury Regulation that defines the 

term "labor organization," but which is ultimately unhelpful. 

It says:

The organizations contemplated by section 501(c)(5) as 

entitled to exemption from income taxation are those 

which:

(1) Have no net earnings inuring to the benefit of any 

member, and

(2) Have as their objects the betterment of the 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.

26 C.F.R. § 1.501(c)(5)-1(a) (1997). A nonprofit entity, the 

Fund clearly satisfies sub-paragraph (1). While the Fund 

may also satisfy the first of sub-paragraph (2)'s requirementsit has as its object the betterment of employee financial conditionsit cannot meet the other two requirements: it 

neither works to improve products nor to develop higher 

degrees of efficiency. The Fund urges us to read subparagraph (2) disjunctively, but given the plain meaning of 

the word "and" we cannot do so. See C.K. OGDEN, BASIC 

ENGLISH INTERNATIONAL SECOND LANGUAGE 132 (1968) ("And is 

used for joining words together: The man and the woman 

are married. Or is used for the idea of one of two: The man 

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or the woman is married."). Although this conclusion would 

otherwise end this casethe regulation does not unambiguously entitle the Fund to an exemptionthe Service did not 

rely on the regulation in its brief or at oral argument. 

Because the Service itself does not argue that the regulation 

excludes the Fund from labor organization status, we decline 

to decide the case on that basis.

Finding help in neither the Code nor the regulation, we 

look next to the IRS's Revenue Rulings, the second most 

important agency pronouncements that interpret the Code. 

Applying the Code to specific situations, Revenue Rulings 

bind both the Service and the taxpayer. Although Revenue 

Rulings "do not have the force and effect of Treasury Department Regulations," they are "published to provide precedents 

to be used in the disposition of other cases, and may be cited 

and relied upon for that purpose." 26 C.F.R. 

§ 601.601(d)(2)(v)(d) (1997). But because "each Revenue Ruling represents the conclusion of the Service as to the application of the law to the entire state of facts involved, taxpayers, 

Service personnel, and others concerned are cautioned 

against reaching the same conclusion in other cases unless 

the facts and circumstances are substantially the same." 26 

C.F.R. § 601.601(d)(2)(v)(e). The Fund can thus prevail only 

by identifying a Revenue Ruling awarding an exemption in a 

case having facts and circumstances "substantially the same" 

as this case. Examining the relevant Revenue Rulings carefully, we find no such controlling authority.

The Service has issued fifteen Revenue Rulings under 

section 501(c)(5). See Stichting Pensioenfonds, 950 F. Supp. 

at 378 nn.2-3 (citing the Rulings). Eleven deal with organizations completely controlled by unions and thus do not involve 

facts and circumstances substantially similar to those in this 

case. Of the four that concern jointly controlled organizations, three award tax exemptions, but none of the organizations covered by those rulings is substantially similar to the 

Fund. See Rev. Rul. 78-42, 1978-1 C.B. 158; Rev. Rul 75-

473, 1975-2 C.B. 213; Rev. Rul. 59-6, 1959-1 C.B. 121. To 

begin with, the organizations do not provide pension benefits. 

Rulings 78-42 and 59-6 deal with apprenticeship committees 

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that provide training and education to employees, while Ruling 75-473 involves a jointly controlled dispatch hall that 

allocates work assignments to union members and adjudicates 

grievances over working conditions. Moreover, the labor 

organizations that the Service found exempt in these three 

rulings focus primarily on improving employee conditions on 

the job, while the Fund has as its purpose improving employee benefits after the job, i.e. pension benefits. The three 

Rulings also differ from this case because none involves 

organizations governed by foreign law. Simply because the 

Service has awarded tax exemptions to labor organizations 

dually controlled under American law does not mean that it 

would necessarily have to reach the same conclusion for 

organizations dually controlled under foreign law, particularly 

since exempting foreign pension plans means that their earnings will escape all U.S. taxation. Earnings of exempt domestic funds, by comparison, are taxed when benefits are 

paid to recipients.

The Fund argues that it should receive an exemption 

because it conducts appropriate labor organization activities. 

That an organization performs activities "appropriate" to 

labor organizations, however, does not make it a labor organization under these Revenue Rulings. The Service has said 

only that a labor organization not itself a labor union that 

engages in appropriate labor union activities "may" qualify 

for an exemption. Rev. Rul. 75-473. The Service does not 

end its inquiry upon finding that the organization carries out 

an "appropriate" union activity. Instead, the Service examines the specific facts of each case, looking to other factors 

such as the organization's purpose, see Rev. Rul. 78-42; Rev. 

Rul. 59-6, and the nexus between the organization's activities 

and the parent labor union's objectives, see Rev. Rul. 75-473. 

Although providing and administering pension plans for 

workers is certainly an appropriate and traditional union 

function, we find no basis for an exemption in this case 

because the Revenue Rulings do not unambiguously stand for 

the proposition that any organization bearing some connection to a traditional labor union and performing appropriate 

or traditional union functions is necessarily an exempt labor 

organization.

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The fourth Revenue Ruling dealing with a jointly controlled 

labor organization casts even more doubt on the Fund's claim. 

Rev. Rul. 77-46, 1977-1 C.B. 147. In that Ruling, the Service 

denied an exemption to an organization that withheld money 

from union members' pay and invested it, later paying it back 

annually with interest. Although the Fund argues, perhaps 

correctly, that this kind of savings plan differs from a pension 

plan, the Fund's claim for an exemption still ultimately rests 

on inference and implication rather than unambiguous authority.

The Fund also relies heavily on several General Counsel 

Memoranda. These "GCMs," however, have no precedential 

value. See Disabled American Veterans v. Commissioner,

942 F.2d 309, 315 n.5 (6th Cir. 1991) (rejecting reliance on 

GCMs on the grounds that "[s]uch informal, unpublished 

opinions of attorneys within the IRS are of no precedential 

value"); Old Harbor Native Corp. v. Commissioner, 104 T.C. 

191, 206-07 (1995) ("[A] general counsel memorandum is not 

binding precedent on this Court."). They therefore cannot 

provide a basis for the Fund's claim.

The Fund has failed to meet its heavy burden of demonstrating unambiguous entitlement to tax-exempt status. We 

find nothing in the Code, the regulation, or the Revenue 

Rulings that even comes close to stating that a jointly controlled pension plan governed by foreign law is a labor 

organization exempt from federal taxation. Our doubts about 

the Fund's entitlement to tax-exempt status are not even 

"nicely balanced."

We recognize that in Morganbesser v. United States, 984 

F.2d 560 (2d Cir. 1993), the Second Circuit, with one judge 

dissenting, held that a jointly controlled pension fund is 

entitled to tax-exempt status under section 501(c)(5). Unlike 

this case, however, Morganbesser involved a pension fund 

organized under U.S. law. The Second Circuit, moreover, 

relied on the precedentially dubious GCMs, never mentioning 

or applying the "unambiguous" standard that we find controlling. In any event, the Treasury Department has now proposed a regulation providing that "[a]n organization is not an 

organization described in section 501(c)(5) if the principal 

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activity of the organization is to receive, hold, disburse, or 

otherwise manage funds associated with ... pension or other 

retirement savings plans or programs." 62 Fed. Reg. 40,447, 

40,449 (1997) (adding proposed 26 C.F.R. § 1.501(c)(5)-

1(b)(1)). Although both parties agree that this purely prospective regulation has no relevance to the case before us, we 

mention it to point out that Morganbesser has a brief life 

expectancy.

III

We turn finally to the Fund's argument that even if not 

entitled to an exemption under section 501(c)(5), it should 

have received a refund pursuant to section 7805(b) of the 

Code, which gives the Service discretion to apply its rulings 

retroactively. See 26 U.S.C. § 7805(b). The Fund cites IBM 

v. United States, 343 F.2d 914 (Ct. Cl. 1965). After the 

Service granted Remington Rand, a direct IBM competitor, 

an excise tax exemption for its Univac computers, IBM 

applied for a similar ruling for its competing computer. 

Several years later, the Service denied IBM's request, at the 

same time revoking Remington's exemption. Invoking section 7805(b), the court held that the Service had abused its 

discretion by taxing IBM but not Remington in the years 

prior to the revocation of Remington's exemption. Id. at 923. 

Relying on this decision, the Fund argues that because the 

Service has exempted two similarly situated British pension 

funds in private determination letters, it likewise abused its 

discretion by failing to give the Fund a refund for the period 

in question, i.e. 1993. We disagree.

To begin with, IBM applies only to direct competitors. In 

its very first sentence, the court stressed the competitive 

relationship between IBM and Remington Rand: "International Business Machines Corporation ... and Remington 

Rand were, in the years 1951-1958, the two competitors in 

the manufacture, sale, and leasing of larger electronic computing systems." Id. at 915-16. Treating direct competitors 

similarly for tax purposes, the court emphasized, "is peculiarUSCA Case #97-5006 Document #308919 Filed: 11/14/1997 Page 9 of 10
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ly essential to free and fair competition," id. at 923; see also 

id. at 921 n.8 (noting that IBM and Remington "were the only 

two competitors as to the type of devices involved in the 

Service's rulings"); id. at 923 (indicating that the Service's 

treatment "favor[ed] the other competitor so sharply that 

fairness called upon the Commissioner ... to establish a 

greater measure of equality"). In view of this language, 

courts interpreting IBM have limited it to cases involving 

direct competitors. See, e.g., Wilson v. United States, 588 

F.2d 1168, 1172 (6th Cir. 1978) (characterizing IBM as applying to Service regulations or rulings that "would lead to 

inequality of treatment between competitor taxpayers"); 

Anderson, Clayton & Co. v. United States, 562 F.2d 972, 981 

(5th Cir. 1977) (same). Because the Fund does not allegeas 

of course it could notthat it competes with the two exempt 

British funds, IBM has no applicability to this case.

We also doubt that section 7805 even applies here. By its 

terms, section 7805 only applies to a decision by the Service 

to limit the retroactive effect of a ruling. Here, the Service 

has simply denied a refund, taking no action whatsoever with 

respect to retroactivity. Moreover, neither the plain language of section 7805 nor any of the cases that the Fund cites 

stands for the proposition that once the Service has treated 

one taxpayer a certain way, it must thereafter treat every 

similarly situated taxpayer exactly the same way. In fact, to 

the extent that Treasury's proposed regulation denying section 501(c)(5) tax-exempt status to pension funds, supra at 8-

9, represents a repudiation of the Service's previous decision 

to exempt the British funds, nothing requires the Service to 

perpetuate its original error by granting the same mistaken 

exemption to other taxpayers. See Sirbo Holdings, Inc. v. 

Commissioner of Internal Revenue, 509 F.2d 1220, 1222 (2d 

Cir. 1975) ("While even-handed treatment should be the 

Commissioner's goal ... [t]he making of an error in one case, 

if error it was, gives other taxpayers no right to its perpetuation.").

We affirm the district court's grant of summary judgment 

for the United States.

So ordered.

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