Opinion ID: 611056
Heading Depth: 2
Heading Rank: 1

Heading: Initial Exemption

Text: 3 In January 1975, the IRS issued IIAH a determination letter stating that IIAH qualified for tax-exempt treatment as a business league under § 501(c)(6). 3 The IRS cautioned, however, that [i]n this letter we are not determining whether any of your present or proposed activities are [an] unrelated trade or business as defined in section 513 of the Code.B. Insurance Sales to Public Entities 4 IIAH's chief source of income (99%) 4 is the commission income that is generated by its members' sales of insurance coverage to local public bodies such as the Huntsville Public Library; the Huntsville/Madison County Jetport; the City of Huntsville, Alabama; the Railroad Authority; Madison County, Alabama; and others. In order to generate this income, the Association Account Assignment and Review Committee (AAARC) would assign each public entity in the Huntsville area to an individual member or member agency. The member in turn would provide an insurance policy for the public entity. Approximately one-half of IIAH's eighteen members wrote public insurance policies. At the time of trial, IIAH members were servicing ten public accounts. 5 Once an IIAH member was assigned a public entity, it would typically attempt to determine the types of insurance coverage the entity needed and solicit the insurance companies it represented in order to obtain coverage for the entity. After evaluating the various insurance policies that were available, the member then selected and presented the policy to the public entity. In most cases, the public entity agreed to purchase the recommended insurance policy. The commission paid on the policy was then split between IIAH and the member, with IIAH receiving 40-60% of the proceeds. C. The Audit 6 For fiscal tax years 1985, 1986, and 1987, IIAH filed information returns for organizations exempt from tax, attesting each year that it had no unrelated business gross income of $1,000 or more. Each year IIAH attached schedules to its returns reflecting retained commissions of $111,896; $123,436; and $145,893, respectively. After audit, the IRS determined that the retained commissions were unrelated business taxable income (UBTI). The IRS issued a notice of deficiency advising IIAH of tax due in the amounts of $21,655; $25,642; and $32,764. IIAH challenged these deficiencies on the basis that the commissions generated contributed importantly, and were substantially related, to its exempt purposes and, hence, were not UBTI.