Opinion ID: 504669
Heading Depth: 1
Heading Rank: 2

Heading: Revocation of the Association's Tax-Exempt Status

Text: 18 The Association asserts four separate arguments in support of its contention that the IRS was without authority to revoke its tax exemption. First, the Association avers that the dividends it paid to retiring members were really severance pay --not retirement benefits. Second, the Association argues that its tax-exempt status was not jeopardized by payment of retirement dividends since the Association is not funded by the City of Canton. Third, the Association contends that the dividends were not retirement benefits but merely retirement rebates of each member's cumulative annual assessments. And finally, the Association maintains that the IRS was without authority to revoke its long-standing tax-exemption since there was no intervening change in Section 501(c)(9). We reject each of these arguments.
19 The first argument asserted by the Association is that the district court erred in concluding that the dividends paid by the Association to its members were pension or annuity benefits when they were, in reality, severance pay. Under Treasury Regulation 1.501(c)(9)-3(e), severance pay is specifically included in the category of other benefits under Section 501(c)(9). Consequently, if the Association's dividends to its members were severance pay rather than retirement benefits, the Association would be entitled to tax-exempt status under Section 501(c)(9). An analysis of the applicable law, however, leads to the conclusion that the dividends were not severance pay. 20 Treasury Regulation 1.501(c)(9)-3(e) provides that severance pay for purposes of this section shall be the same as it is defined in the labor regulations--specifically, 29 C.F.R. Sec. 2510.3-2(b). That section requires, inter alia, that such payments [i.e., severance pay] are not contingent, directly or indirectly, upon the employee's retiring. 29 C.F.R. Sec. 2510.3-2(b)(i). In the instant case, however, unless the person dies while employed by the Canton Police Department, he must retire in order to receive a dividend. Consequently, the payment plan established by the Association has, as a condition for the receipt of a dividend, the police officer's retiring from the force. The dividend payment, therefore, is not severance pay as defined in 29 C.F.R. Sec. 2510.3-2(b)(i), and, accordingly, the payment of such dividend does not exempt the Association from taxation under Treasury Regulation 1.501(c)(9)-3(e).
21 The Association carefully explains to this court that the dividend plan it established is not funded in any way by its members' employer--the City of Canton. Rather, the retirement dividends are funded by membership assessments, contributions, and bank interest. It is simply irrelevant, however, that the dividend program is not funded by the City of Canton. Treasury Regulation 1.501(c)(9)-2(a)(2)(ii)(A) clearly indicates that employer-funded organizations can also qualify for tax-exempt status under Section 501(c)(9). If employer-funded organizations can qualify for tax-exempt status, the mere fact that an organization is not employer-funded does not, ipso facto, establish under the regulations that the organization is entitled to tax exemption. The Association cites us to no statutory or case law to support its assertion that the fact that the City of Canton does not fund the retirement program, standing alone, entitles it to tax-exempt status.
22 The Association also contends that it is entitled to tax-exempt status because it merely pays back the membership dues of retiring members at the time of their retirement. Like the immediately preceding argument, however, the Association cites us to no regulations, code sections, or case law to support its assertion that, if it were merely repaying retiring members' dues, it would be entitled to tax exemption. 23 We need not decide, however, whether, under such a plan, the Association would be entitled to tax exemption because the Association failed to tender to the district court any affidavits or other evidence, as required by Federal Rule of Civil Procedure 56(e), 1 to support its assertion, in its memorandum in support of its motion for reconsideration, 2 that the retirement dividend was merely a rebate of each member's dues. Indeed, the only evidence produced by the Association bearing on its averment that the retirement dividends were merely rebates of its members' individual assessments contradicts the Association's position. The Association's Annual Trustee's Report shows that the retirement benefits were paid from a fund made up of assessments, contributions, and bank interest --not assessments alone. The implication of this report is that each retirement payment was composed, not only of the retiring member's lifetime assessments, but of outside contributions and interest as well.
24 From 1964 to 1980, the IRS gave the Association tax-exempt status under Section 501(c)(4) as a social welfare organization. In 1980, the IRS determined that the Association only provided for the welfare of its membership, and, therefore, changed the Association's tax-exempt status to Section 501(c)(9)--the subsection covering voluntary employee beneficiary associations. The Association did not and does not contest this change. The Association does argue, however, that, since Section 501 was not revised from 1964 to 1984, there is no statutory basis for the IRS to revoke the tax-exempt status under which it has operated since 1964. We disagree. 25 Section 7805(a) of the Internal Revenue Code grants the Secretary of the Treasury power to prescribe all needful rules and regulations for the enforcement of this title.... 26 U.S.C. Sec. 7805(a) (1954). And it is familiar law that interpretive rulings by the Treasury, if found to 'implement the congressional mandate in some reasonable manner,' must be upheld. National Muffler Dealers Ass'n v. United States, 440 U.S. 472, 476, 99 S.Ct. 1304, 1307, 59 L.Ed.2d 519 (1979). Thus, if the Secretary's interpretive ruling found in Treasury Regulation 501(c)(9)-3 implements Section 501(c)(9) in a reasonable manner, it is sufficient intervening law to permit the IRS to revoke the Association's tax-exempt status. We conclude that Treasury Regulation 1.501(c)(9)-3 does reasonably implement Section 501(c)(9). 26 Section 501(c)(9) provides for the tax-exemption of voluntary employee beneficiary associations which provide life, sick, accident, or other benefits. Treasury Regulation 1.501(c)(9)-3(d) provides that [t]he term 'other benefits' [as used in the statute] includes only benefits that are similar to life, sick, or accident benefits. A benefit is similar to a life, sick, or accident benefit, the regulation continues, if: (1) the benefit is intended to safeguard or improve the health of a member or a member's dependents, or (2) the benefit protects against a contingency that interrupts or impairs a member's earning power. Treas.Reg. Sec. 1.501(c)(9)-3(d) (1981). The regulation then specifies that, under those standards, [t]he term 'other benefits' does not include any benefit that is similar to a pension or annuity payable at the time of mandatory or voluntary retirement. Treas.Reg. Sec. 1.501(c)(9)-3(f) (1981). 27 There are three reasons that Treasury Regulation 1.501(c)(9) is a reasonable construction of Section 501(c)(9). In the first place, the regulation is consistent with the time-honored rule of ejusdem generis, i.e., that a general word in a statute takes its character from the specific words with which it appears. In the instant case, Section 501(c)(9) speaks specifically of life, sick, and accident benefits. The addition of the more general term other benefits in Section 501(c)(9) should be construed, under the doctrine of ejusdem generis, as referring to other benefits similar to life, sick, or accident benefits in order to prevent giving the statute unintended breadth. 28 Second, the Treasury's interpretation of other benefits draws support from Section 401 of the Internal Revenue Code. This section (in conjunction with Section 501(a)) provides a tax exemption specifically for qualifying retirement plans; and the restrictions imposed by section 401 are rigorous. If an organization paying retirement benefits could obtain an exemption under Section 501(c)(9) rather than under Section 401 on the theory that retirement payments constitute other benefits, it would be a relatively easy matter to avoid the detailed requirements of Section 401--a result that Congress never intended. 29 Finally, only recently Congress added a statutory restriction applicable to associations seeking exemption under Section 501(c)(9). In so doing, Congress examined the pertinent provisions of the regulations under Section 501(c)(9), endorsed them, and left them fully intact. See H.R.SUPP.REP. NO. 98-432 (Part 2), 98th Cong., 2d Sess. 1285-1287 (1984), U.S.Code Cong. & Admin.News 1984, 697. Accord, SENATE COMM. ON FINANCE, 98TH CONG., 2D SESS., EXPLANATION OF PROVISIONS APPROVED BY THE COMMITTEE ON MARCH 21, 1984 (Vol.1) 317 (Comm.Print 1984); STAFF OF JOINT COMM. ON TAXATION, 98TH CONG., 2D SESS., GENERAL EXPLANATION OF THE REVENUE PROVISIONS OF THE DEFICIT REDUCTION ACT OF 1984, 796-797 (Comm.Print 1984). 30 We conclude that Treasury Regulation 1.501(c)(9) is a reasonable construction of Section 501(c)(9), entitled to the weight of law. This regulation, then, serves as the intervening change in law that became effective in 1981 on which the IRS properly based its revocation of the Association's tax-exempt status.