Legal Document

477 U.S. 105 106 S.Ct. 2426 91 L.Ed.2d 89 UNITED STATES, Petitionerv.AMERICAN BAR ENDOWMENT et al. No. 85-599. Argued April 28, 1986. Decided June 23, Syllabus Respondent American Bar Endowment (ABE), a tax-exempt organization, raises money for its charitable work by providing group life, health, accident, and disability insurance policies, underwritten companies, to members. Because the members have favorable mortality morbidity rates, experience-rating results in substantially lower costs than if were purchased individually. Since companies' of are uniformly annual premiums paid, companies pay refunds excess ("dividends") ABE that used purposes. Critical ABE's fundraising efforts is fact it requires assign all dividends as condition participating program. advises insured each member's share dividends, less administrative costs, constitutes tax-deductible contribution. In 1980, Internal Revenue Service (IRS) advised considered plan an "unrelated trade or business" hence profits thereon subject income tax under §§ 511-513 Code. Accordingly, IRS assessed deficiency on net revenues from program 1979 1980. paid these taxes, well taxes 1981 revenues, and, after exhausting remedies, brought action refund Claims Court did individual respondent who claimed they entitled deductions part paid. The suits consolidated, entered judgment but found Government respondents' claims. Appeals affirmed reversed respondents remanded further factfinding. Held: 1. program, constituting both "the sale goods" performance services," "trade purposes unrelated business tax. This case presents example precisely sort unfair competition between organizations taxable businesses Congress intended prevent undisputed facts do not support inference receives contributions rather Pp. 109-116. 2. taxpayers established any portion their premium payments ABA To be deduction contribution where he has made payment having "dual character" purchase contribution, taxpayer must at minimum demonstrate purposely contributed property value benefit received return. Here, most logical test policies cost similar policies. None demonstrated could cost. 116-118. 761 F.2d 1573, remanded. MARSHALL, J., delivered opinion Court, which BURGER, C.J., BRENNAN, WHITE, BLACKMUN, REHNQUIST, JJ., joined. STEVENS, filed dissenting opinion, post, p. 119. POWELL O'CONNOR, took no consideration decision case. Albert G. Lauber, Jr., petitioner. Francis M. Gregory, respondents. Justice MARSHALL Court. 1 first issue this whether organization derives offering income" 511 through 513 Code (Code), 26 U.S.C. 511-513. second organization's may claim exceeds actual insurance. 2 * (ABE) corporation exempt taxation § 501(c)(3) Code, which, with certain exceptions relevant here, exempts "organized operated exclusively . educational purposes." primary advance legal research promote administration justice, furthers goals primarily distribution grants other groups. All Association (ABA) automatically ABE. "business league" 501(c)(6). 3 major Approximately 20% participate offers negotiates rates insurers chooses shall provide It also compiles list own solicits them, collects members, transmits those insurer, maintains files policyholder, answers members' questions concerning screens claims benefits. 4 There two important benefits purchasing size gives bargaining power individuals lack. policy experience rated. means based group's experience, general actuarial tables. rating When purchases pays negotiated company. If, true, company's given year, company excess, called "dividend," agree, will permit keep distributing them pro rata 5 would possible negotiate charged throughout period, thus receive dividend. However, prices competitively offered public 1575 (CAFC 1985). way able generate large recent years total amount exceeded 40% payments. Ibid. member Thus after-tax commercial identical coverage rates. 6 1980 Subsequently audited returns revenues. After arguing At approximately same time, respondents, participants had originally deducted contributions, suit well. argued consolidated trial 7 suit, finding provision constitute Cl.Ct. 404 (1984). Government, however, court concluded goods services only when can show "he bought more economic value, intention enterprise," id., 415 (citation omitted), facts. Federal Circuit taxes. F.2d, 1577. As however We granted Government's petition certiorari issues, 474 1004, 522, 88 455 (1985), we now reverse. II 8 recently discussed history structure provisions United States v. College Physicians, 475 834, 1591, 841 (1986). imposes tax, ordinary corporate obtains regularly carried it." 512(a)(1), 511(a)(1). An "any conduct related exercise such charitable, educational, purpose," 513(a). sets up three-part test. (1) business; (2) on; (3) Treas.Reg. 1.513-1(a), CFR 1.513-1(a) (1985); supra, 838-839, S.Ct., 1594. concedes latter portions satisfied. 1576. Its defense solely proposition does business. A. 9 Tax Reform Act 1969, Pub.L. 91-172, 83 Stat. 487, defined activity production 513(c). Secretary Treasury provided clarification definition 1.513-1(b) provides: "in general, [an exempt] otherwise possesses characteristics required 'trade business' within meaning section 162" 511-513.1 10 falls literal language definitions. Certainly assembling better-than-average risks, negotiating behalf administering activities be—and private entities order make profit. itself earns considerable Nevertheless, carry out relied former holding, Disabled Veterans States, 650 1178, 1187 (1981), "operated competitive, manner." See Cl.Ct., 409. operate manner, decided, adopted reasoning. 11 rested conclusion four factors. First, was devised been so presented perceived inception." Second, program's phenomenal success generating evidence noncommercial behavior. noted $81.9 million 28 operation, result success, proceed generosity Third, important, court's view, collectively change drastically reduce premiums. That done strong sought paying higher necessary. Fourth, because underwrite act broker, competing entities. 12 appears, then, viewed engaging separate activities—the acceptance form dividends. If so, unspoken premise Court's activity, second. some sense reasoning; should sell product product's fair market argue excessive formula into nontaxable contributions. Even appropriate federal courts engage quasi-legislative there factual basis attempt B 13 cannot agree enormous generated "profits." Were markedly expensive products available nevertheless kept patronage might plausibly conclude reason success. find, remain competitive rest market. Id., 406. never squarely face costs. 14 "such profit margins [as ABE's] maintained year market." 410. apparently reasoned staggering inevitably induce firms offer programs unless intentions price-sensitive decisions. possible, course, genuinely intend necessary, high even very low But explanation market's failure ABE.2 Lacking concluding core easily view standard monopoly pricing. unique asset—its access ABA's highly rates—and chosen asset, sharing 15 argument bulk themselves desired unconvincing. give choice retaining his assigning ABE, constituted voluntary donation. That, here. simply incorrect characterize assignment "voluntary" theoretically band together policy. 16 Again, put too much weight unsupported assumption. approval consent membership," ibid., observing met "surprisingly little dissent," 411, though "ample" opportunities disagreed, ibid. believe them. Perhaps would, option, purposes; Any feel potential savings sufficient justify effort mount challenge leadership. Many want "make waves" upset generates tax-free fellow theoretical ability therefore, best inconclusive. 17 erred present competition. purpose unfairly whose earnings taxed. H.R.Rep. 2319, 81st Cong., 2d Sess., 36 (1950); see U.S., 838, prevent. deduct effective Similarly, escape earnings, need profitable counterparts return investment. Should displace decided disadvantage. 18 failed find compete therefore danger likely, many belong Employers, associations,3 financial frequently Presumably taxed profits, policyholders Such difficult eligible programs. 19 valid favor, billed effort. fact, standing alone, determinative, "giving away" "contribution" equal product. contends prevail represent income; argues clearly erroneous. Cf. Carter Commissioner, 645 784, 786 (CA9 1981) (question motive 162 one fact). facts, Moreover, articulate rule split gratuitous service regulations. assumed, attach label constrained hold III 20 Section 170 provides "charitable contribution," "a gift use of" qualifying entities, 170(c). contend over 21 considerations supporting our holding bear question demonstrates, found, costly policies—group individual—available Thus, recognized, faced hard worthwhile endeavor reducing 22 A generally contributor expects substantial S.Rep. 1622, 83d 196 (1954), U.S.Code Cong. & Admin.News 1954, 4629; Singer Co. Ct.Cl. 90, 449 413 (1971). sometimes nominal Where proportion received, serve deny altogether. difference return, theory See, e.g., Rev.Rul. 67-246, 1967-2 Cum.Bull. 104 (price ticket charity ball deductible extent admission); 68-432, 1968-2 104, (noting possibility character"). 23 set two-part determining payment" deductible. received. "made making gift." Cum.Bull., 105. test, Murphy 54 T.C. 249, 254 (1970); Arceneaux TCM 1461, 1464 (1977); Oppewal 468 1000, 1002 (CA1 1972) (expressing "dissatisfaction subjective tests taxpayer's motives purported contribution" relying differential benefit). 24 applied case, held Broadfoot, Boynton, Turner comparable money. Therefore, held, establish 415-417. Sherwood exist aware during issue. above test—that intentionally wished gift. 25 Appeals, reversing, focused excessively taxpayers' motivation. Appeals' necessary inquiry transaction nature," considering circumstances. 1582. redetermination standard. proper sine qua non transfer without adequate consideration. taxpayer, Three cost, assume least equals Had known money, necessarily declined him. knowledge, again valued equivalently aware. ABE's, gave away IV 27 reverse remand instructions respect affirm taxpayers. ordered. 29 O'CONNOR 30 dissenting. 31 funded, part, procedure business." 32 "The problem directed competition."1 1950, revised 1969. useful recall kind situation rise involved C.F. Mueller Company. Company longstanding macaroni concern. acquired New York University School Law, donated University. taxable, like company, avoid giving competitor advantage. Although precedent seemed against sufficiently concerned about implications agreed Commissioner. Ultimately, reversed, precedent; acted imposed income. 190 120 (CA3 1951). 33 fundraising, that, funded operating normal receiving advantage exemption, taxable. On hand, equally clear sent urgent request assigned Endowment, arrangement business," taxable.2 central akin dividend request, 34 I far closer reasons. competition, addresses. functioned effort, 35 understanding exposes basic error analysis. noted, protect enterprises operation organizations. record, despite three weeks numerous witnesses, notion Endowment's impact whatsoever. relies parade hypotheticals effect competition.3 is, unable point single piece record "Speculation hypothetical cases illuminates discussion classroom, historical illumination courtroom." Brown-Forman Distillers Corp. State Liquor Authority, 476 573, 586, 2080, 2088, 90 552 (1986) (STEVENS, dissenting). judge scoured pointing harmful none.4 absence ruminations possibilities likelihoods, control legislative underscores poses none effects address. twice nonprofit accompanying emphasized fraternal tax.5 arose taxability administered veterans' organizations, enacted legislation ensure taxed.6 Indeed, operations contrary intent unusual step 1972 amendment fully retroactive 1969.7 37 developments actually position congressional attention, emphasis "substantially related" prong societies, reveal relationship, presumptively Particularly preventing considered, different significance. For highlight "market" competing, temporarily leaving aside complete harm competitors, already partially provisions, threat becomes remote. 38 Ironically, moreover, alternative suggested obvious current process. then dramatically elsewhere. speculation indulged majority appropriate, surely include realization alternative—in merely recover managing policyholders—would attract membership currently policies; appeal bargain contribution.8 39 completely surprising light developed extensive leads initially view.9 Furthermore, initiated 1955 pioneering, widely publicized, fundraising. revamped suggestion apply venerable successful interpret until several later. 40 short, business."10 41 Not fail raise concerns directed, endeavor. 42 learned expressly hearing good deal evidence, intentions, transaction. since inception, decades, trumpeted understood.11 testified strictly effort.12 specifically members.13 Finally, factors taken together, compel as, understood be, business.14 43 Notwithstanding explicit endorsement judge's findings,15 speculates program.16 rests remarkably unrealistic appraisal intelligence independence lawyers Those elected buy contribute consequences transaction, free elsewhere requested contribution.17 44 seems somehow coerced monopolist.18 absurd. nothing suggest attractive foist unwanted upon all, earmarks improper tying arrangement.19 45 states "there basis" assumption motivation package, ante, 112-113. what found: 46 "I am persuaded Plan enterprise overwhelming something tolerated sure, expense profession, greater society, exist, existed, survived, survived today. And my findings point." App. 505. 47 404, 405, n. (1984) (incorporating oral 48 bound finding. notwithstanding,20 rejecting run afoul "two rule,"21 decide ground disavowed conflict record. finding, combined analysis scope 49 competitors activity. Depending agreement Chief Judge quite correct vigorously contested trial, seeks collect impose.22 respectfully dissent. permits "all expenses incurred carrying Undoubtedly due desirability deductions, spawned rich voluminous jurisprudence. existence "was dominant hope realizing profit." Brannen 722 695, 704 (CA11 1984) omitted). Courts "profit motive" determine Professional Insurance Agents Michigan 726 1097 (CA6 1984); Carolinas Farm Power Equipment Dealers 699 167 (CA4 1983); Louisiana Credit Union League 693 525 (CA5 1982). One status compete, infra, ----. addition, 414 (1984), particular natural monopoly. decrease rapidly splits components. information maintaining accurate high, economically feasible shared among variety performed policyholder. pre-existing groups association obviously new entrants. here barren hypotheses, express accuracy. assume, below, profitability cited 1, associations distinguished grounds leagues 501(c)(6) charities 501(c)(3). distinction, insubstantial. Business just do. fees, Both 2d, (1950). 1594, ("Congress restrain fostered laws"); 114 ("The taxed"); 1.513-1(b), (1985) (Congress "to eliminate source placing nonexempt endeavors compete"). Tr. Oral Arg. (Solicitor General's argument) ("If voluntarily individually donate back clear, come hands receipts, income"). Brief 24-25 instead consented rebate coupling rebates it, funds derived 'from' solicitations business"); ("Had generosity, dealt charity"); 113 ("Were donation"). 115 ("It likely policies"); ibid, ("Employers, associations, ("Presumably profits"); ("Such programs") (emphases added). end "Ronzoni"—the macaroni-selling harmed University's entry business: passed evil. So you go look evil What trying passed, comes frequently-asked question, 'Who Ronzoni.' "Now, nobody really satisfactorily pointed Ronzoni me. listening came said, 'Here, Ronzoni, adversely affected manner feared adverse slapped Macaroni wrist, basically said your profits.['] "And still somewhat nebulous hurt, damaged hand allow asset funds. perhaps witnesses economists, somebody me picture, tried hard, looking evils alleviate passing tax." 507-509. published incorporated earlier reiterated competition: identifiable gain supports least, suggests underlying [unrelated tax] appears entirely procompetitive effect, consistent tax]. behind statute served program." 414. 91-413, (1969), pp. 1645, 1692 ("In extending virtually bill continues exclude 'unrelated income,' function—such beneficial members"); 91-552, 68 2027, 2097 ("[I]f beneficiary society directly dependents, arranges amounts providing, arranging, function continue excluded tax"). 92-1082, 2-3 (1972), 1972, 3141, 3142-3143 (The "1969 extended application including social welfare clubs. result, raised [I]t 1969 committee report agrees House treatment organizations"). 3, 3143 ("Since believes specific Act, exemption date Act"). service, lowest joined concentration carriers"). I.R.S. Letter Ruling 8042012 (July 1980) (citing technical advice memorandum January 31, 1973, business); Record 854. Hope 612 298, 304 (CA7 (Sprecher, J.) ("unfair key matter law"). 409 ("Advertising promotional materials consistently referred endeavors; reports contributions; communications retention donations, profits. leadership treated such"). 409, ("Even defendant appeared view. While disagreed preferred terminating function, certainly profiting expense"). 411-412 permitted retain obvious, earned 'from services,' 513(c) (1976), reason. activities"). "When impossible manner. huge sums activities, wholly dwarfed insurance-related businesses. disclosed every opportunity, yet (who bore program) allowed practice although it. No fashion. ABA/ABE epidemic irrationality permitting bilked almost decades. reasonable rational consider engaged support. By standard, depends customers 411. "In connection permissibly rejected contention services. accumulation exchange, 'profits' fall 513(c)." 1578 1985) (footnote 'voluntary' policy"). description misleading. example, rates." Ante, 108. statement assumes, assumption, inaccurate. Assume $100, $40, 50% bracket member: After-tax $80. Identical non-ABE (with $40 retained policyholder) produce $60. Only assumes "identical rates" accurate. disparity attributable differing refunds, deductibility valuable cash. wonder recognize character assignments described (suggesting pricing"). Nor constitutional judicial solicitude disagrees organization. Teachers Hudson, 292, 1066, 232 (First Amendment rights nonunion worker union agency fee exclusive representative). 116 assumed erroneous"). Graver Tank Mfg. Linde Air Products Co., 336 271, 275, 69 535, 538, 93 L.Ed. 672 (1949) ("A law, correction errors undertake review concurrent below exceptional showing error"). time renewed assigned.

Classification Label: 11