Court Opinion

ID: 9484511
Source: CourtListenerOpinion
Date Created: 2023-08-05 09:55:24.859723+00
Date Added: 2024-06-11T17:50:17.312279
License: Public Domain

RONEY, Senior Circuit Judge,
dissenting:
I respectfully dissent. I would reverse the tax court. In my judgment, the decision to tax the income received by the Independent Insurance Agents of Huntsville, Inc. turned not on an accurate application of the unrelated income law but on the conclusion of the tax court that the organization did not perform its tax-exempt purposes very well. If this were a case to revoke the tax-exempt status of the appellant, the government could well be on sound ground. But to retroactively tax as unrelated income the precise income that was predicted in UAH’s approved application for tax-exempt status is a misuse of the unrelated income law.
The income taxed here is the percentage of the commissions which the agency received from its member agents when they wrote insurance for public agencies. One of the purposes for which IIAH was organized was to “[ojversee the writing of insurance for public authorities to ensure that such authorities are receiving the best insurance protection and service available.”
The April 1974 application to the IRS specifically stated that IIAH would receive between forty and sixty percent of the commissions earned by its members on such public accounts. In response to this application, the IRS, by letter dated August 23, 1974, expressly acknowledged that “[a] review of your financial statement shows that your income is primarily received from and your expenditures are primarily made with respect to carrying on the public insurance activities.”
Nothing much has changed. When the application was being processed, IIAH submitted a detailed breakdown of activities which indicated that 33.8 percent of time spent was related to its public insurance activity. For the years in issue before the tax court, UAH’s breakdown indicated 29 percent of time spent was related to its public insurance activity.
The Exempt Organizations Branch did advise the petitioner that no determination was made concerning whether any present or proposed activities were unrelated trade or business as defined in Section 513. But the tax-exempt status must have been in part based on the fact that the public insurance activities were exempt activities.
The tax court’s decision focused on what IIAH did, rather than on what its income came from. The court decided that IIAH failed to prove that it conducted regular independent oversight over the servicing of public accounts, provided the best insurance at the lowest cost to public agencies, removed political influence on the public agencies (there being no showing that there had been political influence under the prior system), provided insurance for difficult-to-insure risks, or coordinated coverage so as to reduce policy gaps and conflicts. There is a great deal of evidence and testimony that IIAH tried to do these things. In fact, IIAH argues on appeal that the tax court was clearly erroneous in its findings as to whether these things were indeed accomplished. Presumably, if IIAH had accomplished these things, the tax court would have held the income related to its tax-exempt purposes. But the test should not be whether the purposes were accomplished, but whether the income received was related to the tax-exempt purposes.
*904IIAH offered uncontradicted testimony to the tax court to support its assertion that the income it received as commissions from public accounts was substantially related to its tax-exempt purposes of overseeing and servicing those public accounts. Witnesses representing public bodies such as Madison County, the City of Huntsville, and the Huntsville/Madison County Airport Authority, testified that UAH’s servicing of public accounts advanced the public interest, e.g., by enabling public bodies to obtain and evaluate insurers’ proposals when those bodies lacked the resources to do so. An IIAH member assigned a public account would try to get suitable coverage through one of the insurance companies that it represented, but if it could not get the coverage that way, the member would contact other carriers, either through fellow IIAH members or directly, in an attempt to get the breadth of coverage needed, as well as the best value. There was also evidence of oversight by UAH’s Association Agency Assignment and Review Committee to ensure that such comparison shopping occurred, although the tax court found the proffered testimony insufficient to establish that such oversight was in fact regularly performed.
Witnesses testified that IIAH had been successful in achieving its goals, and that UAH’s assistance and expertise made it possible for the public bodies to acquire coverage that suited their needs and that saved them money. As emphasized by one IIAH insurance agent, a former chairman of the Review Committee, the best insurance is not necessarily the cheapest insurance. Other factors must be considered such as the financial stability of the insurer and whether a policy provides needed coverage.
The IRS called no witnesses to refute any of the testimony on behalf of IIAH. The undisputed testimony showed that UAH’s income from the public entity insurance was related to the servicing of public accounts in a manner exhibiting a substantial relationship to the organization’s tax-exempt purposes.
The fact that IIAH has spent tax-exempt income to provide various benefits for its members is not relevant to the question of whether the activity which produced the income is substantially related to UAH’s tax-exempt purposes. As emphasized by the Court in United States v. American College of Physicians, 475 U.S. 834, 849, 106 S.Ct. 1591, 1599, 89 L.Ed.2d 841 (1986), the subject for inquiry is the manner in which the organization operates its business.
Neither the tax court nor the government has cited authority for the proposition that just because a tax-exempt organization fails to accomplish its stated purpose, the income received in connection with that purpose is unrelated income.