United States v. American Bar Endowment

• Citation: 91 L.Ed.2d 89,477 U.S. 105,106 S.Ct. 2426
• Decision Date: 23 June 1986
• Docket Number: No. 85-599,85-599
• Parties: UNITED STATES, Petitioner v. AMERICAN BAR ENDOWMENT et al
• Court: U.S. Supreme Court

477 U.S. 105

106 S.Ct. 2426

91 L.Ed.2d 89

UNITED STATES, Petitioner

v AMERICAN BAR ENDOWMENT et al.

No. 85-599.

Argued April 28, 1986.

Decided June 23, 1986.

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 by insurance companies, to its members. Because the members have favorable mortality and morbidity rates, experience-rating results in substantially lower insurance costs than if the insurance were purchased individually. Since the insurance companies' costs of providing insurance to the group are uniformly lower than the annual premiums paid, the companies pay refunds of the excess ("dividends") to ABE that are used for its charitable purposes. Critical to ABE's fundraising efforts is the fact that it requires its members to assign it all dividends as a condition for participating in the insurance program. ABE advises its insured members that each member's share of the dividends, less ABE's administrative costs, constitutes a tax-deductible contribution. In 1980, the Internal Revenue Service (IRS) advised ABE that it considered ABE's insurance plan an "unrelated trade or business" and that hence the profits thereon were subject to income tax under §§ 511-513 of the Internal Revenue Code. Accordingly, the IRS assessed a tax deficiency on ABE's net revenues from the insurance program for 1979 and 1980. ABE paid these taxes, as well as taxes on its 1981 revenues, and, after exhausting administrative remedies, brought an action for a refund in the Claims Court as did the individual respondent ABE members who claimed that they were entitled to charitable deductions for part of the insurance premiums they paid. The suits were consolidated, and the Claims Court entered judgment for ABE but found for the Government on the individual respondents' claims. The Court of Appeals affirmed as to ABE's taxes but reversed as to the individual respondents and remanded for further factfinding.

Held:

1. ABE's insurance program, as constituting both "the sale of goods" and "the performance of services," is a "trade or business" for purposes of the unrelated business income tax. This case presents an example of precisely the sort of unfair competition between tax-exempt organizations and taxable businesses that Congress intended to prevent by pro- viding for the unrelated business income tax. The undisputed facts do not support the inference that the dividends ABE receives are charitable contributions from its members rather than profits from its insurance program. Pp. 109-116.

2. The individual respondent taxpayers have not established that any portion of their premium payments to ABA constitutes a charitable contribution. To be entitled to a deduction for a charitable contribution where he has made a payment having the "dual character" of a purchase and a contribution, a taxpayer must at a minimum demonstrate that he purposely contributed money or property in excess of the value of any benefit he received in return. Here, the most logical test of the value of the insurance policies the individual respondents received is the cost of similar policies. None of these respondents have demonstrated that they could have purchased similar policies for a lower cost. Pp. 116-118.

761 F.2d 1573, reversed and remanded.

MARSHALL, J., delivered the opinion of the Court, in which BURGER, C.J., and BRENNAN, WHITE, BLACKMUN, and REHNQUIST, JJ., joined. STEVENS, J., filed a dissenting opinion, post, p. 119. POWELL and O'CONNOR, JJ., took no part in the consideration or decision of the case.

Albert G. Lauber, Jr., for petitioner.

Francis M. Gregory, Jr., for respondents.

Justice MARSHALL delivered the opinion of the Court.

The first issue in this case is whether income that a tax-exempt charitable organization derives from offering group insurance to its members constitutes "unrelated business income" subject to tax under §§ 511 through 513 of the Internal Revenue Code (Code), 26 U.S.C. §§ 511-513. The second issue is whether the organization's members may claim a charitable deduction for the portion of their premium pay- ments that exceeds the actual cost to the organization of providing insurance.

I

Respondent American Bar Endowment (ABE) is a corporation exempt from taxation under § 501(c)(3) of the Code, which, with certain exceptions not relevant here, exempts organizations "organized and operated exclusively for . . . charitable . . . or educational purposes." ABE's primary purposes are to advance legal research and to promote the administration of justice, and it furthers these goals primarily through the distribution of grants to other charitable and educational groups. All members of the American Bar Association (ABA) are automatically members of ABE. The ABA is exempt from taxation as a "business league" under § 501(c)(6).

ABE raises money for its charitable work by providing group insurance policies, underwritten by major insurance companies, to its members. Approximately 20% of ABE's members participate in the group insurance program, which offers life, health, accident, and disability policies. ABE negotiates premium rates with insurers and chooses which insurers shall provide the policies. It also compiles a list of its own members and solicits them, collects the premiums paid by its members, transmits those premiums to the insurer, maintains files on each policyholder, answers members' questions concerning insurance policies, and screens claims for benefits.

There are two important benefits of purchasing insurance as a group rather than individually. The first is that ABE's size gives it bargaining power that individuals lack. The second is that the group policy is experience rated. This means that the cost of insurance to the group is based on that group's claims experience, rather than general actuarial tables. Because ABA members have favorable mortality and morbidity rates, experience rating results in a substantially lower insurance cost. When ABE purchases a group policy for its members, it pays a negotiated premium to the insurance company. If, as is uniformly true, the insurance company's actual cost of providing insurance to the group is lower than the premium paid in a given year, the insurance company pays a refund of the excess, called a "dividend," to ABE. Critical to ABE's fundraising efforts is the fact that ABE requires its members to agree, as a condition of participating in the group insurance program, that they will permit ABE to keep all of the dividends rather than distributing them pro rata to the insured members.

It would be possible for ABE to negotiate lower premium rates for its members than the rates it has charged throughout the relevant period, and thus receive a lower dividend. However, ABE prices its policies competitively with other insurance policies offered to the public and to ABE members. 761 F.2d 1573, 1575 (CAFC 1985). In this way ABE is able to generate large dividends to be used for its charitable purposes. In recent years the total amount of dividends has exceeded 40% of the members' premium payments. Ibid. ABE advises its insured members that each member's share of the dividends, less ABE's administrative costs, constitutes a tax-deductible contribution from the member to ABE. Thus the after-tax cost of ABE's insurance to its members is less than the cost of a commercial policy with identical coverage and premium rates.

In 1980 the Internal Revenue Service (IRS) advised ABE that it considered ABE's insurance plan an "unrelated trade or business" and that the profits thereon were subject to tax under §§ 511-513. Subsequently IRS audited ABE's tax returns for 1979 and 1980 and assessed a tax deficiency on ABE's net revenues from the insurance program. ABE paid those taxes, as well as taxes on the 1981 revenues. After exhausting administrative remedies, it brought an action for a refund in the Claims Court, arguing that its revenues from the insurance program were not subject to tax. At approximately the same time, the individual respondents, who were participants in the ABE insurance program but who had not originally deducted any part of the insurance premiums as charitable contributions, brought suit for refunds in the Claims Court as well. The individual respondents argued that they were entitled to charitable deductions for a portion of those premium payments. The two suits were consolidated for trial in the Claims Court.

The Claims Court entered judgment for ABE in its suit, finding that ABE's provision of insurance to its members did not constitute a "trade or business" subject to tax. 4 Cl.Ct. 404 (1984). It found for the Government, however, on the individual respondents' claims. The court concluded that a taxpayer may claim a charitable contribution for a portion of a payment for goods or services only when he can show that "he bought goods or services for more than their economic value, with the intention that the excess be used to benefit a charitable enterprise," id., at 415 (citation omitted), and that the individual respondents had not established these facts. The Court of Appeals for the Federal Circuit affirmed as to ABE's taxes. 761 F.2d, at 1577. As to the individual respondents, however the court reversed and remanded for further factfinding. We granted the Government's petition for certiorari on both issues, 474 U.S. 1004, 106 S.Ct. 522, 88 L.Ed.2d 455 (1985), and we now reverse.

II

We recently discussed the history and structure of the unrelated business income provisions of the Code in United States v. American College of Physicians, 475 U.S. 834, 106 S.Ct. 1591, 89 L.Ed.2d 841 (1986). The Code imposes a tax, at ordinary corporate rates, on the income that a tax-exempt organization obtains from an "unrelated trade or business . . . regularly carried on by it." §§ 512(a)(1), 511(a)(1). An ...