ABA Ret. Funds v. United States

• Decision Date: 25 April 2013
• Docket Number: No. 09 C 6993,09 C 6993
• Parties: ABA RETIREMENT FUNDS f/k/a AMERICAN BAR RETIREMENT ASSOCIATION Plaintiff, v. UNITED STATES OF AMERICA Defendant.
• Court: U.S. District Court — Northern District of Illinois

ABA RETIREMENT FUNDS f/k/a AMERICAN BAR RETIREMENT ASSOCIATION Plaintiff, v. UNITED STATES OF AMERICA Defendant.

No. 09 C 6993

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

Entered: April 25, 2013

Judge John J. Tharp, Jr.

MEMORANDUM OPINION AND ORDER

This case presents the question of whether Plaintiff ABA Retirement Funds (formerly known as the American Bar Retirement Association, or "ABRA") qualifies as a tax-exempt "business league" under 26 U.S.C. § 501(c)(6). ABRA maintains that the answer is "yes," and sought a refund of the federal taxes it paid on income earned in tax years 2000 to 2002 in connection with its sponsorship of retirement plans for the legal industry. The IRS says "no," however, and it denied ABRA's refund claim. The parties now stipulate to the relevant facts and bring cross-motions for summary judgment. For the reasons stated below, the Court concludes that ABRA did not qualify as a business league under 26 U.S.C. § 501(c)(6) during the period at issue, and therefore grants the Government's motion for summary judgment and denies ABRA's motion.¹

BACKGROUND ²

The American Bar Association ("ABA") is a tax-exempt organization that seeks to serve its members, the legal profession, and the public by, in its words, "defending liberty and justice as the national representative of the legal profession." ABRA Statement of Facts (Dkt. 53) ¶ 3. The ABA incorporated ABRA as an Illinois not-for-profit corporation in 1963 for the purpose of promoting and facilitating the operation and use of tax-qualified retirement plans for members of the ABA. ABRA's prospectus stated that it was organized "for the sole purpose of providing members of the [ABA] and their employees with a retirement plan designed to take advantage of the income tax benefits which apply to a qualified retirement plan." Joint Stipulation of Facts (Dkt. 35) ¶ 1.³ ABRA's only members are those individuals who constitute the ABA's Board of Governors. Id. ¶ 6. ABRA's members elect a board of directors, which in turn appoints officers and names a trustee of the retirement plans. Id.

ABRA created and maintains several IRS-approved master tax-qualified retirement plans for adoption by lawyers and law firms.⁴ These plans are known as the American Bar AssociationMembers Retirement Plan and the American Bar Association Members Defined Benefit Pension Plan (the "Plans"). ABRA has the authority under the Plans to engage, monitor, and replace vendors, and is responsible for the design and maintenance of Plan documents. Id. ¶ 8. Beginning in 1992 and continuing through the years at issue, ABRA contracted with State Street Bank and Trust Company ("State Street") as its primary vendor of the various retirement investments available through the Plans, and ABRA oversaw State Street's activities. ABRA made its Plans available to lawyers and law firms, as well as the general public, without charge upon request. Id. ¶ 9. The Plans included both popular 401(k) plans and rarely-used defined benefit plans. The combination of the Plans and ABRA's and its vendors' activities in connection with the Plans is known as the "Program."

During the years at issue, State Street was the sole trustee for the Program's assets. Id. ¶ 14. State Street had the right to engage and terminate investment advisors, but it was obligated to consult with ABRA and give full consideration to ABRA's recommendations. State Street was also responsible for record keeping and certain administrative services required by the Program. ABRA, however, was responsible for oversight and monitoring of Program vendors including State Street, and ABRA drafted and obtained tax qualification of the Plans, negotiated contracts with vendors, and performed certain fiduciary duties as required by ERISA. Id. ¶¶ 22-23.

State Street was responsible for directly marketing the Plans to the legal profession, but ABRA reviewed and approved the annual marketing plan developed by State Street and made recommendations regarding the goals set forth in the marketing plan, such as targets for the number of new participants and growth in the amount of assets invested. See, e.g., Dkt. 40-8 at61, Dkt. 41 at 37. ABRA also promoted the use of the Plans by educating and encouraging employers and attorneys about the benefits of providing for retirement through the Program. Id. ¶ 16. ABRA encouraged participation in the Program as the "most sound way possible" to save for retirement. Id. ABRA also sent letters soliciting attorneys to participate in the Program, and distributed information that directly promoted participation in the Program. Id. ¶ 17. ABRA's board of directors discussed ways to expand participation in the Program, and ABRA's 2001 and 2002 marketing plans each described the long-term objectives of the Program marketing team as increasing awareness of the Program, increasing the market share of the Program, and increasing plans, participants, and assets in the Program. Id. ¶ 18-19. The Program's website, which State Street made available to participants, included information about investment options and stated that the Program's goal was "to provide investment options that will help our participants meet their individual retirement needs." Id. ¶ 28. Participants were also given access to a computer program that would give them personalized investment advice about the eleven Plan options available in the Program. Id. ¶ 29.

For its services in connection with the Program, the Plans paid ABRA a fee based on a percentage of the total assets invested in the Program, other than assets invested in self-directed brokerage accounts.⁵ Id. ¶ 24. ABRA set its fees based on its estimated cost of operations, including the salaries of its three employees and fees paid to outside consultants. Id. During the period at issue, other retirement plan business organizations also solicited and competed for the retirement investments of attorneys, and the Program was one of numerous options open tolawyers and law firms seeking to participate in retirement plans. Id. ¶ 26. Competitors of the program included mutual funds and other organizations that were in business to make a profit by providing retirement investment options and other retirement services. Id. ¶ 27. Some of the Program's competitors offered broader investment offerings than the Program, and those offerings were formidable alternatives to the Program's options. Id. ¶ 30. The Program was unique, however, in the sense that it was the only retirement program authorized by the ABA and designed specifically for the legal market. ABRA Statement of Facts (Dkt. 53) ¶ 12.

Between 2000 and 2002, ABRA's gross income from fees and interest was between $1.6 and $1.9 million annually, and its taxable income was between $384,000 and $672,000 per year. Joint Stipulation of Facts (Dkt. 35) ¶ 32. By the end of 2002, ABRA had accumulated assets of approximately $3.5 million. Id. ABRA paid a total of nearly $500,000 in federal income taxes during the 2000-2002 period. Id. In June 2004, ABRA filed (for the first time⁶) an Application for Recognition of Exemption Under Section 501(a), seeking exemption from the payment of federal taxes on income it earned from the Programs. Id. ¶ 33. The IRS denied the application in August 2005 and thereafter ABRA filed timely claims for refund of the taxes it paid for 2000, 2001, and 2002. Id. ¶ 33-34. Those claims were disallowed by the IRS in November 2007 and ABRA then instituted this law suit. Id.

DISCUSSION

Section 501(c)(6) of the tax code provides that certain organizations are exempt from paying federal income taxes. Those organizations include:

Business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund forfootball players), not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.

26 U.S.C. § 501(c)(6).

ABRA claims to be a "business league" under the statute. Treasury Regulation 1.501(c)(6)-1 (26 C.F.R. § 1.501(c)(6)-1) further defines a business league as follows:

A business league is an association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit. It is an organization of the same general class as a chamber of commerce or board of trade. Thus, its activities should be directed to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons. An organization whose purpose is to engage in a regular business of a kind ordinarily carried on for profit, even though the business is conducted on a cooperative basis or produces only sufficient income to be self-sustaining, is not a business league. An association engaged in furnishing information to prospective investors, to enable them to make sound investments, is not a business league, since its activities do not further any common business interest, even though all of its income is devoted to the purpose stated. . . .

26 C.F.R. § 1.501(c)(6)-1.

Parsing this text, the regulation requires that an organization meet the following criteria to constitute a "business league":

It is an organization:

(1) of persons having a common business interest;

(2) whose purpose is to promote the common business interest;

(3) not organized for profit;

(4) that does not engage in a regular business of a kind ordinarily conducted for profit;

(5) whose activities are directed to the improvement of business conditions at one or more lines of a business as distinguished from the performance of particular services for individual persons; and

(6) of the same general class as a chamber of commerce or a board of trade.

Bluetooth SIG Inc. v. United States, 611 F.3d 617, 622 (9th Cir. 2010). The regulation also...