Canton Police Benev. Ass'n of Canton, Ohio v. U.S.

• Decision Date: 07 June 1988
• Docket Number: No. 87-3230,87-3230
• Citation: 844 F.2d 1231
• Parties: -1065, 56 USLW 2631, 88-1 USTC P 9285, 9 Employee Benefits Ca 1880 CANTON POLICE BENEVOLENT ASSOCIATION OF CANTON, OHIO, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1231

844 F.2d 1231

61 A.F.T.R.2d 88-1065, 56 USLW 2631, 88-1

USTC P 9285,

9 Employee Benefits Ca 1880

CANTON POLICE BENEVOLENT ASSOCIATION OF CANTON, OHIO, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 87-3230.

United States Court of Appeals, Sixth Circuit.

Argued Jan. 11, 1988.

Decided April 19, 1988.

Rehearing and Rehearing En Banc Denied June 7, 1988.

Paul A. Tscholl, Canton, Ohio, John A. Tscholl, argued, for plaintiff-appellant.

John M. Siegel, Steven D. Bell, Asst. U.S. Atty., Cleveland, Ohio, Marilyn A. Bobula, J. Wm. Sikora, Susan M. Poswistilo, Tax Div., Robert S. Pomerance, Janet K. Jones, argued, Tax Div.--Dept. of Justice, Washington, D.C., for defendant-appellee.

Before MERRITT and RYAN, Circuit Judges, and BROWN, Senior Circuit Judge.

BAILEY BROWN, Senior Circuit Judge.

The Canton Police Benevolent Association of Canton, Ohio ("Association") brought this action in the United States District Court for the Northern District of Ohio seeking a refund of $3,367.02 in federal income taxes for the years 1981 through 1984. The Association alleged that the Internal Revenue Service ("IRS") improperly revoked its status as a tax-exempt organization under Section 501(c)(9) of the Internal Revenue Code. In addition, the Association moved for its attorney's fees under Rule 11 of the Federal Rules of Civil Procedure, alleging that the government's attorney failed to timely inform herself of the facts and law of the case. The parties filed cross-motions for summary judgment. On February 3, 1987, the district court entered a memorandum opinion and order granting summary judgment to the government, and, on the following day, entered an order dismissing the complaint. After the district court denied its motion for reconsideration, the Association filed notice of appeal to this court. We affirm the judgment of the district court.

I. Factual Background

The Association is a not-for-profit membership organization formed in 1962. Membership in the Association is open only to employees of the Canton Police Department in active service. The main purposes of the Association are to promote a fraternal spirit among its members, and to extend moral and material aid to them (and to their dependents) upon their death or retirement from the police force.

The Association pays a "dividend" to a member if he retires from the police department with twenty years of service, or if he dies while working for the department. If a member retires with less than twenty years on the force, the benefit paid by the Association is reduced. During 1981 through 1984, the years in issue, the money to fund death and retirement payments came from dues and assessments levied against the members, from donations, and from interest on the Association's bank accounts. During those years, the Association made twenty payments on account of retirements and three payments on account of deaths; most of the payments were of $4,200 or $4,500 each. The retirement payments added up to more than 85% of the Association's overall expenditures for that period.

In 1964, the IRS recognized the Association as a "social welfare" organization exempt from income taxation under Section 501(c)(4) of the Internal Revenue Code. In February, 1980, the IRS determined that the Association no longer qualified under Section 501(c)(4) but that it did qualify for tax-exempt status under Section 501(c)(9) of the Code.

Section 501(c)(9) accords tax-exempt status to "voluntary employees' beneficiary associations providing for the payment of life, sick, accident, or other benefits to the members of such association or their dependents...." 26 U.S.C. Sec. 501(c)(9) (1954). On July 17, 1980, not long after the Association received a favorable administrative ruling under Section 501(c)(9), the Treasury published in the Federal Register, for public comment, a proposed regulation interpreting that statute. The regulation was issued in final form and became effective in January of 1981. Treas.Reg. Sec. 1.501(c)(9) (1981). Invoking the principle of ejusdem generis (i.e., that a general word in a statute, contract, or will takes its meaning from the specific words with which it appears), the regulation provides that "[t]he term 'other benefits' [as used in Section 501(c)(9) ] includes only benefits that are similar to life, sick, or accident benefits." Treas.Reg. 1.501(c)(9)-3(d) (1981). "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." Id.

The regulation then gives examples of benefits that qualify as "other benefits" for purposes of the statute, and examples of benefits that do not so qualify. With reference to benefits in the nonqualifying category, the regulation states the following:

The 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, or a benefit that is similar to the benefit provided under a stock bonus or profit-sharing plan. For purposes of section 501(c)(9) and these regulations, a benefit will be considered similar to that provided under a pension, annuity, stock bonus or profit-sharing plan if it provides for deferred compensation that becomes payable by reason of the passage of time, rather than as the result of an unanticipated event. Thus, for example, supplemental unemployment benefits, which generally become payable by reason of unanticipated layoff, are not, for purposes of these regulations, considered similar to the benefit provided under a pension, annuity, stock bonus or profit-sharing plan.

Treas.Reg. Sec. 1.501(c)(9)-3(f) (1981). As a corollary to the foregoing, the regulation specifies that "[t]he term 'life benefit' [as used in the statute] does not include a pension, annuity, or similar benefit." Treas.Reg. Sec. 1.501(c)(9)-3(b) (1981).

On the authority of that regulation, the IRS in 1984 revoked the Association's exemption under Section 501(c)(9). The examining agent's report explained that " '[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.' " The report concluded that "[t]he providing of retirement benefits to [the Association's] members upon retirement or separation from service do[es] not qualify as benefits permitted or embraced under section 501(c)(9)." The revocation was effective retroactively--as of January 1, 1981, "the first day of the taxable year in which the [regulation] became final." The Association was directed to file federal income tax returns for 1981 and later years.

The Association filed returns and paid taxes for 1981 through 1984. It thereafter submitted administrative claims for refund of those taxes "on the grounds that [it] qualifie[s] an an exempt organization and its income [is] not subject to income taxes under 26 U.S.C. Sec. 501(c)(9)." When the IRS denied the refund, the Association brought this action in the district court in April of 1986.

The IRS timely submitted its answer. The answer admitted some of the allegations in the complaint and denied others. As to still others, the answer stated that the government was then "without knowledge or information sufficient to form a belief as to the[ir] truth." A pretrial conference was held in July of 1986. Pursuant to that conference, the district court set up a schedule for the parties to file cross-motions for summary judgment.

The Association thereafter moved for summary judgment, claiming that it is entitled to an exemption under Section 501(c)(9). It also moved for attorney's fees and to strike several portions of the government's answer--the portions in which the government stated that it lacked sufficient knowledge to admit or deny particular allegations in the complaint. The Association contended that, under Rule 11 ofthe Federal Rules of Civil Procedure, the government's attorney was chargeable, at the time she drafted the answer, with knowledge of all the facts in the administrative record compiled by the IRS, and that her failure to learn all those facts before preparing the answer amounted to "a fraud upon the Court." The Association further alleged that government counsel went to the pretrial conference without adequate preparation. The government opposed all of the Association's motions and filed a cross-motion for summary judgment.

The district court, 658 F.Supp. 411, held for the government on all issues. First, the court denied the motions to strike and for attorney's fees. The court explained its reasoning this way:

In this action, the plaintiff asserts that the Government's counsel is charged under Rule 11 [of the Federal Rules of Civil Procedure] with all knowledge of the facts possessed by the Internal Revenue Service at the time of her filing the answer.... Thus, following the plaintiff's view, the Government's counsel could never deny an allegation in its answer for want of knowledge unless and until all of the Government's resources were first reviewed by counsel. The court finds that such a burden upon the Government could never be imposed at the time of answering a complaint, nor does the reasonable inquiry requirement of Rule 11 mandate such a review by counsel.

Second, the district court granted the government's motion for summary judgment, concluding that the evidence of record "do[es] not present any material factual inconsistencies," and establishes that "the revocation of tax exempt status by the Internal Revenue Service was proper." The court noted that the Association's payment of retirement dividends accounted for more than 80% of its total disbursements during 1981-1982, and was found by the IRS to be its "primary function." "The critical inquiry,"...