Family Trust of Mass., Inc. v. United States, No. 12-5360

CourtUnited States Courts of Appeals. United States Court of Appeals (District of Columbia)
Docket NumberNo. 12-5360
Decision Date28 June 2013


No. 12-5360


Argued May 15, 2013
Decided June 28, 2013

Appeal from the United States District Court
for the District of Columbia
(No. 1:11-cv-00680)

Christopher S. Rizek argued the cause for the appellant. Matthew C. Hicks was on brief.

Jennifer M. Rubin, Attorney, United States Department of Justice, argued the cause for the appellee. Ronald C. Machen Jr., United States Attorney, and Kenneth L. Greene, Attorney, were on brief.

Before: HENDERSON, TATEL and GRIFFITH, Circuit Judges.

KAREN LECRAFT HENDERSON, Circuit Judge: The Family Trust of Massachusetts, Inc. (FTM) manages a pooled trust established pursuant to 42 U.S.C. § 1396p(d) to provide supplemental services and benefits to disabled individuals receiving Medicaid, Supplemental Security Income (SSI) or other public benefits. FTM applied to the United States Internal

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Revenue Service (IRS) for a charitable tax exemption under I.R.C. § 501(a) and (c)(3) based on its trustee services. After the IRS preliminarily denied FTM's application, FTM filed this action seeking a declaration that it is a tax exempt charitable organization. The district court granted summary judgment to the government, concluding that FTM failed to satisfy two of the statutory requirements to constitute a charitable organization: (1) that it be "operated exclusively for . . . charitable . . . purposes" and (2) that "no part of [its] net earnings . . . inure[] to the benefit of any private shareholder or individual." I.R.C. § 501(c)(3); see Family Trust of Mass., Inc. v. United States, 892 F. Supp. 2d 149 (D.D.C. 2012). We agree with the district court that FTM is not operated exclusively for charitable purposes and, accordingly, affirm the grant of summary judgment on that ground.


Eligibility for some government benefit programs, including Medicaid and SSI, is limited by a claimant's income and assets, which affect whether and to what extent the claimant may receive benefits. See Sai Kwan Wong v. Doar, 571 F.3d 247, 251 (2d Cir. 2009); Lewis v. Alexander, 685 F.3d 325, 333 (3d Cir. 2012). Under statutory "trust-counting" rules, a trust corpus generally is counted as an asset for the purpose of the eligibility limits. Lewis, 685 F.3d at 333 (citing Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66, Title XIII § 13611(d(1)(C), 107 Stat. 312 (codified at 42 U.S.C. § 1396p(d)(1)(C)). The Congress made an exception, however, for a qualifying "special needs" or "supplemental needs" trust—that is, " 'a discretionary trust established for the benefit of a person with a severe and chronic or persistent disability and [] intended to provide for expenses that assistance programs

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such as Medicaid do not cover.' "1 Id. (quoting Sullivan v. Cnty. of Suffolk, 174 F.3d 282, 284 (2d Cir. 1999)); see 42 U.S.C. § 1396p(d)(4). One form of such a trust is the "pooled" special needs trust, which " 'is a special arrangement with a non-profit organization that serves as trustee to manage assets belonging to many disabled individuals, with investments being pooled, but with separate trust "accounts" being maintained for each disabled individual.' " Id. (quoting Jan P. Myskowski, Special Needs Trusts in the Era of the Uniform Trust Code, 46 N.H. Bar J., Spring 2005, at 16); see 42 U.S.C. §1396p(d)(4)(C)(iii).2 FTM was organized in March 2003, inter alia, to manage such pooled account trusts. See Articles of Organization, Family Trust of Mass., art. II (filed July 31, 2002) (JA 256). FTM's Articles of Organization identify four individuals as directors, including Peter M. Macy. Macy is also identified as President and Treasurer and his law office address is listed as FTM's "principal office." Id. art. VII (JA 259).

In March 2004, FTM executed a trust agreement establishing the "Family Trust for Supplemental Needs II" (Trust)—with FTM as its trustee—"to provide for the collective management and distribution of the Trust Estate on behalf of persons who are disabled, as defined in 42 U.S.C. §1382c(a)(3), for whom trust accounts are established." Trust Agreement, Family Trust for Supplemental Needs II § 2.020 (Mar. 23, 2004) (JA 116) (Trust Agreement). The Trust Agreement sets the minimum contribution level for a trust account at $25,000, payable over three years, and provides that, upon the death of a

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beneficiary, the Trust retains a portion of the residual corpus equal to $1,000 plus five to twenty per cent of the remaining funds, depending on the length of the account's life. Each account is assessed a minimum annual trustee fee of $750. The number of pooled trust accounts grew from about 20 in 2005 to 300 by 2010, largely through referrals from "elder law" professionals, including Macy himself. See Letter from FTM to IRS at 4 (Mar. 2, 2009) (JA 456) ("Macy refers his own disabled clients to the pooled trust if they meet the criteria of FTM's charitable class."); Mem. from FTM to IRS ¶ 3 (Dec. 26, 2006) (JA 313) ("Information about the benefits of or through [FTM] is disseminated primarily through word-of-mouth in the Elder Law legal community, but it also is presented in various treatises and other source books for Medicaid law in Massachusetts.").

In November 2005, FTM applied to the IRS for a tax exemption as a "charitable" organization under I.R.C. § 501(a) and (c)(3).3 There followed substantial correspondence between FTM and the IRS. On February 12, 2008, the IRS sent FTM a proposed denial of the application, stating that FTM's trust management services lacked the "donative element necessary" to establish a charitable purpose. Letter from IRS to FTM at 6-7 (Feb. 12, 2008) (JA 400-01) (Proposed Exemption Denial). The IRS explained:

You state that you charge the Trust fees that are reasonable, consistent with the laws of Massachusetts. Thus, you have not established that the services you provide to the Trust are charitable within the meaning of section 501(c)(3).

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In addition, although you state that the fees you charge the Trust are below commercial trustee rates for administration of trusts of the size and nature of the assets you manage, you have not established that these fees are substantially below your cost . . . . Therefore, your services to the Trust are not charitable within the meaning of section 501(c)(3) of the Code.

Id. at 7 (JA 401). The IRS also reasoned that FTM is not "operated exclusively for the relief of the poor and distressed" because it is the Trust—for which FTM provides "trustee services and trust management and investment services"—that provides such relief. Id.

Additional correspondence followed, culminating in an August 3, 2010 conference, after which the IRS sought additional information, including tax returns for "tax years 2007 to the present." Letter from IRS to FTM at 3 (Aug. 18, 2010) (JA 519). FTM responded with copies of its 2007 and 2008 returns, advising that its 2009 return would "be filed by October 15, 2010." Letter from FTM to IRS at 11 (Oct. 8, 2010) (JA 554). FTM filed the 2009 return with the IRS on November 11, 2010.

On April 6, 2011, FTM filed a complaint in district court, pursuant to I.R.C. § 7428(a),4 seeking a declaration that FTM "is exempt from federal income taxation under Section 501(a) of the Internal Revenue Code as an organization described in Section...

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