Funds v. United States

Decision Date21 July 2014
Docket NumberNo. 13–2332.,13–2332.
Citation759 F.3d 718
CourtU.S. Court of Appeals — Seventh Circuit
PartiesABA RETIREMENT FUNDS, Plaintiff–Appellant, v. UNITED STATES of America, Defendant–Appellee.

OPINION TEXT STARTS HERE

Michael A. Clark, Attorney, Tacy Fletcher Flint, Attorney, Sidley Austin LLP, Chicago, IL, for PlaintiffAppellant.

Stephen T. Lyons, Attorney, Jennifer M. Rubin, Attorney, Tamara W. Ashford, Attorney, Teresa E. McLaughlin, Attorney, Department of Justice, Washington, DC, Thomas P. Walsh, Attorney, Office of the United States Attorney, Chicago, IL, for DefendantAppellee.

Before WOOD, Chief Judge, and EASTERBROOK and KANNE, Circuit Judges.

WOOD, Chief Judge.

ABA Retirement Funds, to which we refer simply as ABA Retirement, appeals the district court's denial of its request for tax-exempt status for the years 2000 through 2002. Agreeing with the Internal Revenue Service, the district court found that ABA Retirement was not a tax-exempt “business league” under 26 U.S.C. § 501(c)(6) during the relevant period. We agree with that assessment and affirm.

I

Because the district court granted summary judgment for the United States, the account that follows represents the undisputed facts along with all reasonable inferences that favor ABA Retirement. See Fed.R.Civ.P. 56(c). ABA Retirement is an Illinois not-for-profit corporation whose predecessor, American Bar Retirement Association, was incorporated in 1963 at the direction of the American Bar Association as a non-profit corporation. The entity's name later changed to ABA Retirement Funds, but the change has no effect on the issues before us, and so we use only the current name. The prospectus for the new entity 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.” To that end, the prospectus continued, ABA Retirement was charged with “promoting and facilitating the operation of [tax-qualified retirement plans], and this is the only activity” in which ABA Retirement was expected to engage.

While ABA Retirement's stated purpose was to provide members of the ABA (and later organizations with at least one ABA-member participant) with retirement plans, ABA Retirement itself did not have members in the traditional sense. Its day-to-day operations were run by John Puetz and a staff of three; its only “members” were the people who made up the ABA's Board of Governors. These “members,” of whom there were about 38 from 2000 to 2002, appointed the officers of ABA Retirement and the trustee of its retirement plans. In time, ABA Retirement created several master retirement plans for adoption by lawyers and law firms. We will refer to these plans in the aggregate as “the Plan” and the Plan in combination with ABA Retirement and its vendors' activities done in connection with it as “the Program.”

Until 1992, the Program was offered pursuant to a group annuity contract issued by Equitable Life Insurance Company of America (Equitable). At that time, members of the ABA Retirement's Board of Directors were the trustees of the master trusts. They had direct responsibility for the selection, retention, and termination of the managers of the investment options offered by the Program. That changed in 1999 when ABA Retirement hired State Street Bank and Trust to replace Equitable and perform additional duties as sole Plan trustee, at which point the ABA Retirement directors ceased to be trustees in order to comply with federal securities law. Under the new arrangement, while ABA Retirement was no longer a trustee, it created and maintained the IRS-approved master tax-qualified retirement plans and took on the role of Plan fiduciary. Had ABA Retirement not undertaken the fiduciary role, the federal Employee Retirement Income Security Act (ERISA) would have required an employer who adopted the retirement plans for its employees either to assume the duties or hire a third party to do so. The Program as a whole competed with other retirement plans in the market.

ABA Retirement, as Plan fiduciary, had the authority to engage, monitor, and fire its trustee, State Street. It was responsible for the design and maintenance of Plan documents (including making sure that they were tax-qualified), over-sight of vendors, contract negotiations, and the review and approval of State Street's annual marketing plan. The latter task included making recommendations to State Street about targets for growth of participants and assets. ABA Retirement also made the plans available to the public without charge from 2000 to 2002. The free documents, however, did not come with an adoption agreement, even though they were tailored to ABA Retirement's trust. State Street was responsible for marketing generally, but ABA Retirement promoted the Plan through mail solicitations to attorneys, Sections of the ABA, and other bar groups. It did not limit itself to advertising the plans; it actively worked both to publicize them and to see that they were sold. State Street handled record keeping, a variety of administrative services, and the direct marketing of the Plan to the legal profession (though ABA Retirement reviewed and approved the annual marketing plan). State Street had the authority to engage and fire investment advisors, but it was required to consult with ABA Retirement and give full consideration to ABA Retirement's recommendations. As noted, ABA Retirement had the power to fire State Street.

ABA Retirement had a financial incentive to increase plan assets, since the Plan paid ABA Retirement a program expense fee for its services in connection with the Program based on a percentage of the total invested assets, excluding assets invested in self-directed brokerage accounts. Those who wished to pursue the self-directed route were required to invest a minimum of 5% of their total investment in accounts that would be subject to the program expense fee. ABA Retirement received the interest on the funds. The amount in the funds was not trivial; on its tax returns for 2000, 2001, and 2002, ABA Retirement reported a gross income of $1,861,258, $1,667,862, and $1,601,217, respectively. Its taxable income for those years was $672,098, $384,972, and $411,874; it held assets worth approximately $3.5 million. The tax returns show that ABA Retirement described itself as an employee benefit fund, and its product was retirement plans.

For a long time, it appears that ABA Retirement's revenues were not large enough to raise tax concerns among its managers. It treated itself as a taxable entity until 2004, when it sought tax-exempt status at the time it filed its Form 1024. In August 2005, the IRS notified ABA Retirement that ABA Retirement did not qualify for the exemption from federal income tax under section 501(c)(6) of the Code. ABA Retirement then filed administrative claims for refunds on the taxes it paid from 2000 through 2002 and, again, those were denied. ABA Retirement responded with this suit, arguing that it was a tax-exempt “business league” under I.R.C. § 501(c)(6), 26 U.S.C. § 501(c)(6), during the period from 2000 to 2002, and thus was entitled to a refund for federal income taxes paid. The government contended that ABA Retirement was not a “business league” and thus it owed the taxes. The district court agreed with the government and granted summary judgment in its favor. ABA Retirement appeals.

II

The question whether an association is a business league for purposes of 26 U.S.C. § 501(c)(6) is a mixed question of law and fact, but on summary judgment we must accept the facts in the light most favorable to the nonmoving party and ask whether the law nonetheless requires judgment for the movant. See Guide Int'l Corp. v. United States, 948 F.2d 360, 361 (7th Cir.1991). Our review is de novo. See Hakim v. Accenture U.S. Pension Plan, 718 F.3d 675, 681 (7th Cir.2013).

We begin with the language of the key statute, 26 U.S.C. § 501(c)(6), which grants a tax exemption to:

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

The statute does not define “business league,” and the term “has no well-defined meaning or common usage outside the perimeters of § 501(c)(6).” Nat'l Muffler Dealers Ass'n, Inc. v. United States, 440 U.S. 472, 476, 99 S.Ct. 1304, 59 L.Ed.2d 519 (1979). In fact, the Court noted that the precise term “business league” is one “so general ... as to render an interpretive regulation appropriate.” Id. (citing Helvering v. Reynolds Co., 306 U.S. 110, 114, 59 S.Ct. 423, 83 L.Ed. 536 (1939)).

The Treasury Department furnished just what the Court called for. See Treas. Reg. § 1.501(c)(6)–1 (1978), 26 C.F.R. § 1.501(c)(6)–1; see also Nat'l Muffler, 440 U.S. at 484, 99 S.Ct. 1304 (Treasury regulation “merits serious deference”). Paraphrased, the regulation provides that an organization qualifies as a business league if and only if it is an association (1) “of persons having some common business interest;” (2) “the purpose of which is to promote such common interest;” (3) that is not organized for profit; (4) that does not “engage in a regular business of a kind ordinarily carried on for profit;” (5) whose activities are “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,” and; (6) that is “of the same general class as a chamber of commerce or board of trade.” See Treas. Reg. § 1.501(c)(6)–1, 26 C.F.R. § 1.501(c)(6)–1.

This is not a close case; save for the fact that it is a nonprofit corporation, ABA Retirement fails every necessary condition for...

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