Louisiana Credit Union League v. US, Civ. A. No. 78-3234.

• Decision Date: 31 October 1980
• Docket Number: Civ. A. No. 78-3234.
• Citation: 501 F. Supp. 934
• Parties: LOUISIANA CREDIT UNION LEAGUE v. UNITED STATES of America
• Court: U.S. District Court — Eastern District of Louisiana

501 F. Supp. 934

LOUISIANA CREDIT UNION LEAGUE v. UNITED STATES of America

Civ. A. No. 78-3234.

United States District Court, E. D. Louisiana.

October 31, 1980.

Joseph A. Barreca, New Orleans, La., William J. Lehrfeld, Washington, D.C., for Louisiana Credit Union League.

Jean E. Kilpatrick, Dept. of Justice, Washington, D.C., for the United States.

CHARLES SCHWARTZ, Jr., District Judge.

Section 511 of the Internal Revenue Code imposes a tax on income received by an otherwise tax-exempt organization when that income arises from the organization's involvement in any business activity which is not substantially related to its tax-exempt purpose. I.R.C. §§ 511, 513 (cited hereinafter by section number only). The need of the organization for funds to further its cause does not qualify as such a substantial relation. § 513(a). At issue here is the status and consequent taxability of certain income received by plaintiff Louisiana Credit Union League (the League).

The procedural history of this case, now before the Court on the League's motion for summary judgment and the motion of the Internal Revenue Service (the Service) for partial summary judgment,¹ has been unusual and complicated. On October 3, 1978, the League filed suit under sections 1340 and 1346(a)(1) of Title 28 of the United States Code to recover income tax payments which, it alleged, the Service had wrongfully assessed and collected under the provisions governing the unrelated business income of tax-exempt organizations. The amount which it at that time paid and for which it sought refund was $33.40.

On June 21, 1979, however, the Service issued a notice of a deficiency of $23,717.48 in the tax paid by the League for the year ending March 31, 1977. The instant action was thereupon stayed, in accordance with section 7422(e), for the ninety days allowed the League to file a petition with the Tax Court and for sixty days thereafter. The League opted not to bring action in the Tax Court, however; this Court thereby retained jurisdiction.

The League paid the assessed $23,717.48, plus interest (a total of $27,124.94), for the year ending March 31, 1977, and filed for a refund, which request was denied. In the meantime, the Service issued notices of deficiencies of $20,738.64 (and interest of $4,449.09) for the year ending March 31, 1975, and for $19,797.88 (with interest of $3,837.72) for the year ending March 31, 1976. The League paid these amounts and filed for refunds; the Service denied these claims also. The League thereupon filed an amended complaint asking for repayment of these allegedly wrongfully collected amounts totaling $77,092.67, plus interest.

The League engages in three separate revenue-producing activities, discussed in more detail below, which the Service has found to be trades or businesses unrelated to the League's purpose of fostering the credit union movement in Louisiana. Briefly stated, these sources of income are rebates received upon the writing of new and renewal insurance policies by a company whose coverage plans the League endorses, a five percent commission on delinquent accounts collected by an agency whose services the League endorses to its member credit unions, and revenue from an electronic data processing system which the League makes available to members.

Since April 1, 1972, the League has contractually agreed to give active support and official endorsement solely to insurance policies sold by the CUNA Mutual Insurance Society and the CUMIS Insurance Society, Inc.² The League has encouraged its member credit unions to avail themselves of all the various types of coverage the CUNA group offers and has helped new credit unions establish ties with the company. In addition, the League has printed articles discussing available coverage, has included CUNA literature in its mailings, and has cooperated in providing data processing services for insurance billing needs. In return, the League has received commissions usually of 5% or 7½% on initial insurance purchases and 2½% or 5% on renewals.³ While CUNA/CUMIS is in essence a mutual company marketing only to credit unions, there are at least two other companies which market solely to credit unions. Large general insurance companies such as Prudential, Metropolitan, and John Hancock compete for the credit union market as well.

In addition to its endorsement of insurance and the active assistance it renders to CUNA/CUMIS, the League has since June 22, 1973, been party to a contract with Central Adjustment Bureau, Inc. (CAB). Under its terms, the League endeavors to make its member credit unions aware of the collection services CAB offers; it does so through various sorts of promotion, including discussion in the League's publications and mention at credit union conferences as well as direct urging aimed at individual credit unions. For its efforts, the League receives five percent of the amounts collected on delinquent accounts.

Finally, the League in late 1974 contracted with Louisiana Computing Corporation (LCC) to obtain a new package of computer programs. Such software was jointly owned and received the exclusive endorsement of the League, which entered into data processing contracts with several member credit unions. The League trained union personnel and supplied all reports and report forms. Currently the League collects 27 cents per member for monthly processing, of which it pays 18 or 19 cents to LCC. The League does the accounting and collection work related to its LCC contract; contact between individual credit unions and LCC is rare. Field representatives of the League promote the data processing services.

As already noted, section 511 provides that tax-exempt organizations, such as the League, must pay tax on that portion of their income attributable to unrelated business activity; the Service has found the League's income arising from its insurance endorsements, collection services, and data processing contracts to be such income and has assessed tax accordingly.

"Unrelated business taxable income" is that derived "from any unrelated trade or business," which in turn is defined as being one

the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501 ... except that such term does not include any trade or business-

(1) in which substantially all the work in carrying on such trade or business is performed for the organization without compensation.

In resolving the issues presented by the cross-claims for summary judgment here, our inquiry must potentially consider several questions. These are:

1) Do any of the League's challenged activities constitute a "trade or business" within the meaning of section 513(c)?

2) If an activity is a trade or business is it "regularly carried on" within the meaning of section 512?

3) If the answer to both of the above questions is in the affirmative, is the activity in question one "substantially related" to the exercise of the League's tax-exempt function as defined in section 513(a)?

4) If there is no such substantial relation, is it the case that "substantially all the work in carrying on such trade or business is performed for the organization without compensation" as contemplated by section 513(a)(1)?

I. Trade or Business?

As to the first in this series of questions, "the term `trade or business' includes any activity which is carried on for the production of income from the sale of goods or the performance of services." Section 513(c). Each of the three challenged League activities produces substantial income to the League as a result of services which the League performs. Its involvement in data processing and collection services as well as its promotion of the sale of certain insurance is detailed above.

The League cites Oklahoma Cattlemen's Ass'n., Inc. v. United States, 310 F.Supp. 320 (W.D.Okl.1969), and San Antonio District Dental Society v. United States, 340 F.Supp. 11 (W.D.Tex.1972), for the proposition that an exempt organization's involvement in a trade or business in which it exercises no control over the possible financial result of the endeavor but through which it receives income is insufficient to implicate section 501(b).

In the Oklahoma Cattlemen's case, an exempt organization sent out one letter to its members endorsing the policies of a certain insurance company and supplied that company with its membership roster. In the San Antonio case, dentists contracted with a bank to allow their patients to finance their dental bills; the Dental Society received five percent of the bill amounts, which it then held in reserve against possible defaults on accounts.

The League's activity with respect to insurance, collection, and data processing has been, as already outlined, considerably more extensive than the activity of the exempt organizations considered in the Oklahoma Cattlemen's and San Antonio cases. Therefore, even were the Court to recognize these as precedent, they would not control here in light of the facts of this case.

It is the conclusion of this Court, however, that the broad rule requiring active control over an activity in order for that activity to give rise to taxable income— which rule the League distills primarily from Oklahoma Cattlemen's and San Antonio —is an incorrectly decided one. The plain language of the statute, which directs that any performance of service giving rise to income be deemed a "trade or business," allows no other conclusion.⁴ Section 513(c).

The League also argues, in support of the active control rule, that the Court must look to legislative intent to make its determination. At the time of the enactment of the tax on unrelated business income, exempt institutions such as New York...