MIB, Inc. v. C.I.R.

• Decision Date: 14 May 1984
• Docket Number: No. 83-1505,83-1505
• Citation: 734 F.2d 71
• Parties: 84-1 USTC P 9476 MIB, INC., Petitioner, Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent, Appellant.
• Court: U.S. Court of Appeals — First Circuit

Page 71

734 F.2d 71

84-1 USTC P 9476

MIB, INC., Petitioner, Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent, Appellant.

No. 83-1505.

United States Court of Appeals, First Circuit.

Argued Dec. 7, 1983.

Decided May 14, 1984.

Robert S. Pomerance, Atty., Tax Div., Dept. of Justice, Washington, D.C., with whom Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Atty., Tax Div., Dept. of Justice, and Robert A. Bernstein, Atty., Tax Div., Dept. of Justice, Washington, D.C., were on brief, for appellant.

Robert H. Kapp, Washington, D.C., with whom Ronald E. Stauffer, and Hogan & Hartson, Washington, D.C., were on brief, for appellee.

Before CAMPBELL, Chief Judge, COFFIN and BOWNES, Circuit Judges.

LEVIN H. CAMPBELL, Chief Judge.

The issue in this appeal by the Commissioner of Internal Revenue is whether appellee MIB, Inc. ("MIB") was erroneously classified by the United States Tax Court as a tax exempt "business league" under section 501(c)(6) of the Internal Revenue Code, 26 U.S.C. Sec. 501(c)(6). ¹ Established as a non-profit corporation by the life insurance industry, MIB provides a data bank and exchange for certain information concerning the health and insurability of people who apply for life insurance. The Commissioner believes that MIB falls outside the Code's definition of a "business league," hence he assessed an income tax deficiency against it in the tax year ending September 30, 1979, for some $1.5 million. In a decision reported at 80 T.C. 438 (1983), the Tax Court overturned the Commissioner, finding no tax due. This appeal resulted. We reverse.

I.

The facts were largely stipulated.

MIB was organized in 1978 in Delaware as a non-stock, non-profit corporation. Its membership is basically open to all life insurance companies incorporated in the United States or Canada, and most all companies in the United States are members. In 1979, its 732 members wrote 98 percent of the legal reserve life insurance in force in this country. MIB's affairs are managed by a board of directors elected by the member companies. There were nine directors in 1979, four of whom had to be medical officers and all of whom had to be officers of a different member company.

MIB's purposes, as set forth in its certificate of incorporation, include the following:

1. To provide for the exchange on a non-profit basis among the Corporation's member life insurance companies of underwriting information with respect to proposed insureds and insurance claimants in such a manner as may best protect the accuracy and confidential nature of the information so exchanged and the interests with respect thereto of such proposed insureds, claimants and insurers concerned;

2. to aid its members in their consideration, assessment and assignment of prospective insurance risks by making available information which is essential to careful underwriting practices and procedures;

3. to help prevent perpetration of fraud upon its members and their policymakers by proposed insureds and claimants who may omit or seek to conceal facts essential to accurate, proper and reasonable determination of insurance risks;

4. to assist in mortality, morbidity and related studies of value to life insurers and or benefit to the medical profession and general public....

The principal activity carried on by MIB is maintenance of a computerized system for gathering, storing and distributing to members, upon their request, confidential underwriting information--mainly, though not solely, health data. The information MIB gathers and disseminates is obtained exclusively from its member companies. It does not employ its own investigators, examine life insurance applicants, use consumer reporting agencies, or the like. MIB's rules require member companies to submit, at their expense, coded reports of certain types of information furnished by applicants for life insurance. Ninety percent of this consists of "medical impairments," which are, in essence, characteristics of the subject's health or medical history. There are 228 categories of coded medical impairments that may be reported. Full medical histories are not reported to MIB.

Besides medical information, MIB collects other data relevant to insurability, e.g., information showing an applicant's date and place of birth, information pertaining to reckless driving or criminal violations, information showing participation in aviation or hazardous sports activity, and records of alcohol or drug abuse. While the reports do not list the amount of life insurance applied for, they show whether the applicant previously applied for insurance with a face amount in excess of $250,000. The Tax Court found that about 20 percent of all insurance applications reflected impairments or some other type of information that members had to report to MIB.

The confidentiality of the information passed through MIB is strictly preserved, subject to rules and regulations adopted by MIB's board. Members are required to supplement, revise and update incomplete or incorrect data. When an individual applies for life insurance, the company routinely asks his permission to obtain data pertaining to him from MIB's computerized data file in Boston. Upon receiving permission, the company makes a request to MIB and is then furnished with whatever coded information about the person MIB may have received from its member companies. ² The identities of the reporting companies are not, however, revealed.

By comparing any data so received from MIB with the applicant's answers to questions in the current insurance application, a company can discover any incomplete or misleading aspects of the application. If the company feels it needs to know more, it may in proper circumstances request further details. MIB will forward such a request to the one or more reporting companies, which may in their discretion respond directly to the requesting company.

With limited exception, MIB's reports do not contain sufficient information for a member to make underwriting decisions. Under MIB's rules, members are expected to establish the insurability of applicants by conducting their own independent investigations.

The main function of the information circulated by MIB is to "alert" members to possible omissions or misstatements in current applications. The Tax Court found that because insurance applicants, as well as insurance agents and brokers, are made aware that insurers exchange information in this manner, MIB "works as a powerful deterrent to fraud and misrepresentation." The court found that the effect of fraud deterrence was felt on an industry-wide basis: since information in applications was more trustworthy, member companies were saved the expense both of further investigations and of the misclassification of risks; and these savings were, at least in part, passed on to policyholders.

Besides storing and retrieving data on particular life insurance applicants, as described above, MIB carries on one other activity. It participates through the Center for Medico-Actuarial Statistics in studies of the effect on life expectancy of conditions such as obesity and high blood pressure. These studies are made available to the public generally, not only to MIB's own members. However, in 1979, only five of MIB's 250 employees engaged full-time in this work, while 150 clerks and 60 electronic data experts were involved in operating the information exchange. Similarly, in 1979 the Center for Medico-Actuarial Statistics was allocated only $150,000, while the information exchange received around $10 million.

MIB's funds come principally from assessments and fees from member companies. Over $11 million came from that source in 1979. The largest single source of revenues, amounting to $5.3 million, was from so-called "checking charges" imposed by MIB on members based on the number and type of requests each of them made for information from the information exchange. For a standard request, MIB charged members 18 to 27 cents depending on how many requests the member made each month. Requests for detailed or expedited responses cost more, up to $1 extra. MIB received around 18 million information requests from members in the year.

MIB also received an additional $5 million of its 1979 revenue from a "basic assessment" which it made against each of its members, computed in accordance with the amount of insurance the member had in force in a given year.

Funds for support of the Center for Medico-Actuarial Statistics ($150,000 in 1979, see above) were separately derived from a separate charge to members equal to three percent of the basic assessment. MIB also took in $825,000 from assessments imposed on members specifically to maintain its executive offices in Connecticut. (The balance of its receipts, in excess of $1 million, amounted to conceded taxable income stemming from use of its computers to perform commercial services other than the information exchange.)

The concept of an information exchange goes back to the 1890's when the medical directors of several insurance companies arranged to pool underwriting information. In 1902, the companies arranged for the exchange function to be carried on by an unincorporated association known as the Medical Information Bureau ("the Bureau"). Beginning in the 1940's, the Bureau engaged a division of the Sperry Rand Corporation, known as the Recording & Statistical Company ("R & S"), to set up and operate the information exchange as the Bureau's "servicing agent." Under successive contracts with the Bureau, R & S provided and operated in Boston an up-to-date automated system for entering, filing, editing and distributing information of the type in issue. Included in R & S's functions were "checking services" involving computer searching and retrieval, communications to and from member companies, processing of mail inquiries, and similar activities. R & S received as compensation the amount of its costs plus an...