Professional Ins. Agents of Michigan v. C.I.R.
| Decision Date | 26 January 1984 |
| Docket Number | No. 82-1591,82-1591 |
| Citation | 726 F.2d 1097 |
| Parties | 84-1 USTC P 9177 PROFESSIONAL INSURANCE AGENTS OF MICHIGAN, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Joseph Falcone, argued, Lieberman & Falcone, P.C., Southfield, Mich., for petitioner-appellant.
Kenneth W. Gideon, Chief Counsel, John H. Menzel, I.R.S., Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Chief, Appellate Section, Robert A. Bernstein, David I. Pincus, argued, Tax. Div., Dept. of Justice, Washington, D.C., for respondent-appellee.
Before ENGEL and KENNEDY, Circuit Judges, and MORTON, Chief District Judge. *
Professional Insurance Agents of Michigan (PIA), is a trade association exempt from federal income taxation as a "business league" under Section 501(c)(6) of the Internal Revenue Code of 1954. PIA was formed in 1937, incorporated as a non-profit corporation under the laws of Michigan in 1956, and received an Internal Revenue Service ruling that it qualified as an exempt organization in 1958. PIA's Articles of Incorporation describe its objectives as follows:
The object of this Association shall be to maintain and extend the American Agency System, which system is defined to be the production of insurance premiums and service of insurance contracts by insurance agents operating solely on a commission basis on their own account as independent contractors, owning their own expirations and who maintain their own offices separate from any insurance company; to promote the equitable rights of its members; to provide its members with increased knowledge thru education in insurance underwriting and selling, loss prevention and agency management; to promote a high standard of ethics, friendship and cooperation among its members, to better serve the public, themselves, their companies and to professionalize the industry; to oppose bad practices of insurance and to cooperate with the Department of Insurance of the State of Michigan.
About 1,000 of the nearly 2,400 eligible Michigan insurance agents belonged to PIA. Many of the other agents belonged to a rival trade organization known as Independent Insurance Agents of Michigan. The average PIA member was a relatively small insurance agency with 3-5 employees, writing primarily personal lines of coverage such as automobile and homeowners' insurance.
An insurance agent, upon becoming a member of PIA, automatically became a member of the National Association of Professional Insurance Agents (National Association). The National Association was a nationwide organization of insurance agents whose membership consisted of the members of its various state and regional affiliates. Despite their shared membership, PIA and the National Association were separate organizations operating independently of one another. The governing body of the National Association was a board of directors comprised of two or three directors elected by each local organization.
During the tax years at issue, PIA endorsed or promoted to its membership several different group insurance programs underwritten by private insurance companies. These programs were: (1) an "Errors and Omissions" liability policy sponsored by the National Association and underwritten by the Utica Mutual Insurance Company; (2) a group life and health insurance policy sponsored by PIA and underwritten by the Independent Liberty Life Insurance Company; and (3) a group life and disability policy sponsored by the National Association and underwritten by unspecified insurance companies. PIA also had at one time (prior to beginning its agreement with Independent Liberty) sponsored a group health, life, and disability program underwritten by the Time Insurance Company. PIA received a refund with respect to Time Insurance Company's program during its fiscal year ending September 30, 1975. The above three programs and the Time Insurance refund will now be discussed in turn.
Errors and Omissions Insurance (sponsored by the National Association)
Errors and Omissions (E & O) insurance is a type of professional malpractice insurance which protects the insurance agent from liability in the event his client suffers a loss as a result of errors made in writing a policy. The insurance is expensive and difficult to underwrite, and the insurance carriers who offer it prefer to spread their risk by selling to a national market on a group, rather than an individual, basis. As a result, the market for coverage on an individual basis was both limited and volatile, with insurance companies occasionally finding it necessary to discontinue the coverage soon after entering the market.
In order to increase the availability of the insurance and maintain continuity of coverage, the National Association agreed to sponsor an E & O program carried by the Utica Mutual Insurance Company. PIA also performed services in connection with the program, including putting certain brochures describing the program and schedules from which a member could calculate his premiums into the membership packets which PIA distributed to new and prospective members; promoting the insurance at educational seminars and in PIA's official magazine; and answering telephone inquiries concerning the program. However, the E & O program could have been available to the PIA's members through the National Association without PIA's participating therein. Utica Mutual paid the National Association a fee equal to 15 percent of gross premiums for the latter's sponsorship of the E & O program. The National Association in turn gave PIA an amount equal to 8 percent of the premiums paid by its members, as compensation for PIA's efforts in promoting the program. While the National Association was not contractually obligated to make these payments to PIA, PIA's executive vice president testified that if the National had stopped making them he would have recommended to PIA's board of directors that they drop the National's E & O insurance program entirely and look for an acceptable substitute sponsor.
During the years at issue approximately 75 to 80 percent of PIA's members subscribed to the E & O coverage sponsored by the National Association. Non-member insurance agents were also permitted to enroll in the plan. The fees received by PIA for its E & O promotional activities amounted to $21,242, $25,978, and $32,991, during the three taxable years here at issue.
Group health and life insurance (sponsored by PIA)
During the years at issue, PIA sponsored a group health and life insurance policy offered by the Independent Liberty Life Insurance Company. As the sponsor, PIA performed several promotional and administrative services for the insurance company, as set forth in a 1974 letter from the company to PIA:
The Association [PIA] will perform certain services on behalf of Independent Liberty such as: Publicizing the program and collecting applications, maintaining an inventory and issuing group certificates, reviewing all claims for submission to the company's claims department, disbursing claim drafts, coordinating communications between the company and the membership regarding underwriting and claim problems, and assisting the company in making other company products available to the general membership.
Because these services are to be performed on behalf of Independent Liberty to provide better service for the association members, we will reimburse the Association for a portion of its increased administrative cost by paying a service fee of 6% of the monthly collected premium. The Association should receive the service fee shortly after the close of each month and will continue as long as the Association continues to provide the agreed upon services.
The above-mentioned six percent fee amounted to $16,709, $27,576, and $24,570, during the 3 taxable years here at issue.
Access to low cost group health and life insurance was important to PIA's member agencies because it helped them to compete for employees in the marketplace. However, several other multiple-employer group insurance plans were open to insurance agencies and were operating in Michigan during the years at issue.
Somewhere between 20 and 30 percent of the members participated in the Independent Liberty program. Those who did not do so generally fell into one of two groups: (1) those with few or no employees who had no need for group insurance benefits, or (2) those with 10 or more employees who chose to negotiate their own plan directly with an insurance company.
Group life and disability insurance (sponsored by the
National Association)
PIA also promoted to its members several group life and disability insurance programs which were sponsored by the National Association and underwritten by various private insurance companies. The services PIA performed in connection with these plans were similar to the services it provided in connection with the National Association's E & O program, and included the mailing of descriptive brochures to new or prospective members as part of their membership packet. In return for its promotional efforts PIA received a fee from the National Association equal to 4 percent of all premiums paid by its members. This 4 percent fee amounted to $5,183, $8,103, and $7,294 during the 3 taxable years here at issue.
Experience rating reserve refund
From 1964 through December 31, 1973, PIA directly, or through its nonexempt subsidiary, Agent's Service Exchange, provided a group health, life and disability insurance program to its members through a master group insurance policy with Time Insurance Company. One aspect of this policy was a provision permitting the insurance company to maintain an "experience rating reserve." An "experience rating reserve" is a sum, taken from the insured individuals' premium payments, that is set aside by the insurance company to protect it against the...
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