Texas Medical Ass'n Ins. Trust v. U.S.
| Decision Date | 30 September 2005 |
| Docket Number | No. CIV. A-04-CA-190-LY.,CIV. A-04-CA-190-LY. |
| Parties | TEXAS MEDICAL ASSOCIATION INSURANCE TRUST, Plaintiff, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Western District of Texas |
Michael Lynn Cook, Jenkins & Gilchrist, Austin, TX, for Texas Medical Association Insurance Trust, plaintiff.
Louise P. Hytken, Department of Justice, Tax Division, Cynthia E. Messersmith, Department of Justice, Dallas, TX, for United States of America, defendant.
Before the Court in the above-styled cause of action are Plaintiff Texas Medical Association Insurance Trust's ("TMAIT") Motion For Summary Judgment (Clerk's Document No. 9), Defendant United States of America's response (Clerk's Document No. 13), and TMAIT's reply (Clerk's Document No. 18). Additionally, before the Court is Defendant United States' Motion For Summary Judgment (Clerk's Document No. 14), TMAIT's response (Clerk's Document No. 17), and the United States' reply (Clerk's Document No. 17). On April 29 2005, the Court held a hearing on the summary-judgment motions at which both parties were represented by counsel. The sole issue in this cause is whether the gain TMAIT realized from its 2002 sale of Prudential Financial, Inc., common stock is "income derived during such year from [TMAIT's] members or transactions with members" for purposes of section 277(a) of the Internal Revenue Code (the "Code"). See I.R.C. § 277(a). Having reviewed the summary-judgment motions, responses, and replies, and having considered the applicable law and the arguments of counsel at the April 29 hearing, the Court finds as a matter of law that the gain TMAIT realized from the 2002 sale of Prudential shares is nonmember income and not income derived from members or transactions with members for purposes of section 277(a). The Court concludes that TMAIT's motion for summary judgment should be denied and that the United States' motion for summary judgment should be granted.
Although TMAIT is a trust created under the laws of the State of Texas, for federal tax purposes, it is classified as a taxable membership organization and is subject to the provisions of Code section 277, which provides that a taxable membership organization is allowed deductions for the taxable year only to the extent of "income derived during such years from members or transactions with members." Id. TMAIT's primary function is to provide a variety of group insurance programs for subscribers who are members of the Texas Medical Association and for those who are employed by, or associated with, its members.1 TMAIT receives subscription payments from its members, of which it retains a portion to cover administrative costs related to the group insurance programs, uses a portion to fund the group insurance programs by purchasing insurance policies from various insurance companies, including Prudential Insurance Company of America ("Prudential"), and uses a portion to pay premiums under various group insurance policies. Insurance benefits are paid directly to TMAIT's members as provided under the various insurance companies' policies. From 1970 until 1999, TMAIT bought group insurance exclusively from Prudential. In 1999, Prudential sold its health-insurance business, including the group health insurance policy issued to TMAIT, to Aetna Insurance Company ("Aetna"). Following the sale, TMAIT bought group insurance from both Prudential and Aetna.
By purchasing policies from Prudential, a mutual company, TMAIT automatically received a "membership interest" in Prudential. This membership interest included the right to vote for Prudential's Board of Trustees as well as the right to participate in any distribution of surplus. In 2000, Prudential converted from a mutual company to a stock company. Under Prudential's demutualization plan, Prudential policyholders with policies in force on December 15, 2000, including TMAIT, would receive shares of common stock of the newly created Prudential Financial, Inc., in exchange for their mutual-company membership interests. On December 18, 2001, pursuant to Prudential's plan, TMAIT exchanged its Prudential membership interest for 839,303 shares of Prudential common stock. There is no dispute that the membership interests held by TMAIT had a zero basis, and therefore, the Prudential shares received a carryover basis of zero. See I.R.C. § 358(a).
In 2002, TMAIT sold 209,303 Prudential shares for $33.12 per share, which resulted in a gain of $6,925,811. Also, during 2002, TMAIT paid $6.6 million into Aetna's Insurance Premium Stabilization Fund ("Aetna IPS Fund") on behalf of TMAIT's members, thereby defraying an increase in its members' portion of insurance premiums. On July 9, 2003, TMAIT filed its 2002 tax return, which reflected taxable income of $6.8 million, and paid the tax assessed of $2,325,975.2 On July 29, 2003, TMAIT filed an amended 2002 tax return, claimed a $6.6 million deduction based on its payment to Aetna's IPS Fund, amended its assessed tax due to $77,280, and claimed a refund of taxes paid in the amount of $2,248,695. On April 6, 2004, TMAIT commenced this action against the United States claiming that it is entitled to a tax refund of erroneously paid taxes for 2002 in the amount of $2,248,695. See 26 U.S.C. § 6532(a)(I) ().3 The United States answered and denies the allegations in TMAIT's complaint. Both parties move for summary judgment.
This Court has jurisdiction over TMAIT's complaint. See 28 U.S.C. § 1346(a)(1) (). Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." FED. R. CIV. P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). "If the moving party meets the initial burden of showing there is no genuine issue of material fact, the burden shifts to the nonmoving party to produce evidence or designate specific facts showing the existence of a genuine issue for trial." Allen v. Rapides Parish Sch. Bd., 204 F.3d 619, 621 (5th Cir.2000) (internal quotations and citations omitted). When both parties move for summary judgment, the court reviews each party's motion independently, viewing the evidence and inferences in the light most favorable to the nonmoving party. Ford Motor Co. v. Texas Dept. of Transp., 264 F.3d 493, 498 (5th Cir.2001) (citing Taylor v. Gregg, 36 F.3d 453, 455 (5th Cir.1994)). Doubts are to be resolved in favor of the nonmoving party, and any reasonable inferences are to be drawn in favor of that party. See Burch v. City of Nacogdoches, 174 F.3d 615, 619 (5th Cir.1999). However, "[n]either `conclusory allegations' nor `unsubstantiated assertions' will satisfy the non-movant's burden." Wallace v. Texas Tech Univ., 80 F.3d 1042, 1047 (5th Cir.1996), and only disputes over facts that might affect the outcome of the lawsuit under governing law will preclude the entry of summary judgment. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
Resolution of the parties' motions for summary judgment center on the interpretation and application of the following portion of Code section 277, which pertains to deductions incurred by certain membership organizations in transactions with its members:
In the case of a social club or other membership organization which is operated primarily to furnish services or goods to members and which is not exempt from taxation, deductions for the taxable year attributable to furnishing services, insurance, goods, or other items of value to members shall be allowed only to the extend of income derived during such year from members or transactions with members.
See I.R.C. § 277(a) (emphasis added). At issue is the interpretation of the clause "income derived during such year from members or transactions with members," and specifically at issue is the term "derived," which is not defined in the Code.
TMAIT moves for summary judgment contending that, based on the unusual facts regarding its 2002 sale of Prudential shares, the gain realized from the sale is "income derived during [2002] from members or transactions with members" and, therefore, it properly took the 2002 $6.6 million payment to the Aetna IPS Fund as a deduction for the year. See I.R.C. § 277(a). TMAIT also contends that the clause "income derived during such year from members or transactions with members" should be broadly interpreted, contrary to the Tax Court decision in Concord Consumers Housing Cooperative v. Commissioner, 89 T.C. 105, 1987 WL 42460 (1987).
TMAIT argues that the following sequence of events establishes that the gain realized from the sale of its Prudential shares is income derived from its members: (1) TMAIT members transferred subscription payments to TMAIT requesting that TMAIT purchase insurance policies for its members; (2) TMAIT purchased insurance policies from Prudential on behalf of its members; (3) as a result of TMAIT's purchase of the Prudential policies, TMAIT received (a) insurance policies and (b) Prudential membership interests; (4) TMAIT's membership interests in Prudential,...
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Texas Medical Association Insurance Trust v. United States, 05-51619.
...company, pursuant to 26 U.S.C. § 277(a). For the reasons stated in the district court's opinion, Texas Med. Ass'n Ins. Trust v. United States, 391 F.Supp.2d 529 (W.D.Tex.2005), the judgment is AFFIRMED. ...