WATER QUALITY ASS'N v. United States, 83 C 6048.

• Decision Date: 28 March 1985
• Docket Number: No. 83 C 6048.,83 C 6048.
• Citation: 609 F. Supp. 91
• Parties: WATER QUALITY ASSOCIATION EMPLOYEES' BENEFIT CORP., Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Northern District of Illinois

609 F. Supp. 91

WATER QUALITY ASSOCIATION EMPLOYEES' BENEFIT CORP., Plaintiff, v. UNITED STATES of America, Defendant.

No. 83 C 6048.

United States District Court, N.D. Illinois, E.D.

March 28, 1985.

Robert E. Arroyo of Keck, Mahin & Cate, Chicago, Ill., for plaintiff.

Terri E. Shapiro, Dept. of Justice, Washington, D.C., Edward J. Moran, Asst. U.S. Atty., Chicago, Ill., for defendant.

MEMORANDUM OPINION AND ORDER

GETZENDANNER, District Judge:

This action for a refund of federal taxes, brought pursuant to 28 U.S.C. § 1346(a), is before the court on the cross-motions for summary judgment of plaintiff Water Quality Association Employees' Benefit Corporation ("the Corporation") and defendant United States of America. In this action, the Corporation claims entitlement to a tax refund for taxes paid in 1981 by it and its predecessor, the Water Quality Employees' Benefit Trust ("the Trust"). At issue on these motions is the validity of Treas.Reg. § 1.501(c)(9)-2(a)(1). Should the regulation be found valid, full summary judgment in favor of the government will be warranted. If the regulation is found invalid, however, the Corporation will need to show other facts before prevailing. Hence, the Corporation's motion for summary judgment is in the nature of a motion for partial summary judgment.

FACTUAL BACKGROUND

The parties agree to the following facts: The Water Quality Association ("WQA") was founded nearly thirty years ago and is composed of retailers, distributors, suppliers, and manufacturers of point-of-use water conditioning equipment, such as water softeners. WQA's members are scattered throughout the United States. WQA is a trade association exempt from federal income taxation under 26 U.S.C. § 501(c)(6).

Since each WQA member has on the average of five employees, it was expensive for each member to obtain insurance for its employees. Consequently, WQA established the Trust so that its members could pool their limited insurance premiums and thereby decrease the cost of insurance while increasing the insurance protection for the member employees. An insurance company was appointed to underwrite the joint purchase of group life and health insurance as well as disability income insurance for WQA member employees and their dependents. The Trust itself has never underwritten the insurance coverage for trust participants, but rather has acted as a conduit, collecting contributions from WQA member participants and paying those contributions to the insurance company as insurance premiums. Only WQA members and their employees were allowed to participate in the Trust.

Over the years, the members benefitted from the underwriting of such a large and homogeneous group. By 1981, over 3,000 individuals were insured through the program. The Trust paid dividends to participants when the insurance company's claims and expenses were less than anticipated. Additionally, a portion of the insurance refunds were retained by the Trust and were used to establish a reserve to pay off deficits when they occurred.

Since the trust agreement was drafted to provide for payments only to trust beneficiaries and for necessary administrative expenses, the Trust applied for a federal income tax exemption under 26 U.S.C. § 501(c)(9).¹ Section 501(c)(9) allows an exemption for a "voluntary employees' beneficiary association" ("VEBA") established to provide certain insurance benefits. In 1977, the Internal Revenue Service granted the exemption. At that time, the exemption for the Trust was well within the proposed Treasury Regulation defining the scope of VEBAs.² On August 1, 1981, the Trust transferred the insurance plan and its assets to the Corporation, which operates the insurance program in exactly the same manner as did the Trust.

The Corporation claims that it, like the Trust, is entitled to the tax exemption provided by § 501(c)(9) since, like the Trust, it is a "voluntary employees' beneficiary association." However, on July 17, 1980, the proposed regulation discussed above was withdrawn and on January 8, 1981, a final regulation defining VEBAs was published containing a "same geographic locale" limitation that the parties agree renders the Corporation ineligible for the exemption.³

The principal difference between the 1969 proposed regulation (in effect for 12 years) and the 1981 final regulation is the requirement that when employees from employers in the same line of business desire to form a VEBA, the employers must be located in the "same geographic locale." The Corporation admits that its member employers are not located in the same geographic locale. Hence, if the final regulation is found valid, full summary judgment in the government's favor would be warranted.

LEGAL DISCUSSION

The question before the court, one of first impression, is whether Treas.Reg. § 1.501(c)(9)-2(a)(1) effectuates the congressional intent of 26 U.S.C. § 501(c)(9). The Internal Revenue Commissioner's power to prescribe regulations

is not the power to make law — for no such power can be delegated by Congress — but the power to adopt regulations to carry into effect the will of Congress as expressed by the statute. A regulation which does not do this but operates to create a rule out of harmony with a statute is a mere nullity.

Manhattan Co. v. Commissioner, 297 U.S. 129, 134, 56 S.Ct. 397, 399, 80 L.Ed. 528 (1936), quoting, Lynch v. Tilden Produce Co., 265 U.S. 315, 320-22, 44 S.Ct. 488, 489-90, 68 L.Ed. 1034 (1924); Miller v. United States, 294 U.S. 435, 439-40, 55 S.Ct. 440, 441-42, 79 L.Ed. 977 (1935). In Manhattan Co., the Court upheld an amended regulation as effectuating the legislative intent, where the original regulation was "contrary to the intent of the statute." Id. 297 U.S. at 134, 56 S.Ct. at 399. In the present case, the court must similarly determine whether the "same geographic locale" requirement of Treas. Reg. § 1.501(c)(9)-2(a)(1) effectuates the original congressional intent of 26 U.S.C. § 501(c)(9), or whether it impermissibly exceeds the scope of that provision by adding "something which is not there." United States v. Calamaro, 354 U.S. 351, 359, 77 S.Ct. 1138, 1143, 1 L.Ed.2d 1394 (1957).

In determining the validity of a Treasury Regulation, courts have relied on the criteria set forth in National Muffler Dealers Association v. United States, 440 U.S. 472, 99 S.Ct. 1304, 59 L.Ed.2d 519 (1979). See e.g., Strick Corp. v. United States, 714 F.2d 1194, 1197 (3d Cir.1983), cert. denied, ___ U.S. ___, 104 S.Ct. 2345, 80 L.Ed.2d 819 (1984); Max Sobel Wholesale Liquors v. Commissioner, 630 F.2d 670, 672 (9th Cir.1980).

In National Muffler, the Supreme Court considered whether the petitioner was a "business league" within the meaning of 26 U.S.C. § 501(c)(6). The National Muffler Dealers Association claimed that it was a "business league" entitled to tax exempt status. Since the term "business league" had no common definition outside the scope of Treas. Reg. § 1.501(c)(6)-1, the Court determined that the Treasury Regulation "if found `to implement the congressional mandate in some reasonable manner' must be upheld." National Muffler, 440 U.S. at 476, 99 S.Ct. at 1306, quoting, United States v. Cartwright, 411 U.S. 546, 550, 93 S.Ct. 1713, 1716, 36 L.Ed.2d 528 (1973). This approach recognizes that Congress has delegated to the Secretary of the Treasury and the Commissioner of the IRS, and not to the courts, the task of prescribing all rules and regulations for enforcing the Internal Revenue Code. Among other things, this deference guarantees that rules are written by "masters of the subject" who are responsible for putting the rules into effect. National Muffler, 440 U.S. at 477, 99 S.Ct. at 1306, quoting, United States v. Moore, 5 Otto 760, 763, 95 U.S. 760, 763, 24 L.Ed. 588 (1878).

The National Muffler Court made clear that the central inquiry in determining the validity of a regulation was whether it "carried out the congressional mandate in a proper manner." 440 U.S. at 477, 99 S.Ct. at 1307. In making that determination, the Court continued,

we look to see whether the regulation harmonizes with the plain language of the statute, its origin, and its purpose. A regulation may have particular force if it is a substantially contemporaneous construction of the statute by those presumed to have been aware of congressional intent. If the regulation dates from a later period, the manner in which it evolved merits inquiry. Other relevant considerations are the length of time the regulation has been in effect, the reliance placed on it, the consistency of the Commissioner's interpretation, and the degree of scrutiny Congress has devoted to the regulation during subsequent re-enactments of the statute.

Id. In considering these factors, courts should keep in mind that the Commissioner is the one empowered to makes choices among various reasonable and permissible statutory interpretations. Id. at 488, 99 S.Ct. at 1312. When the Commissioner's regulation implements the congressional intent behind a provision in "some reasonable manner," courts are not at liberty to strike down the regulation simply because the taxpayer offers a more attractive statutory interpretation. Rather, Treasury Regulations are normally sustained "unless unreasonable and plainly inconsistent with the revenue statutes." Commissioner v. South Texas Lumber Co., 333 U.S. 496, 501, 68 S.Ct. 695, 698, 92 L.Ed. 831 (1948) (cited in United States v. Cartwright, 411 U.S. at 557, 93 S.Ct. at 1719).

In National Muffler, the Court upheld the Treasury Regulation in question. In reaching that conclusion, the Court looked at statements submitted in 1913 to the Senate Finance Committee, which drafted the statute which the regulation sought to interpret. Those statements rejected tax-exempt status for organizations like the National Muffler Association. The Supreme Court noted that, while the initial regulation of 1919 could have included appellant, the 1929...