SUPREME COURT FINDS BAR ENDOWMENT'S INSURANCE PROGRAM IS SUBJECT TO UNRELATED BUSINESS TAX

SUPREME COURT FINDS BAR ENDOWMENT'S INSURANCE PROGRAM IS SUBJECT TO UNRELATED BUSINESS TAX

A 6-1 majority of the Supreme Court has ruled that the tax- exempt American Bar Endowment's (ABE) insurance program is a "trade or business" for purposes of the unrelated business income tax (UBIT). Justice Marshall's opinion for the majority stated that the case presented an example of the kind of unfair competition between exempt groups and commercial entities that Congress intended to prevent by imposing the unrelated business income tax. The Court also held that individual members of the ABE are not entitled to charitable contribution deductions for excess premiums that are refunded to the ABE by the insurance companies that provide coverage for the group. Justices Powell and O'Connor took no part in the consideration or decision of the case. The tax-exempt American Bar Endowment, a group sponsored by the American Bar Association (ABA), sells group life, health, and accident insurance to ABA members to support its charitable work. The ABA members generally have favorable mortality and morbidity rates, and the experience-rating results in lower insurance costs than would be obtainable by individual ABA members. The cost of insuring the ABA members is uniformly lower than the amount of the premiums collected, and the insurers refund excess premiums to the ABE. The participating members are required to assign all of the excess premiums to the ABE as a condition of participation in the insurance program. The ABE advised members that the assignments would qualify them for a charitable contribution deduction in the amount of the excess premiums, less the ABE's administrative costs. The Service determined that the ABE was subject to the UBIT, and the group filed a refund suit in the Claims Court. This suit was consolidated with one brought by the individual members who were denied charitable contribution deductions. The Claims Court ruled that the ABE was not subject to the UBIT, but denied charitable contributions deductions to the individual plaintiffs. (See Tax Notes, February 6, 1984, p.497 for a summary of the Claims Court opinion.) The Federal Circuit affirmed as to the UBIT issue, but reversed the lower court's finding with respect to the individual ABE members. (See Tax Notes, May 27, 1985, p.1040 for a summary of the Federal Circuit opinion.) Writing for the majority, Justice Marshall noted, "This case presents an example of precisely the kind of unfair competition that Congress intended to prevent." The Court found that for purposes of Code section 511-513, the ABE's insurance program was both "the sale of goods" and the "performance of services" as required under the definition of "trade or business." The majority disagreed with the Claims Court's finding that the "enormous" excess premiums received by the ABE were not profits. "ABE has a unique asset -- its access to the ABA's members and their highly favored mortality and morbidity rates -- and it has chosen to appropriate for itself all of the profit possible from that asset, rather than sharing any with its members," wrote Justice Marshall. Accordingly, the Court found that the facts did not support the conclusion that the ABE received the excess contributions as charitable contributions from the members rather than profits from its insurance programs. With respect to the deductions claimed by the individual ABE members, Justice Marshall concluded that the Claims Court properly held that the members were not entitled to the deductions, since the members failed to demonstrate that the transfers were made without adequate consideration, the "sine qua non of a charitable contribution." The majority found that the members failed to demonstrate that they could have purchased similar policies for a lower cost. In dissent, Justice Stevens found that the record of the case failed to reveal that the ABE program had any impact on competition in the industry. Noting that the ABE program had been in existence since 1955, Justice Stevens continued, "When Congress revamped the unrelated business tax in 1969, there was no suggestion that it was intended to apply to this venerable and successful program, and the IRS did not so interpret it until several years later." Justice Stevens characterized as "absurd" the majority's contention that the ABE was in the position of a monopolist whose insurance terms were so attractive to the membership that an unwanted condition could be "foisted" upon the purchasers of insurance policies. (For a story on the oral argument in this case, see Tax Notes, May 5, 1986, p.448.)

Tax Notes, May 27, 1985, p.1040; May 5, 1986, p.448

A 6-1 majority of the Supreme Court has ruled that the tax- exempt American Bar Endowment's (ABE) insurance program is a "trade or business" for purposes of the unrelated business income tax (UBIT). Justice Marshall's opinion for the majority stated that the case presented an example of the kind of unfair competition between exempt groups and commercial entities that Congress intended to prevent by imposing the unrelated business income tax. The Court also held that individual members of the ABE are not entitled to charitable contribution deductions for excess premiums that are refunded to the ABE by the insurance companies that provide coverage for the group. Justices Powell and O'Connor took no part in the consideration or decision of the case. The tax-exempt American Bar Endowment, a group sponsored by the American Bar Association (ABA), sells group life, health, and accident insurance to ABA members to support its charitable work. The ABA members generally have favorable mortality and morbidity rates, and the experience-rating results in lower insurance costs than would be obtainable by individual ABA members. The cost of insuring the ABA members is uniformly lower than the amount of the premiums collected, and the insurers refund excess premiums to the ABE. The participating members are required to assign all of the excess premiums to the ABE as a condition of participation in the insurance program. The ABE advised members that the assignments would qualify them for a charitable contribution deduction in the amount of the excess premiums, less the ABE's administrative costs. The Service determined that the ABE was subject to the UBIT, and the group filed a refund suit in the Claims Court. This suit was consolidated with one brought by the individual members who were denied charitable contribution deductions. The Claims Court ruled that the ABE was not subject to the UBIT, but denied charitable contributions deductions to the individual plaintiffs. (See Tax Notes, February 6, 1984, p.497 for a summary of the Claims Court opinion.) The Federal Circuit affirmed as to the UBIT issue, but reversed the lower court's finding with respect to the individual ABE members. (See Tax Notes, May 27, 1985, p.1040 for a summary of the Federal Circuit opinion.) Writing for the majority, Justice Marshall noted, "This case presents an example of precisely the kind of unfair competition that Congress intended to prevent." The Court found that for purposes of Code section 511-513, the ABE's insurance program was both "the sale of goods" and the "performance of services" as required under the definition of "trade or business." The majority disagreed with the Claims Court's finding that the "enormous" excess premiums received by the ABE were not profits. "ABE has a unique asset -- its access to the ABA's members and their highly favored mortality and morbidity rates -- and it has chosen to appropriate for itself all of the profit possible from that asset, rather than sharing any with its members," wrote Justice Marshall. Accordingly, the Court found that the facts did not support the conclusion that the ABE received the excess contributions as charitable contributions from the members rather than profits from its insurance programs. With respect to the deductions claimed by the individual ABE members, Justice Marshall concluded that the Claims Court properly held that the members were not entitled to the deductions, since the members failed to demonstrate that the transfers were made without adequate consideration, the "sine qua non of a charitable contribution." The majority found that the members failed to demonstrate that they could have purchased similar policies for a lower cost. In dissent, Justice Stevens found that the record of the case failed to reveal that the ABE program had any impact on competition in the industry. Noting that the ABE program had been in existence since 1955, Justice Stevens continued, "When Congress revamped the unrelated business tax in 1969, there was no suggestion that it was intended to apply to this venerable and successful program, and the IRS did not so interpret it until several years later." Justice Stevens characterized as "absurd" the majority's contention that the ABE was in the position of a monopolist whose insurance terms were so attractive to the membership that an unwanted condition could be "foisted" upon the purchasers of insurance policies. (For a story on the oral argument in this case, see Tax Notes, May 5, 1986, p.448.)

Search Connectors

Retrieving Documents With a Tax Analysts’ Citation:

Field Restricted Searching:

SUPREME COURT FINDS BAR ENDOWMENT'S INSURANCE PROGRAM IS SUBJECT TO UNRELATED BUSINESS TAX