United States v. Amer. Bar Endowment, 477 U.S. 105 (1986)

United States v. American Bar Endowment

No. 85-599

Argued April 28, 1986
Decided June 23, 1986
477 U.S. 105

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR

THE FEDERAL CIRCUIT

Syllabus

Respondent American Bar Endowment (ABE), a tax exempt organization, raises money for its charitable work by providing group life, health, accident, and disability insurance policies, underwritten by insurance companies, to its members. Because the members have favorable mortality and morbidity rates, experience rating results in substantially lower insurance costs than if the insurance were purchased individually. Since the insurance companies’ costs of providing insurance to the group are uniformly lower than the annual premiums paid, the companies pay refunds of the excess ("dividends") to ABE that are used for its charitable purposes. Critical to ABE’s fundraising efforts is the fact that it requires its members to assign it all dividends as a condition for participating in the insurance program. ABE advises its insured members that each member’s share of the dividends, less ABE’s administrative costs, constitutes a tax-deductible contribution. In 1980, the Internal Revenue Service (IRS) advised ABE that it considered ABE’s insurance plan an "unrelated trade or business," and that hence the profits thereon were subject to income tax under §§ 511-513 of the Internal Revenue Code. Accordingly, the IRS assessed a tax deficiency on ABE’s net revenues from the insurance program for 1979 and 1980. ABE paid these taxes, as well as taxes on its 1981 revenues, and, after exhausting administrative remedies, brought an action for a refund in the Claims Court, as did the individual respondent ABE members who claimed that they were entitled to charitable deductions for part of the insurance premiums they paid. The suits were consolidated, and the Claims Court entered judgment for ABE, but found for the Government on the individual respondents’ claims. The Court of Appeals affirmed as to ABE’s taxes, but reversed as to the individual respondents and remanded for further factfinding.

Held:

1. ABE’s insurance program, as constituting both "the sale of goods" and "the performance of services," is a "trade or business" for purposes of the unrelated business income tax. This case presents an example of precisely the sort of unfair competition between tax exempt organizations and taxable businesses that Congress intended to prevent by providing for the unrelated business income tax. The undisputed facts do not support the inference that the dividends ABE receives are charitable contributions from its members, rather than profits from its insurance program. Pp. 109-116.

2. The individual respondent taxpayers have not established that any portion of their premium payments to ABA constitutes a charitable contribution. To be entitled to a deduction for a charitable contribution where he has made a payment having the "dual character" of a purchase and a contribution, a taxpayer must at a minimum demonstrate that he purposely contributed money or property in excess of the value of any benefit he received in return. Here, the most logical test of the value of the insurance policies the individual respondents received is the cost of similar policies. None of these respondents have demonstrated that they could have purchased similar policies for a lower cost. Pp. 116-118.

761 F.2d 1573, reversed and remanded.

MARSHALL, J., delivered the opinion of the Court, in which BURGER, C.J., and BRENNAN, WHITE, BLACKMUN, and REHNQUIST, JJ., joined. STEVENS, J., filed a dissenting opinion, post, p. 119. POWELL and O’CONNOR, JJ., took no part in the consideration or decision of the case.