United States v. American Bar Endowment

PETITIONER: United States
RESPONDENT: American Bar Endowment
LOCATION: United States District Court for the Western District of New York

DOCKET NO.: 85-599
DECIDED BY: Burger Court (1981-1986)
LOWER COURT: United States Court of Appeals for the Federal Circuit

CITATION: 477 US 105 (1986)
ARGUED: Apr 28, 1986
DECIDED: Jun 23, 1986

Albert G. Lauber, Jr. - on behalf of Petitioner
Francis M. Gregory, Jr. - on behalf of Respondent

Facts of the case


Media for United States v. American Bar Endowment

Audio Transcription for Oral Argument - April 28, 1986 in United States v. American Bar Endowment

Warren E. Burger:

We'll hear arguments next in United States against the American Bar Endowment.

Mr. Lauber, I think you may proceed whenever you are ready.

Albert G. Lauber, Jr.:

Mr. Chief Justice, and may it please the Court:

These tax refund actions present two questions.

The first is whether the American Bar Endowment, a charitable affiliate of the ABA, is subjected to unrelated business income tax on the profits it derives from running a group insurance program for its members.

The second question is whether the individual respondents, ABA members who acquired insurance from the endowment, are entitled to deduct a portion of their insurance premium as a charitable contribution.

Because Respondents were plaintiffs in a tax refund suit, they of course had the burden of proof.

The Endowment conceded that its insurance activities were regularly carried on, and that those activities were unrelated to the accomplishment of its educational objectives.

In order to avoid income tax on its insurance revenues, therefore, the Endowment was required to prove that the insurance operation was not a trade or business.

Section 513(c) of the Code defines a trade or business as any activity which is carried on for the production of income from the sale of goods or the performance of services.

Respondent agrees that its insurance operation satisfies every element of that definition in the statute, except for one that might be called the "from" test.

The Endowment argued that its $5 million in annual insurance profits are not derived from the insurance goods that it sells or from the insurance services it performs.

Mr. Lauber, last week we had the all-events test.

This week we have the "from test"?

Albert G. Lauber, Jr.:

The "from" test.

But that's what they argue.

they argue that all this money they are making doesn't come from the insurance services that its staff of 40 perform during their working day, but rather, all the money comes from charitable fundraising.

Now, that argument in turn is based on their group gift theory which is the core of their case.

The group gift theory starts from the premise that the Endowment sells insurance only to ABA members and the dependents of ABA members.

Mr. Lauber, if they sold it to the public in general, what difference would it make?

Albert G. Lauber, Jr.:

Well, they would then have a harder time making their group gift argument because their group gift argument, which is really the guts of their case, depends on selling only or largely to the organization's own members.

I suspect some arguments can be made the other way, that if the public in general were being solicited, that that would more clearly put them in the business community.

Albert G. Lauber, Jr.:

I think they would agree with that, but their argument is because they only sell to members, they are different.

And they reason that although they charge fair market, competitive prices for their insurance, they set their prices at a level that enables them to make fairly sizeable profits.

Now, they argue that their members, acting collectively, have the theoretical power to deprive them of any profits by forcing the Endowment to sell insurance at a lower price, at a price that would only cover its costs and let them make no profit at all.

So they argue that all the profit they make comes at the sufferance of their members, and therefore, every dollar of profit does not come from the insurance business, but it comes from charitable fundraising in the form of a group gift that the members make by refraining from requiring the Endowment to operate at cost.

The Claims Court accepted this group gift argument.

It reasoned that the idea of a group profiting from its own members is almost a contradiction in terms, and the Claims Court held as a matter of law that an enterprise that depends on the consent of its members for its profits is not a trade or business.

This group gift theory, for which neither the courts below nor Respondent cites any authority or precedent, is wrong for four independent reasons.

First of all, the group gift idea is foreclosed by the legislative history of the 1969 law in which Congress enacted its definition of the term trade or business.