American Academy of Family Physicians v. United States

91 F.3d 1155 (1996)

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American Academy of Family Physicians v. United States

United States Court of Appeals for the Eighth Circuit
91 F.3d 1155 (1996)

Facts

The American Academy of Family Physicians (academy) (plaintiff) was tax-exempt as a business league under § 501(c)(6) of the Internal Revenue Code (code). The academy owned and sponsored several types of insurance plans for its members. Principal Mutual Life Insurance Company (Principal) underwrote the plans. Under the agreement between the academy and Principal, plan holders paid premiums to Principal, which set aside those premiums in reserves out of which Principal paid claims. Upon termination of all policies and all claims, the academy would be entitled to any remaining reserve funds. Until that time, Principal was free to manage the investment of the reserve funds. Principal was required to pay a fixed amount of the reserve funds to the academy every year, regardless of how profitable the insurance plans had been that year. The academy did not pay taxes on Principal’s payments to the academy. The Internal Revenue Service (IRS) determined that those payments were unrelated business taxable income (UBTI) and taxable to the academy, notwithstanding the academy’s § 501(c)(6) status. The academy paid the assessed taxes and sued the United States (defendant) for a refund. The district court ruled that the payments were not UBTI and ordered the United States to issue a refund. The United States appealed.

Rule of Law

Issue

Holding and Reasoning (Fagg, J.)

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