United States v. American Bar Endowment

The American Bar Endowment (ABE) (plaintiff) was a tax-exempt organization that advanced the administration of justice and legal research. All members of ABE were automatically members of ABE. ABE fundraised for its charitable services by offering group insurance policies to the members and retaining the members’ pro rata shares of dividends. Members received a benefit by deducting their pro rata shares minus ABE’s administrative costs as charitable contributions on their tax returns. The group policies were negotiated by ABE for an overall policy discount, but the premiums paid by members were of similar costs regardless of whether they had obtained a policy from ABE or elsewhere. In 1980, the Internal Revenue Service (IRS) (defendant) issued a deficiency notice, informing ABE that its group insurance plan was an unrelated trade or business to its charitable purpose and thus that the profits made from the plan were subject to taxation. Under the Internal Revenue Code’s unrelated-business tax, income of a tax-exempt organization that profited from an unrelated trade or business regularly carried on was subject to a corporate tax rate. ABE paid the taxes and sought a refund in the United States Court of Claims. The claims court found for ABE, ruling that ABE was not engaging in a trade or business and that the insurance-sale profits were contributions by members rather than business income. The claims court also stated that ABE’s group insurance plan did not violate the unrelated-business tax’s purpose of eliminating unfair competition for goods and services between exempt and nonexempt organizations. Simultaneously, a group of ABE members sought refunds for untaken past charitable-contribution deductions, i.e., the assignments of their dividends to ABE. The claims court found that those members had not proven that their purchases of the policy and assignments of dividends had been made for a charitable purpose. The two matters were consolidated and appealed.