ABA Retirement Funds v. USA
Filing
Filed opinion of the court by Chief Judge Wood. AFFIRMED. Diane P. Wood, Chief Judge; Frank H. Easterbrook, Circuit Judge and Michael S. Kanne, Circuit Judge. [6591505-1] [6591505] [13-2332]
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In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 13‐2332
ABA RETIREMENT FUNDS,
Plaintiff‐Appellant,
v.
UNITED STATES OF AMERICA,
Defendant‐Appellee.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 09 C 6993 — John J. Tharp, Jr., Judge.
____________________
ARGUED JUNE 5, 2014 — DECIDED JULY 21, 2014
____________________
Before WOOD, Chief Judge, and EASTERBROOK and KANNE,
Circuit Judges.
WOOD, Chief Judge. ABA Retirement Funds, to which we
refer simply as ABA Retirement, appeals the district court’s
denial of its request for tax‐exempt status for the years 2000
through 2002. Agreeing with the Internal Revenue Service,
the district court found that ABA Retirement was not a tax‐
exempt “business league” under 26 U.S.C. § 501(c)(6) during
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the relevant period. We agree with that assessment and af‐
firm.
I
Because the district court granted summary judgment for
the United States, the account that follows represents the
undisputed facts along with all reasonable inferences that
favor ABA Retirement. See FED. R. CIV. P. 56(c). ABA Retire‐
ment is an Illinois not‐for‐profit corporation whose prede‐
cessor, American Bar Retirement Association, was incorpo‐
rated in 1963 at the direction of the American Bar Associa‐
tion as a non‐profit corporation. The entity’s name later
changed to ABA Retirement Funds, but the change has no
effect on the issues before us, and so we use only the current
name. The prospectus for the new entity stated that it was
organized “for the sole purpose of providing members of the
[ABA] and their employees with a retirement plan designed
to take advantage of the income tax benefits which apply to
a qualified retirement plan.” To that end, the prospectus con‐
tinued, ABA Retirement was charged with “promoting and
facilitating the operation of [tax‐qualified retirement plans],
and this is the only activity” in which ABA Retirement was
expected to engage.
While ABA Retirement’s stated purpose was to provide
members of the ABA (and later organizations with at least
one ABA‐member participant) with retirement plans, ABA
Retirement itself did not have members in the traditional
sense. Its day‐to‐day operations were run by John Puetz and
a staff of three; its only “members” were the people who
made up the ABA’s Board of Governors. These “members,”
of whom there were about 38 from 2000 to 2002, appointed
the officers of ABA Retirement and the trustee of its retire‐
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ment plans. In time, ABA Retirement created several master
retirement plans for adoption by lawyers and law firms. We
will refer to these plans in the aggregate as “the Plan” and
the Plan in combination with ABA Retirement and its ven‐
dors’ activities done in connection with it as “the Program.”
Until 1992, the Program was offered pursuant to a group
annuity contract issued by Equitable Life Insurance Compa‐
ny of America (Equitable). At that time, members of the ABA
Retirement’s Board of Directors were the trustees of the mas‐
ter trusts. They had direct responsibility for the selection, re‐
tention, and termination of the managers of the investment
options offered by the Program. That changed in 1999 when
ABA Retirement hired State Street Bank and Trust to replace
Equitable and perform additional duties as sole Plan trustee,
at which point the ABA Retirement directors ceased to be
trustees in order to comply with federal securities law. Un‐
der the new arrangement, while ABA Retirement was no
longer a trustee, it created and maintained the IRS‐approved
master tax‐qualified retirement plans and took on the role of
Plan fiduciary. Had ABA Retirement not undertaken the fi‐
duciary role, the federal Employee Retirement Income Secu‐
rity Act (ERISA) would have required an employer who
adopted the retirement plans for its employees either to as‐
sume the duties or hire a third party to do so. The Program
as a whole competed with other retirement plans in the
market.
ABA Retirement, as Plan fiduciary, had the authority to
engage, monitor, and fire its trustee, State Street. It was re‐
sponsible for the design and maintenance of Plan documents
(including making sure that they were tax‐qualified), over‐
sight of vendors, contract negotiations, and the review and
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approval of State Street’s annual marketing plan. The latter
task included making recommendations to State Street about
targets for growth of participants and assets. ABA Retire‐
ment also made the plans available to the public without
charge from 2000 to 2002. The free documents, however, did
not come with an adoption agreement, even though they
were tailored to ABA Retirement’s trust. State Street was re‐
sponsible for marketing generally, but ABA Retirement pro‐
moted the Plan through mail solicitations to attorneys, Sec‐
tions of the ABA, and other bar groups. It did not limit itself
to advertising the plans; it actively worked both to publicize
them and to see that they were sold. State Street handled
record keeping, a variety of administrative services, and the
direct marketing of the Plan to the legal profession (though
ABA Retirement reviewed and approved the annual market‐
ing plan). State Street had the authority to engage and fire
investment advisors, but it was required to consult with
ABA Retirement and give full consideration to ABA Retire‐
ment’s recommendations. As noted, ABA Retirement had the
power to fire State Street.
ABA Retirement had a financial incentive to increase plan
assets, since the Plan paid ABA Retirement a program ex‐
pense fee for its services in connection with the Program
based on a percentage of the total invested assets, excluding
assets invested in self‐directed brokerage accounts. Those
who wished to pursue the self‐directed route were required
to invest a minimum of 5% of their total investment in ac‐
counts that would be subject to the program expense fee.
ABA Retirement received the interest on the funds. The
amount in the funds was not trivial; on its tax returns for
2000, 2001, and 2002, ABA Retirement reported a gross in‐
come of $1,861,258, $1,667,862, and $1,601,217, respectively.
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Its taxable income for those years was $672,098, $384,972,
and $411,874; it held assets worth approximately $3.5 mil‐
lion. The tax returns show that ABA Retirement described
itself as an employee benefit fund, and its product was re‐
tirement plans.
For a long time, it appears that ABA Retirement’s reve‐
nues were not large enough to raise tax concerns among its
managers. It treated itself as a taxable entity until 2004, when
it sought tax‐exempt status at the time it filed its Form 1024.
In August 2005, the IRS notified ABA Retirement that ABA
Retirement did not qualify for the exemption from federal
income tax under section 501(c)(6) of the Code. ABA Retire‐
ment then filed administrative claims for refunds on the tax‐
es it paid from 2000 through 2002 and, again, those were de‐
nied. ABA Retirement responded with this suit, arguing that
it was a tax‐exempt “business league” under I.R.C. §
501(c)(6), 26 U.S.C. § 501(c)(6), during the period from 2000
to 2002, and thus was entitled to a refund for federal income
taxes paid. The government contended that ABA Retirement
was not a “business league” and thus it owed the taxes. The
district court agreed with the government and granted
summary judgment in its favor. ABA Retirement appeals.
II
The question whether an association is a business league
for purposes of 26 U.S.C. § 501(c)(6) is a mixed question of
law and fact, but on summary judgment we must accept the
facts in the light most favorable to the nonmoving party and
ask whether the law nonetheless requires judgment for the
movant. See Guide Int’l Corp. v. United States, 948 F.2d 360,
361 (7th Cir. 1991). Our review is de novo. See Hakim v. Accen‐
ture U.S. Pension Plan, 718 F.3d 675, 681 (7th Cir. 2013).
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We begin with the language of the key statute, 26 U.S.C.
§ 501(c)(6), which grants a tax exemption to:
Business leagues, chambers of commerce, real‐estate
boards, boards of trade, or professional football
leagues (whether or not administering a pension fund
for football players), not organized for profit and no
part of the net earnings of which inures to the benefit
of any private shareholder or individual.
The statute does not define “business league,” and the term
“has no well‐defined meaning or common usage outside the
perimeters of § 501(c)(6).” Nat’l Muffler Dealers Ass’n, Inc. v.
United States, 440 U.S. 472, 476 (1979). In fact, the Court not‐
ed that the precise term “business league” is one “so general
… as to render an interpretive regulation appropriate.” Id.
(citing Helvering v. Reynolds Co., 306 U.S. 110, 114 (1939)).
The Treasury Department furnished just what the Court
called for. See Treas. Reg. § 1.501(c)(6)‐1 (1978), 26 C.F.R. §
1.501(c)(6)–1; see also Nat’l Muffler, 440 U.S. at 484 (Treasury
regulation “merits serious deference”). Paraphrased, the
regulation provides that an organization qualifies as a busi‐
ness league if and only if it is an association (1) “of persons
having some common business interest;” (2) “the purpose of
which is to promote such common interest;” (3) that is not
organized for profit; (4) that does not “engage in a regular
business of a kind ordinarily carried on for profit;” (5) whose
activities are “directed to the improvement of business con‐
ditions of one or more lines of business as distinguished
from the performance of particular services for individual
persons,” and; (6) that is “of the same general class as a
chamber of commerce or board of trade.” See Treas. Reg. §
1.501(c)(6)‐1, 26 C.F.R. § 1.501(c)(6)–1.
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This is not a close case; save for the fact that it is a non‐
profit corporation, ABA Retirement fails every necessary
condition for business league status. Because the district
court’s opinion is thorough, here we focus on just two of the
reasons why ABA Retirement is not a business league: (1) its
activities are not directed to the improvement of business
conditions for the legal field generally; and (2) it engages in a
business ordinarily conducted for profit.
1. Improving business conditions of the legal profession
One of the prerequisites to business‐league status is that
the entity’s activities must be “directed to the improvement
of business conditions of one or more lines of business as dis‐
tinguished from the performance of particular services for in‐
dividual persons.” Treas. Reg. 1.501(c)(6)‐1 (emphasis add‐
ed). ABA Retirement fails to satisfy this requirement for at
least two reasons: first, it characterized its business as the
provision of individual benefits; and second, it has not
shown anything that could reasonably be called improve‐
ment of business conditions for the legal profession general‐
ly.
On the tax returns it filed for the relevant years ABA Re‐
tirement stated that its business was the operation of an em‐
ployee benefit fund and its product was retirement plans.
This is a perfectly good business, but it is one that provides
benefits to individual persons, not to an entire field of com‐
merce. We have no doubt that, as § 1.501(c)(6)‐1 recognizes,
some organizations may improve business conditions in a
line of business by performing services that benefit individ‐
ual industry participants. Although state‐created and thus
not quite on point here, the Washington State Apple Adver‐
tising Commission illustrates the general idea. See Hunt v.
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Wash. State Apple Adver. Comm’n, 432 U.S. 333 (1977). Another
example might be the Owner‐Operator Independent Drivers
Association. See Owner‐Operator Indep. Drivers Ass’n, Inc. v.
Fed. Motor Carrier Safety Admin., 656 F.3d 580 (7th Cir. 2011).
But those individual benefits must be incidental to the in‐
dustry‐wide benefits. The regulation requires improvement
of business conditions “as distinguished from” the perfor‐
mance of particular services. That requires line‐drawing. Or‐
ganizations that provide benefits to an industry only by ben‐
efitting specific individuals within that industry fall on the
other side of the “business league” line. ABA Retirement
counters that lawyers secure in their retirement are happy,
confident lawyers, and this is reflected in the general satis‐
faction quotient for the profession as a whole. That may be
true: we do not doubt that retirement planning is good for
the legal profession generally (as it is for everyone else), but
ABA Retirement furnished that benefit almost exclusively by
providing a particular service to particular persons, namely,
retirement plans for those who signed up for its Program.
The fact that it also distributed some materials without
charge does not change the nature of the enterprise.
Assoc. Master Barbers & Beauticians of Am., Inc. v. Comm’r
of Internal Revenue, 69 T.C. 53 (1977), is instructive. It stands
for the proposition that regardless of whether an organiza‐
tion’s activities further an exempt purpose, if those actions
do not use non‐exempt means, they will not receive tax‐
exempt status. The association in question was a non‐profit
entity that had been organized to unify master barbers. Id. at
55. The court did not question that the described goal would
improve the conditions of the master barber industry. In try‐
ing to achieve this goal, the association provided its mem‐
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bers with (among other things) various types of insurance,
from which it received commissions. Id. at 59.
The tax court recognized that an organization “whose
principal purpose and activity is such as to qualify for ‘busi‐
ness league’ exemption does not lose its exempt status by
engaging in incidental activities which standing alone would
be subject to taxation.” It therefore proceeded to “examine
the extent of petitioner’s insurance activities to see if they
constitute[d] only incidental, as opposed to substantial, ac‐
tivities.” Id. at 67. It found that the association’s insurance
activities were directed towards providing benefits to indi‐
viduals within the industry and those activities were sub‐
stantial. This was enough, it held, to require a finding that
the association did not qualify for business league status.
Here, we know that ABA Retirement’s involvement with the
Program was in no way “incidental”—it was the fiduciary,
and its own prospectus states that it was incorporated “for
the purpose of promoting and facilitating the operation of
the Plan and this is the only activity in which it is expected
that ABA Retirement will engage.” ABA Retirement’s day‐to‐
day goal was to promote its own plan first and general re‐
tirement savings in the legal profession second; it therefore
cannot receive tax‐exempt status under § 501(c)(6).
2. Business ordinarily conducted for profit
Related to the finding that ABA Retirement’s activities
were aimed primarily at the provision of services to individ‐
ual persons was the fact that it engaged in the business of
providing retirement plans, a business ordinarily conducted
for profit. ABA Retirement argues that the district court
reached this conclusion by “conflating” ABA Retirement
with the Program. It explains that while the Program itself
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may have been a business ordinarily conducted for profit,
the Program was administered by State Street and ABA Re‐
tirement simply sponsored the Program as part of its mis‐
sion to improve the condition of the legal industry.
ABA Retirement focuses on the “sponsoring” language
because, pursuant to IRS regulations, a trade organization
“having characteristics similar to those described in section
1.501(c)(6)‐1 of the regulations” (i.e. characteristics similar to
a business league) is permitted to sponsor retirement plans
without losing its tax‐exempt status. Rev. Proc. 89‐9, 1989‐1
C.B. 780, superseded by Rev. Proc. 2000‐20, 2000‐1 C.B. 553.
Because the IRS approved ABA Retirement’s retirement
plans, and a condition of that approval that the organization
have characteristics “similar to” a business league, ABA Re‐
tirement argues it is therefore a business league entitled to
the exemption. Unfortunately, this is a bridge too far.
As a matter of logic, simply because x has “characteristics
similar to” y does not necessarily make x a y. A cucumber
has characteristics similar to a zucchini but it is not, in fact, a
zucchini. And, while having characteristics similar to a zuc‐
chini may be enough for some purposes (for instance, to
stand in as a zucchini in an impressionist still life), it will not
be enough when an object possessing all the characteristics
of a zucchini—in other words, a zucchini itself—is required
(say, when making zucchini bread). In order to be a business
league for purposes of 26 U.S.C. § 501(c)(6), ABA Retirement
must satisfy every condition laid out in § 1.501(c)(6)‐1; for
purposes of Rev. Proc. 89‐9 it needed only to have character‐
istics “similar to” those in the regulation.
Returning to the question at hand—whether ABA Re‐
tirement was engaged in business ordinarily done for profit
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during the relevant period—the answer is an unequivocal
yes. ABA Retirement did not just sponsor the Program; it
was the Program fiduciary. Assuming fiduciary duties on
behalf of law firms that sign up for the Program is itself an
act ordinarily done for profit. ABA Retirement has cited no
case, nor can we find one, in which an entity was a plan fi‐
duciary under ERISA and yet qualified as an exempt busi‐
ness league.
ABA Retirement finally relies on Am. Acad. of Family Phy‐
sicians v. United States, 91 F.3d 1155 (8th Cir. 1996), where the
Eighth Circuit found that the Academy’s sponsorship of a
group insurance program did not translate into taxable
business activity by the Academy. See id. at 1159. Again,
however, we see important differences between that case
and ours. First, the question was not whether the Academy
was a business league but instead whether the payments it
received through its sponsorship of the insurance plans were
taxable under 26 U.S.C. § 511 as “unrelated business taxable
income.” Our case involves the antecedent question whether
ABA Retirement is a business league. As we explained
above, ABA Retirement’s activities were not primarily di‐
rected toward the improvement of the legal profession as dis‐
tinguished from the performance of particular services for in‐
dividual persons. Second, even if we put that aside, there are
other crucial differences between ABA Retirement and the
Academy. In Family Physicians, the insurance program was
administered “in its entirety by an unrelated, non‐exempt
corporation” over which the Academy “had no administra‐
tive or underwriting responsibilities” for the policies. 91 F.3d
at 1159. The amounts paid to the Academy in relation to the
insurance program “were neither brokerage fees nor other
compensation for commercial services, but were the way the
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parties decided to acknowledge the Academy’s eventual
claim to the excess reserves while [the policy administrator]
was still holding and using the reserves.” Id. In contrast,
nearly all of ABA Retirement’s income came from a program
expense fee State Street paid it for services in connection
with the Program. The fee was also based on a percentage of
the total invested assets. Unlike the Academy, ABA Retire‐
ment was the Plan fiduciary. Family Physicians does not com‐
pel a different result.
**********************
We conclude that ABA Retirement is not a business
league under 26 U.S.C. § 501(c)(6). We therefore AFFIRM the
judgment of the district court.
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