UNITED STATES OF AMERICA, PETITIONER V. AMERICAN BAR ENDOWMENT; UNITED STATES OF AMERICA, PETITIONER V. FREDERIC D. TURNER, ET UX., ET AL. No. 85-599 In the Supreme Court of the United States October Term, 1985 The Solicitor General, on behalf of the United States, petitions for a writ of certiorari to review the judgment of the United States Court of Appeals for the Federal Circuit in these cases. Petition for a Writ of Certiorari to the United States Court of Appeals for the Federal Circuit PARTIES TO THE PROCEEDING In addition to the parties named in the caption, Arthur M. Sherwood (and his wife), Herbert C. Broadfoot II (and his wife), and Frederick G. Boynton are respondents. TABLE OF CONTENTS Questions Presented Parties to the Proceeding Opinions below Jurisdiction Statutes involved Statement A. American Bar Endowment B. Frederic D. Turner, et ux., et al. Reasons for granting the petition A. American Bar Endowment B. Frederic D. Turner, et ux., et al. Conclusion Appendix A Appendix B Appendix C Appendix D Appendix E OPINIONS BELOW The opinion of the court of appeals (App., infra, 1a-23a) is reported at 761 F.2d 1573. The opinion of the Claims Court (App., infra, 25a-58a) is reported at 4 Cl. Ct. 404. JURISDICTION The judgment of the court of appeals (App., infra, 24a) was entered on May 10, 1985. On July 31, 1985, the Chief Justice extended the time within which to petition for a writ of certiorari to and including October 7, 1985. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). STATUTES INVOLVED The relevant portions of Sections 501, 511, 512, and 513 of the Internal Revenue Code of 1954 (26 U.S.C.), and of Sections 1.501(c) (6)-1 and 1.513-1 of the Treasury Regulations on Income Tax (26 C.F.R.), are set out in a statutory appendix (App., infra, 59a-76a). QUESTIONS PRESENTED 1. Whether income derived by a tax-exempt professional organization from the sale of group insurance to its members is "unrelated business income" subject to tax under Sections 511 through 513 of the Internal Revenue Code. 2. Whether an insured member's assignment of his policy dividends to the organization, when the assignment is a requirement of purchasing the insureance, is deductible as a "charitable contribution" under Section 170 of the Code. STATEMENT These cases were consolidated for trial and decision in the Claims Court and for briefing, argument and decision in the court of appeals. Although the cases are closely linked, they raise different legal issues and are most conveniently discussed separately. A. American Bar Endowment 1. The American Bar Endowment is a corporation exempt from tax under Section 501(c)(3) of the Internal Revenue Code. /1/ Its main purposes are to advance legal research and to promote the administration of justice. It accomplishes these purposes by making grants to other charitable and educational organizations (App., infra, 26a). All members of the American Bar Association (ABA) are members of the Endowment without paying additional dues (C.A. App. 116). The ABA is exempt from tax under Section 501(c)(6) as a "business league." The Endowment has conducted a group insurance program for ABA members since 1955 (App., infra, 27a). The program offers life, health, accident, and disability insurance underwritten by major insurance companies. Coverage for members' dependents is also available under some plans (ibid.). The life insurance plan, the most heavily subscribed, had $2.75 billion of insurance outstanding in 1980. More than 57,000 (or about one-fifth) of the Endowment's members were then enrolled in one or more of the plans (C.A. App. 143). The Endowment administers its insurance plans with a staff of 40 (App., infra, 27a). It actively supports and officially endorses coverage under the plans, and solicits its members' enrollment through aggressive advertising prepared and distributed by its staff (C.A. App. 141, 811, 1248-1268). The staff also performs many tasks essential to the program's day-to-day operation, such as screening members' applications, collecting members' premiums, and forwarding premiums to the underwriters (id. at 141-142). Nearly all of the Endowment's operating budget is consumed by these activities (id. at 139). The Endowment's contracts with its underwriters require the latter to calculate and refund to the Endowment annually any policy dividends or retrospective rate credits that accrue to the group policies (C.A. App. 120-122, 128). These sums, which we shall refer to collectively as "dividends," reflect the excess of the premiums paid by ABA members over the underwriters' cost of paying claims and servicing the plans (App., infra, 27a-30a). In order to enroll in the program, every insured must waive his claim to receive these dividends and must consent to their retention by the Endowment. This condition is stated on the insurance application forms, and the Endowment insists on its strict enforcement (id. at 3a-4a, 32a; C.A. App. 440-442). The Endowment applies the dividends, net of its plan administration expenses, to fund its educational projects. Every year, it calculates the percentage of the overall premiums that have been thus applied, and advises its insured members that they may, in the opinion of the Endowment's counsel, deduct corresponding portions of their own premiums as tax-deductible charitable contributions (App., infra, 4a, 32a-33a; C.A. App. 867-871). The Endowment's strategy is to maximize the policy dividends and thus maximize its profits. It uses its considerable leverage with the underwriters to tailor the insurance program to that end (App., infra, 3a-4a, 27a-30a). Because the plans are experience-rated, and because ABA members enjoy very favorable mortality and morbidity experience, the Endowment could, if it chose, offer insurance at very low premiums, perhaps at premiums approaching the lowest available for group insurance in the country (App., infra, 30a-32a). In order to produce the largest dollar volume of policy dividends, however, the Endowment sets the price of its insurance at rates comparable to those charged for other insurance products in the market (App., infra, 3a-4a, 27a-30a). The Endowment regularly reviews the market comparability of its prices and benefits and adjusts its premiums from time to time to keep them competitive (ibid.). By the same token, the Endowment takes care not to raise its premiums above the market range, for fear of discouraging participation (ibid.). The use of prevailing market rates, coupled with the favorable mortality and morbidity experience of ABA members, has made the Endowment's insurance operations highly profitable. The amounts refunded to it as dividends often exceed 40% of the premiums its members pay (C.A. App. 560-561; App., infra, 4a). Income from its insurance operations is by far the major source of its revenue (C.A. App. 1319). The Endowment thus serves successfully as a middleman between its members and commercial vendors of insurance. 2. Sections 511 through 513 of the Internal Revenue Code impose a tax, at regular corporate rates, on the "unrelated business taxable income" of otherwise tax-exempt organizations like the Endowment. An "unrelated trade or business" is one "the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other (tax-exempt) purposes" (I.R.C. Section 513(a)). Section 513 (c) provides that "the term 'trade or business' includes any activity which is carried on for the production of income from the sale of goods or the performance of services." The Endowment's gross policy dividends from its insurance operations during 1979-1981 aggregated almost $19 million (C.A. App. 129). On audit, the IRS determined that those revenues, less the Endowment's expenses of administering the insurance program were subject to tax as "unrelated business income" (id. at 130, 139). The Commissioner accordingly determined tax deficiencies of approximately $6 million for the three years (id. at 130-132). The Endowment paid the asserted deficiencies and, following denial of its administrative claims for refund, instituted this refund suit in the Claims Court. It conceded that its insurance operations were "regularly carried on" (I.R.C. Section 512(a)). It likewise conceded that the conduct of those operations was "not substantially related" to the performance of its tax-exempt educational functions (I.R.C. Section 513(a)). See C.A. App. 144. The Endowment's principal contention was that its insurance operations did not amount to a "trade or business," on the theory that they represented "contributions" that ABA members made "by foregoing the advantage of having premium refunds returned to them" (id. at 22-24). Following a trial, the Claims Court entered judgment for the Endowment. It held that the profits derived by the Endowment from its insurance operations were immune from unrelated business income tax because they did not arise from a "trade or business" within the meaning of Section 513(c). The court believed that its task in interpreting that Section was to "distinguish between those activities that constitute a trade or business and those that are merely fundraising" (App., infra, 33a-34a). The controlling test for this purpose, the court concluded, was whether the Endowment conducted its activities in "a competitive, commercial manner" (id. at 34a). The court then recited several factors that, "taken together, * * * ma(d)e it impossible * * * to conclude that the (Endowment's) insurance programs were operated" in a commercial or competitive way (id. at 40a). The Endowment's insurance program, the court said, was "label(led)" by it and "perceived" by its members as "a fundraising activity." The Endowment's profits, the court stated, were "astounding" and "(could) not be maintained in a competitive market." And "the insurance program," the court observed, "was operated with the approval and consent of the ABA membership." App., infra, 32a, 36a-38a. In the court's view, "an enterprise that depends on the consent of its customers for its profits is not operating in a commercial manner and is not a trade or business" (id. at 41a). 3. The Court of Appeals for the Federal Circuit affirmed. It concluded that the Claims Court had "properly found facts" and had "applied the correct standard" to determine whether the Endowment's insurance operations were a "trade or business" within the meaning of Section 513(c). See App., infra, 9a. Based on "the persistent and fundamental fund-raising motivation" of the Endowment's insurance program, "the knowledgeable approval of and consent to the program by the ABA's members," and the Endowment's "phenomenal success" in accumulating policy dividends, the court of appeals was persuaded that the Endowment's activities were not "competitive" or "commercial" and thus were immune from tax. Id. at 8a-9a. The court of appeals described as "inapposite" (App., infra, 10a) decisions of the Fourth, Fifth, and Sixth Circuits holding that profits derived by tax-exempt professional or trade associations from the operation of group insurance plans are subject to unrelated business income tax. See Professional Insurance Agents v. Commissioner, 726 F.2d 1097 (6th Cir. 1984); Carolinas Farm & Power Equipment Dealers v. United States, 699 F.2d 167 (4th Cir. 1983); Louisiana Credit Union League v. United States, 693 F.2d 525 (5th Cir. 1982). In thus reasoning, the Federal Circuit relied principally on the fact that the organizations marketing the insurance in those cases were "(b)usiness leagues" exempt from tax under Section 501(c)(6), rather than charitable or educational associations exempt from tax (as is the Endowment) under Section 501(c)(3). The fact that the Endowment "set out to make as much profit as possible" did not in the court's view determine whether its insurance activities were a "trade or business" (App., infra, 11a). "Unlike what some other courts may do," the court of appeals observed, "this court does not find 'profits,' or the maximization of revenue, to be the controlling basis for a determination of whether the unrelated business tax provisions apply" (ibid.). B. Frederic D. Turner, et ux., et al. 1. The individual respondents are ABA members who bought insurance from the Endowment (App., infra, 31a, 38a). /2/ Each agreed, as a condition of enrollment, that the Endowment could keep any dividends apportioned to his policy (ibid.). Each knew, when he wrote his premium checks, that the Endowment would use the dividends to further its work in the legal field. Respondents Turner and Sherwood signed up for life insurance in 1972. They enrolled after reading brochures explaining that the Endowment's insurance program raised money for educational purposes while offering attractive insurance benefits at a reasonable cost (C.A. App. 405-407, 414-415, 1027-1034, 1040-1047). The brochures principally described the "highlights" of the coverage that the Endowment offered for sale, including the option granted to members under 40 (as Turner and Sherwood then were) to be accepted without medical evidence of insurability (ibid.). Respondent Broadfoot initially purchased life insurance in 1971 because, as he testified, "(m)y first child had recently been born and I was interested in obtaining some life insurance" (C.A. App. 388). He regarded the premiums charged as reasonable (id. at 402-403). At one time he carried a life policy through the Georgia State Bar but discontinued it after determining that it cost more than the Endowment's (id. at 396-399). Respondent Boynton purchased disability insurance in 1978 (C.A. App. 74). He concluded after reading the Endowment's literature that its disability coverage was "reasonably or competitive(ly) priced" (id. at 430). Before applying for his policy, he examined a number of other disability plans. He found that two offered considerably greater benefits than the Endowment's but were more expensive (id. at 427, 429). None of the individual respondents testified that, if given an option, he would have elected to assign his policy dividends to the Endowment. None testified that he chose the Endowment's coverage over a cheaper policy in order to further the Endowment's educational goals, or that he thought the premiums charged by the Endowment exceeded the economic value of the insurance he purchased. Two nonparty insureds, on the other hand, testified that they would have opted to keep their dividends had such an election been afforded (C.A. App. 592-593, 690-691). One testified that he had purchased insurance from the Endowment because he found its premiums competitive and because he thought that the Endowment "would certainly have the clout to deal with the insurance company" (id. at 687-688). The other testified that his sole motive for signing up was to obtain insurance; he had previously held through his state bar association a group life policy that cost more than the Endowment's (C.A. App. 590-593, 596, 784-785). 2. Section 170(a) of the Code provides an income tax deduction for "charitable contribution(s)." Section 170(c)(2)(B) defines a "charitable contribution" as "a contribution or gift" to or for the use of an entity that is "organized and operated exclusively for religious, charitable * * * or educational purposes." None of the individual respondents deducted any part of the insurance premiums that he paid the Endowment as a "charitable contribution" on his tax return for the years at issue (C.A. App. 52-54, 64-66, 76-78, 86-89). Thereafter, respondents were invited, and agreed, to take part in this "test case" mounted by the ABA (id. at 409-410, 425). Each filed an administrative claim for refund, claiming a charitable contribution deduction ranging from 28% to 55% of the premiums he had paid. These percentages depended on the year and type of insurance involved, and were derived from notices issued to respondents by the Endowment (id. at 391-392, 407-408, 416-418, 423-424, 868-871). Each sought a refund of $40 or less (id. at 52-54, 64-66, 76-78, 86-89). When the IRS demurred, respondents instituted these refund suits in the Claims Court. They contended that each premium they paid to the Endowment was a "dual payment," representing in part the purchase of insurance and in part a charitable donation (App., infra, 48a). The Claims Court, following a trial, entered judgment for the United States. It held that none of the respondents was entitled to a charitable contribution deduction for any portion of his premiums. The court began by examining the relevant legal standards. In its view, an insured's "mere awareness" that the Endowment's insurance profits would be devoted to charitable purposes "is not sufficient to establish that he made a charitable contribution" (App., infra, 52a). Rather, "(t)o establish a dual payment, the taxpayer must demonstrate that he bought goods or services for more than their economic value, with the intention that the excess be used to benefit a charitable enterprise" (id. at 49a). Each respondent, in other words, had to show "that an equivalent insurance product was available to him for a lower price and that he bypassed that product because he wished to make a charitable contribution to the Endowment" (id. at 52a (footnote omitted)). Turning to the facts of each case, the Claims Court concluded that none of the respondents had proved that his purchase of insurance from the Endowment reflected anything other than his own economic interest (App., infra, 52a-54a). Three of the respondents, the court found, had failed to establish that cheaper insurance was available to them elsewhere (ibid.). The fourth, while demonstrating that cheaper insurance existed, offered no proof that he knew about it during the tax years at issue and had elected to buy the Endowment's policy instead (id. at 55a). The court noted that the Endowment's advertising was "aggressive" and "in some ways suggested (that its insurance) may be the best deal in the market" (C.A. App. 811). Thus, if an ABA member "did not have the two plans side by side," he might well be unaware that he could have obtained a policy elsewhere for less (id. at 811-812). 3. The court of appeals reversed and remanded. It directed the Claims Court to conduct "such further proceedings as are appropriate to determine whether the relationship between the Endowment and the (individual respondents) was predominately of a business nature or whether the transaction did have a substantial charitable component" (App., infra, 22a-23a). The Federal Circuit held that the inquiry conducted by the trial court -- whether the respondents could have obtained comparable insurance coverage for less money -- was "an incorrect definitization of the proper standard" (App., infra, 19a). The Claims Court's approach was wrong, the court of appeals said, because it required affirmative proof of "a charitable motivation of disinterested generosity" (id. at 19a-20a). The correct legal test, rather, in the court of appeals' view, was "whether the transaction between the Endowment and the taxpayers * * * was of a business nature and not charitable" based on "all the pertinent circumstances" (id. at 21a (original quotation marks omitted)). Such a test, the court opined, "should not be too difficult" for ABA members to pass (id. at 22a). Finding the record "almost completely bare" as to the nature of the insureds' dealings with the Endowment, the court of appeals remanded their cases with instructions. Given "the Endowment's persistent and public efforts to enhance its charitable funds," the court suggested, members who bought insurance from it should be able "to present a prima facie case" for a charitable deduction "simply (by) mak(ing) a sworn assertion that they wanted to aid that charitable endeavor and entered the Endowment's plan because it enabled them to do so" (ibid.). Under the Federal Circuit's instructions, the government on remand would then have the burden to "controvert that position and (to) suggest factors showing that the transaction was basically business-oriented" (ibid.). On July 17, 1985, the court of appeals stayed proceedings on remand pending disposition of this petition. REASONS FOR GRANTING THE PETITION The court of appeals has decided two important questions of federal tax law in a way that conflicts directly with the decisions of other courts of appeals and with well-established tax principles. The first question presented is related to that on which this Court recently granted review in United States v. American College of Physicians, No. 84-1737 (July 1, 1985), also on certiorari to the Federal Circuit. The second question presented is inextricably bound with the first, involving the effect of the insurance purchase from the buyer's rather than the seller's viewpoint. The questions have considerable administrative importance and potentially involve hundreds of millions of dollars in revenue. Review by this Court is therefore appropriate. A. American Bar Endowment 1. a. The court of appeals' holding concerning the taxability of the Endowment's insurance operations squarely conflicts with recent decisions of the Fourth, Fifth and Sixth Circuits. See Carolinas Farm & Power Equipment Dealers v. United States, 699 F.2d 167 (4th Cir. 1983); Louisiana Credit Union League v. United States, 693 F.2d 525 (5th Cir. 1982); Professional Insurance Agents v. Commissioner, 726 F.2d 1097 (6th Cir. 1984). The organization involved in each of those cases was a tax-exempt association which, like the Endowment, drew its members exclusively from a single trade or profession. Each operated a group insurance program for its members. Like the Endowment, each selected an insurer to underwrite its program, actively promoted and marketed its group coverage to its members, performed day-to-day tasks of administering the program, and received rebates of the members' premiums from the underwriters. Like the Endowment, each association made sizable profits on its insurance operations, yet contended that they did not constitute a "trade or business" within the meaning of Section 513(c). In Louisiana Credit Union League v. United States, supra, the Fifth Circuit squarely rejected that argument (693 F.2d at 531-534). It noted that Section 513(c) defines a "trade or business" to include "any activity which is carried on for the production of income from the sale of goods or the performance of services." Since the association both sold insurance and performed services in administering its plans, and since it "had a profit motive for its activities," the Fifth Circuit held that it was engaged in a "trade or business" and that its insurance profits were thus subject to unrelated business income tax (693 F.2d at 532-534). As the court put it (id. at 532): We believe that the "profit motive" standard is the proper one to be applied in this case, for it is consistent with the plain language of section 513 as well as the accompany regulations. The statute, which clearly encompasses within its parameters any activity "carried on for the production of income," first raises the issue of motive. The regulations, which invoke section 162 and its "profit motive" gloss, confirm that motive is the key inquiry. Thus, to determine whether a tax-exempt organization is carrying on a trade or business, the court must look to see whether that institution is engaged in extensive activity over a substantial period of time with the intent to earn a profit. The Fourth and Sixth Circuits, on virtually identical facts, have reached the same conclusion for the same reasons. See Carolinas Farm & Power Equipment Dealers v. United States, 699 F.2d at 170 (adopting "profit motive" test); Professional Insurance Agents v. Commissioner, 726 F.2d at 1102 (same). The decision below squarely rejects both the legal standard applied by these courts and the tax result they reached. Whereas the Fourth, Fifth and Sixth Circuits employed a "profit motive" test for determining the existence of a "trade or business" under Section 513(c), the Federal Circuit below declared: "Unlike what some other courts may do, this court does not find 'profits,' or the maximization of revenue, to be the controlling basis for (that) determination" (App., infra, 11a). And whereas the Fourth, Fifth and Sixth Circuits have held that insurance profits of exempt organizations are subject to unrelated business income tax, the court below, on substantially identical facts, has ruled such profits tax-free. b. In finding these conflicting decisions "inapposite," the Federal Circuit (App., infra, 10a), like the Claims Court (id. at 25a-26a), relied principally on the fact that the associations marketing the insurance there were organized as "(b)usiness leagues" exempt from tax under Section 501(c)(6), rather than as charitable or educational associations exempt from tax (as is the Endowment) under Section 501(c)(3). This is precisely the same meaningless distinction that the respondent in United States v. American College of Physicians, supra, urged upon this Court in unsuccessfully opposing certiorari in that case (84-1734 Br. in Opp. 12). The respondent there, like the Endowment, is a professional association tax-exempt under Section 501(c)(3). In an effort to avoid tax on its profits from the publication of commercial advertising, it urged that Treasury Regulations holding such activities to be an "unrelated trade or business" should be construed to apply only to the advertising operations of Section 501(c)(6) groups, and not to identical advertising operations of Section 501(c)(3) groups (84-1737 Br. in Opp. 11-13, 15). As we have pointed out in greater detail in our briefs in United States v. American College of Physicians (84-1737 Reply Br. at 4-8; U.S. Br. at 33-40), /3/ the subsection of Section 501(c) under which a professional association happens to be organized makes absolutely no difference in determining the taxability of its profit-motivated activities. The question here is whether the Endowment's insurance operations are a "trade or business." Those words are defined in Section 513(c), and that definition applies to all tax-exempt organizations, regardless of the particular subsection of Section 501(c) -- there are more than twenty -- on which they base their tax-exempt status. Under that definition, it is the nature of the activities conducted, not the origin of the exemption, that determines the taxability of the profits realized. There is, accordingly, no statutory basis for contending that insurance operations conducted by Section 501(c)(6) groups are a "trade or business," but that the Endowment's substantially identical insurance operations are not a "trade or business," simply because the Endowment chose to be organized under Section 501(c)(3). Indeed, such a contention would be particularly strained here, since the Endowment is a Section 501(c)(3) affiliate of the ABA, which is itself a Section 501(c)(6) business league. On the court of appeals' theory, any business league could escape tax on its insurance operations -- operations that would be subject to tax under the decisions of the Fourth, Fifth, and Sixth Circuits -- simply by spinning off those operations into a Section 501(c)(3) sister corporation. This in effect would make payment of the unrelated business income tax elective, a result that Congress would surely find rather surprising. 2. a. In declining to follow the holdings of the Fourth, Fifth and Sixth Circuits, and in rejecting the legal standard those courts adopted, the Federal Circuit has ignored both the express language of Section 513(c) and Congress's intention in enacting the unrelated business income tax. Before that law was enacted (Revenue Act of 1950, ch. 994, 64 Stat. 906 et seq.), charitable organizations that carried on ordinary trades or businesses were able to escape tax on their profits on the theory that the charitable "destination" of the revenues took precedence over their commercial "source." Thus, a nationwide vendor of macaroni (C.F. Mueller Co. v. Commissioner, 190 F.2d 120 (3d Cir. 1951)), and a commercial bathing beach facility (Roche's Beach, Inc. v. Commissioner, 96 F.2d 776 (2d Cir. 1938)), successfully claimed tax-exempt status simply because their business profits went to charity. In 1950 Congress responded to this problem in two ways. First, it enacted the so-called "anti-feeder" provision (I.R.C. Section 502(a)), under which organizations "operated for the primary purpose of carrying on a trade or business for profit" cannot claim tax exemption solely on the ground that their profits go to charity. Second, Congress enacted the "unrelated business income tax," now codified in Sections 511 through 515 of the Code. Those provisions generally require any organization that otherwise qualifies for tax exemption to pay tax at regular corporate rates on income derived "from any unrelated trade or business * * * regularly carried on by it" (I.R.C. Section 512(a)(1)). The chief impetus behind the new tax was Congress's desire to put the business operations of tax-exempt organizations on an equal footing with those of their taxpaying commercial counterparts. The House report stated that "(t)he problem at which the tax on unrelated business income is directed * * * is primarily that of unfair competition." H.R. Rep. 2319, 81st Cong., 2d Sess. 36 (1950). As amended in 1950, the Code "does not deny (a tax) exemption where the organizations are carrying on unrelated active business enterprises, or require that they dispose of such businesses, but merely imposes the same tax on income derived therefrom as is borne by their competitors" (id. at 37). The unrelated business income tax, as enacted in 1950, did not include a definition of the term "trade or business." The legislative history, however, made clear that the term "has the same meaning as it has elsewhere in the code, as, for example, in (the predecessor of Section 162(a))," which authorizes deductions for expenses incurred "in carrying on any trade or business." See H.R. Rep. 2319, supra, at 109; S. Rep. 2375, 81st Cong., 2d Sess. 106 (1950). Under Section 162(a), "(i)t is well established that the existence of a genuine profit motive is the most important criterion for the finding that a given course of activity constitutes a trade or business." Lamont v. Commissioner, 339 F.2d 377, 380 (2d Cir. 1964) (emphasis added). In 1967, the Treasury promulgated regulations defining a "trade or business" for purposes of the unrelated business income tax. Treas. Reg. Section 1.513-1, 32 Fed. Reg. 17657 (1967). The regulations explained that any activity "which is carried on for the production of income and which otherwise possesses the characteristics required to constitute (a) "trade or business' within the meaning of section 162 * * * presents sufficient likelihood of unfair competition to be within the policy of the (unrelated business income) tax" (Treas. Reg. Section 1.513-1(b)). "Accordingly," the Treasury concluded, "for purposes of section 513 the term 'trade or business' has the same meaning it has in section 162, and generally includes any activity carried on for the production of income from the sale of goods or performance of services" (ibid.). In an effort to resolve the controversy spawned by these regulations, Congress in 1969 codified the Treasury's definition of "trade or business" (Tax Reform Act of 1969, Pub. L. No. 91-172, 83 Stat. 487 et seq.). Congress explicitly stated its intention "to make clear that such regulations are valid" and its determination that they "should be placed in the tax laws." H.R. Rep. 91-413, 91st Cong., 1st Sess. Pt. 1, at 44 (1969); S.Rep. 91-552, 91st Cong., 1st Sess. 75 (1969). Effectuating that aim, Congress in 1969 added to the Code a new Section 513(c). It provides that, "(f)or purposes of this section, the term 'trade or business' includes any activity which is carried on for the production of income from the sale of goods or the performance of services." b. The unalloyed language of Section 513(c) makes plain the error of the Federal Circuit. The Endowment's insurance operations obviously comprised both "the sale of goods" and "the performance of services." It sold various insurance products at retail, and it performed valuable services by putting together a group of above-average insureds, negotiating with underwriters, assembling a package of group policies, marketing that package to its members, collecting its members' premiums, and discharging countless other day-to-day administrative tasks. Indeed, its staff of 40 ran the business in much the same way that most insurance brokers, plan administrators, and other financial intermediaries run theirs. Equally obviously, the Endowment carried on its insurance operations "for the production of income." Both courts below found that the Endowment's insurance operations were unusually profitable and were consciously structured to be so, since it set its retail premiums far above its wholesale cost so as "to maximize dividends" and thus maximize profits (App., infra, 4a). In holding that the Endowment's insurance activities were not a "trade or business," the Federal Circuit simply ignored the language of the statute. Given the language of the statute, the Federal Circuit's notion that the "phenomenal" and "astounding" profitability of the Endowment's insurance operations negated their trade-or-business status (App., infra, 8a) seems almost whimsical. The key criterion for assessing the existence of a "trade or business" under Section 513(c) is the presence of a profit-making motive. One would have thought that a motive, successfully executed, to make extraordinarily large profits would make an activity more of a "trade or business," not less of one. This common-sense thought is consistent, not only with the statutory language, but with the economic facts. Economically speaking, the Endowment's insurance operations function as a business set up to exploit a very valuable, but virtually cost-free, asset -- a pool of potential insureds, all ABA members, who have far-above-average mortality and morbidity experience. The Endowment could elect to exploit this asset in at least two ways, depending on its marketing strategy. It could charge below-market premiums, maintaining a modest level of profitability per insured but attracting a big market share. If it did that, many more lawyers would presumably join the ABA and buy insurance from the Endowment, since its premiums would be among the lowest available anywhere. If the Endowment chose to run its insurance business in that way, it would make its profits (as do supermarkets) on volume, and would clearly -- even under the decision below -- have to pay unrelated business income tax on those profits. Alternatively, the Endowment could elect, as it in fact did, to charge market-level premiums, maintaining a very high level of profitability per insured but settling for a more modest market share. On this approach, many lawyers might decide to buy insurance elsewhere, the Endowment's prices being roughly equivalent to those charged in the marketplace generally. But the Endowment would make lots of money on the lawyers who picked it. That is what the Endowment chose to do, and it should pay tax on its insurance income just as clearly as if it had chosen the high-volume, low-mark-up option discussed above. Contrary to the conclusion of the courts below, finally, it is immaterial that the Endowment, in marketing its insurance, described its solicitations as "fundraising," or that the funds raised were channeled to the Endowment's educational projects (App., infra, 8a, 35a). Whenever a charity raises money, from an unrelated business or otherwise, its activity can be styled "fundraising," since the income is destined for -- indeed, must, if the charity is to retain its tax exemption, be used exclusively for -- charitable purposes. The profits NYU once derived from its macaroni factory (C.F. Mueller Co. v. Commissioner, supra) could equally have been labeled "fundraising," for the funds financed education. That is what prompted Congress to enact the unrelated business income tax in 1950, determining that tax-exempt groups should not be granted a tax subsidy at the expense of their taxpaying competitors in the marketplace, and enacting a statute that focuses on the source, not on the destination, of a tax-exempt organization's income. The rationale of the courts below -- that the Endowment's insurance profits represented "charitable fund-raising" -- simply begs the question, which is not whether the Endowment raised funds for charitable purposes, but whether it raised funds for those purposes by running a "trade or business." As commentators on the Claims Court's decision have succinctly noted, "the court's emphasis on the destination of the profits for charitable purposes is wholly at variance with the genesis of the tax." Schwarz & Hutton, Recent Developments in Tax-Exempt Organizations, 18 U.S.F.L. Rev. 649, 684 (1984). 3. The question presented has considerable administrative importance. Group insurance plans are popular revenue-raisers for tax-exempt organizations. The IRS advises that in recent years it has issued dozens of private letter rulings responding to requests for guidance about the application of the unrelated business income tax to the insurance operations of tax-exempt groups. A preliminary IRS survey discloses 37 open or recently-closed audits involving this issue. Considering bar associations alone, a 1982 study by the Endowment (C.A. App. 1188) revealed that 90% of state bars offer group life, medical, and disability insurance, and that most large local bar associations sell various types of insurance as well. The reasoning of the decision below could be pressed into service by hundreds of educational groups, fraternal societies, business leagues, and other tax-exempt membership associations nationwide. Under the court of appeals' theory, any group whose members are blessed with better-than-average health or longevity can offer group insurance at prevailing market rates without paying tax on its profits. As this case illustrates, these profits tend to be large, and the taxes at stake -- for the Endowment, over $6 million for the three years at issue -- concomitantly substantial. There is, moreover, no principled basis for confining the court of appeals' reasoning to insurance activities. Tax-exempt associations could operate vacation resorts, catalogue shopping centers, apartment houses, or any other profit-motivated enterprise for their members. So long as they contrive to make extraordinarily large profits, and publicize to their members the charitable destination of those profits, they would seem under the Federal Circuit's reasoning to be as well situated as respondent to claim immunity from tax on their business receipts. Aside from the revenue impact, the question presented is important because the unrelated business income tax has a significant regulatory function. Congress designed the tax, not just to raise money, but to keep the commercial endeavors of tax-exempt and non-exempt competitors on a par. The Endowment offers insurance at market prices and enjoys the patronage of some 57,000 ABA members. It competes directly with insurance brokers, plan administrators, and underwriters nationwide who vie for the business of those 57,000 lawyers. The fact that the Endowment elected to limit its market share by forbearing to underprice its competitors does not mean, as the Claims Court thought (App., infra, 48a), that its insurance business has "an entirely procompetitive effect." Quite the contrary: a tax-exempt group need not undersell everyone else in the market to run afoul of the policy of the unrelated business income tax. It must be rather cold comfort to respondent's competitors that respondent's insurance could be even cheaper than it is. Particularly is that so when the Endowment exploits its standing as a charitable organization to its commercial advantage by telling its members that their premiums are tax-deductible. 4. As noted earlier, the question presented here concerning the unrelated business income tax is connected to that on which the Court has granted certiorari in United States v. American College of Physicians, No. 84-1737 (July 1, 1985). The question in that case is whether a tax-exempt group's publication of commercial advertising, which it concedes to be a "trade or business," is "substantially related" to its educational purposes. The question here, by contrast, is whether a tax-exempt group's conduct of insurance operations, which it concedes not to be "substantially related" to its educational purposes, is a "trade or business." The two questions, while obviously linked, involve the construction of different statutory phrases, appearing in different provisions of the Code, each illuminated by a unique legislative history, and each accompanied by a long and discrete tradition of judicial interpretation. This Court's decision in United States v. American College of Physicians, supra, therefore, is most unlikely to resolve the question of statutory construction presented here. For the reasons outlined above, that question merits this Court's plenary review. B. Frederic D. Turner, et ux., et al. 1. Section 170 of the Code affords an income tax deduction for a "charitable contribution," defined as "a contribution or gift" to or for a charitable, educational, or other qualifying organization (I.R.C. Section 170(c)(2)). The phrase "contribution or gift" is not further defined in the Code or Regulations. However, Congress made clear in the legislative history of the 1954 Code that a transfer of property constitutes a contribution or gift "only if there (is) no expectation of any quid pro quo." H.R. Rep. 1337, 83d Cong., 2d Sess. A44 (1954). For purposes of the charitable contribution deduction, in other words, "gifts" are limited to "those contributions which are made with no expectation of a financial return commensurate with the amount of the gift." S.Rep. 1622, 83d Cong., 2d Sess. 196 (1954). Drawing upon this legislative history, the courts of appeals have consistently denied charitable contribution deductions to taxpayers who expect to receive, or do receive, an economic quid pro quo commensurate with the value of the property they transfer to charity. In Sedam v. United States, 518 F.2d 242 (1975), the Seventh Circuit denied a charitable deduction for a donation to an old-age home, where the "gift" was required as a condition of admitting patients. "It is at least clear," the court held, "that a payment is not a contribution or gift under section 170 if it is made with the expectation of receiving a commensurate benefit in return" (518 F.2d at 245). In Stubbs v. United States, 428 F.2d 885 (1970), the Ninth Circuit upheld the denial of a charitable deduction for a developer's contribution of land to a municipality, where the transfer was made in the hope of obtaining favorable zoning treatment. The "gift" did not qualify for deduction under Section 170, the court held, because it "was in expectation of the receipt of certain specific direct economic benefits" (428 F.2d at 887). Indeed, the Federal Circuit's predecessor on previous occasions itself denied charitable deductions where "the transferor has received, or expects to receive, a quid pro quo sufficient to remove the transfer from the realm of deductibility under section 170." Singer Co. v. United States, 449 F.2d 413, 423 (Ct. Cl. 1971). 2. Consistently with these well-established principles, the Claims Court in the instant cases held that respondents were not entitled to deduct their insurance premiums as "charitable contributions" unless they could show that, in purchasing insurance from the Endowment, they had "bought goods or services for more than their economic value, with the intention that the excess be used to benefit a charitable enterprise" (App., infra, 49a). Since respondents testified that they regarded the Endowment's insurance package as "reasonably or competitively priced" (C.A. App. 430), and since none of the respondents proved that he knew of a less-expensive insurance package available anywhere else, the Claims Court concluded that each had failed to show that he "purchased (the Endowment's) insurance for reasons other than his own economic interest" (App., infra, 54a). In short, because respondents failed to prove that the premiums they paid exceeded the fair market value of the insurance they bought, they were not entitled to charitable contribution deductions, having received, as they had expected to receive, "a financial return commensurate with the amount of (their) gift(s)" (S. Rep. 1622, supra, at 196). 3. In reversing the judgment of the Claims Court, and in rejecting the legal standard it adopted, the Federal Circuit's decision is squarely at odds with fundamental tax principles enunciated by Congress and confirmed by other courts of appeals. The court below completely ignored the economic comparability between what respondents paid for and what they got. Instead, it adopted a vague and subjective standard mandating inquiry into "whether the relationship between the Endowment and the (respondents) was predominately of a business nature" (App., infra, 22a-23a). Under that standard, the Federal Circuit ruled, respondents on remand could "present a prima facie case for the deduction * * * simply (by) mak(ing) a sworn assertion that they wanted to aid (the Endowment's) charitable endeavor and entered the Endowment's plan because it enabled them to do so" (id. at 22a). The burden of proof, the court said, would then shift to the government to "controvert that position and suggest factors showing that the transaction was basically busines-oriented" (ibid.). The court of appeals' reasoning is multiply flawed. It is contrary to the numerous cases holding that "a payment is not a contribution or gift under section 170 if it is made with the expectation of receiving a commensurate benefit in return" (Sedam v. United States, 518 F.2d at 245). Far from making out a prima facie case for a deduction, the self-serving affidavit contemplated by the court of appeals is entitled to no probative weight. Such an affidavit would sidestep the real question, which is not whether respondents bought insurance from the Endowment because they "wanted to aid (its) charitable endeavor" (App., infra, 22a), but whether they enrolled in its program with "no expectation of any quid pro quo" (H.R. Rep. 1337, supra, at A44). Tax cases, moreover, are no exception to the rule, acknowledged from time immemorial, that the plaintiff bears the burden of proof. Helvering v. Taylor, 293 U.S. 507, 514-515 (1935); Welch v. Helvering, 290 U.S. 111, 115 (1933). Indeed, even "(a)fter satisfying the procedural burden of producing evidence to rebut the presumption in favor of the Commissioner, the taxpayer must still carry his ultimate burden of proof or persuasion." Rockwell v. Commissioner, 512 F.2d 882, 885 (9th Cir. 1975). The court of appeals' proposed affidavit procedure encroaches impermissibly on these long-settled rules. Contrary to the court of appeals' belief, finally, the fact that respondents may be said to have "approv(ed) of and consent(ed) to" the Endowment's insurance program (App., infra, 8a) by agreeing to waive their entitlement to policy dividends makes no difference in determining whether they are entitled to charitable contribution deductions. Respondents, like all other ABA members, have absolutely no choice in this respect. If they will not waive their dividends, they cannot get insurance; it is simply part of the price of admission. The Endowment sets its price of admission fully cognizant of the valuable function it performs by assembling a pool of better-than-average insurance risks and negotiating favorable contracts with its underwriters. That in turn enables the Endowment to make big profits while keeping its retail price competitive. Many lawyers elect to pay that price because they cannot find a better deal elsewhere. The simple fact of the matter is that ABA members do not have access to the wholesale group insurance market, but must pay the retail price, and the Endowment in this respect charges whatever the retail market will bear. Respondents got what they paid for -- insurance at market prices -- and they accordingly have no claim to any charitable contributions. 4. Because the Federal Circuit remanded the individual respondents' cases with instructions to the Claims Court, the court of appeals' decision on the "charitable contribution" question is interlocutory. That issue is nevertheless suitable for this Court's immediate review. It presents a clear-cut question of law, resolution of which is essential to the proper conduct of proceedings (if any) on remand. It is closely linked to the unrelated business income tax question presented in American Bar Endowment, as to which the Federal Circuit's judgment is final. The two questions draw on a common nucleus of facts, and the legal analysis brought to bear on the one may well illuminate the proper approach to be taken to the other. Indeed, in light of the Federal Circuit's description of the Endowment's insurance operations as "a fund-raising program" (App., infra, 2a), the two questions, in a sense, are reverse sides of the same coin) requiring analysis of the insurance transaction from the seller's and the buyer's viewpoint respectively. The charitable contribution question has considerable importance, potentially involving $1.5 million in annual revenue and tax deductions of some 57,000 taxpayers in these cases alone. The court of appeals has stayed proceedings on remand pending disposition of this petition, and considerations of judicial economy favor resolution of the charitable contribution question now. CONCLUSION The petition for a writ of certiorari should be granted. Respectfully submitted. CHARLES FRIED Acting Solicitor General ROGER M. OLSEN Acting Assistant Attorney General ALBERT G. LAUBER, JR. Assistant to the Solicitor General ROBERT A. BERNSTEIN ROBERT S. POMERANCE Attorneys OCTOBER 1985 /1/ Unless otherwise noted, all statutory references are to the Internal Revenue Code of 1954 (26 U.S.C.), as in effect for the tax periods in issue (the Code or I.R.C.). /2/ Respondents' wives are parties solely by virtue of having filed joint income tax returns with their husbands for the relevant tax years. /3/ We are providing copies of these briefs to counsel for respondents in this case. APPENDIX