Stichting Pensioenfonds Voor De Gezondheid, Geestelijke en Maatschappelijke Belangen v. United States

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 29, 1997 Decided November 14, 1997

No. 97-5006

Stichting Pensioenfonds Voor de Gezondheid, Geestelijke en

Maatschappelijke Belangen,

Appellant

v.

United States of America,

Appellee

Appeal from the United States District Court

for the District of Columbia

(No. 95cv01568)

K. Peter Schmidt argued the cause for appellant. With

him on the briefs was Philip W. Horton.

Robert W. Metzler, Attorney, U.S. Department of Justice,

argued the cause for appellee. With him on the briefs were

Mary Lou Leary, Acting U.S. Attorney at the time the brief

was filed, Loretta C. Argrett, Assistant Attorney General,

U.S. Department of Justice, and Kenneth L. Greene, Attor-

ney.

Before: Edwards, Chief Judge, Ginsburg and Tatel,

Circuit Judges.

Tatel, Circuit Judge: A Dutch pension fund jointly con-

trolled by employers and unions and claiming to be a "labor

organization" as described in section 501(c)(5) of the Internal

Revenue Code challenges the Internal Revenue Service's

denial of its application for exemption from federal income

taxation. Because tax exemptions require unambiguous proof

and because we can find no authority directly entitling the

pension fund to an exemption, we affirm the district court's

grant of summary judgment for the United States.

I

Appellant Stichting Pensioenfonds Voor de Gezondheid,

Geestelijke en Maatschappelijke Belangen (the "Fund") is a

Dutch pension plan formed in 1969 following negotiations

between labor unions representing hospital workers and the

Dutch national hospital employers' association. Soon after

the Fund's formation, the Dutch government granted it "com-

pulsory treatment," thus requiring all private hospitals and

their employees to participate. The Fund has since expanded

to include fourteen health and social welfare sectors in the

Netherlands. The Fund has no principal place of business in

the United States, nor does it engage in any trade or business

here.

A board of directors controls the Fund's management and

assets. Pursuant to Dutch law, employers and unions each

appoint half of the board's twelve directors. The six employ-

er directors and the six union directors enjoy equal voting

power. If all directors are not present at a meeting, each

side may only cast as many votes as the side with the fewer

directors. On all policy issues, employer and union directors

must agree, or the board may not act. Unions and employers

also designate equal numbers of directors to all committees

formed by the board.

As the second largest private pension fund in the Nether-

lands, the Fund covered approximately one million people as

of December 31, 1993, some of whom were union members

and some of whom were not. About 600,000 were active

contributing members. Some 330,000 of the remaining mem-

bers were "sleepers," a Dutch idiom referring to employees

no longer working in industry sectors covered by the Fund

but entitled to receive pension benefits upon retirement by

virtue of previous employment. The remaining members

were retirees already receiving pension benefits.

Both employers and employees contribute to the Fund.

The board of directors establishes required contribution

rates, as well as the respective portions of the total contribu-

tion paid by employers and employees.

The Fund invests in U.S. stocks and mutual funds. In

1993, its U.S. security custodians withheld and paid to the

U.S. Treasury over eight million dollars in income tax.

Claiming tax-exempt status as a labor organization under

section 501(c)(5) of the Internal Revenue Code, see 26 U.S.C.

s 501(c)(5) (1994), the Fund filed a claim for this amount.

Receiving no response from the Service, the Fund filed suit in

the U.S. District Court for the District of Columbia.

Noting that taxpayers must prove exemptions "unambigu-

ously," and finding that the Fund lacked "a sufficient nexus

with a more traditional labor organization to qualify as a tax-

exempt labor organization itself," the district court granted

summary judgment for the United States. Stichting Pensio-

enfonds Voor De Gezondheid, Geestelijke En Maatschappe-

lijke Belangen v. United States, 950 F. Supp. 373, 374, 379

(D.D.C. 1996). In doing so, the district court rejected the

Fund's alternative argument that, even if not entitled to tax-

exempt status, it should have received a refund pursuant to

section 7805(b) of the Code, 26 U.S.C. s 7805(b) (1994) (su-

perceded by 28 U.S.C.A. s 7805(b)(8) (West Supp. 1997)).

Stichting Pensioenfonds, 950 F. Supp. at 381. We review the

district court's grant of summary judgment de novo. Tao v.

Freeh, 27 F.3d 635, 638 (D.C. Cir. 1994).

II

Because the Constitution confers upon Congress exclusive

authority to collect taxes to provide for the general welfare of

the United States, U.S. Const. art. I, s 8, cl. 1, only Congress

itself may create exemptions from federal tax laws. Given

the importance of taxation and the general presumption in

favor of taxing all sources of income, courts may not infer

exemptions when Congress has not clearly provided for them.

See 1 Jacob Mertens, Jr., The Law of Federal Income

Taxation s 3.49 (Nov. 1991). For this reason, the Supreme

Court has consistently held for over a century that a taxpayer

must "unambiguously" prove entitlement to an exemption:

"Exemptions from taxation are not to be implied .... they

must be unambiguously proved," United States v. Wells Far-

go Bank, 485 U.S. 351, 354 (1988); "[T]hose who seek an

exemption from a tax must rest it on more than a doubt or

ambiguity. Exemptions from taxation cannot rest upon mere

implications," United States v. Stewart, 311 U.S. 60, 71 (1940);

"As taxation is the rule, and exemption the exception, the

intention to create an exemption must be expressed in clear

and unambiguous terms.... Legislation which relieves any

species of property from its due proportion of the burdens of

the government must be so clear that there can be neither

reasonable doubt nor controversy in regard to its meaning,"

Yazoo & Miss. Valley R.R. Co. v. Thomas, 132 U.S. 174, 183

(1889). As Justice Cardozo said for an unanimous court over

sixty years ago, "Exemptions from taxation are not to be

enlarged by implication if doubts are nicely balanced." Trot-

ter v. Tennessee, 290 U.S. 354, 356 (1933). With this extreme-

ly high standard in mind, we search for some direct authority

that unquestionably and conclusively entitles the Fund to the

exemption it seeks.

We begin, of course, with the Internal Revenue Code.

Section 501(c)(5) exempts labor, agricultural, and horticultural

organizations from taxation. 26 U.S.C. s 501(c)(5). The

Code neither defines the term "labor organization" nor elabo-

rates on its meaning. The legislative history, moreover,

provides no unambiguous guidance. The early twentieth-

century congressional debates on whether to include the term

"labor organization" in section 501(c)'s precursor had nothing

to do with whether jointly controlled entities providing pen-

sion benefits should be exempt from federal taxation. In-

stead, the debates focused on whether the Code's exemption

for "fraternal beneficiary societies ... providing for the pay-

ment of life, sick, accident, or other benefits to members"

would be understood as covering all labor organizations, a

question that Congress answered negatively when it explicitly

exempted labor organizations. See 44 Cong. Rec. 4154-55

(1909). We agree with the district court that this legislative

history provides "little help" in understanding the scope of

the term "labor organization." See Stichting Pensioenfonds,

950 F. Supp. at 375.

We next turn to the Treasury Regulation that defines the

term "labor organization," but which is ultimately unhelpful.

It says:

The organizations contemplated by section 501(c)(5) as

entitled to exemption from income taxation are those

which:

(1) Have no net earnings inuring to the benefit of any

member, and

(2) Have as their objects the betterment of the condi-

tions of those engaged in such pursuits, the improvement

of the grade of their products, and the development of a

higher degree of efficiency in their respective occupa-

tions.

26 C.F.R. s 1.501(c)(5)-1(a) (1997). A nonprofit entity, the

Fund clearly satisfies sub-paragraph (1). While the Fund

may also satisfy the first of sub-paragraph (2)'s require-

ments--it has as its object the betterment of employee finan-

cial conditions--it cannot meet the other two requirements: it

neither works to improve products nor to develop higher

degrees of efficiency. The Fund urges us to read sub-

paragraph (2) disjunctively, but given the plain meaning of

the word "and" we cannot do so. See C.K. Ogden, Basic

English International Second Language 132 (1968) ("And is

used for joining words together: The man and the woman

are married. Or is used for the idea of one of two: The man

or the woman is married."). Although this conclusion would

otherwise end this case--the regulation does not unambigu-

ously entitle the Fund to an exemption--the Service did not

rely on the regulation in its brief or at oral argument.

Because the Service itself does not argue that the regulation

excludes the Fund from labor organization status, we decline

to decide the case on that basis.

Finding help in neither the Code nor the regulation, we

look next to the IRS's Revenue Rulings, the second most

important agency pronouncements that interpret the Code.

Applying the Code to specific situations, Revenue Rulings

bind both the Service and the taxpayer. Although Revenue

Rulings "do not have the force and effect of Treasury Depart-

ment Regulations," they are "published to provide precedents

to be used in the disposition of other cases, and may be cited

and relied upon for that purpose." 26 C.F.R.

s 601.601(d)(2)(v)(d) (1997). But because "each Revenue Rul-

ing represents the conclusion of the Service as to the applica-

tion of the law to the entire state of facts involved, taxpayers,

Service personnel, and others concerned are cautioned

against reaching the same conclusion in other cases unless

the facts and circumstances are substantially the same." 26

C.F.R. s 601.601(d)(2)(v)(e). The Fund can thus prevail only

by identifying a Revenue Ruling awarding an exemption in a

case having facts and circumstances "substantially the same"

as this case. Examining the relevant Revenue Rulings care-

fully, we find no such controlling authority.

The Service has issued fifteen Revenue Rulings under

section 501(c)(5). See Stichting Pensioenfonds, 950 F. Supp.

at 378 nn.2-3 (citing the Rulings). Eleven deal with organiza-

tions completely controlled by unions and thus do not involve

facts and circumstances substantially similar to those in this

case. Of the four that concern jointly controlled organiza-

tions, three award tax exemptions, but none of the organiza-

tions covered by those rulings is substantially similar to the

Fund. See Rev. Rul. 78-42, 1978-1 C.B. 158; Rev. Rul 75-

473, 1975-2 C.B. 213; Rev. Rul. 59-6, 1959-1 C.B. 121. To

begin with, the organizations do not provide pension benefits.

Rulings 78-42 and 59-6 deal with apprenticeship committees

that provide training and education to employees, while Rul-

ing 75-473 involves a jointly controlled dispatch hall that

allocates work assignments to union members and adjudicates

grievances over working conditions. Moreover, the labor

organizations that the Service found exempt in these three

rulings focus primarily on improving employee conditions on

the job, while the Fund has as its purpose improving employ-

ee benefits after the job, i.e. pension benefits. The three

Rulings also differ from this case because none involves

organizations governed by foreign law. Simply because the

Service has awarded tax exemptions to labor organizations

dually controlled under American law does not mean that it

would necessarily have to reach the same conclusion for

organizations dually controlled under foreign law, particularly

since exempting foreign pension plans means that their earn-

ings will escape all U.S. taxation. Earnings of exempt do-

mestic funds, by comparison, are taxed when benefits are

paid to recipients.

The Fund argues that it should receive an exemption

because it conducts appropriate labor organization activities.

That an organization performs activities "appropriate" to

labor organizations, however, does not make it a labor organi-

zation under these Revenue Rulings. The Service has said

only that a labor organization not itself a labor union that

engages in appropriate labor union activities "may" qualify

for an exemption. Rev. Rul. 75-473. The Service does not

end its inquiry upon finding that the organization carries out

an "appropriate" union activity. Instead, the Service exam-

ines the specific facts of each case, looking to other factors

such as the organization's purpose, see Rev. Rul. 78-42; Rev.

Rul. 59-6, and the nexus between the organization's activities

and the parent labor union's objectives, see Rev. Rul. 75-473.

Although providing and administering pension plans for

workers is certainly an appropriate and traditional union

function, we find no basis for an exemption in this case

because the Revenue Rulings do not unambiguously stand for

the proposition that any organization bearing some connec-

tion to a traditional labor union and performing appropriate

or traditional union functions is necessarily an exempt labor

organization.

The fourth Revenue Ruling dealing with a jointly controlled

labor organization casts even more doubt on the Fund's claim.

Rev. Rul. 77-46, 1977-1 C.B. 147. In that Ruling, the Service

denied an exemption to an organization that withheld money

from union members' pay and invested it, later paying it back

annually with interest. Although the Fund argues, perhaps

correctly, that this kind of savings plan differs from a pension

plan, the Fund's claim for an exemption still ultimately rests

on inference and implication rather than unambiguous author-

ity.

The Fund also relies heavily on several General Counsel

Memoranda. These "GCMs," however, have no precedential

value. See Disabled American Veterans v. Commissioner,

942 F.2d 309, 315 n.5 (6th Cir. 1991) (rejecting reliance on

GCMs on the grounds that "[s]uch informal, unpublished

opinions of attorneys within the IRS are of no precedential

value"); Old Harbor Native Corp. v. Commissioner, 104 T.C.

191, 206-07 (1995) ("[A] general counsel memorandum is not

binding precedent on this Court."). They therefore cannot

provide a basis for the Fund's claim.

The Fund has failed to meet its heavy burden of demon-

strating unambiguous entitlement to tax-exempt status. We

find nothing in the Code, the regulation, or the Revenue

Rulings that even comes close to stating that a jointly con-

trolled pension plan governed by foreign law is a labor

organization exempt from federal taxation. Our doubts about

the Fund's entitlement to tax-exempt status are not even

"nicely balanced."

We recognize that in Morganbesser v. United States, 984

F.2d 560 (2d Cir. 1993), the Second Circuit, with one judge

dissenting, held that a jointly controlled pension fund is

entitled to tax-exempt status under section 501(c)(5). Unlike

this case, however, Morganbesser involved a pension fund

organized under U.S. law. The Second Circuit, moreover,

relied on the precedentially dubious GCMs, never mentioning

or applying the "unambiguous" standard that we find control-

ling. In any event, the Treasury Department has now pro-

posed a regulation providing that "[a]n organization is not an

organization described in section 501(c)(5) if the principal

activity of the organization is to receive, hold, disburse, or

otherwise manage funds associated with ... pension or other

retirement savings plans or programs." 62 Fed. Reg. 40,447,

40,449 (1997) (adding proposed 26 C.F.R. s 1.501(c)(5)-

1(b)(1)). Although both parties agree that this purely pro-

spective regulation has no relevance to the case before us, we

mention it to point out that Morganbesser has a brief life

expectancy.

III

We turn finally to the Fund's argument that even if not

entitled to an exemption under section 501(c)(5), it should

have received a refund pursuant to section 7805(b) of the

Code, which gives the Service discretion to apply its rulings

retroactively. See 26 U.S.C. s 7805(b). The Fund cites IBM

v. United States, 343 F.2d 914 (Ct. Cl. 1965). After the

Service granted Remington Rand, a direct IBM competitor,

an excise tax exemption for its Univac computers, IBM

applied for a similar ruling for its competing computer.

Several years later, the Service denied IBM's request, at the

same time revoking Remington's exemption. Invoking sec-

tion 7805(b), the court held that the Service had abused its

discretion by taxing IBM but not Remington in the years

prior to the revocation of Remington's exemption. Id. at 923.

Relying on this decision, the Fund argues that because the

Service has exempted two similarly situated British pension

funds in private determination letters, it likewise abused its

discretion by failing to give the Fund a refund for the period

in question, i.e. 1993. We disagree.

To begin with, IBM applies only to direct competitors. In

its very first sentence, the court stressed the competitive

relationship between IBM and Remington Rand: "Interna-

tional Business Machines Corporation ... and Remington

Rand were, in the years 1951-1958, the two competitors in

the manufacture, sale, and leasing of larger electronic com-

puting systems." Id. at 915-16. Treating direct competitors

similarly for tax purposes, the court emphasized, "is peculiar-

ly essential to free and fair competition," id. at 923; see also

id. at 921 n.8 (noting that IBM and Remington "were the only

two competitors as to the type of devices involved in the

Service's rulings"); id. at 923 (indicating that the Service's

treatment "favor[ed] the other competitor so sharply that

fairness called upon the Commissioner ... to establish a

greater measure of equality"). In view of this language,

courts interpreting IBM have limited it to cases involving

direct competitors. See, e.g., Wilson v. United States, 588

F.2d 1168, 1172 (6th Cir. 1978) (characterizing IBM as apply-

ing to Service regulations or rulings that "would lead to

inequality of treatment between competitor taxpayers");

Anderson, Clayton & Co. v. United States, 562 F.2d 972, 981

(5th Cir. 1977) (same). Because the Fund does not allege--as

of course it could not--that it competes with the two exempt

British funds, IBM has no applicability to this case.

We also doubt that section 7805 even applies here. By its

terms, section 7805 only applies to a decision by the Service

to limit the retroactive effect of a ruling. Here, the Service

has simply denied a refund, taking no action whatsoever with

respect to retroactivity. Moreover, neither the plain lan-

guage of section 7805 nor any of the cases that the Fund cites

stands for the proposition that once the Service has treated

one taxpayer a certain way, it must thereafter treat every

similarly situated taxpayer exactly the same way. In fact, to

the extent that Treasury's proposed regulation denying sec-

tion 501(c)(5) tax-exempt status to pension funds, supra at 8-

9, represents a repudiation of the Service's previous decision

to exempt the British funds, nothing requires the Service to

perpetuate its original error by granting the same mistaken

exemption to other taxpayers. See Sirbo Holdings, Inc. v.

Commissioner of Internal Revenue, 509 F.2d 1220, 1222 (2d

Cir. 1975) ("While even-handed treatment should be the

Commissioner's goal ... [t]he making of an error in one case,

if error it was, gives other taxpayers no right to its perpetua-

tion.").

We affirm the district court's grant of summary judgment

for the United States.

So ordered.