# Opposition Brief — United States v. American Bar Endowment

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 1986
- **Citation:** 477 U.S. 105

## Text

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IN THE
Supreme Court of the United States

OCTOBER TERM, 1985

UNITED STATES OF AMERICA,

‘“ Petitioner

AMERICAN BAR ENDOWMENT,

Respondent

UNITED STATES OF AMERICA,
Petitioner

V .

FREDERICK D. TURNER et ux.,
ARTHUR M. SHERWOOD et ux.,
FREDERICK G. BOYNTON and
HERBERT C. BROADFOOT, IT ef we.,
Respondents

On Petition for a Writ of Certiorari to the United States
Court of Appeals for the Federal Circuit

RESPONDENTS’ BRIEF IN OPPOSITION

FRANCIS M. GREGORY, JR.
(Counsel of Record)

RANDOLPH W. THROWER

MAC ASBILL, JR.

CAREY P. DEDEYN

S"1EILA J. CARPENTER
SUTHERLAND, ASBILL & BRENNAN
1666 K Street, N.W.
Suite 800
Washington, D.C. 20006
(202) 872-7800

Attorneys for Respondents

WILSON - Epes PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

QUESTIONS PRESENTED

1. The appropriate question as to the American Bar
Endowment is as follows:

Whether policyholder dividends assigned to the En-
dowment, a section 501/c) (3) charitable organization, by
its insured members in a group insurance program con-
stitute income from an unrelated trade or business when
the United States Claims Court found as fact, and the
United States Court of Appeals for the Federal Circuit
agreed, that such dividends were not income earned by
the Endowment from the “sale of goods or the perform-
ance of services,” but, to the contrary, were received by
the Endowment in a charitable fundraising activity ap-
proved of and controlled by the well-informed member-
ship of the Endowment?

2. The appropriate question as to the four individuals
claiming a charitable contribution deduction is as follows:

Whether the Federal Circuit correctly remanded the
cases of the four individual insureds to the Claims Court
for a determination of whether a charitable contribution
deduction was appropriate in light of “all the pertinent
circumstances” involving the relationship between the
four insured members and the Endowment, including the
motivation and intent of each individual claiming a chari-
table deduction?

(i)

ii
STATEMENT REQUIRED BY RULE 28.1

The American Bar Endowment is a non-stock member-
ship corporation. Its membership consists of all members
in good standing of the American Bar Association. It
has no parent and no subsidiaries. :

The individual insureds and their spouses who are re-
spondents in this Court are: Frederick D. Turner and
Margaret S. Turner, Arthur M. Sherwood and Karen H.
Sherwood, Frederick G. Boynton, Herbert C. Broadfoot,
II and Nancy L. Broadfoot.

TABLE OF CONTENTS

Page

So ,_ e i
STATEMENT REQUIRED BY RULE 28.1.0... ii
pe FT yy iv
ER IT eae ee er 1
SEE ; 2
STATEMENT OF THE CASE .....00..020...0..ccccccccecseseeeese. 2
Introduction ............... ip icseslieeiibieddapbiapadniarinbaddunicsedenihe 2
Supplementary Statement ....................0...000000-cccee0-. 3

A. The ABE Charitable Fundraising Plan ............. 3

B. The Individual Insureds ....................00..0......0....- 7
SUMMARY OF ARGUMENT .....00. oe . 8
REASONS FOR DENYING THE WRIT |... 10
I. The Unrelated Business Income Issue ............. 10

II. The Charitable Contribution Issue 0.000 18
I este ica asaia tea aril weesemspesennincdiaseeoiiona 23
EE RE aR Ee Ae A ae A-l
EEE ee aE eT nee B-1
SHEA ae ee C.j

(iii)

iv

TABLE OF AUTHORITIES
Cases: Page

Carolinas Farm & Power Equip. Dealers Ass’n v.
United States, 699 F.2d 167 (4th Cir. 1983), |
rev’g, 541 F. Supp. 86 (E.D.N.C. 1982) _......... 12, 13-14

Louisiana Credit Union League v. United States,

693 F.2d 525 (5th Cir. 1982), aff’g, 501 F. Supp.
Se Se Bi IED ns csciersntitennntineinslbnbdisienindabasedinenes 12, 13

Professional Ins. Agents v. Commissioner, 726
F.2d 1097 (6th Cir. 1984), aff’g, 78 T.C. 246

(1982) ....... NEN LANE RAE a IMI RED OD es ENTE CRETE 12-13
Sedam v. Commissioner, 518 F.2d 242 (7th Cir.

ERR gee a eae ee ca Me Re, Re in Ne 20
Singer Co. v. United States, 449 F.2d 413 (Ct. Cl.

I ical ek a a 20, 21
Stubbs v. United States, 428 F.2d 885 (9th Cir.

1970), cert. denied, 400 U.S. 1009 (1971) ......... 20, 21

United States v. American College of Physicians,
cert. granted, 53 U.S.L.W. 3911 (U.S. July 1,

1985) (No. 84-1737) _...... ee eee oe Dea ee 17-18
Internal Revenue Code and Rulings:
I a SN 2, 20
Section 501 (c) (3) —.......... apligeiaitaas a a ae i, 14, 15
SERNA Ra eR ENN TT 14, 16
Section 512 (a) ................... Deceeeeietiihediaiamsieasbiiieiadianablaied 10
Section 513 ....... Teele <Cotnsuutatanitansedsenkttetiatiaiienaentiid 16
EE ae ET ER ee Se RCE passim
Rev. Rul. 67-246, 1967-2 C.B. 104 ............................... 19
Rev. Rul. 68-432, 1968-2 C.B. 104 ......... ee. 19
Supreme Court Rules:
i ic eneneiaeeeeaiaianes ii
a a 2

IN THE
Supreme Court of the United States

OCTOBER TERM, 1985

No. 85-599

UNITED STATES OF AMERICA,

Petitioner
v.

AMERICAN BAR ENDOWMENT,
Respondent

UNITED STATES OF AMERICA,

Petitioner
v.

FREDERICK D. TURNER et uz., et al.,
Respondents

On Petition for a Writ of Certiorari to the United States
Court of Appeals for the Federal Circuit

RESPONDENTS’ BRIEF IN OPPOSITION

Respondents American Bar Endowment (“ABE” or
“Endowment”) and Frederick D. Turner, et al. (also re-
ferred to as “individual insureds”) respectfully request
that the Petition for Writ of Certiorari to the United

States Court of Appeals for the Federal Circuit be denied.

OPINIONS BELOW

The Government failed to append to its Petition the
two oral opinions of the United States Claims Court,
despite the fact that Chief Judge Kozinski viewed them

as part of his opinion' and the parties had reproduced

1“The court made ora’ findings of fact on the record after trial.
This opinion supplements those findings as appropriate to the resolu-
tion of the legal issues discussed.” (P. App. 26a n.1)

2

each as an “oral opinion” of the Claims Court in the
Joint Appendix filed in the Federal Circuit. (C.A. App.
763-825) The oral findings with respect to the Endow-
ment, delivered at the close of trial on November 11,
1983, are set forth in Appendix A to this Opposition
(“App. A”); those with respect to the individual in-
sureds, delivered at a status call on December 21, 1983,
are set forth in Appendix B (“App. B”).?

STATUTES INVOLVED

The Government failed to note that section 170 of the
Internal Revenue Code of 1954 is involved in this Peti-
tion. The relevant portions of section 170 are set forth
in Appendix C.

STATEMENT OF THE CASE
Introduction

The Government, in its Statement of the Case, omits
critical facts and obscures others; the Petition does not
contain “all that is material to the consideration of the
questions presented.” (Rule 34.1.(g)) Specifically, the
Petition fails to apprise this Court of the fact that,
after a hotly contested trial nearly four weeks in length
that addressed numerous disputes of material fact in-
volving 25 witnesses and hundreds of exhibits, the Claims
Court entered specific findings of fact resolving against
the Government the key factual issues presented to it.
The Claims Court’s findings of fact were not challenged
by the Government before the Federal Circuit and were
unanimously confirmed by that court. It is not feasible
or even appropriate in this Opposition to present a com-
prehensive review of the factual findings. Our supple-

*? The following additional abbreviations are used in this Oppo-
sition: “C.A. App.” refers to the Joint Appendix filed with the
Federal Circuit; “P. App.” refers to the Appendix to the Petition
(“Pet.”).

3

mentary statement attempts to highlight the important
elements underpinning the opinions below.

Supplementary Statement
A. The ABE Charitable Fundraising Pian

In the 1950’s, the Endowment, at the suggestion of the
American Bar Association (“ABA”), undertook a novel
charitable fundraising plan through a group life insur-
ance program that was designed to generate sufficient
contributions to enable the ABE to further its charitable
objectives. (P. App. 26a-27a) As an integral feature of
the charitable fundraising plan and as a condition for
participation, Endowment members agreed to assign their
proportionate share of policyholder dividends as con-
tributions to the Endowment. (P. App. 32a)

The insurance offered threugh the Endowment’s pro-
gram is professional association group insurance—a new
concept in 1955 but a common one today. (P. App. 35a;
C.A. App. 236-37, 243-44) Such plans are generally used
to provide low cost insurance as a service to members.
(P. App. 38a) For example, both the medical and en-
gineering professions provide their members with low
cost group insurance by this method. (C.A. App. 256-57, .
267-70) Under such an arrangement the association
serves as the group policyholder. One or more insur-
ance companies underwrite the plans of insurance, and
there may be a broker or agent of record. The necessary
administration of the insurance program is accomplished
by the association and/or by a third party administra-
tor; on some plans the insurance company provides ad-
ministrative services. (C.A. App. 253-56, 319-20)* Pol-

% During the years in issue, New York Life and Mutual of Omaha
were the insurers for the life and accident and health insurance
programs, respectively, and the Endowment employed a licensed
insurance broker (James Group Service, Inc.) which received a
negotiated commission from the insurance companies for its serv-

4

icyholder dividends paid by the insurance company
(which are unnecessary insurance premiums (Pet. 3) )
normally are returned tax free to the members of the
association either in the form of a cash distribution or
a credit toward future premiums.

The Endowment’s plan, however, is different from other
professional association plans. Participating ABE mem-
bers pay premiums much higher than necessary to ob-
tain the insurance coverage; they allow policyholder divi-
dends resulting from the excess premiums to be retained
by the Endowment (after the expenses of administering
the plan are deducted) and used for charitable grants in
the field of law. (P. App. 32a-33a, 36a-40a)* Although
there was a factual dispute at trial as to the origin, pur-
poses and nature of the Endowment’s insurance program,
the Claims Court resolved this dispute, finding that the
program was devised as a means for charitable fundrais-
ing and “has been so presented and perceived from its
inception,” and further finding that the Endowment has
“stubbornly adhered to the original concept that its plans
are exclusively for fundraising.” (P. App. 35a-36a)

The Claims Court found as a fact that the Endowment
did not function either as an insurer or as a_ broker.
Despite the Government’s repeated assertions to the con-

ices. (P. App. 3a-4a, 27a) The Endowment administered the insur-
ance program. (P. App. 4a)

4 At the time of trial, the Endowment had made grants totaling
over $63 million to recipients including the American Bar Founda-
tion, the ABA Fund for Public Education, the Institute for Judicial
Administration, the Institute for Court Management, the National
College of District Attorneys, the National Council of Juvenile and
Family Court Judges, the National College of Criminal Defense
Lawyers, the National Institute for Trial Advocacy, and the Na-
tional Legal Aid and Defender Association. (C.A. App. 116-17)
In its fiscal years 1979, 1980 and 1981, the Endowment made grants
totaling $3,602,462, $4,397,619, ard $4,640,000, respectively. (C.A.
App. 117)

5

trary, the Court found thai the Endowment did not sell
insurance. (P. App. 27a, 47a) The Government contended
at trial that the Endowment, purportedly acting as a
“middleman” or a “retailer”, received payments of some
sort from the insurance carriers for services rendered,
but the Claims Court rejected this argument and expressly
found that the policyholder dividends came from the
members :

All of the evidence on both sides makes it clear that
the money here came from premiums, that no mat-
ter what the flow of dollars the economic reality was
that these were the members paying money to the
association and not insurance companies paying the
group in some fashion.

(App. A-12) The Claims Court found as fact that the
amounts received by the Fndowment did not constitute
income “from the sale of goods or the performance of
services” :

The amount of money ABE is permitted to retain
far exceeds the value of any service it may be pro-
viding through the operation of the insurance pro-
grams. It is quite obvious, then, that this money
was not earned “from the sale of goods or the per-
formance of services,” 26 U.S.C. § 513(c) (1976), —
but for some other reason. That reason was the in-
tent of the members to support the Endowment’s
charitable activities.

(P. App. 41a) (Emphasis added. )

The Government did not challenge this finding before
the Federal Circuit, ignoring it there as it has ignored
it here. Even so, the Federal Circuit reviewed the evi-
dence of record and confirmed the findings of the Claims
Court, remarking that “the Claims Court specifically and
permissibly rejected the Government’s contention that the
dividends represent a payment for the Endowment’s serv-
ices.” (P. App. 11a)

6

The Claims Court found that the significant policy-
holder dividends generated by the in:versction of the ex-
cellent mortality and morbidity experience of Endowment
members, together with the decision to set premiums at
levels significantly higher than necessary, reflected“ the
charitable fundraising strategy of the Endowment and
the expectations of the ABE membership.’ In other words,
the ABE membership wanted the program to work as it
did and wanted the dividends to remain with the Endow-
ment for charitable purposes. (P. App. 35a-40a; App.
A-9)°

Despite the Government’s attempts at trial to prove the
contrary. the Claims Court explicitly found that ABE
members were fully and fairly informed in a variety of
ways as to the charitable purposes of the insurance pro-
gram:

5 The Government’s repeated characterization of policyholder
dividends assigned to the Endowment by insured members as “in-
come” and “profits” begs the question. The trial in this case was
directed to the factual dispute as to whether such dividends con-
stituted “income” or “profits’”’ from the sale of goods or the perform-
ance of services or whether there was another explanation, namely,
the intention of the membership to allow the Endowment to retain
the dividends (after deducting the expenses of administering the
program) for charitable purposes. On the basis of the evidence at
trial, the Claims Court found that the latter explanation was the
correct one. (P. App. 40a-41la)

® ABA/ABE members could have decided to retain the benefit of
their favorable mortality and morbidity for themselves. The Court
found (P. App. 38a), however, that ABA/ABE members affirma-
tively chose not to pocket the dividends but to dedicate them to
charity:

If the ABA had chosen to do this, it could have offered its
members insurance at premiums lower than any other bar asso-
ciation, perhaps the lowest premiums of any group in the
country. The ABA members, however, have chosen a more
generous approach, allowing the Endowment (rather than the
ABA) to operate the insurance program and retain the divi-
dends.

7

[The Endowment] disclosed the relevant facts to its
members at every available opportunity, yet the
members (who bore the economic cost of this pro-
gram) allowed the practice to continue although they
collectively had the power to change it.

(P. App. 40a; App. A-7-A-9)* The Claims Court also
found as a fact, again contrary to the Government’s as-
sertions at trial (P. App. 39a), that the attitude of the
ABA/ABE leadership toward the program reflected the
views of the membership ana that, if the members had
wanted to discontinue the charitable feature and retain
the dividends for themselves, the leadership would have
responded by implementing those wishes:

Plaintiff has demonstrated to the court’s satisfac-
tion that there are ample, effective channels within
the ABA for members to make their views known
and have them implemented.

(P. App. 39a-40a & n.9) (Emphasis added.) *

B. The Individual Insureds

The Government ignores the fact that the brief testi-
mony of the individual insureds in support of a deduction
was supplementary to and based upon all of the testimony
at trial concerning the relationship of the Endowment —

7 The Court found that “both the ABE leadership and the insured
members considered the insurance program a fundraising activity
and treated it as such.” (P. App. 36a) “Most professional associa-
tions (including almost all bar associations) operate such programs
on a service-oriented basis and secure the most economical group
insurance for their members.” (P. App. 38a) “The money that
could have been saved by the members who bought insurance was
equal to the dividends refunded minus the Endowment’s operating
expenses. This amounted to several million dollars a year.” (P.
App. 38a n.7)

8 Wm. Reece Smith, Jr, a former President of the ABA and of
the Endowment, testified at length concerning the governance of the
ABA and ABE. (C.A. App. 198-211) He and other ABA and ABE
leaders noted the lack of dissent within the ABA concerning its
support of the Endowment’s program. (C.A. App. 188-89, 221-24)

8

members to the insurance program. In addition, in pur-
porting to summarize the testimony of the individuals,
the Government disregards highly pertinent, particular-
ized evidence of charitable motivation.

Arthur M. Sherwood, as a member of the New York
State Bar, had carried New York State Bar sponsored
life insurance but dropped it before the taxable years
involved here. He understood that the ABE program was
charitable and that the (significantly cheaper) New York
plan was not. Mr. Sherwood annually received notices
(as did all insured meinbers) from the Endowment in-
forming him of the portion of his premium that was a
contribution to the Endowment. He testified that he in-
tended and expected that a substantial portion of his
ABE premium would go to charity. (C.A. App. 413, 415-
18)

Herbert C. Broadfoot testified that he believed he was
making a dual payment: “One component is the insur-
ance coverage aspect of it, and another component is the
contribution that I am making to the American Bar
Endowment.” (C.A. App. 395) Although it was cited in
our brief to the Federal Circuit, the Government over-
looked the following testimony by Mr. Broadfoot:

... | was advised by the insurance agent I consulted
that the American Bar Endowment insurance pro-
gram was more costly than the same coverage at his
company or at other insurance companies. However,
he recognized the contribution feature of this insur-
ance coverage. That really was what we discussed
when we reviewed the program.

(C.A. App. 393-94)

SUMMARY OF ARGUMENT

The contention by the Government that the Federal
Circuit’s decision in the Endowment’s case conflicts with
decisions of other Courts of Appeals is without merit.
The decisions of other <ourts relied upon by the Govern-
ment are based on findings of fact that the dollars there

9

in question were received by business leagues from insur-
ance companies in exchange for the performance of serv-
ices for such companies. The small percentages of pre-
miums received by those associations were found by the
Claims Court to be “well within the range normally paid
for those types of promotional and administrative serv-
ices.” (P. App. 44a) The legal question addressed by those
courts—whether earnings from those services nevertheless
did not constitute “business” income because they lacked
the requisite profit motive—does not arise in the Endow-
ment’s case. Here the Claims Court found and the Fed-
eral Circuit confirmed that the policyholder dividends the
Government would tax were not income that the Endow-
ment earned from the sale of goods or the performance
of services. Instead they were attributable to the generous
decision of Endowment members to support a charitable
fundraising effort by allowing the Endowment to retain
the dividends. Accordingly, such dividends cannot be un-
related business income.

None of the other reasons advanced by the Government
for granting its Petition is meritorious. Without admit-
ting it, what the Government is seeking from this Court
is a reversal of the findings of fact on which both deci-
sions below are based.

As to Messrs. Turner, et al., the Federal Circuit has
entered an interlocutory order remanding the four cases
to the Claims Court for further proceedings. The Claims
Court was instructed to determine if a charitable con-
tribution deduction is appropriate for each of the four
individual insureds in light of “all the pertinent circum-
stances” (P. App. 2la) involving the relationship be-
tween the four insured members and the Endowment,
including evidence of the motivation and intent of each
individual claiming a charitable deduction. No reason
exists to grant the Petition; the Federal Circuit, in re-
manding for further proceedings, did so on the basis of
traditional principles of tax law which do not conflict
with any decided cases.

10

REASONS FOR DENYING THE WRIT

I. The Unrelated Business Income Issue

1. While the Petition repeatedly accuses the Federal
Circuit of refusing to apply the appropriate statutory
standard, in reality it is the Government which cannot
afford to (and therefore never does) apply the statutory
standard to the facts found below. The Endowment can
be taxed only to the extent it realizes “unrelated business
taxable income,” which in pertinent part is defined by
section 512(a)(1) of the Internal Revenue Code as—

the gross income derived by any organization from
any unrelated trade or business (as defined in sec-
tion 513) ... less the deductions allowed ....

(P. App. 63a) A “trade or business” is defined by section
513(¢) as “any activity which is carried on for the pro-
duction of income from the sale of goods or the perform-
ance of services.” (P. App. 67a) (Emphasis added.) Ab-
sent a finding that an activity was carried on by an ex-
empt ‘organization (1) to produce income and (2) that
such income was from the sale of goods or the perform-
ance of services, there cannot be a finding that the En-
dowment engaged in a trade or business.

The Petition asserts that the Endowment’s “operations
obviously comprised both ‘the sale of goods’ and the ‘per-
formance of services,’”’ and implies that these activities
were the reason the Endowment was able to retain the
dividends that the Government would tax. (Pet. 17-18)”
However, both courts below rejected the Government’s

*In the past the Government had flatly conceded that the Endow-
ment does not “sell insurance.” (C.A. App. 95) This inconsistency
is not surprising since throughout this litigation the Government
has not been able to make up its mind as to who paid the Endow-
ment the millions of dollars it would tax, or to fix on a logical
explanation of what the Endowment has done—year in and year
out—to realize its “profit” (over $63 million cumulatively) on the
administration of a single group insurance program.

11

contention that dividends were paid to the Endowment by
insurance companies or Endowment members in return
for the sale of goods or the performance of services by
the Endowment. (See P. App. 9a-12a, 35a-4la) The
Claims Court concluded that the Endowment did not re-
ceive one penny of compensation from an insurance car-
rier for any reason and held unequivocally that the mem-
bers of the Endowment did not assign dividends to the
Endowment in exchange for the sale of goods or the rer-
formance of services.'® Rather, it was the “intent of the
members to support the Endowment’s charitable activi-
ties” that caused the members to permit the Endowment
to retain $63 million in dividends for charitable pur-
poses (P. App. 4la), and, as the Federal Circuit ex-
plained, the Claims Court “determined that the Endow-
ment’s receipts have far exceeded the value of any
services which it might have performed in the course of
its administration of the plan, and thus did not fit within
the statutory definition of income from a trade or busi-
ness.” (P. App. 8a-9a)™

10The Government would characterize the relaticnship of the
ABE and its insured members as one where the Endowment bought
insurance wholesale and sold it to the members retail. (Pet. 17, 25)
This is in sharp contrast to the findings of the Claims Court and ~
the analysis of both courts below. New York Life and Mutual of
Omaha sold the insurance and the premium payments were made
by the members. In the usual service-oriented plan the dividends,
after expenses, would have been returnea to the members or applied
for their benefit. The price to such members, after dividends, is in
no sense a wholesale price. It is the price of a particular insurance
product, namely, participation in an association group insurance
program. The generosity of Endowment members in giving up
their policyholder dividends returned by the insurance carriers
does not make the “wholesale-retail” concept valid.

11 The amounts the Government would tax as unrelated business
income during the years in issue are five to seven times the fee
(including a normal profit) that would have been charged by a third
party administrator for performing the same services in those
years. (C.A. App. 138-39, 373-74, 468-71, 582, 734-35, 1173-84)

12

2.a. The Government asserts that the decision of the
Federal Circuit “squarely conflicts” (Pet. 12) with three
eases from other circuits which allegedly arise “on sub-
stantially identical facts” as the Endowment’s case. (Pet.
13)** Only by ignoring the unique facts of this case can
the Government make such an assertion. In the trade
association cases relied on by the Government, there was
no question that the sums involved were received “from
the performance of services.” Each of those associations
performed services for an insurance carrier and was paid
a fee in the form of a small percentage of premiums by
the insurance carrier for the performance of services."

The principal unrela‘ed business income issue in Pro-
fessional Insurance Agents concerned a percentage of
premiums paid to PIA by insurance carriers for its ac-
tivities in connection with several different group insur-
ance programs that it endorsed. 78 T.C. at 256. These
payments were made by insurance carriers in return for
services rendered to them."* For example, one agreement

12 See Professional Ins. Agents v. Commissioner, 726 F.2d 1097
(6th Cir. 1984), aff’'g, 78 T.C. 246 (1982); Carolinas Farm &
Power Equip. Dealers Ass'n v. United States, 699 F.2d 167 (4th
Cir. 1983), rev’g, 541 F. Supp. 86 (E.D.N.C. 1982); Louisiana
Credit Union League v. United States, 693 F.2d 525 (5th Cir.
1982), aff’g, 501 F. Supp. 934 (E.D. La. 1980).

13 As noted by the Claims Court, the associations received per-
centages of premiums which were “well within the range normally
paid for those types of promotional and administrative services,
[and] stand in stark contrast to the 40, 50 and even 90% of premi-
ums regularly refunded as dividends and retained by ABE.” (P.
App. 44a-45a)

14 PIA also retained an “experience rating reserve” (which is not
a dividend) that it received when one of the programs it endorsed
was terminated. Although PIA agreed to be responsible for dis-
tributing this fund to its members, it never did so and there is no
indication that PIA members knew that PIA had received and
retained this fund to which they were arguably entitled. 726 F.2d
at 1100-01.

13

with an insurance company indicated that PIA would
“perform certain services on behalf of’” the insurance
company. 726 F.2d at 1100. The agreement further
recited that because the services were performed on be-
half of the insurance company, the association was to be
reimbursed with a service fee of 6% of premiums. A 4%
fee received by PIA in connection with another policy
was said by the Sixth Circuit to be “[i]n return for its
promotional efforts.” Jd.

In analyzing whether PIA was conducting a trade or
business, the Sixth Circuit appropriately focused on the
phrase “carried on for the production of income”, since it
was clear that the fees received were derived from the
performance of services. The court asked “whether PIA
has engaged in extensive activity over a substantial pe-
riod of time with intent to earn a profit.” Jd. at 1102.
Since the record reflected a profit motive, the tax was im-
posed.

The other cases are to the same effect. In Louisiana
Credit Union League, the business league received a flat
percentage of both initial and renewal premiums on in-
surance policies in return for “services which the League
performs.” 501 F. Supp. at 938. The Fifth Circuit re-.
jected the argument that the fees derived from services
were not income from a trade or business, noting that
the League’s contracts with the two companies indicated
that the revenue was “earned” (emphasis in original)
by virtue of the League’s activities on the carrier’s be-
half, 693 F.2d at 531, and such activities were engaged
in “over a substantial period of time with the intent to
earn a profit.” Jd. at 532."

In Carolinas Farm & Power Equip. Dealers Ass’n, the
association received in exchange for services an “admin-

1° These fees were in the form of commissions on insurance pre-
mimums and ranged from 21% percent to 72 percent. 501 F. Supp.
at 936.

14

istrative allowance” from the insurance company in the
amount of 7% of premiums. 541 F’. Supp. at 88. The
Fourth Circuit held that the plain language of the statute
should control and that an activity is a trade or business
“if an exempt organization conducts it for the production
of income from the performance of services.” 699 F.2d
at 170."°

Thus, in all three trade association cases, there was no
question that the income received was derived from the
performance of services. The money was received from
the insurance companies as fees for services rendered and
the amounts received were consistent with the market
value of the services. There was no suggestion in these
cases that income was the result of a charitable fundrais-
ing program. The facts of these three cases and the legal
analysis required by their particular facts present a stark
contrast to the facts and legal analysis pertinent to the
Endowment’s case."

b. The Government argues that the Federal Circuit,
in finding the business league cases inapposite, “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
»s charitable or educational associations exempt from
tux (as is the Endowment) under Section 501(c) (3).”
(Pet. 14)

The Government misperceives the distinction drawn
by the Claims Court between the section 501(c) (6) trade

16 The association also received experience refunds (dividends)
on its program. However, since these were passed back to the
members, no unrelated business income tax was asserted by the
IRS with respect to these funds. 541 F. Supp. at 88.

17 The Federal Circuit, after stating succinctly that “[a] charity
should not be subject to taxation merely because its charitable
solicitations are successful,” pointed out that this would be the
result “if we adopted the IRS’ reasoning in this case.”’ (P. App.
12a)

15

association cases and the Endowment’s case. In the for-
mer, the courts were not presented with facts where it
was necessary to distinguish between the “profits” of a
business enterprise and the successful result of an effort
to solicit charitable contributions. In the broadest sense
every charity seeks to maximize the “profits” from its
charitable fundraising; this does not mean that in every
case the existence of “profit” is the equivalent of income
derived from the sale of goods or the performance of
services.’* That is why a trial was required in this case
to determine whether the Endowment was running a
business, and the Endowment’s position prevailed. The
dividends assigned by insured members to the Endow-
ment are the fruits of a charitable fundraising effort and
are not an exchange for goods sold or services rendered.

The Government also ignores the fact that the Federal
Circuit relied upon the specific statutory language of sec-

tion 513(c) as an independent ground for distinguishing
these cases:

We note an additional ground for distinguishing
these cases: the business leagues received a stipend
from the insurance companies for services provided
to these companies, and not merely experience divi-
dends which their members allowed them to keep.
Their profits therefore fell within the definition of '
“trade or business” (“income from the. . . perform-
ance of services”) contained in section 513(c).

(P. App. 10a)’* Neither decision below stands on the
proposition that a section 501(c) (3) organization and a

18 The Government’s expert economist, Dr. Plotkin, testified that
the maximization of revenue or profits “absolutely” did not provide
a basis for distinguishing between charitable fundraising and busi-
ness profits. Further inquiry was required te determine whether
the funds derived were the product of a business or a charitable
fundraising effort. (C.A. App. 695-97) That is precisely the ques-
tion answered by the Claims Court in this case.

19 Similarly, the Claims Court determined that the trade associ-
ation cases “are also distinguishable factually,” finding that each

16

section 501(c) (6) organization are to be treated differ-
ently for purposes of section 513 if they are operating in
the same manner. Certainly the Endowment has never
made any such contention. The statutory definition of a
trade or business should be applied to each exempt’ or-
ganization and that is precisely what the Claims Court
and Federal Circuit ‘lid in this case.”

3. The Government’s unsupported assertion that the
Endowment’s case has significant administrative im-
portance should also be rejected. The record at trial did
not disclose that the members of any other professional
association knowingly chose to donate millions of dollars
to charity that they concededly could have caused to have
been returned to themselves tax free.** Thus, it is hard
to suppress skepticism at the Government’s unsupported
contention that hordes of members of tax-exempt organi-
zations are now prepared to follow the practice of the
members of the Endowment—which has been widely
publicized for many years—and remove from their
pockets dollars they have historically kept in order to
donate that money for charitable uses. But if they are,
they should be encouraged, in keeping with the policy of
the tax laws, to donate their dividends for public chari-
table purposes rather than retaining them for private

association received consideration for services rendered (P. App.
44a-45a) and that “none of the cited cases suggest that members
were fully informed of the arrangement with the insurance company
and permitted it to continue even though it caused them a mone-
tary loss.”” (P. App. 45a)

2°In addition, no one has ever contended that a “destination”
of income test had any relevance to this case. (Pet. 15-16) The
opinions below do not embrace any such test.

21 The Government disingenuously suggests that the administra-
tive importance of this case is buttressed by the fact that most
state bar associations sponsor insuraace programs. (Pet. 20) The
Petition fails to note that state bar programs operate “on a service-
oriented basis and secure the most economical group insurance
for their members.”’ (P. App. 38a)

17

gain. This possibility provides no reason for granting
the Petition.

4. In belittling the Federal Circuit’s opinion as
“whimsical” (Pet. 18), the Government chooses not to
mention that the Internal Revenue Service on two occa-
sions (1972 and 1973) ruled that the dividends received
and retained by the Endowment did not constitute un-
related business income. The Claims Court, however,
noted the Service’s change of position:

It is also not without significance that for 21 years
the Internal Revenue Service took the position that
ABE’s operation of the insurance program was not
taxable. See IRS Letter Ruling 8042012 (July 3,
1980) (citing unpublished technical advice memo-
randum of January 31, 1973, that concluded ABE’s
insurance program was not a business). This sug-
gests that whatever UBIT policies the ABE’s activi-
ties are thought to implicate must be subtle indeed.
[P. App. 46a] **

5. The Petition asserts as a reason for granting certi-
orari that United States v. American College of Physi-
cians, cert. granted, No. 84-1737 (July 1, 1985), “is
related” and “is connected” to this case. (Pet. 12, 21)
In fact, the only relationship between the two cases is
that both involve the same section of the Internal Reve-
nue Code. Otherwise, as the Petition itself demonstrates,
the two cases have nothing in common. American College
raises only the question of whether a tax-exempt organi-
zation’s income from “commercial advertising, which it
concedes to be a ‘trade or business,’ is ‘substantially re-
lated’ to educational purposes” (Pet. 21), a question on

22 The Federal Circuit observed that its “refusal to view the

recouped dividends as payment for the Endowment’s services is
consistent with the IRS’ own memoranda” explaining when the
imposition of the unrelated business income tax is called for and
when it is not. (P. App. 12a n.6)

18

which the lower courts disagreed. In this case, the Gov-
ernment correctly noted that the Endowment conceded
that its insurance program was not “substantially re-
lated” to its exempt function. (Pet. 5)

al

American College presents a totally different issue from
the unanimous fact-specific decision in the Endowment’s
case. The Government itself acknowledges that American
College “is most unlikely to resolve the question of statu-
tory construction presented here.” (Pet. 22) As we
demonstrate above, there is no “question of statutory
construction presented here” if one deals forthrightly
with section 513 as written by Congress and applied by
the Claims Court and the Federal Circuit. In any event,
the fact that American College of Physicians (or any
other case on the Court’s docket for that matter) will
not govern this case hardly constitutes a reason for
granting the Petition.

II. The Charitable Contribution Issue

1. The Petition states that the Federal Circuit “stayed
proceedings on remand pending disposition of this peti-
tion.” (Pet. 11) This statement is an incomplete ex-
planation of the interlocutory posture of the cases of the
individual insureds. A brief review of the decisions be-
low will help to clarify the present posture. The Claims
Court declined to take an approach that would afford a
deduction for all Endowment insureds, but instead pro-
mulgated a test focused solely on the fair market value
of different insurance. The Federal Circuit concluded
that the Claims Court’s unitary test was too rigid, in
that it failed to take into account all the facts and cir-
cumstances bearing upon the motivation and intent of
individual insureds (P. App. 19a-22a) and thereupon re-
manded for “an examination of all the pertinent circum-
stances surrounding the individual transaction,” includ-
ing direct evidence of the motive and intent of each in-

19

dividual insured, to determine whether a contribution
was appropriate. (P. App. 21a)

When the Government failed to seek a stay in the
Federal Circuit and the individual insureds requested
that proceedings on remand be instituted, Chief Judge
Kozinski repeatedly urged the Government to allow the
proceedings on remand to be completed so that a full rec-
ord could be presented to this Court, with no delay in the
filing of the Petition.* Refusing to allow this to happen,
the Government appealed Judge Kozinski’s denial of its
motion for a stay, and the Federal Circuit then granted
the stay. Presumably, the Government concluded that a
final judgment in these cases, entered after an eviden-
tiary hearing as to the charitable motivation and: intent
of the individual insureds, would not enhance its chances
for certiorari. Certiorari is inappropriate at this inter-
locutory stage of the proceedings.

2. The Government ignores the Federal Circuit’s dis-
cussion of the dual payment concept, which is at the heart
of that court’s analysis of the charitable contribution is-
sue.** Under recognized principles governing charitable
deductions in such instances, the donor must show that
his or her payment was significantly in excess of the
economic benefit received—the so-called quid pro quo.
The Government disregards the significance of the find-
ings below that the dividends assigned to the Endowment
were in such amounts as to be “wholly unrelated” to the
value of any services conceivably rendered by the En-
dowment. It argues, curiously, that this “staggering”

23 Transcript of June 27, 1985 status call at 9-13, 23; Transcript
of July 3, 1985 status call at 17-19.

*4In asking this Court to overturn the dual payment decision
below, the Government does not mention its own rulings which
recognize a charitable contribution in a situation where a payment
is made in anticipation of both an economic benefit and a charitable
contribution. See, e.g., Rev. Rul. 68-432, 1968-2 C.B. 104 and Rev.
Rul. 67-246, 1967-2 C.B. 104.

20

amount of “profit” is evidence of a business motivation.
In fact, in the context of a cha.itable fundraising pro-
gram, what this receipt of disproportionate dividends
demonstrates is a dual payment, part for an economic
benefit and part for charity. Endowment members have
parted with dollars that would otherwise have been re-
turned to them; since a gift has been made with adverse
economic consequences, the Federal Circuit properly held
that an insured member should be entitled to demon-
strate entitlement to a deduction by proving that he or
she had made a dual payment.

3. The Government appears to claim that the individ-
ual insureds’ cases are in conflict with Sedam v. United
States, 518 F.2d 242 (7th Cir. 1975); Stubbs v. United
States, 428 F.2d 885 (Sth Cir. 1970), cert. denied, 400
U.S. 1009 (1971); and Singer Co. v. United States, 449
F.2d 413 (Ct. Cl. 1971). A proper analysis of these cases,
however, shows that the Federal Circuit’s decision is con-
sistent with each.

In Sedam, the taxpayer claimed a charitable contribu-
tion deduction for payments made “in consideration” for
a nursing home admitting his mother as a resident. 518
F.2d at 245. The court stated 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 ....” Jd. (Emphasis added.) There was no con-
tention by the taxpayer that a dual payment was made.
He had deducted the entire payment. The Government,
in relying on Sedam, doéS not deal with the fact that the
Federal Circuit applied the same standard in this case
(P. App. 18a-15a), nor does the Petition come to grips
with the significance of the key word “commensurate” as
it applies here.

In this case, the individual insureds have contributed
dividends to the Endowment for charitable purposes for
which they received nothing in return. The amount of

21

the charitable contribution was calculated after the in-
surance companies had been paid for providing the insur-
ance coverage at prices negotiated at arms’ length, after
the broker had been paid its negotiated commission and
after payment of the Endowment’s expenses of admin-
istering the insurance program had been deducted from
the dividends. In other words, after establishing the full
and fair value of the benefit a member received for his
premium dollars, there was a significant amount of
money left over, which the insured members allowed the
Endowment to reta., for its charitable purposes.

The suggestion that Singer Co. conflicts with the Fed-
eral Circuit’s opinion is somewhat surprising in view of
the fact that the Federal Circuit relied upon Singer. (P.
App. 15a-18a) In Singer, the taxpayer expected that sales
of sewing machines to schools at less than market prices
would increase future retai! sales. A deduction was de-
nied because the taxpayer failed to show that the fair
market value of the anticipated econom’: benefit was less
than the discount given to the schools. 449 F.2d at 420,
423-24.

Stubbs was a jury case in which the question was
whether a landowner could deduct as a charitable con-
tribution the value of land dedicated as a public road.
The issue of a guid pro quo was put to the jury, which
apparently believed the prior inconsistent testimony of the
taxpayer at a hearing before the Zoning Commission that
he would receive by reason of the transfer an offsetting
economic benefit to an adjacent property. 428 F.2d at
887 n.1. As in Sedam, there was no contention that there
was a dual pay:nent.

4. The Government erroneously argues that the Fed-
eral Circuit’s decision has in some way altered traditional
principles of burden of proof applicable in tax refund
cases by stating that such burden would shift to the Gov-
ernment on the deductibility issue upon presentation of a

22

prima facie case. The Federal Circuit’s opinion says no
such thing. Nor does the Federal Circuit suggest a “self-
serving affidavit” as an appropriate way to proceed. ( Pet.
24-25)

The Federal Circuit applies well-recognized concepts of
shifting evidentiary responsibilities at trial to the partic-
ular circumstances of this case. It outlined those elements
which for certain members would constitute a prima
facie case for sustaining the charitable contribution de-
duction.” A prima facie case, of course, is that minimum
quantum and quality of proof which, if unrebutted, would
entitle the proponent to a judgment on his claim. Once
the taxpayer has presented a prima facie case, it is only
the burde: of going forward with additional evidence to
rebut that case which shifts to the Government. If the
Gevernment discharges its responsibility of coming for-
ward with rebuttal proof, the taxpayer is still required
to establish by a preponderance of the evidence his en-
titlement to the claimed deduction. This process is all
that the Federal Circuit decision envisions, and nothing
in its opinion offends any notion regarding the burden of
persuasion in tax or other civil cases.

25 The Government does not mention that the Federal Circuit
also outlined other elements on the basis of which a “trial court
might reasonably conclude” that “the taxpayer should be denied a
deduction.” (P. App. 21-222)

23

CONCLUSION
The petition for writ of certiorari should be denied.

Respectfully submitted, —

/s/ Francis M. Gregory, Jr.

FRANCIS M. GREGORY, JR.
(Counsel of Record)

RANDOLPH W. THROWER

MAc ASBILL, JR.

CAREY P. DEDEYN

SHEILA J. CARPENTER
SUTHERLAND, ASBILL & BRENNAN
1666 K Street, N.W.
Suite 800
Washington, D.C. 20006
(202) 872-7800

Attorneys for Respondents

Dated: November 7, 1985

APPENDICES

A-1
APPENDIX A

IN THE UNITED STATES CLAIMS COURT

No. 465-82T

AMERICAN BAR ENDOWMENT,
Plaintiff,
v.

THE UNITED STATES,
Defendant.

TRANSCRIPT OF ORAL OPINION
OF CHIEF JUDGE ALEX KOZINSKI
ON NOVEMBER 11, 1983

THE COURT: Okay thank you very much. I am go-
ing to take a little break and come back with as much of
a decision or perhaps an entire decision, as I can make
today.

(A brief recess was taken.)
THE COURT: Please be seated.

I am going to decide Case Number 465-82T, the case
of the American Bar Endowment versus the United

States, in favor of the American Bar Endowment, the
Plaintiff.

I have sat through three and a half weeks of trial, and
have had an ample opportunity to observe witnesses, and
to absorb their testimony and I have looked at as many
documents as I think could [profitably] * be looked at.
And the reason I am deciding that case in favor of the
American Bar Endowment is that I have det» rmined that

* Brackets indicate a correction required in the transcript.

A-2

this is not a business and is not making a profit from its
enterprise.

Now, Dr. Plotkin suggested several smell tests that
can be employed for that purpose, and I suppose I have
used my own smell test as well as the facts.

The first factor, and one which ought not to be at all
underestimated in importance, is the way the program is
billed, the way it is advertised, the way it is presented,
the way it is operated. The program is presented to the
world and to the members in a very open fashion, as a
charitable program, as a means of fundraising.

That is not determinative. The fact that the program
either through subterfuge or through perhaps honest de-
lusion is presented as a fundraising effort or the ™eans
to raise charitable funds, is not conclusive, is not binding
on the Court; but I certainly think it is well worth con-
sidering as one factor.

I may be less skeptical than my brothers and sisters
in the field of taxation law, but to me what people say
to each other, particularly when large groups of people
say it repeatedly to each other and they have a common
understanding, makes a difference, makes a starting
point. It raises a presumption. Perhaps not a very strong
presumption, but one that I think is well worth keeping
in mind as a place from which to depart.

Now, in this case we have seen a good deal of adver-
tising and a good deal of literature, a good deal of pro-
motional materials, ABA journal articles, reports, so on,
and I find that it was made abundantly clear to the ABA
membership and the ABE membership that the insurance
programs were a method for fundraising. That was billed
as its purpose, and this was communicated in fact to the
membership; and one, of course, can never guarantee in
a group of 300,900 that each and every member will un-
mistakably learn the precise purpose, but I find that with
perhaps trivial examples, lawyers being well informed,

A-3

certainly being able to read, and there was a barrage of
literature, barrage of advertising, barrage of reports
which over the years should have made it abundantly
clear and-did make it quite clear that was the billed
purpose, that was the way the program was perceived.

I also look in the smell-test category, rather than neces-
sarily the operative fact—and it is a gray area as to
where one begins and the other one ends, but I also look
at the startling profitability of this group. And it has
made a lot of money over the years, it has made $63
million. That tells me two things. One of them is there
was a lot of testimony about who else in this general type
of enterprise or in this general field has made, or will
make or can have made this much of a profit, and I
think the evidence is quite clear, and in any case I so find
that equivalent profits were only made by what has been
described by one witness as the robber scoundrels of the
insurance industry who, as I understood Ms. Khachadour
and other witnesses to explain, used captive audiences,
used very serious pressure tactics, used practices that
ean [be] viewed as entirely—or could be viewed cer-
tainly and have been viewed as unethical and have been
made unlawful; such things as a person who wants to
get a loan, who may be desperate for a loan, maybe some-
thing having to do with his house or who may need the
loan for some other personal purpose and may be re-
quired as a condition for buying the loan to buy the
insurance.

The analogy to those kinds of situations, or to that
kind of an enterprise is nonexistent here. To be sure,
the American Bar Endowment used advertising and some-
thing that conceivably could be viewed as scare tactics,
listing the many illnesses that befall man in light of his
transgression many years ago with the apple and the
snake; and I suppose that is our lot, we have frail bodies
and once in a while we do get reminded of the fact that
the unfortunate among us can be beset with illness and
death.

A-4

But that is an entirely different kind of pressure tactic
than holding the necessity of a completely collateral
nature, such as a loan, car or house loan, or some other
transaction, hostage to the purchase of insurance.

a

So when we look at the question of these great tre-
mendous profits, we have to find some other explanation
as to why this particular operation has been so successful
in raising funds, and once again here I reveal my lack of
skepticism, perhaps, but my feeling is that the obvious
explanation sometimes is the one that is correct. You
know, if it looks like a duck and quacks like a duck, and
you know it leaves droppings on the floor like a duck,
then maybe it is a duck. And in this case the explanation
that suggests itself to the mind immediately, if indeed the
American Bar Endowment were selling its members—
“selling,” I use loosely the term, was conveying the idea
that this was a fundraising enterprise and therefore rates
are going to be set in accordance therewith, and that the
many millions of dollars that were made from this enter-
prise were disclosed to the members over the years, and
the profitability of the enterprise continued, the sugges-
tion is that maybe members really thought this was a
fundraising enterprise, that they were really participating
in fundraising and that they tolerated this as consistent
with the purpose of the effort.

That is certainly the suggestion that arises in one’s
minds [sic] when one looks at these factors. Nothing I
have seen in this case suggests that that is different. I
think it is almost bizarre to suggest that the strong fund-
raising aspect of the literature and of the approach, of
the information conveyed, the fact that the profits, as
they are called, or the result of all of these fundraising
activities were disclosed and, so to speak, rubbed into the
faces of the members, that it would be ignored, that it
doesn’t exist in reality? I simply have seen nothing in
this case that suggests that those factors ought to be not
taken into account.

A-5

Now, what have_we got here? When I started to
analyze it, I posed it as * »othesis at various times in

the trial, but now I ° te it as my finding: I think
we have a situation here there is a group asset.
There is an asset tha, ... only by virtue of the group.

An individual member di<s not have a piece of the
asset in the sense that he could walk away and pocket
it and use it on his own. By virtue of existing as part of
a group something more is created, an economic good is
created which did not exist outside the group experience.
And I am not sure how to characterize this asset or what
I ought to call it, but we all know, all of us who have sat
here and watched for the last several weeks know the
nature of the beast. It is a favorable group rating. It is
the ability to bargain well with the insurance company
and to get the discounts that go with being an experience
rated group.

It has been described in various ways, but what it
amounts to is a reality that seems to be, at least as far
as this record is concerned, limited to the insurance in-
dustry. I don’t say some other case might not arise that
might involve a similar analogous experience in some
other industry, but nothing suggests itself to the mind.

The asset is created by virtue of the fact that it is
possible, or so we have learned, to segregate out of the
mass marketing of insurance a group that has more
favorable morbidity and mortality experience; that en-
ables that group and its members by virtue of group
membership to profit from lower rates. Or they could
profit from lower rates if they don’t do something to stop
themselves from so profiting.

And that rais[es] interesting questions. I wish I had’
had economists to discuss with me—because I am not
sure anybody else here likes economists. I know Mr.
Gregory is skeptical of them, but I for one enjoy listening
to economists and I frequently learn. And what was

A-6

somewhat lacking on this record, and what I had to to
some extent use my own imagination for is the economics
of the group asset. How does one create a group asset,
how does one control a group asset, how does one
monetize a group asset and the various aspects of group
ownership, control and distribution of whatever benefits
are involved.

And absent evidence to the contrary it seems to me that
an asset that is created by virtue of the existence of the
group ought to belong to the group and not to any one
individual member, that it is something that the group as
a whole must dispose of through normal group processes.
It is not, as I said, the type of asset that could be divided
up and allow each person to walk away with it, it has to
be dealt with in some group fashion, left to be dissipated.
It seems to me group processes normally rule by majority
and when the group is too large to have absolute majority
rule the representative process is the way to dispose of
group | assets].

To be sure there are always in the group, as there is
in society, those who would deal with group problems in
a fashion which is different from the majority. That is
the nature of the democratic process and that is the
nature of the group process. Any group larger than one
has a potential for dissidence. And I don’t know what
one can do about it. We are all a part of groups and
societies; and I don’t think there is anybody here who
agrees with everything our Government does in every
instance, nevertheless it is our Government and it has
imputed to us our action, and by the same token the
group asset is disposed of by the group. In this case the
group has made a decision through its membership, or
its leadership to dedicate and devote the group assets for
a charitable purpose. And they have chosen a way which
in my view is calculated to achieve that result. And by
donating the asset in total to the American Bar Endow-
ment and allowing for it to monetize it, to in some

A-7

fashion derive from this asset the most benefit that it
can for the charitable enterprise.

Now, it should be obseived, and I think Dr. Plotkin
agreed with me on this, from an economic standpoint the
membership by making the decision has uniformly to a
person made a contribution in an economic sense; by
voting for this group device, for this disposition of the
group asset, each and every member has been deprived
of the opportunity to participate in a lower-cost insur-
ance program, if indeed the American Bar Endowment
were able to set one up.

Now, there have been some last-minute questions raised
on that, and I simply cannot beliave that after all of the
evidence we have seen in this trial about state bars and
local bars and county bars setting up group plans that
there wuuid be serious question that if the ABA member-
ship with all of the legal talent at its disposal chose to
set up a plan that would be simply a service-oriented plan
that they could not figure out some way of doing it with-

out losing the tax status of either the ABE or ABA or
both.

Now, by making the decision. each and every member
is contributing to the joint enterprise by agreeing to
forgo the benefits, and they have been pointed out to be
substantial benefits, of the much lower service-oriented
group insurance.

The question then arises to what degree is there really
control over the group. By the group rather, I mean
over the program. And that has been raisec as an issue.
And I simply have seen no evidence at all suggesting that
this group is any different from any other group in the
ability of members to make their views known to the
leadership, and to change the direction taken by the

leadership when it is inimical to their understanding and
interest.

A-8

I said I would take judicial notice of the events that
transpired in the D. C. Bar several years ago, and in that
case there was a great rift between the leadership of the
Bar and the rank and file. There is great evidence that
the D. C. Bar thought that the two referendums that
were posed, one which would lower dues on the one hand
and the other which would limit activities to the Bar,
would sound the death knell to the Bar as an institution,
that it would render it merely a shadow of its former
self, that it was the professional responsibility to engage
in other activities, that this was generally a bad idea.

There was no doubt to those of us who are in D. C.,
certainly not to me when I was here when this was going
on, and certainly the materials don’t raise any doubt, but
that this was a grass roots movement versus leadership
of the Bar. And when all was said and done, and when
it came down to the economic interests of the Bar mem-
bers and the few dollars here and the few dollars there.
and the dust settled, the members of the Bar speke loud
and clear: They preferred to keep the money themselves
‘ather than engaging in various extraneous Bar-type
activities, other than the minimal ones of atterney disci-
pline and the like. D. C. members simply did not want
their Bar squandering their money, or at least they
viewed it as squandering their money on public spirited
types of activities, activities that would enhance the
organization.

I have little reason to believe that when $63 million
are at stake that the members of the American Bar
Association or the American Bar Endowment could not
change that policy. Now, again I want to point out that
more than $63 million are at take, because not only is
at stake the amount that was actually collected in divi-
dends and premium refunds, but one must also include
the economic incentives and the economic benefits lost, all
of the benefits that other members of the Bar who chose
not to participate in insurance would have gained if only
there were a change in the policy. So we are not talking

A-9

only about those who buy the insurance and forgo the
premiums, but we are also talking about the significant
economic incentives that exist for those who do not buy
the insurance but wish they could.

I am persuaded that if the American Bar Association
Plan were not viewed as a fundraising 2nterprise and
were not viewed by the overwhelming majority of the
membership as something to be tolerated as, to be sure,
an economic expense but one for the good of the profes-
sion, and for the greater good of society, that it would
not exist, it could not have existed, it could not have
survived, it would not have survived to today. And at
least on the basis of this record those are my findings on
that point.

I do want te speak a little about the analysis of Dr.
Plotkin, whom I certainly enjoyed hearing, and for whom
I have a great deal of respect. I questioned him at some
length because—well, I couldn’t forego the opportunity,
and because I guess I had questions that went to the
heart of his anaiysis, or to the manner in which his
analysis was constructed, and I wanted to understand
what direction he came from.

Now, Dr. Plotkin was quite candid that the analysis
that he employed was an industrial organization ana}sis.
It was analysis born of antitrust. Much time is spent by
econom'sts wondering whether if one fixes priccs every-
one will be better or worse off, and as I recall by way of
showing on that board—I :m sure Mr. Gregory would
want to know precisely how that is done—that if you only
avoid price fixing there will be more things for more
people, and things get more complex from there.

_ The question I asked myself is how do the under-
pinnings of industrial organization analysis, antitrust
analysis, relate to the question in this case. And the ques-
tion in this case is a rather more narrow one. We are
not dealing with the broad questions of antitrust, those

A-10

questions involve very cor-plex issues and very complex
policy judgments. We are here dealing with basically the
question of whether something is a business or is not a
business, whether something is a fundraising activit|y]
or not a fundraising activity. We are lcoking to indices,
but by definition that activity has to take place in the
market.

And by definition, again from Dr. Plotkin’s own state-
ments, that activity, fundraising activity, must displace
and must have a ripple effect upon the market in which
it operates. 't is alinost inconceivable to have some ac-
tivity that one could classify as simply fundraising that
does not somehow |a|]ffect other transactions in the mar-
ket and other various structures of the marketplace. And
I was interested to find out how those policies, how the
things that Dr. Plotkin was taki»g into account in reach-
ing his conclusion related to what we are talking about
here.

I was a little disappointed to understand that Dr.
Plotkin, while he was conversant with spaghetti—which
is fine, which is really the place where the unrelated
bu iness income tax started from—was not as conversant
as I weil might have hoped with the policies of the un-
related business income tax. To him the fact that if one
buys one brand of spaghetti one is less likely to buy an-
other one seemed to be—I don’t mean to give too little
weight to his testimony, but simply that seemed to be the
key for him, a question of substitution in the market.
And this is simply not the way I viewed the unrelated
business income tax and that is not the way I viewed
the Disabled American Veterans.

The unrelated business income tax was passed to avoid
a certain kind of evil. Now, we all know that one cannot
use and ought not use, and I certainly will not use
legislative history to go contrary to the express terms of
a statute when they are clearly applicable to a situation.

A-11

But Congress was not so generous in defining for us
business profit and the like. We have to make the deci-
sions on our own, we the courts. And therefore in look-
ing at a situation where you have a transaction where
both buyer and seller are consenting in the sense that one
controls the other, or one has significant control over the
other, one is somewhat at a joss to see whether something
is a profit. That is what we have been grappling with
here for the last three weeks. So you go back and look
at what evil there is in the market. What was Congress
trying to do in 1950 or 1953 or when the junrelated]
business income tax was passed, and one comes to the
frequently-asked question, “Who is Ronzoni.”

Now, nobody has really satisfactorily pointed to Ron-
zoni for me. I have been listening for three weeks of
trial and nobody came up and said, “Here, this is Ron-
zoni, this is the competitor that is going to be adversely
affected in the manner in which Congress feared there
would be adverse effects when it slapped Mueller Maca-
roni Company on the wrist,!”] or basically said you can-
not do that, you cannot use your tax exempt status to
make profits.

And I am still somewhat nebulous as to who Ronzoni
is, as to who is hurt, who is damaged if the members of
the association on the one hand allow the association to
use its group asset in order to raise funds. And I don’t
think—you know, the most obvious Ronzonis, or the most
obvious candidates are the other life insurance companies,
your Prudentials, your Mutuals of New York, and the
like. And all the evidence seems to be that if only ABE
charged less, if only ABE charged less and perhaps
charged so little as to make no return or profit or what-
ever one calls it, fundraising, at all, there will be more
people buying ABE insurance, for many people that
would then become a better deal and it would he more
likely that Prudential Insurance and Mutua! of New York
and the like would lose business.

A-12

So in that respect the results suggested here by appli-
cation of the tax at least initially looks like a perverse
result. But when one thinks out loud, what else is there?
I mean is there some other organization in the market,
some other Ronzoni, some other enterprise that is’ dam-
aged, hurt, that suffers by virtue of the fact that this
charitable type enterprise is engaging in this activity. Is
the evil the Congress sought to alleviate creeping in in
some fashion which is not obvious to the naked eye. And
it takes another look.

And the question then is what of the organization as
an intermediary, or as somebody who goes and sells the
group experience for insurance companies, or somehow
competing perhaps with other people who would act as
intermediaries to this group, or something of that sort.

And the evidence tends to strike a couple of these
hypotheses out right away. All of the evidence on both
sides makes it clear that the money here came from
premiums, that no matter what the flow of dollars the
economic reality was that these were the members pay-
ing money to the association and not insurance companies
paying the group in some fashion. The evidence of the
insurance people was «tear, but more telling was the un-
disputed evidence of all of the other witnesses, Ms.
Khachadour as I recall was one of them; and quite clearly
insurance companies don’t manufacture money, although

some of us may suspect at times they do; it comes from
premiums.

I don’t think this is a terribly .omplicated transaction,
I think most people know what dividends are and that
basically they come from refund of the premium and the
premium came from the member. So it is difficult to con-
struct a hypothesis that somehow the group is selling
something to the insurance companies.

And you get back to the question is the group profiting
from its own members. And I simply was not able to

A-13

find that it is. I find that the idea of profiting from
oneself, that the idea that profit given by consent, is
almost a contradiction in terms.

Now, could somebody else have stepped in, or is APE
precluding somebody from stepping in and taking advan-
tage of some market opportunities, the sellers of maca-
roni, some sort of analogy of that sort?

The point is there is only one such group asset, only
one group experience. It belongs to the group. I have
seen no reason to think that it belongs to society as a
whole or to individual members; nothing has been pre-
sented to suggest that it ourht to belong to anybody but
the group. And this situation is not like the purchase of
macaroni, where basically only one entity can have the
benefit of that and the group has chosen to make a gift
of that group asset to the Endowment. And you know,
perhaps other witnesses and other economists, on a dif-
ferent record, somebody will be able to point out to me
Ronzoni in this picture, but I have tried very hard, and
looking at the policies of the tax, the policies of the
unrelated business income tax, I have not been able to
find the evils that Congress sought to alleviate by passing
that tax.

Therefore getting back to the analysis itself, there is
nothing that would push back the original inclination I
had, this is billed as a charitable enterprise, it is pre-
sented as a charitable enterprise, it is a group asset, it is
given by [m]utual consent, meiabers have control, one
can’t make a profit on oneself, I don’t think. I think it is
the antithe ‘s of a profit to say that one can have control
of how much profit we take, much like the suggestion I
made to Mr. Dennis what would happen if all Safeway
customers were allowed to vote on the prices at Safeway.
The reason Safeway makes a profit is because customers
don’t get a chance to vote. And I therefore conclude that
it is just not a business enterprise, by its structure, by

A-14

the way it is operated, by the way it is billed and by the
reference to the policies of the tax, there was not profit
and therefore not a business.

I have considerably greater trouble on the issue of the
individual members, and as clear in my mind as the issue
of the Endowment is, or at least the way it seems to me
it is clear, I have still grave doubts on the question of the
individual members, and I am not going to be able to
resolve them today.

{ have listened to both sides, and I have listen{ed] to
both sides speak today, and perhaps the problem is the
case has been tried and presented and certainly viewed
by me largely with reference to the unrelated business
income tax, to that aspect of the transaction, and in the
fond hope that that would take care of the other problem
as well. And in Plaintiff’s view I know that it does. In
Defendant’s view I think, had the result been different on
the Endowment case, I am sure they would have had
the same view. I view them as not necessarily related.
I reéognize that is a much more difficult problem and one
that I just cannot resolve today. I am simply going to
have to go back and think about it.

I understand very well where the two parties are com-
ing from. I think I understand this case as well as any-
body here, because I have the benefit of not having the
perspective of one party or another. And Plaintiff is
saying the valuation of insurance to a group ought to be
the net cost. That is a fair market value.

I understand Defendant’s position equally well, that
one looks at comparable sales and comparable transac-
tions and that you don’t look at cost of the product to
determine its value. One can get into a bargain and buy
something one day, buy a stock one day, say, and then it
gets taken over, or there is an offering by some cther
company to buy out that steck and it immediately shoots
up. Well, the fair market value of the stock is not neces-

A-15

sarily what one paid for it the day before, it is what
somebody else was willing to buy it for today. Those who
have bought and sold on the stock market know that. I
think there are inherent and difficult inconsistencies that
cannot be resolved yy either position and that may be
unresolvable.

I recognize that the Government has done away with,
or has never really quite presented the Duberstein test;
and the question is not one of good heart or generosity,
but I am troubled by the position taken by the Plaintiff
in offering Mr. Burnett a charitable contribution. I may .
decide that nevertheless Mr. Burnett ought to get one,
but having seen him sitting on the stand, and being con-
vinced that he in fact bought the insurance because it
was the best deal he had, I am troubled about saying
that he ought to get a charitable deduction on top of
everything. I simply am convinced as to him that he is
buying the insurance by virtue of the fact that it is the
best deal and not because he has any attachment to the
Endowment’s purposes or otherwise.

I am equally troubled by the position taken by the De-
fendant, the suggestion that these are name tags, or books
or key chains capable of valuation in one market is simply
not supported by this record. I think it is utter nonsense.
I think there are at least 50 markets for insurance, par-
ticularly group insurance. I think one ought to take into
account the basic and significant differences between
group insurance and individual insurance. I think indi-
vidual insurance by clearly established record is a dif-
ferent product, and a significantly different product. One
can take it with one to one’s grave or something of that
sort. Certainly to California. And it is viewed, sold,
marketed and considered as a different product. There
are little frills you can buy with it. You can buy double
indemnity and accidental death, waiver of premium; you
can insure your insurability. It is yours, you can do lots
of things with it. I think the subjec. e valuation that

A-16

people place on having an insurance plan is not [de-
pendent] upon a membership to [sic] an organization or
that it is somehow geographically limited.

So comparison with individual insurance, although not
entirely irrelevant, I think is inherently misleading, and
it is very difficult to account for the subjective differences
that a particular consumer of insurance would feel in
having his own insurance that can’t be taken away from
him, that has guaranteed premiums as opposed to an-
other insurance where he has to pay membership in an
organization that may or may not exist, that may or may
not expel him, that may or may not be acting in his best
interest, that may or may not be in the same geographic
area all the time; let’s say he has to move overseas or
elsewhere, there are many uncertainties connected with
group insurance which are simply not present to indi-
vidual insurance and I find the analogy on them on the
basis of this records [sic] to be a difficult one. I don’t
find them incompatible, entirely irrelevant, but on the
spectrum of things individual insurance is much further
away from center than let’s say other Bar plans or
other associational insurance «.vailable.

Nevertheless the point is well taken. The market con-
sists of lots of competing products and many of them are
only imperfect substitutes for another, and yet for better
or worse courts must consistently make decisions on the
basis of somewhat arbitrary distinctions between valua-
tions of one item or another; the house near the end of
the block as opposed to the one in the middle of the block,
the house two blocks away closer to the supermarket and

across the street from the school. Courts do it all the
time.

What is troubling about Defendant[’s| analysis is not
the idea that one ought to value some very, very sub-
jective considerations one against the other, but the idea
that there is one market, and the idea that one ean find

A-17

a fair market value for insurance in the United States
and place the American Bar Endowment plan either
within or without that marke ange. And that is very
troubling.

I am troubled by the gentleman or lady in New York
City who is a member of those two associations and who
has by hypothesis in front of himself or herself the two
plans, the New York State plan and the American Bar
Association Plan. I cannot on the basis of this record—I
could not conclude for such individual if he or she were
to come to ask for a refund in this Court and I would
look at that person’s situation that a decision to buy
American Bar Endowment insurance is other than a gift,
that it was a contribution, that it was indeed the differen-
tial was paid in order not to get insurance, but in order
to get whatever satisfaction one gets from contributing.

There are the two positions. Both create unfairness
and both create what I view as inconsistencies. And I
know both sides feel that their view of the transaction is
the only one that is acceptable. I am simply saying I am
enough troubled about it that I am not going to decide
today. And I am going to say this much: I am not
simply withholding this issue, but I am indeed undecided.
I am so close to 50-50 on the issue that I cannot per-
sonally myself tell which way I would decide the case
were I to make a decision at this minute. I would prob-
ably have to throw up a coin or something close to that.
I don’t know if that is any help to anybody. It is not
nearly as much help as getting the case decided in one’s
favor, but there it is.

I am fairly firm, quite firm on the Endowment side of
the case. As I have said before, I consider myself in-
fallible although not irreversible, so I think everybody
should have the hope, or the appropriate amount of
skepticism.

A-18

I want to suggest to the parties further possibilities of
settlement. I had hinted at this before today’s session.
I want to now propose it outright. On the one hand, I
think there are basics for settling. Nobody really knows,
including myself, how I am going to come out on the
members. At least Mr. Rubloff empathizes with my di-
lemma and I hope others too. I will decide it, one way or
another I will come out with it, and if nobody suggests
the middle way I will have to select one of the two posi-
tions suggested, and in light of my ruling on the other
case I am going to have to go back and rethink and look
at the authorities cited one more time. And I figured the
first case out and I will figure this one out too for better
or worse, but let me suggest the possibility that settle-
ment may not still be beyond reach.

I have made my statement on the Endowment’s case.
And one should not underestimate the deference that an
Appellate Court will give to a trial Judge who has sat
here for three and a half weeks and looked at the wit-
nesses and considered the evidence.

On the other hand, these are big issues. And by every-
body’s analysis there is really not that much in dispute.
If the parties after all of this want to sit down and ham-
mer out a stipulation, I bet you it could be done. So
nobody is really going to offer me the kind of deference
in a case where there are two inconsistent witnesses, one
says I was home with my mother and the other says I
saw them stabbing the victim. It is just not that kind of
case.

I will endeavor as best I can to pull together the rele-
vant facts as I see them, but my opinions tends [sic]
to be short on facts. I tend io say only the things that I
consider relevant or crucial to my decision, and I think
it is fair to say that the Appeilate Court will be able to
make up its own mind on the analysis, the analytical por-
tion of my conclusion. So whereas I think there is good

A-19

reason for the Bar Endowment and its members insofar
as the Endowment to be heartened by my decision, there
is always the possibility of reversal, and I guess I don’t
need to repeat that again. I think it ought to be on every-
body’s mind.

And then there is the question of how I am going to
come out on the individual members. I have no way of
knowing what is really important to the parties and what
is really the telling aspects of the case, whether the mem-
bers’ case is more important than the Endowment case
or the like. This is only something that each side can
determine on its own.

But as far as the Government is concerned, I promise
at least as far as the Endowment is concerned, and cer-
tainly whatever I do with the members, I will write an
opinion that I hope is persuasive. I will, having once
decided how the case ought to appear, I will draft it in
such a manner as to maximize the chances for affirmance.
Let me just say there is certainly solace to be taken from
the possibility of reversal, but I wouldn’t count on it. I
think more likely than not appellate courts in such cases
tends {sic} to give some deference.

I am going to think about this case. I have about
seven trials coming up, five before the first of the year, a
couple more in January, and I have three major opinions
in the works. Frankly, I have spent enough time on tax
for a while, and particularly on the American Bar En-
dowment. I am going to another trial starting Tuesday.
I have got speaking engagements and trials in Houston
and Lord knows. I have got a trial starting between
Christmas and New Year’s. So I would just as soon not
think about this case for a while. And in light of all that
you have learned today, and perhaps for the first time
you have now had your respective views scrutinized by
somebo’ I hope you understand understands what you
all have .o say. You may not all agree with everything I

A-20

said, in fact I am sure each side disagrees with some of
what I said, but I do understand your case and I do in
light of the maximum amount of evidence that has been
presented I think have a pretty good grasp of what
went on. ,

So try to step back from your own position, from your
own view of the case and kind of view it from my per-
spective, and then ask yourself is there a basis for trying
to work out on the one hand securing the gains already
made, and on the other hand salvaging the limiting losses
that might already have been suffered.

So I think you should all go home, digest it, buy the
record, buy a transcript, listen carefully to what I was
saying, what I was asking, what I said this afternoon,
and try to figure out how I am going to decide the other
aspect of the case. And if you can, you are more clair-
voyant than I am. But what I propose to do is take a
little while off and work on some other cases. I simply
do not at this point have the time to devote further to
this case and I am going to leave it in abeyance. The
other cases are lined up. Anc I do want to give every-
body a chance to have things sink in and I would then
like to request one more massive and good faith effort at
settlement.

What I have said today on the record is not necessarily
of precedential value. My thoughts are in the transcript.
They do not embody an opinion. They are known to those
present, but of course they would not be binding on any-
body else. Think of the consequences of an opinion, the
consequences of affirmance or reversal of the opinion, and
think about the one outstanding issue; and do not mini-
mize how difficult an issue it is. Much as everybody
thinks that they are right on it, I think you fairly ought
to know I am not doing this in order to in a sense extort
a seitlement. If I could have decided the case in its
entirety today I would be entirely pleased to do so. I am

A-21

not holding back just to press settlement. I simply cannot
decide it today. It is unusual for me, but I always
reserve that prerogative, and when important cases come
along and difficult issues, issues I cannot resolve on the
spot, I want to be as candid about that as I am about
telling you when I have made up my mind.

Why don’t we set the case for status in about three
weeks?

MR. GREGORY: I take it, Your Honor, that with
four remaining cases of the individuals, you are not
deciding either the New York Plaintiff cases today or the
other cases?

THE COURT: I am deciding the Bar Endowment
case. I am not deciding any of the individual cases. Now,
in a sense there is no decision today, and there is no
opinion or judgment or order or anything of that sort. I
have simply made the prediction of what my opinion is
going to read like. I am not going to change my mind.
My mind may be changeu for me but i am not going to
change my mind on that one. In a sense what I was tell-
‘ng you is what my mind looks like at this point and I
have decided in my mind the Bar Endowment case, and
I will eventually have an opinion that reflects many of
the thoughts I gave today orally.

I am not deciding any of the individual cases. I don’t
think they can be separated, Georgia, New York, though
perhaps it can be, perhaps what we wind ‘.p with is some
geographical nightmare where people from New York are
going to be better off than people from Arkansas. I
would hope that is not the result I come up with. I would
hope fervently that everybody thinks about the mischief
that judges can do when they start trying to work their
way out of what they consider to be difficult theoretical
boxes, or difficult dilemmas.

I want to be candid, this is a dilemma for me. I find
that aspect of the case the most difficult part. Everything

A-22

else, judgment calls, whatever, but it finally fell into
‘place for me. I see my way clear quite well on the En-
dowment. It just has not fallen into place for me as far
as the members are concerned. Please don’t make me
make any mischief. We want the law to develop’in a
reasonable fashion. And consider your respective interest,
consider what you think you can give up, take int» ac-
count what I have said and the consequences of the ruling
in this case to yourselves, to the law as a whole, to other
taxpayers.

It is never too late to settle. I suppose it is too late to
settle once cert is denied, but should we set—can I get
the agreement of both sides you will go back, digest what
I have said and make one final very serious stab at
settlement?

B-1
APPENDIX B

IN THE UNITED STATES CLAIMS COURT

Nos. 163-83T, 190-83T,
320-83T, 351-83T

FREDERICK D. TURNER et u~.,
ARTHUR M. SHERWOOD ef v/2.,
FREDERICK G. BOYNTON and
HERBERT C. BROADFOOT, II et ux.,
Plaintiffs,
Vv.

THE UNITED STATES,
Defendant.

TRANSCRIPT OF ORAL OPINION
OF CHIEF JUDGE ALEX KOZINSKI
ON DECEMBER 21, 1983

THE COURT: So be it. I will just decide the case.
Now, I’m not going to have the judgment for you until
well into February. In light of what my findings and my
tentative conclusions are the sides can do—you know, I’m
disappointed in the fact that there has been no settle-
ment, but I have no doubt that much thought has been
given, and that without knowing anything about the
settlement—and I assure you, Judge Margolis has been
very circumspect, has told me nothing at all about the
settlement—assuming, because I know counsel from the
ease and otherwise that it has been in good faith on all
sides.

I guess there wouldn’t be any call for judges if all the
litigants could agree with each other as to how they come
out.

B-2

Very well. I found this to be,—first of all, I have good
news and bad news. It depends on which side. I have
given more thought about the part of the case, the Ameri-
can Bar Endowment part of the case, the part that I had
decided at the time of the last meeting, and I am pleased
to say I haven’t changed my mind.

I feel entirely comfortable with the result, and I can
tell you now with a fair degree of certainty that that is
how it will, in fact, come out in my opinion. I have not
started working on the opinion, but once in awhile one
makes an oral ruling and is troubled by it, and looks for
ways of stepping back or anything of that sort, so I will
not be stepping back from what I said the last time we
met.

I may be wrong, but I am happily so. I hope I’m right.
I do continue in my conclusion that—

MR. RUBLOFF: Your Honor, could I inquire of the
Court as to whether any findings of fact, specific findings
of fact will be made?

THE COURT: Probably not. You can pick them out
of what I said in my opinion. I don’t think I will make
specific findings. Is there something specific you would
like to ask me?

MR. RUBLOFF: Well, I know in other cases it has
been the Court’s practice to respond to—

THE COURT: Te the written questions?

MR. RUBLOFF: To the questions that were specified
by the parties as representing the issues in fact.

THE COURT: I looked at this case, and it got so in-
volved and so far from what it was that I actually saw
was relevant to the case that I decided not to go down the
list of everything. I just didn’t think they were all that
important. But if you have something that you would
like to call my attention to that you think is really im-

B-3

portant that I have not resolved, by ail means call it to
my attention.

I may get a copy of the order and go down with all
of you when this is done. I was going to do it, and after
four weeks of trial things got so, in my mind, so far
afield from some of the things that were in that order
specified as issues in dispute that I decided not to do
anything with it.

Let me go through and deal with each case, and then
we can go back and answer specific questions. Was there
anything in particular that you had in mind?

MR. RUBLOFF: No, Your Honor, I didn’t mean to
make any proposal or request, it was simply an inquiry
because I was aware of the fact that in prior cases it
had been your practice to respond specifically to the
matters contained in, I think it is what you call the
order governing—

THE COURT: Proceedings at trial.

MR. RUBLOFF: Right. I just wanted to clarify
what the Court’s—

THE COURT: Sometimes I do and sometimes I don’t,
depending on whether I think it is important, depending
on whether the parties think [it] is important. I iook at
it, and I did look at it before the last time I met with you
to see whether following down that pathway would prove
fruitful, and given the fact that the case was tried by
one side geared to DAV to some extent, and somewhat
differently by the other side, and since I decided DAV
was not really relevant and controlling in this case, be-
cause in DAV there was a commercial transaction, you
know, the buyers were not related parties, and here
there was a difference in that element.

I may go back, let me get a copy of the order and then
] may go back and answer some of your questions. Of

B-4

course there will always be time in remand to answer
some of those questions, too, and there will be remand.

In any case, the question of the four individual Plain-
tiffs, in a way I found was the most troubling aspect of
the case, some of them because the way the case was
tried by both sides much of the focus was directed on
the Endowment case itself. To some extent there is value
in that, because if I understand things correctly, had the
Endowment lost that would pretty much have taken care
of the individual Plaintiffs. Given that the Endowment
has won makes it, I think, a much more difficult case to
deal with individual plaintiffs.

And I, you know, had some misgivings, some of which
I expressed the last time, about the perception that was
conveyed, at least by some of the witnesses, that some-
how there was one unitary market for insurance. In
fact, it is quite clear there were many markets for in-
surance, geographically and otherwise. Certainly geo-
graphically there were large differences, and I was
troubled by the possibility that some—and I still am—
that some members of the American Bar Endowment
who buy insurance may be getting a terribly good deal,
and may get a charitable deduction, when in fact, this
is the best deal they could get.

And I was equally troubled that a blanket rule going
the other way would perhaps deprive some people who
are in fact making a contribution from deduction. But
then I thought about it some more and decided it is
really my province to decide cases and I will leave policy
to people who are paid to set policy, and I can only de-
cide the cases that are before me, and let future cases,
future lawyers, future judges, those involved in the ad-
ministration of justice and the administration of income
tax laws and federal regulations deal with questions of
equity and equality and what not.

So I went to each individual plaintiff, and I looked to
see what there was in the file or what was in the record

B-5

that would support his claim for a charitable contribu-
tion. And in trying to analyze the evidence I considered
the dual payment cases, the cases that talk about making
a charitable contribution while paying for something else,
and I also considered the authority cited by the United
States Government, and the conclusion I came to was that
there must be some showing that the payment made had
at least in part a charitable component.

That there must be showing that he was not entirely
motivated by some other collateral economic concern. If
the record did not establish that, the existence of some
charitable component, I decided that that plaintiff should
not prevail.

In the case of insurance the question was did some-
body buy more expensive insurance than he or she, I
guess he in this case, could have gotten by—did he buy
American Bar Endowment insurance, which was a much
worse deal or significantly worse dea] than what would
have been available elsewhere in the market. And I took
each of the plaintiffs in order and looked at the status
and what else was in the record, and in the case of Mr.
Broadfoot I decided that he did not make such a show-

ing, and I am holding, in his case, in favor of the
Defendant.

Mr. Broadfoot, if I did not get my names confused, I
believe was one of the gentlemen who lived in Georgia.
He had ABE life insurance in the amount of $50,000,
and he said that he was aware at the time he made the
application, or the time he paid the check, he was aware
of the fact that a portion of this payment would be used,
albeit collaterally when it comes back as a dividend, but

would be used to support a tax exempt charitable type
of activity.

But that is not enough, at least in my reading of the
law. Simply knowing that part of a payment goes to a
charitable endeavor does not, in my view, render this

Ne

B-6

payment charitable if in fact the payment was entirely
motivated, could have entirely been motivated by other
economic concerns.

So it is perfectly consistent for somebody in Mr. Broad-
foot’s position to have no sympathy at all for the Ameri-
can Bar Endowment, although I am certain that he, in
fact, did, or else he wouldn’t have been here—it would
have been perfectly consistent to know that a portion of
the payment were going to those types of activities, and
yet paid grudgingly. Pay it, but not be particularly
happy about it, or not have that motivation at all, and
we had at least one witness who said as much.

He said he was not upset about the fact that the things
were going to the ABE, but that was not a motivating
factor at all. I found nothing in Mr. Broadfoot’s testi-
mony to suggest that the charitable contribution was, in
fact, motivating him to buy the insurance from the ABE.
It is curious with all these plaintiffs what they did not
say, given that they were on the stand and able to
testify.

They did not say that they selected this insurance over
cheaper available coverage that they had, or equal cov-
erage. Certainly, Mr. Broadfoot did not. He made no
indication that he didn’t—and not only that, it is enough
that he didn’t look for the insurance, perhaps because he
was so enamoured with the idea of contributing to the
ABE. Really, nothing at all that would support the view
that he, in fact, bought the ABE insurance at some
economic cost to him, at some additional economic cost
to him, in order to support American Bar Endowment.

If one looks at the Georgia life plan, and I have said
already on this record I find that, Georgia Bar Associa-
tion plan, and I already said on this record that I find
the individual insurance to be materially different from
association type of insurance, and I continue to adhere
to that view. I believe that individual insurance, because

B-7

of the differences in portability, the differences in the
ability to get it with or without medical examination, is
a different product.

In group insurance, where everybody in the group can
get it, it may be limited to in some way geographically,
it may be tied to payment of some collateral membership
fee, like one has to be a member of the ABA in order to
be able to buy the ABE insurance, I find them to be sig-
nificantly different commodities. So I look at what might
have been available to Mr. Broadfoot in Georgia, and the
inference is that—well, certainly there was no evidence
that he, in fact, considered any other plan, but in fact,
the rates were not considerably different between the
Georgia plan and the ABE plan, if I remember the
figures correctly.

The question of Mr. Broadfoot, as to whether he con-
sidered the ABE plan to be outrageously overpriced at
the time he bought it, he said he did not, and really,
there was no indication at all, certainly not enough of
an indication to persuade me that he, in fact, rejected
the cheaper available coverage because he felt he wanted
to buy the more expensive coverage in order to con-
tribute to the ABE.

So in the case of Mr. Broadfoot I decide in favor—in
fact, now that I look I see that Mr. Broadfoot noted that
the cost of the Georgia program, in fact, exceeded the
eost of the ABE, the Georgia Bar plan exceeded the cost
of the ABE coverage. In light of all of that, I simply
cannot find that he was making a charitable contribution.

Mr. Turner. Well, let’s take Mr. Boynton, who was
the other gentleman who was in New York—I’m sorry,
in Georgia. Mr. Boynton had a separate issue involving
the Ionosphere Club. That issue was resolved in his
favor when the Government proceeded and had put no
evidence contrary to his testimony in any case, so on
that issue Mr. Boynton wins. Mr. Boynton, if my notes

B-8

are correct here, was involved in the disability program
rather than the life program of the ABE. Again, he
noted that he was aware that part of his payment of the
premium reflected a payment towards the American Bar
Endowment’s charitable activities. :

There was, however, no indication as to what other
coverage might have been available to him. He did say
he did look at other available plans. He did not say that
those were significantly less expensive, and then he bought
American Bar Endowment plan at some additional eco-
nomic sacrifice to him in order to make a charitable
contribution.

As far as this record reflects Mr. Boynton, too, seems
to have gotten—at least there is nothing in the record
that suggests other than that Mr. Boynton took the best
deal he could get on the market. In that case, I found
the motivation for purchasing insurance was entirely eco-
nomic, and that his entire motivation is covered by eco-
nomic interest, and cannot be deemed, any portion of it
can be deemed to be charitable.

Mr. Turner. He is from New York. The interesting
point in his testimony is that he says he is not a member
of the New York State Bar Association. I must have
been under a misapprehension of fact at some point in
the proceedings, because I did not recall this, and I had
thought that New York like some other states must have
an integrated bar, and that being an attorney in New
York State would make one automatically a member of
the New York State Bar Association. Of course, that is
not true in all states, and apparently Mr. Turner’s testi-
mony is that that is not true in the State of New York.

I surmise from this that the New York State Bar
Association is a voluntary association. It is a voluntary
association of which Mr. Turner is not a member, or
was not a member at the time he testified, and I don’t
think he was a member—lI can’t tell from his testimony,

B-9

he says he was formerly a member, it is not clear when,
but I gathered from what was said that he was not a
member in the tax years in question.

I find Mr. Turner’s case just a little bit more difficult
because apparently he had had some other insurance, and
it is not entirely clear why he switched. It certainly
would be consistent to say he might have switched to the
ABE plan because he wanted to make a charitable con-
tribution, and he might have switched from a less expen-
sive to a more expensive plan, but he doesn’t say that.

He said that he had policies with Provident Mutual
and Drexel Life Insurance, it would have been easy for
him to say that those plans or establishing those plans
were cheaper, and he was doing what would be counter-
intuitive moving to a more expensive plan from a cheaper
one, or give some other indication that, in fact, he chose
ABE other than for the fact it was the best deal in the
market. The burden is on the plaintiff. It was not es-
tablished in the case of Mr. Turner.

I note that he was not a member of the New York
State Bar Association, so he could not have taken ad-
vantage of the favorable rates available under that plan
from New York Life Insurance Company. Those rates,
from what the evidence shows, were more favorable, at
least for some age brackets. It is not clear to me why
Mr. Turner. was not a member, what the cost of mem-
pership would have been, what other implication there
would have been for this membership, so it is certainly
impossible to tell whether—on this fact, as to whether
whatever cost would have been associated with becoming
a member or obtaining membership in the New York
State Bar Association, when added to the premium he
would have paid for the insurance would, in fact, have
made the New York State Bar insurance, where would
that be in relation to the ABE.

B-10

There is no other evidence on the record that I could
see relevant which would suggest other than an entirely
economic motive on Mr. ‘urner’s part. Again, the fact
that [he] knew that part of his premium was going to
these charitable endeavors of the ABE is not sufficient,
at least in my view of the law.

The most interesting and difficult case involved Mr.
Sherwood, and again I just decided these one case at a
time, and I suppose with 50,000 or 75,000 members of
the ABE might come trotting in here, I don’t know what
to say. These are the cases I have before me.

I note, first of all, that he had both life and dependent
insurance. As to the dependent insurance, I—again, this
is a voluminous record and I did not go hunting through
it at great length, but as far as I can tell there was
really nothing in the record to show comparison of rates
available for the dependent insurance. There was no in-
dication affirmatively from Mr. Sherwood that he bought
dependent insurance at great economic, or a greater eco-
nomic sacrifice to himself in order to benefit the ABE.

So far as the dependent insurance is concerned, I find
in favor of Defendant and against the taxpayer.

Now, on the life insurance, what makes this case in-
teresting is that Mr. Sherwood was a member of the
New York Bar Association. According to his application
for ABE insurance Mr. Sherwood was born in 1939.
This is Exhibit No. 353 in the record, and I have no
reason to doubt its accuracy. So that means that in 1979
he reached his 40th birthday, in 1980 he would have
reached his 41st birthday—in 1980 he would have been
41, in 1981 he would have been 42.

So we have here an individual who was, in fact, eligible
for the New York Bar plan, and for whom in the age
bracket of 40 to 44, which he would have been in at
least for the most part of those three years, the New

B-11

York plan would have been somewhat cheaper for the
first year, and significantly cheaper for the second or
additional years. Apparently the New York plan, there
was a high premium in the first year.

So that posed an interesting question, whether the
availability of this plan aione, the availability of what I
consider to be an equivalent product in the market, in
that particular market, would have been a sufficient indi-
cation that another product was considered, was rejected,
and therefore, the inference ought to be drawn that the
taxpayer was choosing a more expensive and less ad-
vantageous economic product, and therefore, was doing so
for charitable purposes.

That case gave me trouble. It also gave me trouble on
__Mr. Sherwood’s case also gave me trouble on another
count. He had $320,000 worth of insurance, with $20,000
of that apparently being with the American Bar / socia-
tion, and $320,000 is a fairly odd amount, so there is
somewhat of an inference that he bought $300,000 in-
surance somewhere, and then maybe $20,000 from the
ABA or the ABE.

Unfortunately, he really don’t [sic] say anything of
that sort. I looked, and tried te find some indication as
to what was going on in his mind when he bought or
obtained the insurance. Apparently he bought the in-
surance in the early ’70s and then raised the coverage
from $8,000 to $20,000 in 1978. He does state that he
was aware that a portion of the payment that he made
to the Endowment was for, or would go for charitable
purposes. But nowhere does he really say that he could
have gotten the extra $20,000 of insurance more cheaply
from his insurance company, or indeed, from the New
York Bar Association, and that he rejected those in order
to make a contribution.

In fact, apparently he was a member of the New York
Bar life insurance program, and rejected that, let the

B-12

coverage lapse later. It is not explained as to why he
did that.

It is a close case in my mind. In order to have Plain-
tiff prevail, at least in my mind, it would have.to be
established that, in fact, an equivalent product was avail-
able in the market at a significantly lower cost, and I
think in this case that was established.

I think it must also be established that the product was
known to the taxpayer, and that an affirmative decision
was made to reject the lower priced product, and that
affirmative decision was based on some desire to make a
charitable contribution, and although I find this case
close, I decided against the taxpayer and in favor of the
Defendant.

There are things that Mr. Sherwood could have said
that he did not about his decision to reject or discontinue
his coverage under the New York State Bar plan, there
were things he could have said as to what the expense
would have been of buying an additional $20,000 of in-
surance privately, if indeed, that was available, which I
assume that it was.

Finally, although I don’t think there is anything wrong
with this, I think some weight has to be given to the fact
that American Bar Endowment insurance was marketed
aggressively, and with many indications in the literature
that this was a good deal, and a good buy, and I don’t
mean to suggest that there is anything at all wrong with
that.

Given what I have said, the nature of Endowment’s
endeavor was, and that was that it was a contribution,
it was not a business. It was a way for the members to
make this economic good available as a group for con-
ducting charitable purposes. I think it was incumbent
upon those running the Endowment to try to run it in a
way which would maximize, I guess one would call the

B-13

revenues, or maximize the benefit to the Endowment fronr
this nice advantage that was provided by the members.

So I think there is nothing wrong at all with advertis-
ing that is aggressive, and in some ways suggested this
may be the best deal in the market, and indeed, for
many people, from the best I can tell, across the country
it may very well have been a very good deal, indeed, and
perhaps the best deal. It may, in fact, not have been,
and I’m not sure thai they ever claimed for it to be the
best deal in all circumstances, but I think there was
enough in the literature where if Mr. Sherwood did not
have the two plans side by side, and could not see the
exact rates for his particular age group, he might not

e aware of the fact that he could have gotten an extra

000 of insurance from the New York Bar Associa-

Ls. « perhaps less than he could have with the ABE.

I think it is a leap of faith which is one I’m not going
to take withcut benefit of testimony from the Plaintiff.
If Plaintiff wishes to tell me that he has considered a
lower cost alternative, rejected it because he wanted to
make a contribution, that may very well be a different
case. In fact, in my view of the law I would, again de-
pending on the facts of the case, probably rule in favor
of the Plaintiff if such a showing were made. But a
showing must be made by the Plaintiff and I found in
the case of all four Plaintiffs that the showing was
simply not made.

Now, I understand why the showing might not have
been made. These are test cases, and I suppose a broader
victory is always better than a narrow one, a victory
where—I am just surmising, just assuming this is what
might have happened—that if less is [said] that is fact.
specific, and these plaintiffs survive that would, of course,
be of much greater precedential value one way or the
other, in resolving what is a knotty, knotty legal issue
and will affect the conduct of the Endowment and the

B-14

collection of revenue laws for many years in respect to
many people.

I wish I could have come up with a more creative and
less fact specific decision in these cases, but from my
reading of the law I simply can’t. I will not exclude the
possibility that under the right set of fact[s] the Plaintiff
could show that the purchase of insurance had a chari-
table component, and in fact, was motivated by more
than economic desire to buy insurance. I think the au-
thorities compel that. But on the other hand, I cannot
say that once it is established some of those dollars go
to charity under any and all circumstances, a portion
of the payment was charitable, without assistance from
above—just one or two floors above—I don’t think I can
take either of those positions.

Now, Appellate Courts and Members of Congress and
those in the Internal Revenue Service have to look at the
broader picture, or may have to look at the broader pic-
ture’ My responsibility is to decide the cases I have
here, and that is where I come down.

So after a truly careful review of the situation of the
four plaintiffs, and I have given it considerabe thought,
I find that the required showing was not made for any
of them, except for the one Ionosphere matter which we
can put aside, and that I will rule in favor of the
Defendant.

Now, do I have my order governing proceedings at
trial? Do you have a copy? Is there something in par-
ticular you want to ask me? I have copies here you can
look at. Someone made some notes, and you know, I don’t
remember why. I don’t think it was me, probably some-
body else. I mean, there are little yesses and nos and
whatever, it might have been a law clerk. I’m willing
to let you look, and don’t take whatever is there in terms

B-15

of notes as a—I don’t know what the notes are, so just
ignore them.

As you go through, I will answer any questions that
you think are not clear by now, or that—just take your
time and go through it, and I will be happy to answer
them. I will also use this in writing an opinion, to make
sure I cover whatever points I cover or need to be
covered.

If you want, I can go through and answer what I can
answer. I mean, some of them seem fairly easy, some of
them seem complicated and pointless. I don’t mind going
through and trying to answer.

Maybe we should just go down the list one time and
see what we have.

On page 3, Paragraph V, Issues in Dispute.

“The parties agree that the ultimate questions of fact
and law in this case are:

a. As to the individual plaintiffs, did they make chari-
table contributions to the Endowment during the taxable
years by virtue of the Endowment’s receipt of dividends
and experience credits and, if so, in what amount?”

I think I answered that question. It is, as to each
individual plaintiff, that they did not.

“b. As to the Endowment, did it have unrelated busi-
ness taxable income arising from its receipt of dividends
and experience credits during the taxable years and, if
so, how much?”

I have answered that question as no, it did not have
unrelated business income.

Now we get to the difficult questions, okay?

“Subsidiary Questions, A. 1. Did the individual plain-
tiffs, in making their premium contributions to the En-
dowment, make ‘dual payments’ part as a contribution

B-16

of dividends and experience credits to the Endowment
for charitable uses in the field of law, and part for in-
surance coverage?”

That is a very difficult question to answer. It is quite
clear that the payments that they actually made -were,
in fact, partially used to buy insurance, and partially by
way of the dividends then used to suppert the charitable
purposes of the Endowment. I’m not sure whether any-
thing more is implied in the question in the concept of
dual payments.

Does either side wish to speak to that?

I have said that that does not necessarily apply to a
charitable contribution. I do recognize that part of each,
and I do find that part of each check paid, at least with
these individual plaintiffs, that each check contained—
well, that each check was used in part to pay for insur-
ance, and in part eventually through dividends to pay for
the Endowment’s charitable purposes. Is that satisfac-
tory or clear?

MR. THROWER: May I make a brief comment on
that, Your Honor?

THE COURT: Of course, Mr. Thrower.

MR. THROWER: But I haven’t seen in your com-
ments or heard in your comments a reflection or com-
ment on our position that the group, by a group decision,
has been making a group gift, that it could by a group
decision change that in any year, and that where the
group participates in the group decision in making a con-
tribution equal to the difference between what they pay
and what they could have paid had they made the de-
cision to get the full economic benefit for themselves,
that that constitutes the measure of the group gift, and
the allocation of it made on an objective basis, and
rather than on a subjective basis, would follow what we
have done, what the Endowment has done, and what is

customarily done under Section 61 and under Section
79.

B-17

THE COURT: Well, I accept that theory, and to my
mind it brings one so far as to say this is not a busi-
ness, and therefore, Endowment is not subject to a reg-
ular business income tax.

The problem is that by that argument every member
of the Endowment makes a contribution, whether they
buy insurance or they don’t buy insurance. That those
who do not buy insurance from the Endowment are
nevertheless making the contribution, and that is the
economic opportunity of buying—that they forego in hav-
ing the much cheaper insurance available to them, caus-
ing them perhaps to go out and buy—

MR. THROWER: That is certainly true. They make
a sacrifice, each member of the American Bar Associa-
tion, and thereby a member of the Endowment. Each
member who does not have the insurance makes the sac-
rifice. Only the insured members actually pay money
which constitutes what we assert is a charitable de-
duction.

So the sacrifice of the others is essential in order to
permit the ongoing program, but it is only the insured
members who paid the money, and that entire group of
people, whether they are high risk—they might be quite
high risk, they might be quite low risk—nevertheless, as
a group have the opportunity of getting the insurance
at the low cost without any charitable element written
into it.

This was the concept that we undertook to refiect,
rather than the subjective approach of looking at each
member, which I don’t think was really advocated by
either party, and as we indicate I believe in the earlier
filings, it has generally been disapproved both by the
Courts and by rulings of the Internal Revenue Service
in favor of the objective approach, as is followed under
Section 61 and 79, where—

B-18

THE COURT: Well, Section 79 is a specific statu-
tory provision, which is a problem—

MR. THROWER: It is specific, simply reflecting this
general principle, however.

THE COURT: —that Congress has addressed.
MR. THROWER: That’s right.

THE COURT: I am just not able, Mr. Thrower, to
—perhaps a case by case approach is not appropriate,
and in that case, I simply would rule for the Defendant.
I view the question of whether something is a business
as something that can be made as a group decision. I
don’t view the question of whether one makes a chari-
table contribution as a group decision. That is an in-
dividual decision, and the majority of the members of the
E: dowment cannot make that for the minority.

-

They can certainly keep them from getting an eco-
nomic benefit by making a group decision as to what
the rates are going to be, but the idea of being forced
to make a gift goes contrary to my conception of what a
charitable contribution is. I remember Mr.—I don’t
know why I always forget his name, he was the gentle-
man with the cane—

MR. WATKINS: Mr. Burnett, Your Honor.

THE COURT: Mr. Burnett, and he paid more for
the insurance than he would have paid, but apparently
he got the best deal he could, and the fact that he was
a member of the group, the majority of which chose to
make a charitable contribution, I just don’t think that
that made him a charitable contributor. He was buying
insurance, the best deal he could get, and without—

MR. THROWER: As to Burnett, our position would
be that as a member of the group the Burnetts are en-
titled to participate in this group gift in the same way
as others. If they did not participate, then the par-

B-19

ticipation of those with an average risk or better than
average risk, their participation in the gift would be
larger, because the group gift remains the same, but
because the group itself could in any year by a group
decision reduce the net cost for every member of the
group, including the Burnetts, it seemed to us that each
member should participate.

Otherwise, if you went to a subjective position on that
basis, those in good health and better risk would have a
great part of this group gift when you eliminated the
Burnetts in the high risk.

THE COURT: Mr. Thrower, I understand your ar-
gument, I really do. I simply don’t find the model clas-
sification. It

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385012_0453%3A03. Public record. Not legal advice.