DocketNumber： Docket No. 6282-65
Filed Date： 6/22/1970
Status： Precedential
Modified Date： 11/14/2024
*108
Held: (1) Petitioner, an insurance trust set up to acquire insurance for members at group rates, is not an organization exempt from Federal income tax under
(2) Amounts paid to petitioner by its members as premiums based on insurance company premiums but with an additional sum included to cover anticipated expenses of the trust are not income to petitioner.
(3) Retroactive rate credit refunds received by petitioner from the insurance company which are distributable to its members, the amount of such distributions in any year being within the discretion of the trustees, do not constitute income to petitioner.
*1325 Respondent determined deficiencies and additions to taxes in petitioner's income taxes for the years and in the amounts as follows:
| Additions to tax under -- | |||
| FYE June 30 -- | Deficiency | Sec. 291, | Sec. 6651(a), |
| I.R.C. 1939 | I.R.C. 1954 | ||
| 1951 | $ 348.96 | $ 87.24 | |
| 1952 | 391.17 | 97.79 | |
| 1953 | 404.54 | 101.14 | |
| 1954 | 384.50 | 96.13 | |
| 1955 | $ 91.11 | ||
| 1956 | 1,040.53 | 1,282.12 | |
| 1958 | 234.73 | ||
| 1960 | 11,600.88 | 3,698.18 | |
| 1962 | 8,068.14 | 2,017.03 | |
| 1963 | 2,881.74 | 720.44 | |
| 25,120.46 | 382.30 | 8,043.61 | |
*111 *1326 The issues for decision are:
(1) Whether petitioner is exempt from Federal income tax under the provisions of
The trust was created by an agreement dated April 2, 1951, between the New York State Association of Real Estate Boards, Inc., and several individuals who were officers or otherwise connected with that association as trustees and such employer members of the association as accepted the agreement by signing a counterpart thereof. During the years here in issue, the New York State Association of Real Estate Boards, Inc. (hereinafter referred to as the association), was a statewide association of local real estate boards, real estate brokers, and other affiliated groups of persons such as builders, property owners, and salesmen. Real estate brokers might be individual members who became, as did groups of such brokers, members of the association by virtue of their membership in local real estate boards affiliated with the association. The association, which had its executive offices in Albany, N.Y., was exempt from Federal income tax by a ruling of the Commissioner of Internal Revenue dated January 14, 1943.
Petitioner was created to provide group life insurance for the members of the association. An employer member could through*113 petitioner to whom the master policy of insurance was issued obtain insurance at a group rate for himself and his employees and a sole proprietorship individual member could obtain insurance for himself at a group rate. The members of the association who participated in the insurance program, whether actually employers or individuals, were referred to as employer members and this term will be so used *1327 herein. Originally, the administrative duties incident to petitioner's operations were handled by the association but after a year or two were turned over to a firm of insurance brokers who engaged an administrator to handle the work.
The executive director of the association billed the participant-employer members each month. The administrator of the fund collected the premium checks and sent a check to the insurance company for the total amount of the premium charged to the trust by the insurer. The administration of the plan was financed by the excess in the amount of premiums charged to the employer members over the premium charged by the insurance company to the trust. The cost of administration would be estimated every year and apportioned among employer members *114 according to the dollar amount of insurance each had in effect. In certain years the excess over the premiums charged by the trustees was not sufficient to cover the administration expenses and in other years was in excess of such expenses. In 1951 the master policy was purchased from John Hancock Life Insurance Co. and in 1952 and subsequent years from United States Life Insurance Company.
The agreement of April 2, 1951, provided in part:
3. The Trustees declare that they will receive, hold and expend the contributions of the Employer Members and the Employees of the Employer Members herein provided for and any other money or property which may come into their hands as Trustees hereunder (all such contributions, monies and property being herein sometimes called the "Trust Estate") with the powers and duties and for the uses, purposes and trusts herein defined and none other.
* * * *
5. The Trustees shall make application to any reputable Insurance Company licensed in New York State and operating on the agency system, for such policies of group insurance providing for all or any Life, Accident, Health, Hospital or Surgical benefits or other insurance benefits which may be decided*115 upon by the Trustees.
* * * *
8. The Trustees shall use and apply the Trust Estate for the following purposes:
(a) To pay or provide for the payment of all the reasonable and necessary expense of collecting the Employer Member contributions and administering the affairs of the Trust.
(b) To pay or provide for the payment of the premiums under policies of Group or any other insurance provided for in "5" above.
(c) To establish and accumulate such reserve funds as the Trustees in their discretion, deem necessary or desirable for the proper execution of the trust herein created.
(d) To establish and accumulate dividends or experience rating refunds accruing from said policies. The Trustees may, in their discretion, hold or distribute such dividends or refunds. The Trustees may use any such funds specifically for any purpose relating to the administration of this trust. When, however, a distribution *1328 of dividends or refunds is authorized by the Trustees, the sum allocated for this purpose shall be divided in accordance with any equitable formula adopted by the Trustees, subject to the Trustees' duty to comply with Section 210, Article 9 of the Workmen's Compensation Law as*116 amended.
At the suggestion of a representative of the insurance broker engaged to do administrative duties relating to petitioner's operations a new agreement was entered into on June 30, 1954, entitled, "Agreement and Declaration of Trust." This agreement was between individual trustees and employer members who became parties to the agreement by signing an application for group insurance. This agreement provided in part:
CREATION OF THE TRUST AND ACCEPTANCE
1. The Trustees shall have the power to demand, collect and receive premiums from the contributing employers for the purpose of paying their prescribed share of the cost of the insurance provided in Item III hereof, and shall hold the same as a Trust Fund until applied to the ultimate purposes herein provided. * * *
* * * *
3. All funds received by the Trustees hereunder as part of the Trust Fund shall be used and applied in the following manner and for the following purposes.
(a) To pay or provide for the payment of all premiums on such insurance policies procured by the Trustees as and when the same shall fall due.
The Trustees are excused from investing funds coming into their hands, it being understood that such funds shall*117 be paid in their entirety to the Company as premiums.
(b) To make refunds of unearned premiums to the Employers at such times as may be deemed by the Trustees to be proper.
4. Any and all experience rating refund shall be paid to the Trustees and shall be received by them as part of the Fund to be administered and distributed by them to the Employers in proportion to be premium payments by each Employer into such Fund for the year for which the refund is received as compared to the total premiums paid by all Employers participating in the Fund, except that the Trustees may use in their discretion any portion of such refunds for the administration of the Trust as provided in Item IV, Paragraph 4.
* * * *
Item V
1. Any employer participating hereunder may withdraw from this Agreement and Declaration of Trust by giving written notice to the Trustees not less than thirty (30) days prior to the anniversary date of the group insurance policy or policies issued by the Company and as of such anniversary date such Employer's obligation to contribute to the Group Life Insurance Fund shall cease.
2. Upon termination of any Employer's participation hereunder, for any reason, the insurance on *118 the Employees of such Employer will be cancelled as provided in the policy procured. Upon such termination such Employer will cease to have any rights whatsoever in or to the trust funds, unless and until such Employer is again restored as provided in the Insurance Plan.
* * * *
*1329 Item VII
Termination
A majority of the Employers, may, by resolution duly signed, resolve to terminate this trust and insurance procured hereunder. In any such event the Trustees shall use the fund available in the trust fund to pay any and all obligations of the trust. Should the trust fund be insufficient to pay such obligations, the Employers will contribute an amount sufficient to cover any such deficiency, determined on the basis of the pro rata amount of the insurance in force on the lives of the Employees of the respective Employers immediately prior to such termination. Should there be a Surplus in the trust fund after payment of all obligations, such surplus shall be distributed by the Trustees to the Employers at the time of termination in proportion to the amount of premiums paid by each while an Employer hereunder. Upon termination of this trust the Trustees shall nevertheless continue*119 as such for the purpose of dissolution and may take any action with regard to policies of insurance standing in their names which may be required by the Company.
From time to time petitioner would receive retroactive rate credits from the insurance company in varying amounts depending on the experience of the insurer in the prior year. A retroactive rate credit is an amount determined at the end of the policy year, representing the excess, if any, of the premiums earned for the policy year over the sum of the paid claims, increase in reserve expenses, and pooling charges. A reserve was set up in 1954 by petitioner at the suggestion of a representative of the insurance brokerage firm administering petitioner's operations to absorb any increases in the premium charged by the insurance company and that set by the trustees for the employer members and also possibly higher expenses. The purpose of establishing the reserve was to encourage sales by keeping a stable premium cost to the employer members insofar as possible. Such a reserve in the amount of approximately 1 year's premium is common in a group insurance trust. The reserve was funded by retention by petitioner in the reserve*120 of a portion of the retroactive rate credit refunded to it. The balance of such refund was refunded to the employer member-participants.
When a retroactive rate credit was received, petitioner's administrator would meet with the chief underwriter of the insurance company and the chairman of petitioner's board of trustees to recommend how the credit should be divided between the reserve fund and refunds to participants. At the meeting the division would be determined. The amount determined to be refunded to the participants would be returned to the employer members on the basis of a percentage of premiums paid for the members in the current year. No dividend or refund was given to prior participants of the insurance trust who had dropped out by the time the retroactive rate credit was actually received *1330 by petitioner, even though the credit was based upon excess premiums of a prior year during which such person had participated.
Petitioner had an agreement with the association to pay it for certain services rendered. The association would cooperate with the insurance fund by having its traveling association secretary distribute to the local boards literature dealing *121 with the insurance plan. In addition, four times a year the association would mail material prepared by petitioner's administrator to the entire association membership. In 1958 and 1959 petitioner agreed to pay the association for these services 20 percent of the retroactive rate credit it received. In 1960 the agreement was modified to provide for a payment of 20 percent of such retroactive rate credit to a maximum of $ 3,000. The $ 3,000 payment was a large factor in the income of the association exceeding its expenses during several of the association's fiscal years. No other funds of petitioner's were used by or passed on to the association during the years 1952 through 1963. *122 they join a real estate board in order to be eligible for the insurance.
The following schedule shows petitioner's receipts and disbursements for its fiscal years ended June 30, 1956, through June 30, 1963: *1331
| Fiscal year ended June 30 -- | ||
| 1956 | 1957 | |
| Receipts | ||
| Premiums received from participants | $ 49,161.65 | $ 51,815.10 |
| Retroactive rate credits | 18,908.59 | |
| Interest | 160.60 | 491.20 |
| Totals | 68,230.84 | 52,306.30 |
| Disbursements | ||
| Premiums paid out for participants' insurance | 44,976.81 | 48,254.98 |
| Distributions of refunds to participants | 6,467.00 | |
| Administrative fee | 3,412.21 | 3,329.67 |
| Advertising and promotion paid to the Association | 3,500.00 | 3,000.00 |
| Miscellaneous expenses | 1,033.52 | |
| 25.75 | ||
| Audit fee | 400.00 | 400.00 |
| Fidelity insurance premiums | ||
| Totals | 52,289.02 | 62,510.92 |
| Accumulated reserve | (( | |
| Fiscal year ended June 30 -- | ||
| 1958 | 1959 | |
| Receipts | ||
| Premiums received from participants | $ 54,445.95 | $ 58,637.72 |
| Retroactive rate credits | 7,954.84 | 3,221.27 |
| Interest | 512.79 | 529.59 |
| Totals | 62,913.58 | 62,388.58 |
| Disbursements | ||
| Premiums paid out for participants' insurance | 50,684.03 | 54,012.01 |
| Distributions of refunds to participants | 59.68 | 4,145.92 |
| Administrative fee | 4,661.46 | 4,843.14 |
| Advertising and promotion paid to the Association | 1,590.97 | 788.07 |
| Miscellaneous expenses | 796.36 | 631.07 |
| Audit fee | 600.00 | 600.00 |
| Fidelity insurance premiums | 40.65 | 162.55 |
| Totals | 58,433.15 | 65,182.76 |
| Accumulated reserve | ( | 17,940.24 |
| Fiscal year ended June 30 -- | ||
| 1960 | 1961 | |
| Receipts | ||
| Premiums received from participants | $ 61,240.46 | $ 62,894.53 |
| Retroactive rate credits | 36,156.59 | 162.29 |
| Interest | 593.61 | 1,701.70 |
| Totals | 97,990.66 | 64,758.52 |
| Disbursements | ||
| Premiums paid out for participants' insurance | 56,547.99 | 57,301.98 |
| Distributions of refunds to participants | (10.18) | 5,461.50 |
| Administrative fee | 4,915.59 | 4,224.84 |
| Advertising and promotion paid to the Association | 3,000.00 | 3,000.00 |
| Miscellaneous expenses | 150.00 | 49.44 |
| 3,550.00 | ||
| Audit fee | 612.84 | 612.00 |
| Fidelity insurance premiums | 162.55 | 162.55 |
| Totals | 65,378.79 | 74,362.31 |
| Accumulated reserve | 50,552.11 | 40,948.32 |
| Fiscal year ended June 30 -- | ||
| 1962 | 1963 | |
| Receipts | ||
| Premiums received from participants | $ 60,504.96 | $ 60,580.81 |
| Retroactive rate credits | 14,091.64 | 10,357.21 |
| Interest | 1,648.21 | 1,767.25 |
| Totals | 76,244.81 | 72,705.27 |
| Disbursements | ||
| Premiums paid out for participants' insurance | 46,505.71 | 44.036.81 |
| Distributions of refunds to participants | 10,060.96 | |
| Administrative fee | 4,428.39 | 4,089.01 |
| Advertising and promotion paid to the Association | 3,000.00 | 3,000.00 |
| Miscellaneous expenses | ||
| Audit fee | 605.05 | 619.99 |
| Fidelity insurance premiums | 162.55 | 162.55 |
| Totals | 54,791.70 | 61,969.32 |
| Accumulated reserve | 62,401.13 | 73,227.78 |
*1332 Respondent in his notice of deficiency dated August 31, 1965, computed the deficiencies as heretofore set forth on the basis of considering receipts by petitioner as "income" and disbursements as "expenses" which resulted in losses for certain years which were considered as net operating loss carrybacks. The tax was computed by allowing the credits and deductions provided for "Trusts" under
OPINION
Petitioner contends that it is exempt from taxation under
*126
*127
In order for an organization to be exempt from tax under
*129 Under the specific terms of the trust agreement all moneys taken in by the petitioner from its members are specifically set aside for the purpose of procuring insurance for the participant employers or of being returned to the members. Respondent does not deny that under the terms of the "trust agreements" it is a fact that all moneys taken in by petitioner (except interest income) are held in trust for specific uses for the members' benefit or to be returned to the members. Respondent states that he would never have determined the deficiency if petitioner had operated in accordance with its trust agreement. Respondent argues that under the agreement of June 30, 1954, the trustees had no right to set up a reserve of a portion of the retroactive rate credits and in so doing appropriated the amounts to petitioner's own purposes or in substance made a "claim of right" to the amounts.
We do not agree with this contention of respondent. The trust agreement specifically provided that the trustees were empowered to "make refunds of unearned premiums to the employers at such times as may be deemed" by them "to be proper." It likewise specifically provided that all such amounts were to*130 be returned to employer members, even though such employer members might not be the identical persons or groups as the employer members who had paid in the funds, because of members being added and members dropping out.
In several cases, the first being
In the recent case of
The instant case is indistinguishable in principle from
Although the respondent seems to raise the issue of the legality of the first*133 trust instrument under New York law, we find that to be irrelevant under the doctrine of
Under the rationale of
We hold that petitioner's only receipts of "taxable income" are from interest. Its other receipts were merely trust funds to be disbursed *1336 for insurance premiums or operation expenses or at a proper time returned to the "trust beneficiaries."
*134 Petitioner filed no Federal income tax returns for the years here in issue and did not file Forms 990-T returns required by organizations exempt from Federal income tax as petitioner claims to be. Seeking to excuse its failure, petitioner argues that its trustees were not informed by counsel or by their accountants that returns of any nature should have been filed.
Erroneous advice or a taxpayer's belief that no return is required is not reasonable cause for failure to file returns where the regulations clearly state that a return should be filed. See
We sustain respondent in his determination of additions to tax for failure of petitioner to file*135 returns.
1. All references are to the Internal Revenue Code of 1954 unless otherwise indicated.↩
2. Apparently some amount was paid to the association for administrative services in 1951 but the record is not clear in this respect.↩
1. This amount is computable from the record but has not been actually computed by either party.↩
3.
(a) Exemption From Taxation. -- An organization described in subsection (c) or (d) or section 401(a) shall be exempt from taxation under this subtitle unless such exemption is denied under section 502, 503 or 504.
* * * *
(c) List of Exempt Organizations. -- The following organizations are referred to in subsection (a): * * * * (4) Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.↩
4. Sec. 1.501(c)(4)-1 Civic organizations and local associations of employees.
(a)
(i) It is not organized or operated for profit; and
(ii) It is operated exclusively for the promotion of social welfare.
(2)
5. Petitioner in its brief specifically states that it is not claiming exemption under
6. As we understand this concession it embraces offsetting all expenses of petitioner's operation against its receipts from its employer members, so that the interest is taxable in full except for the exemption of $ 100 allowed by