A recent Supreme Court decision has chipped away at one more source that many associations use to supplement income earned from dues.
The decision in the case, U.S. v. American Bar Endowment, concerns the taxability of insurance policies offered to association members.
In April, the Supreme Court ruled in U.S. v. American College of Physicians that unless an association can prove that advertising in its publication is directly related to the educational intent of the organization, revenue from the ads is taxable.
In the latest ruling, on June 23, the high court disallowed the American Bar Association's practice of reinvesting insurance policy dividends, with the consent of its members, and using the money to award grants and support educational activities for the ABA and other legal organizations. The ABA's policyholders also had taken tax write-offs on the contribution.
The suit asked the ABA's fund-raising arm to pay $6 million in taxes on contributions received between 1979 and 1981 from members covered by its group insurance plan.
The court ruled 6-to-1 in favor of having the ABA's endowment pay taxes on the contributions and blocked members from writing off part of the premium as a charitable contribution.
Last year, the endowment provided almost $5 million in grants using the contribution program, its executive director, Charles J. Lynch, said. "We are very surprised that the Supreme Court would fail to recognize the charitable functions of the organization," said Lynch.
The endowment, whose sole purpose has been to provide insurance to members for almost 30 years, currently covers 57,000 people, he said. Although its fate is unclear, Lynch agreed that one possible solution would be to spin off the insurance business into a for-profit entity. The board will meet late next week to discuss the situation.
Justice Thurgood Marshall, who wrote the court's opinion, said that the endowment was in competition with businesses that did not enjoy the same tax benefits. The endowment, Marshall said, could offer its members a lower after-tax cost for its commercial policy because of the write-off for charitable contributions. "This case presents an example of precisely the sort of unfair competition between tax-exempt organizations and taxable businesses that Congress intended to prevent by providing for the unrelated business income tax (UBI)," Marshall said.
The UBI was adopted in 1950 and revised in 1969. The two Supreme Court rulings regarding nonprofits say such groups must be taxed at the same rate as for-profit entities if they are engaged in similar and competing business activities.
Although the endowment's attorneys minimized the impact of the decision, others in the associations community reacted differently. "This decision will definitely set a precedent and it will affect associations that are operating in a similar way," said Alan Dye, an attorney with Webster, Chamberlain and Bean, a local law firm that represents associations. "The case was a test of a practice employed by thousands of associations," reported Association Trends Magazine, a national weekly newspaper.
Jim Albertine, director of government affairs for the American Society of Association Executives, said his group is going to ask Congress to further define UBI and its impact on nonprofits. Albertine said the courts have addressed the issue in a "piecemeal" fashion in the past.
On the other side of the issue, the Business Coalition for Fair Competition, which is fighting what it sees as unfair competition mostly from schools and government organizations, is preparing a position statement for the House Ways and Means Committee asking that Congress review the UBI tax.
During the past 10 years, many associations have sought to raise funds by means other than membership dues, said Frank Martineau, chairman of Association Trends Magazine. He said 55 percent of most associations' income today is not derived from dues. In a survey released by ASAE recently, almost 20 percent of the 2,000 respondents said they have spun off for-profit subsidiaries, while 28.6 formed foundations. PROFESSIONAL
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