ABA Retirement Funds v. USA: Business Leagues and Integral Parts

In an opinion remarkable only because it is so thoroughly boring, the 7th Circuit recently held that ABA Retirement Funds, an Illinois not-for-profit corporation, did not meet the requirements for exemption from tax under IRC 501(c)(6).  ABA Retirement Funds v. USA.  Actually, the opinion is boring because the claim to exemption is so obviously ridiculous.  How anybody could have claimed tax exempt status for what amounts to an attorney retirment fund management company is beyond me, but ABARF did and spent a lot of money insisting that they be granted that exemption too.  The district court opinion is much more instructive and includes a helpful note on the integral part doctrine.  The 7th Circuit pretty much refers us to that opinion and then discusses one or two aspects of the case as though writing a concurrence to the lower court.  Here is what seems like a pretty bright line test for business leagues, according to the district court:

Parsing this text, the regulation [1.501(c)(6)-1] requires that an organization meet the following criteria to constitute a “business league”:

It is an organization:

(1) of persons having a common business interest;

(2) whose purpose is to promote the common business interest;

(3) not organized for profit;

(4) that does not engage in a regular business of a kind ordinarily conducted for profit;

(5) whose activities are directed to the improvement of business conditions at one or more lines of a business as distinguished from the performance of particular services for individual persons; and

(6) of the same general class as a chamber of commerce or a board of trade. The regulation also states that if an organization is “engaged in furnishing information to prospective investors to enable them to make sound investments,” its purpose is not “to promote [a] common business purpose” and therefore it does not constitute a business league.

All ABARF did, on the other hand, was sell stuff exclusively to attorneys.  It would be as if the Ford dealer down the street insisted that it was a univesity because it sold cars only to universities.

There is one other instructive highlight, though.  The District Court opinion rejects ABARF’s belated insistence that the integral part doctrine entitles it to exemption because ABA could have sold and managed retirement plans without losing its tax exempt status.   ABARF arguement that the ABA could have maintained the retirement management without losing its tax exemption, implyies that the integral part doctrine allows a back door way of achieving tax exemption for what would have been an unrelated business — albeit one insubstantial enough not to jeopardize the parent’s tax exempt status.  The district court correctly rejected this attempted slight of hand by noting that an unrelated business is, by definition, not “integral” to a parent’s tax exempt status (duh!).  An integral activity, on the other hand — e.g., providing laundry services to a single exempt hospital parent — can be dropped into that hospital’s subsidiary, and that sub be exempt under the integral part doctrine. 

dkj