## Facts

- American Bar Endowment (ABE) was a § 501(c)(3) charitable organization that sponsored group life, health, accident, and disability insurance for lawyer-members.
- Commercial insurers underwrote the policies; ABE did not assume insurance risk.
- The group was experience-rated, and premiums were set above insurers’ actual costs, producing refunds (“dividends”) based on favorable claims experience.
- Participation required members to assign all dividend rights to ABE; ABE used dividends to support its charitable programs.
- ABE advised members that their pro rata share of dividends (net of ABE administrative costs) could be treated as a charitable contribution deduction.
- The IRS assessed unrelated business income tax (UBIT) on ABE’s net insurance-related revenues for multiple tax years, asserting the program was an unrelated trade or business.
- ABE sought a refund; individual members sought refunds claiming charitable contribution deductions for part of their premium payments.

## Issues

1. Whether ABE’s group insurance program was a “trade or business” and “unrelated” under I.R.C. §§ 511–513 such that the resulting net income was subject to UBIT.
2. Whether members could deduct any portion of insurance premiums as “charitable contributions” under I.R.C. § 170 where the payment both purchased insurance and allegedly included a donative component.

## Decision

- The Supreme Court reversed the rulings favoring ABE on UBIT and rejected the members’ claimed deductions.
- The Court held ABE’s insurance program produced income from the sale of goods or performance of services and therefore constituted a taxable unrelated trade or business under the UBIT provisions.
- The Court held the members failed to prove that any portion of their premium payments qualified as deductible charitable contributions.

## Legal Principles

- For UBIT, “trade or business” includes any activity carried on to produce income from the sale of goods or performance of services, and UBIT targets unfair competition between exempt organizations and taxable businesses.
- Income characterized as “dividends” or refunds arising from commercially structured member insurance arrangements may be treated as business income when it reflects profits from the activity rather than voluntary gifts.
- A charitable contribution requires a transfer without adequate consideration; when a payment has a “dual character” (purchase plus purported gift), a deduction requires proof that the taxpayer intentionally paid in excess of the value of benefits received.
- Taxpayers claiming a charitable deduction for an alleged excess payment must substantiate both the excess over fair market value and donative intent.

## Conclusion

The Court treated ABE’s member insurance program as a commercial, unrelated trade or business generating taxable unrelated business income and denied members’ charitable deductions because they did not establish a purposeful excess payment beyond the value of insurance received.


United States v. American Bar Endowment, 477 U.S. 105 (1986)