Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 83 C 6048--Susan Getzendanner, Judge.
Cummings, Chief Judge, Ripple, Circuit Judge, and Eschbach, Senior Circuit Judge.
The Internal Revenue Code exempts a variety of corporations and associations from the federal income tax. See 26 U.S.C. § 501(c). But to qualify for an exemption from taxation an organization must meet the specific statutory language, Commissioner v. Lake Forest, Inc., 305 F.2d 814, 817 (4th Cir. 1962); Producers' Creamery Co. v. United States, 55 F.2d 104, 106 (5th Cir. 1932), and the cases there cited,*fn1 and the additional "needful rules and regulations" that the Secretary of the Treasury ("Secretary") prescribes in aid of the statute's interpretation. See 26 U.S.C. § 7805(a); National Muffler Dealers Association, Inc. v. United States, 440 U.S. 472, 477, 59 L. Ed. 2d 519, 99 S. Ct. 1304. That an organization is of a type similar to those exempted is not enough. Employees' Benefit Association of American Steel Foundries v. Commissioner, 14 B.T.A. 1166, 1183 (1929).
Appellant Water Quality Association Employees' Benefit Corporation ("taxpayer") claims that it is exempt from the federal income tax because it is a voluntary employees' beneficiary association ("VEBA") as described in Section 501(c)(9) of Title 26, United States Code,*fn2 though it concedes that it does not satisfy the Treasury Regulations' "same geographic locale" requirement. See Treas. Reg. § 1.501(c)(9)-2(a)(1), 26 C.F.R. § 1.501(c)(9)-2(a)(1) (1981).*fn3 In an action brought in federal district court pursuant to 28 U.S.C. § 1346 (a), appellant sought a refund of $85,178 in taxes paid for the year 1981; it asserted that the same locale provision is an impermissible restriction added to the statutory language of Section 501(c)(9). The district court held otherwise and granted summary judgment in favor of the government. Water Quality Association Employees' Benefit Corp. v. United States, 609 F. Supp. 91 (N.D. Ill. 1985). Because this provision of the Treasury Regulations unreasonably narrows the exemption that Congress granted in Section 501(c)(9), we reverse and remand.
For a number of years the taxpayer and its predecessor, the Water Quality Association Employees' Benefit Trust ("Trust"), enjoyed tax-exempt status as a VEBA. Acting under proposed Treasury Regulations published in 1969, the Internal Revenue Service granted the exemption in 1977 based upon the Trust's 1976 application. At that time, Treasury Regulations required that
an organization described in section 501(c)(9) must be composed of individuals who are entitled to participate in the association by reason of their status as employees who are members of a common working unit. The members of a common working unit include, for example, the employees of a single employer, the employees of one industry, or the members of one labor union.
Proposed Treas. Reg. § 1.501(c)(9)-1(b)(1), 34 Fed. Reg. 1028 (1969). The Trust then as now*fn4 was used to fund an insurance program for the employees (and their dependents) of members of the Water Quality Association ("WQA") -- a group of small businessmen who manufacture, distribute, supply and sell point-of-use water treatment equipment (e.g., water softeners). The exemption enhanced the financial stability of the Trust since the Trust was thus able to earn income on the accumulated dividends that it held as reserves without adverse tax consequences.
On July 17, 1980, the 1969 proposed Treasury Regulations were withdrawn and proposed amendments to the regulations under Section 501(c)(9) were substituted in their place. Among the changes was a new provision that restricted membership in tax-exempt VEBAs to employees engaged in the same line of business in the same geographic area if they are not employed by a common employer; the geographic restriction did not apply to VEBAs whose membership consisted of employees who belong to a labor union or work for affiliated employers. This provision was retained in the Final Regulations published on January 8, 1981. See Treas. Reg. § 1.501(c)(9)-2(a)(1); 46 Fed. Reg. 1719, 1721 (1981). As a result, the Internal Revenue Service no longer recognized the exempt status of the Trust since participation admittedly was not geographically restricted; WQA members operate their businesses nationwide and therefore their employees are not located in the same geographic locale.
The only issue to be decided on this appeal is whether the "same geographic locale" restriction of Treas. Reg. § 1.501(c)(9)-2(a)(1) is a permissible interpretation of the Tax Code. A Treasury Regulation such as the one before us was promulgated pursuant to the Secretary's general authority to "prescribe all needful rules and regulations for the enforcement of [the revenue laws]," 26 U.S.C. § 7805(a); it is an "interpretative" rather than "legislative" regulation. Rowan Companies, Inc. v. United States, 452 U.S. 247, 253, 68 L. Ed. 2d 814, 101 S. Ct. 2288. The latter is issued under a specific delegation of authority by Congress and has the same effect as a valid statute. Batterton v. Francis, 432 U.S. 416, 425 & n. 9, 53 L. Ed. 2d 448, 97 S. Ct. 2399. Legislative regulations therefore are accorded greater deference than interpretative regulations, and judicial inquiry concerning legislative regulations is limited to "whether the interpretation or method is within the delegation of authority." Rowan Companies, Inc. v. United States, 452 U.S. at 253. On the other hand, a court may when appropriate substitute its judgment for an agency's when the regulation is interpretative. General Electric Co. v. Gilbert, 429 U.S. 125, 50 L. Ed. 2d 343, 97 S. Ct. 401; Batterton v. Francis, supra; CWT Farms, Inc. v. Commissioner, 755 F.2d 790, 800 (11th Cir. 1985) (citations omitted). See also Davis, Administrative Law Treatise § 7.8 at 36-43 (2d ed. 1979).
Still, courts ordinarily owe deference to a regulation that "'implement[s] the congressional mandate in some reasonable manner.'" United States v. Vogel Fertilizer Co., 455 U.S. 16, 24, 70 L. Ed. 2d 792, 102 S. Ct. 821, quoting United States v. Correll, 389 U.S. 299, 307, 19 L. Ed. 2d 537, 88 S. Ct. 445. But despite the rather broad deference often given to Treasury Regulations, see Fulman v. United States, 434 U.S. 528, 533, 55 L. Ed. 2d 1, 98 S. Ct. 841 (Treasury Regulations "must be sustained unless unreasonable and plainly inconsistent with the revenue statutes" and "should not be overturned except for weighty reasons"), a court nonetheless must scrutinize a regulation's fidelity to the overall statutory framework and legislative history, see United States v. Vogel Fertilizer Co., 455 U.S. at 24-26; an interpretative regulation is not a statute, and the Treasury is not the Congress. See Manhattan General Equipment Co. v. Commissioner, 297 U.S. 129, 134, 80 L. Ed. 528, 56 S. Ct. 397 ("The power of an administrative officer or board to administer a federal statute and to prescribe rules and regulations to that end is not the power to make law -- for no such power can be delegated by Congress . . . ."). Our analysis here requires that we "look to see whether the regulation harmonizes with the plain language of the statute, its origin, and its purpose," National Muffler Dealers Association, Inc. v. United States, 440 U.S. at 477, and consider the following:
A regulation may have particular force if it is a substantially contemporaneous construction of the statute by those presumed to have been aware of congressional intent. If the regulation dates from a later period, the manner in which it evolved merits inquiry. Other relevant considerations are the length of time the regulation has been in effect, the reliance placed on it, the consistency of the Commissioner's interpretation, ...