- 7.25.41 Insurance Activities
- 18.104.22.168 Overview
- 22.214.171.124 Commercial-Type Insurance
- 126.96.36.199 Exceptions
- 188.8.131.52.1 Below Cost to Charitable Recipients
- 184.108.40.206.2 Health Maintenance Organizations
- 220.127.116.11.3 Certain Property or Casualty Insurance
- 18.104.22.168.4 Certain Retirement or Welfare Benefits
- 22.214.171.124.5 Charitable Gift Annuities
- 126.96.36.199 Blue Cross/Blue Shield
- 188.8.131.52 Case Law
Part 7. Rulings and Agreements
Chapter 25. Exempt Organizations Determinations Manual
Section 41. Insurance Activities
IRC 501(m)(1), effective for tax years beginning after December 31, 1996, provides that an organization described in IRC 501(c)(3) or in IRC 501(c)(4) is exempt from tax only if no substantial part of its activities consists of providing commercial-type insurance.
The phrase "no substantial part " has the meaning given to it under present law applicable to such organizations. See, e.g., Haswell v. U.S., 500 F.2d 1133 (Ct. Cl. 1974); Seasongood v. Comm’r, 227 F.2d 907 (6th Cir. 1955); and IRC 501(h). H.R. Rept. No. 99–426, 99th Cong., 2d Sess. 662 (1986), 1986–3 C.B. Vol. 2 664.
Where an organization that is otherwise exempt under IRC 501(c)(3) or IRC 501(c)(4) provides commercial-type insurance, but it is not a substantial part of its activities, the activity of providing commercial-type insurance is treated as an unrelated trade or business under IRC 513. However, in lieu of the tax on unrelated trade or business taxable income under IRC 511, the unrelated trade or business activity is taxed under the rules relating to insurance companies (Subchapter L). IRC 501(m)(2).
Commercial-type insurance generally is any insurance of a type provided by commercial insurance companies. The issuance of annuity contracts is treated as providing insurance. IRC 501(m)(4).
There are several exceptions to the definition of commercial-type insurance. IRC 501(m)(3).
Commercial-type insurance does not include insurance provided at substantially below cost to a class of charitable recipients. IRC 501(m)(3)(A).
Rev. Rul. 71–529, 1971–2 C.B. 234 presents an example of the meaning of the term substantially below cost.
A class of charitable recipients refers to a group of recipients that would constitute a charitable class under present law. H.R. Rept. No. 99–426, 99th Cong., 2d Sess. 662 (1986), 1986–3 C.B. Vol. 2 664.
Commercial-type insurance does not include health insurance provided by a health maintenance organization (HMO) that is of a kind customarily provided by such organizations and is incidental to the organization’s principal activity of providing health care. IRC 501(m)(3)(B).
Commercial-type insurance does not include property or casualty insurance provided either directly or indirectly through an organization described in IRC 414(e)(3)(B)(ii) by a church or convention or association of churches for the church, convention or association. IRC 501(m)(3)(C).
Commercial-type insurance does not include the provision of retirement or welfare benefits by a church or a convention or association of churches directly or indirectly through an organization described in IRC 414(e)(3)(A) or IRC 414(e)(3)(B)(ii) for the employees of such organizations or for the employees’ beneficiaries. IRC 501(m)(3)(D).
This exception does not apply if insurance is provided to persons other than the church or convention or association of churches and their employees.
Commercial-type insurance does not include the provision of charitable gift annuities.
Charitable gift annuities are a form of life insurance used as part of fund-raising programs where a charity receives a large payment from an individual donor and, in return, pays the donor an annuity. In order for a charitable gift annuity to qualify under this exception, a portion of the amount paid in connection with the issuance of the annuity must be allowable as a deduction under IRC 170 or IRC 2055, and the annuity must be described in IRC 514(c)(5) (determined as if cash amounts paid were property).
Effective for tax years beginning after December 31, 1986, IRC 833 describes the federal tax treatment for Blue Cross/Blue Shield and certain similarly situated organizations that were exempt from federal income tax.
In Paratransit Insurance Corporation , 102 T.C. 745 (1994), a nonprofit corporation provided automobile liability insurance to its members, all of which were tax-exempt organizations that provided transportation to the elderly, the handicapped, the needy, etc. The Tax Court held that this activity was commercial-type insurance, that it was a substantial part of the organization’s overall activities, and that it was not provided at substantially below cost to a class of charitable recipients under section 501(m).
In Florida Hospital Trust Fund. et al. v. Commissioner, 103 T.C. 140 (1994), an organization served as a group self-insurance fund for its member hospitals to insure against hospital professional liability, excess hospital professional liability, and workers’ compensation liability. The Tax Court held that this activity was commercial-type insurance.
In Nonprofits’ Insurance Alliance of California v. U.S., 94–2 USTC Para. 50,593 (Fed. Cl. 1994), an organization served as a group self-insurance risk pool with a membership consisting entirely of nonprofit organizations. It was formed under state law in response to the concerns of nonprofit organizations in the state regarding the price and availability of commercial insurance. Under state law, the pooling arrangement did not qualify as insurance and was not subject to regulation under the state insurance law. The Court of Federal Claims held that the organization did not provide insurance at substantially below cost to a class of charitable recipients.