PLR 1027058: The IRS approved limited lobbying expenditures by an employee-benefit trust

Plain-English summary

The IRS considered whether a tax-exempt employee-benefit trust could spend a small amount on lobbying about health care legislation that might affect its existence, powers, duties, or tax-exempt status. The trust proposed to limit the activity to monitoring legislation, communicating with state officials, and responding to technical requests, without grassroots lobbying. Its proposed lobbying costs would not exceed 0.1 percent of annual revenue, while its administrative expenses were about 1.4 percent. The IRS ruled that these expenditures would not cause the trust to lose exemption under IRC § 501(c)(9), because substantially all of its operations would remain devoted to providing permitted benefits.

Ruling snapshot

• Question: Could the trust incur limited lobbying expenses about health care reforms without losing its § 501(c)(9) exemption?
• Outcome: approved
• Key authorities: IRC § 501(c)(9); Treas. Reg. §§ 1.501(c)(9)-1(c) and 1,509(c)(9)-3(d)

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 201027058 Contact Person:
Release Date: 7/9/10
Date: 4/15/10 Identification Number:
Telephone Number:

Employer Identification Number:

509.00-00

Legend:

Taxpayer =
State =
Local Governments =

This is in reply to your letter dated July 9, 2008, and subsequent correspondence, submitted on
behalf of the Trust, concerning whether making certain lobbying expenditures will adversely
affect Taxpayer’s tax exempt status under Section 501(c)(9) of the Internal Revenue Code.

Taxpayer is a jointly trusteed multi-employer, multi-union , whose mission is to establish,
through the cooperative efforts of public school districts and their employees’ unions, a
comprehensive health and benefits program for eligible school employees in an area of the State.

The State Legislature is considering comprehensive health care reform. A number of bills are
pending before the State Legislature which would modify the existing legal regime governing
health care benefits. Many of these changes have the potential to affect the existence of the
Taxpayer, its powers and duties, and the universe of those eligible for the types of benefits the
Taxpayer exists to provide.

Taxpayer proposes to engage a paid professional lobbyist to monitor and report to it about the
progress of such bills and to make appearances before, or communications with, the Legislature
and Governor solely with respect to decisions which might affect the continued existence of the
Taxpayer, its powers and duties, and/or tax-exempt status. The Taxpayer would take steps, both
contractually and in terms of its instructions to its lobbyist, to ensure that the lobbying activities
were strictly limited to the foregoing topics. In addition, it is possible that the Taxpayer would
also authorize its lobbyist or other representatives to respond to written requests for technical
advice or assistance from a state legislative committee or regulatory body, in connection with the
impact of any proposed legislation on the continued existence of the Taxpayer, its powers and
duties, and/or tax-exempt status.

Specifically, Taxpayer’s lobbying will be directed at ensuring that health insurance reforms
allow Taxpayer to avail its beneficiaries of the advantages of pooling of resources and
concentration of purchasing power; and to ensure that health reforms allow Taxpayer to provide
benefits in addition to statutory minimums and to fill gaps in coverage. In addition Taxpayer’s
lobbying expenditures may be used for providing testimony or technical assistance to the state
Legislature. Taxpayer would not engage in any grassroots lobbying.

Taxpayer spends virtually all of its revenue on benefit premiums to insurance carriers or health
maintenance organizations. In recent years, its administrative expenses have been only 1.4
percent of its total revenues. This percentage, while it varies slightly from year to year, is
relatively constant over time. The lobbying expenses that Taxpayer proposes to incur would not
exceed one-tenth of one percent of Taxpayer’s annual revenue.

Taxpayer does not envision lobbying expenses as an ongoing expense, but, rather, will limit its
lobbying activities to years in which there are what Taxpayer considers to be “serious”
comprehensive health care reforms potentially impacting Taxpayer’s existence, its powers and
duties, and the universe of those eligible for the types of benefits the Taxpayer exists to provide.

Ruling Requested:

Taxpayer’s expenditure of up to 0.1 percent of its revenues in any year to monitor for Taxpayer,
and report to Taxpayer about, comprehensive health insurance reform efforts, and to make
appearances before, or communicate with, the Legislature and Governor on Taxpayer’s behalf
solely with respect to decisions which might affect the continued existence of the Taxpayer, its
powers and duties, or its tax-exempt status, will not cause it to lose exemption under Section
501(c)(9) of the Code.

Law:

Section 501(c)(9) of the Code provides for exemption from federal income tax of voluntary
employee's beneficiary associations which provide for the payment of life, sick, accident or other
benefits to the members of such association or their dependents or designated beneficiaries, if no
part of the net earnings (other than through such payments) inures to the benefits of any private
shareholder or individual.

Section 1.501(c)(9)-1(c) of the Treasury Regulations on Income Tax provides that “substantially
all” of a section 501(c)(9) organization’s operations must be in furtherance of providing . . .
benefits” such as life, sick, accident or other benefits.

Section 1,509(c)(9)-3(d) provides that the term other benefits includes only benefits that are
similar to life, sick or accident benefits, including only benefits that are intended to safeguard or
improve the health of a member or a member’s dependents, or benefits that protect against a
contingency that interrupts or impairs a member’s earning power.

Analysis:

Under section 1.501(c)(9)-1(c) of the regulations, “substantially all” of a section 501(c)(9)
organization’s operations must be “in furtherance of providing . . . benefits” such as life, sick,
accident benefits. Section 1,509(c)(9)-3(d) provides that the term other benefits includes only
benefits that are similar to life, sick or accident benefits, including only benefits that are intended
to safeguard or improve the health of a member or a member’s dependents, or benefits that
protect against a contingency that interrupts or impairs a member’s earning power.

Lobbying expenses are not “other benefits” within the meaning of the regulations. A very small
amount of lobbying expenses could arguably be treated as de minimus administrative expenses.

Here, Taxpayer proposes to limit its expenditures to those expenses necessary to monitor for
Taxpayer, and report to Taxpayer about, comprehensive health insurance reform efforts, and to
make appearances before, or communicate with, the Legislature and Governor on Taxpayer’s
behalf solely with respect to decisions which might affect the continued existence of the
Taxpayer, its powers and duties, and/or tax-exempt status. We also note that the lobbying
expenses relate to specific legislation and are not incurred yearly on an ongoing basis.

Taxpayers total administrative expenses are approximately 1.4 percent per year, and the
proposed lobbying expense would add only another 0.1 percent to such expenses. Thus over 98
percent of Taxpayer’s revenues are expended for permissible purposes, and accordingly
“substantially all” of Taxpayer’s operations are in furtherance of providing permissible
benefits to Taxpayer’s beneficiaries.

Ruling:

Taxpayer’s expenditure of approximately 0.1 percent of its premium income in any year to
monitor for Taxpayer, and report to Taxpayer about, comprehensive health insurance reform
efforts, and to make appearances before, or communicate with, the Legislature and Governor on
Taxpayer’s behalf solely with respect to decisions which might affect the continued existence of
the Taxpayer, its powers and duties, or its tax-exempt status, will not cause it to lose its
exemption under Section 501(c)(9) of the Code.

This ruling is conditioned on the understanding that there will be no material changes in the facts
upon which it is based.

This ruling is limited to the issue discussed above. Nothing in this ruling determines any other
issue under the Internal Revenue Code.

This ruling will be made available for public inspection under section 6110 of the Code after
certain deletions of identifying information are made. For details, see enclosed Notice 437,
Notice of Intention to Disclose. A copy of this ruling with deletions that we intend to make
available for public inspection is attached to Notice 437. If you disagree with our proposed
deletions, you should follow the instructions in Notice 437.

This ruling is directed only to the organization that requested it. Section 6110(k)(3) of the Code
provides that it may not be used or cited by others as precedent.

Because this letter could help resolve any future questions about tax consequences of your
activities, you should keep a copy of this ruling in your permanent records.

If you have any questions about this ruling, please contact the person whose name and telephone
number are shown in the heading of this letter.

In accordance with the Power of Attorney and Declaration of Representative currently on file

with the Service, we are sending a copy of this letter to your authorized representative.

Sincerely,

Ronald J. Shoemaker
Manager Technical Group 2
Enclosure: Notice 437