Determination 1047024: IRS denied exemption to a cooperative charitable insurance pool

Plain-English summary

The IRS issued a final adverse determination denying tax-exempt status under section 501(c)(3) to a cooperative self-insurance pool for charitable organizations. The organization received its initial funding from its members and did not satisfy the section 501(n) requirements for a qualified charitable risk pool, including the required startup capital from nonmember charitable organizations. Its articles also lacked required provisions concerning member eligibility and insurance coverage. Because the organization did not qualify for exemption, the IRS stated that contributions were not deductible under section 170 and required the organization to file federal income tax returns.

Ruling snapshot

• Question: Did the cooperative self-insurance pool qualify for exemption under IRC section 501(c)(3) as a qualified charitable risk pool?
• Outcome: denied
• Key authorities: IRC §§ 170, 501(c)(3), 501(n), 6104(c), 6110, and 7428(b)(2).

Full text (IRS public release)

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

Release Number: 201047024
Release Date: 11/26/10
Date: September 2, 2010

Contact Person:
XXXXXXXXXX
Identification Number:
XXXXXX
Contact Number:
XXXXXXXXXXXXX
Employer Identification Number:
XXXXXXXXXX
UIL Code: 501.03-01
509.01-01
Form Required To Be Filed:
XXXX
Tax Years:
XXX

Dear

This is our final determination that you do not qualify for exemption from Federal income tax as
an organization described in Internal Revenue Code section 501(c)(3). Recently, we sent you a
letter in response to your application that proposed an adverse determination. The letter
explained the facts, law and rationale, and gave you 30 days to file a protest. Since we did not
receive a protest within the requisite 30 days, the proposed adverse determination is now final.

Because you do not qualify for exemption as an organization described in Code section
501(c)(3), donors may not deduct contributions to you under Code section 170. You must file
Federal income tax returns on the form and for the years listed above within 30 days of this
letter, unless you request an extension of time to file. File the returns in accordance with their
instructions, and do not send them to this office. Failure to file the returns timely may result in a
penalty

We will make this letter and our proposed adverse determination letter available for public
inspection under Code section 6110, after deleting certain identifying information. Please read
the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, follow the
instructions in Notice 437. If you agree with our deletions, you do not need to take any further
action.

In accordance with Code section 6104(c), we will notify the appropriate State officials of our
determination by sending them a copy of this final letter and the proposed adverse letter. You
should contact your State officials if you have any questions about how this determination may
affect your State responsibilities and requirements.

2

XXXXXXXXXXXXXXXXX

If you have any questions about this letter, please contact the person whose name and
telephone number are shown in the heading of this letter. If you have any questions about your
Federal income tax status and responsibilities, please contact IRS Customer Service at
1-800-829-1040 or the IRS Customer Service number for businesses, 1-800-829-4933. The
IRS Customer Service number for people with hearing impairments is 1-800-829-4059.

Sincerely,

Robert Choi
Director, Exempt Organizations
Rulings & Agreements

Enclosure
Notice 437
Redacted Proposed Adverse Determination Letter
Redacted Final Adverse Determination Letter

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

Date: May 18, 2010

Contact Person:
XXXXXXXXXX
Identification Number:
XXXXXX
Contact Number:
XXXXXXXXXXXXX
FAX Number:
XXXXXXXXXXXXX
Employer Identification Number:
XXXXXXXXXX

Legend:

M = XXXXXXXXXX
N = XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
O = XXXXXXXXXXXXX

Dear

We have considered your application for recognition of exemption from Federal income tax
under Internal Revenue Code section 501(a). Based on the information provided, we have
concluded that you do not qualify for exemption under Code section 501(c)(3). The basis for
our conclusion is set forth below.

You were organized under the nonprofit laws of the State of M on March 19 Your name
at the time of incorporation was N. You amended your Articles of Incorporation on June 19
and changed your name to O. You restated your Articles on February 20 Your Restated
Articles indicate that you were formed to create and administer a group self-insurance pool for
the benefit of your members.

You operate a cooperative self-insurance pool offering “commercial-type” auto insurance
coverage to your members. You provide insurance for your members by assuming some
insurance risk yourself but also purchase insurance from third-party insurance companies on
behalf of your members. Specifically, your three primary functions are: Loss Control Risk
Management; Underwriting; and Claims Processing.

Your membership consists of organizations in M that have been recognized as exempt under
section 501(c)(3) of the Code. Members own or lease at least one vehicle.

You received all of your initial funding directly from your members.

LAW:

Section 501(c)(3) of the Code provides for the exemption from federal income tax for
corporations organized and operated exclusively for charitable, scientific or educational

XXXXXXXXXXXXXXXXX

purposes, provided no part of the corporation's net earnings inures to the benefit of any
private shareholder or individual.

Section 1.501(c)(3)-1(c)(1) of the Income Tax Regulations provides that that an
organization will be regarded as "operated exclusively" for one or more exempt purposes
only if it engages primarily in activities which accomplish one or more of such exempt
purposes specified in section 501(c)(3) of the Code. An organization will not be so regarded
if more than an insubstantial part of its activities is not in furtherance of an exempt
purpose.

1.501(c)(3)-1(a)(2) of the regulations provides that the term “exempt purpose or purposes”
means any purpose or purposes specified in section 501(c)(3).

Section 501(n)(1) of the Code provides that a qualified charitable risk pool shall be treated
as an organization organized and operated exclusively for charitable purposes, and
subsection (m) shall not apply to a qualified charitable risk pool.

Section 501(n)(2) of the Code provides that the term "qualified charitable risk pool" means
any organization, comprised of section 501(c)(3) members, which is organized and operated
solely to pool insurance risks of its members (other than risks related to medical
malpractice) and to provide information to its members with respect to loss control and risk
management, and satisfies the organizational requirements of section 501(n)(3).

Section 501(n)(3) of the Code states that an organization will be organized as a qualified
charitable risk pool if the risk pool is organized as a non-profit organization under state law
provisions authorizing risk pooling arrangements for charitable organizations, the risk pool
is exempt from any state income tax (or will be so exempt after such pool qualifies as an
organization exempt from federal income tax), the risk pool receives at least $1,000,000 in
startup capital from nonmember charitable organizations; such risk pool is controlled by a
board of directors elected by its members; and the organizational documents require that
each member of the risk pool be described in section 501(c)(3), any member no longer
described in section 501(c)(3) shall notify the pool of its determination, and each policy of
insurance issued by the risk pool will not cover the insured with respect to events occurring
after the effective date of the determination.

RATIONALE:

An organization may be described in section 501(c)(3) of the Code if it is a “qualified
charitable risk pool” as described in section 501(n). To qualify as a charitable risk pool, an
organization must meet all the organizational requirements specified in section 501(n)(3).
One requirement, in section 501(n)(3)(C), states that the organization must receive at least
$ in startup capital from nonmember charitable organizations.

You do not meet the organizational requirement described at section 501(n)(3)(C) of the
Code with respect to startup capital from nonmember charitable organizations. You
received startup funding only from your members and did not receive at least $ in
startup capital from nonmember charitable organizations.

XXXXXXXXXXXXXXXXXX

Also, you do not meet the organizational requirements described at section 501(n)(3)(E) of
the Code, because your Restated Articles of Incorporation do not contain the language
required by sections 501(n)(3)(E)(i), (ii), and (iii).

Thus, because you do not meet the organizational requirements of sections 501(n)(3)(C)
and (E) of the Code, you are not a charitable risk pool within the meaning of section 501(n)
and thus are not described in section 501(c)(3).

CONCLUSION:

Accordingly, you do not qualify for exemption as an organization described in section
501(c)(3) of the Code and you must file federal income tax returns.

Contributions to you are not deductible under section 170 of the Code.

You have the right to file a protest if you believe this determination is incorrect. To protest, you
must submit a statement of your views and fully explain your reasoning. You must submit the
statement, signed by one of your officers, within 30 days from the date of this letter. We will
consider your statement and decide if the information affects our determination.

Your protest statement should be accompanied by the following declaration:

Under penalties of perjury, I declare that I have examined this protest statement, including
accompanying documents, and, to the best of my knowledge and belief, the statement
contains all the relevant facts, and such facts are true, correct, and complete.

You also have a right to request a conference to discuss your protest. This request should be
made when you file your protest statement. An attorney, certified public accountant, or an
individual enrolled to practice before the Internal Revenue Service may represent you. If you
want representation during the conference procedures, you must file a proper power of attorney,
Form 2848, Power of Attorney and Declaration of Representative, if you have not already done
so. For more information about representation, see Publication 947, Practice before the IRS
and Power of Attorney. All forms and publications mentioned in this letter can be found at
www.irs.gov, Forms and Publications.

If you do not file a protest within 30 days, you will not be able to file a suit for declaratory
judgment in court because the Internal Revenue Service (IRS) will consider the failure to protest
as a failure to exhaust available administrative remedies. Code section 7428(b)(2) provides, in
part, that a declaratory judgment or decree shall not be issued in any proceeding unless the Tax
Court, the United States Court of Federal Claims, or the District Court of the United States for
the District of Columbia determines that the organization involved has exhausted all of the
administrative remedies available to it within the IRS.

If you do not intend to protest this determination, you do not need to take any further action. If
we do not hear from you within 30 days, we will issue a final adverse determination letter. That
letter will provide information about filing tax returns and other matters.

XXXXXXXXXXXXXXXXX

Please send your protest statement, Form 2848 and any supporting documents to this address:

You may also fax your statement using the fax number shown in the heading of this letter. If
you fax your statement, please call the person identified in the heading of this letter to confirm
that he or she received your fax.

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

Sincerely,

Robert Choi
Director, Exempt Organizations
Rulings & Agreements