PLR 1246039: IRS confirms that state-funded member benefits do not create private inurement

Plain-English summary

The IRS ruled that a business league's use of state development-fund distributions to provide health and pension benefits would not create private inurement or adversely affect its § 501(c)(6) status. The organization did not use its own earnings to fund the benefits, did not charge a fee for providing them, and used the state funds for benefits and reasonable related administrative expenses. The IRS concluded that the state-mandated benefits served a function related to the organization's exempt purpose and did not constitute services for individual members. The ruling was based on the stated facts and representations and did not address unrelated provisions.

Ruling snapshot

• Question: Would a business league's use of state funds for member health and pension benefits create private inurement or jeopardize its § 501(c)(6) exemption?
• Outcome: Approved
• Key authorities: IRC §§ 501(c)(6), 511, and 513; Treas. Reg. § 1.501(c)(6)-1; Rev. Ruls. 66-151, 67-251, 71-155, 73-452, and 76-410

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Number: 201246039 Contact Person:
Release Date: 11/16/2012
Identification Number:
Date: August 21, 2012
Telephone Number:

Employer Identification Number:
UIL: 501.06-00

LEGEND:

You =
State =
Date 1 =
x =

Dear

This letter is in reference to your letter from your authorized representative. You are requesting
rulings, as amended, under § 501(c)(6) of the Internal Revenue Code with regard to private
inurement and unrelated business income tax.

FACTS:

You are a business league in State. You were recognized as exempt from federal
income tax as an organization described in § 501(c)(6) by letter on Date 1.

A State statute provides for the establishment of a Development Fund within State’s

Treasury. State will make distributions from the Development Fund to certain types of
organizations, including you. You must use the distribution to fund health and pension benefits
to your members, their families, employees, and others in accordance with your rules and
eligibility requirements, as approved by a State Commission. Also from the distribution, you will
annually pay $x to a particular organization, at the place where you operate your activities, for
health insurance, life insurance, or other benefits to active and disabled individuals in
accordance with your rules and eligibility requirements.

Your website states that your members in good standing and their dependents are eligible for
your Health Care Plan and your Pension Plan. In addition, full- time employees of your
members are eligible for your Pension Plan. You state that you interview insurance providers
and administrators and select the plan features to be provided as well as the provider. You pay

the premiums as they become due based on a billing from the provider.

You describe your eligibility guidelines as straightforward and easily administered. One
of your employees tracks the eligibility standards for each member. When an individual
achieves the required eligibility standards, his name is added to the monthly roster sent
to the provider. Based on this record, the provider’s representative notifies each
member of the benefit program and the member’s eligibility date.

You represent that you do not receive any fees for particular services. Amounts you
receive from the Development Fund under the state formula for purposes of providing
health and pension benefits are used exclusively for providing for such benefits and for
the reasonable administrative costs of providing such benefits, not to exceed an amount
specified by the statute. No amount received from the Development Fund for the
purpose of providing health and welfare benefits is returned to you for your own use.

You state that you are reimbursed from the Development Fund for a portion of your
controller's compensation. Controller is a part-time employee whose primary
responsibility is the Development Fund, including general accounting and internal
controls of the Development Fund monies, financial reporting to State Control Board,
working directly with the auditors for the State Control Board, the State Department of
Agriculture, and you, and working with the pension fund actuaries and other
professionals.

You are required to file an annual audit of funds received from the Development Fund
with the State Control Board. The expense of this audit is paid from Development Fund
funds. Furthermore, the State Department of Agriculture engages an auditing firm to
conduct an independent audit of all expenditures of all organizations similar to you that
receive Development Fund funds. The State Department of Agriculture allocates the
expense of this audit among the organizations, and you pay this expense out of
Development Fund funds, not out of your general account. You engage and pay for an
independent certified public accountant to audit you and your related entities.

You state that, in summary, no funds received from the Development Fund for the
purpose of providing pension, health, and welfare benefits are used for your general
purposes, but are used as set forth in the State statute establishing and governing the
Development Fund. Any amounts received from the Development Fund for such
benefits are used solely for providing the benefits and for the reasonable administrative
expenses of paying such benefits. The reasonable administrative expenses include the
controller’s allocable expense directly related to the benefits programs, and such
expense is reimbursed from the Development Fund, not paid by you. You do not charge
and are not paid a fee for services related to provision of benefits.

RULINGS REQUESTED:

(1) Providing the proposed benefits will not result in “private inurement” as described in
§ 501(c)(6), and

(2) Providing the proposed benefits will not adversely affect your § 501(c)(6) status.

LAW:

Section 501(c)(6) provides, in part, for the exemption from federal income tax of business
leagues, chambers of commerce, real-estate boards, boards of trade, not organized for profit
and no part of the net earnings of which inures to be benefit of any private shareholder or
individual.

Section 511(a) imposes a tax for each taxable year on the unrelated business taxable income of
every organization described in § 501(c).

Section 513(a) defines “unrelated trade or business” (in the case of an organization subject to
the tax imposed by § 511) as any trade or business the conduct of which is not substantially
related (aside from the need of such organization for income or funds or the use it makes of the
profits derived) to the exercise or performance by such organization of its exempt purpose or
function.

Section 1.501(c)(6)-1 of the Income Tax Regulations provides that a business league is an
association of persons having some common business interest, the purpose of which is to
promote such common interest and not to engage in a regular business of a kind ordinarily
carried on for profit. It is an organization of the same general class as a chamber of commerce
or board of trade. Thus, its activities should be directed to the improvement of business
conditions of one or more lines of business as distinguished from the performance of particular
services for individual persons. An organization, whose purpose is to engage in a regular
business of a kind ordinarily carried on for a profit, even though the business is conducted on a
cooperative basis or produces only sufficient income to be self-sustaining, is not a business
league.

Rev. Rul. 66-151, 1966-1 C.B. 152, holds that the management of health and welfare plans for a
fee by a business league exempt under § 501(c)(6) is an unrelated business within the meaning
of § 513. The organization is composed of firms in a particular industry, and its purpose and
principal activity is to represent such firms in all matters pertaining to their relations with labor
and labor unions. The organization also regularly manages health and welfare plans for its
members, and receives a fixed fee for each employee covered by the plan; significant amounts
of the organization’s income and expenses are attributable to the management of these plans.
The revenue ruling concludes that the management of the plans by the organization constitutes
the conduct of unrelated trade or business.

Rev. Rul. 67-251, 1967-2 C.B. 196, holds that a business league which extends financial aid
and welfare services to its members does not qualify for exemption under § 501(c)(6) since part
of its net earnings is inuring to the benefit of private individuals, even though its financial aid to
members is minor in relation to its other activities which are directed to improvement of business
conditions in a line of business.

Rev. Rul. 71-155. 1971-1 C.B. 152, concerns a nonprofit association composed of insurance
companies that write a specified type of insurance and are licensed in a particular State. The
organization was formed pursuant to State and Federal programs that are designed to make
insurance available to persons who are in high-risk categories and cannot otherwise obtain
coverage. The purpose of the organization is to provide for the equitable distribution of high-risk
policies among all members. The revenue ruling holds that the organization's activities promote
the common business interest of the members since the spreading of high risk policies among
its members provides insurance to persons who would normally be unable to obtain insurance
and minimizes public criticism of the industry. Thus, its activities are directed to the
improvement of business conditions of one or more lines of business as distinguished from the
performance of particular services for its individual members, and the organization is exempt
from tax under § 501(c)(6).

Rev. Rul. 73-452, 1973-2 C.B. 183, concerns a nonprofit corporation created by State statute to
pay claims against insolvent insurance companies. All insurance companies writing fire and
casualty insurance in the State are required by statute to be members of the organization. The
revenue ruling states that by assuring the payment of the claims and providing means for their
orderly liquidation, the organization is serving a quasi-public function imposed by law which is
directed at relieving a common cause of hardship and distress of broad public concern in the
field of insurance protection. This function also serves an important common business interest
of the industry by meeting a widespread need which is incident to the field of insurance, could
not be effectively met in the ordinary course of the individual insurance businesses of the
members, and does not directly enhance the profitability of such individual businesses. It thus
appears that the organization's activities do not constitute the performance of particular services
for its individual members but are instead directed towards the improvement of business
conditions in a line of business. Accordingly, the organization is exempt from Federal income
tax under § 501(c)(6).

Rev. Rul. 76-410, 1976-2 C.B. 155, holds that a nonprofit organization composed of insurance
companies operating with a State and created under the State’s no-fault insurance statute to
provide personal injury protection benefits for residents of the State who sustain injury in
situations where the injuring party is unknown or has very limited or no liability coverage
qualifies for exemption under § 501(c)(6). The organization's activities promote the common
business interests of its members by fulfilling an obligation that the State has imposed upon the
insurance industry as a prerequisite for doing business with the State and by enhancing the
image of the industry.

ANALYSIS:

As a § 501(c)(6) organization, you may not allow your net earnings to inure to the benefit of any
private shareholder or individual, and your activities must be directed to the improvement of
business conditions of one or more lines of business as distinguished from the performance of
particular services for individual persons.

Your state law requires that certain organizations provide health and welfare benefits to their

members out of amounts allocated to those organizations from a State fund. By this means, the
State legislature intends that every member of such organizations in the State and meeting
eligibility requirements approved by a State board receive some form of health and pension
benefits at no cost to the member.

Like the insurance activities described in Rev. Rul. 71-155, supra, using State funds to procure
health and pension benefits for your members and their employees is a way of providing
insurance to persons who would normally be unable to obtain such benefits, thereby improving
the image of the industry. By using State funds to provide health and pension benefits to your
members, you are serving a function imposed by law which is directed at relieving a cause of
hardship and distress in a particular industry in State. Rev. Rul. 73-452 and Rev. Rul. 76-410.
You are complying with a legal mandate that will improve business conditions in your members’
line of business rather than performing particular services for individual members.
Consequently, such activities are considered to be substantially related to your exempt
purposes, and would not affect your recognition under §501(c)(6).

Unlike the organization described in Rev. Rul. 67-251, supra, your net earnings would not inure
to the benefit of private shareholders or individuals when you use State funds to provide State-
mandated benefits to your members. You are not using your own earnings to fund the benefits,
but amounts allocated by the State from a State fund expressly for the purpose of providing
such benefits. Furthermore, unlike the organization described in Rev. Rul. 66-151, supra, you
do not manage the health and pension plans yourself, but merely arrange for coverage with an
insurer using State funds to pay the premiums. In addition, the amounts received from the State
fund do not represent a fixed fee for each member covered by an insurance plan, but merely a
lump sum earmarked for the provision of benefits to members. Therefore, we conclude that
redirecting the sums from the State Development Fund to purchase state-mandated coverage is
not inurement of your net earnings to your members.

RULINGS:
Accordingly, based on the facts and circumstances discussed above, we rule as follows:

(1) Providing the proposed benefits will not result in private inurement as described in
§ 501(c)(6), and

(2) Providing the proposed benefits will not adversely affect your § 501(c)(6) status.

This ruling is based on the facts as they were presented and on the understanding that there will
be no material changes in these facts. Any changes that may have a bearing upon your tax
status should be reported to the Service. Because it could help resolve questions concerning
your federal income tax status, this ruling should be kept in your permanent records. Pursuant
to a Power of Attorney on file in this office, a copy of this letter is being sent to your authorized
representative.

Except as we have specifically ruled herein, we express no opinion as to the consequences of
this transaction under the cited provisions or under any other provision of the Code.

This ruling will be made available for public inspection under § 6110 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) provides
that it may not be used or cited as precedent.

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

Enclosure Sincerely yours,
Notice 437

Ronald J. Shoemaker
Manager, Exempt Organizations
Technical Group 2