IRS revokes an employee association's exemption for substantial commercial insurance activity

Plain-English summary

The IRS revoked a local employee association's section 501(c)(4) exemption. The association provided commercial-type insurance to its members, and the IRS determined that this was a substantial part of its activities. Section 501(m) limits exemption for section 501(c)(3) and 501(c)(4) organizations when a substantial part of their activities consists of providing commercial-type insurance. The organization agreed to the revocation and had been filing Form 1120-PIC for the relevant years.

Ruling snapshot

• Question: Did the employee association remain exempt when providing commercial-type insurance was a substantial part of its activities?
• Outcome: Revocation
• Key authorities: IRC §§ 501(c)(4), 501(m), and 6110(k)(3); Treas. Reg. § 1.501(c)(4)-1(b)

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

22 N Front St, Room 426
Memphis, TN 38103

UIL: 501.04-01

TAX EXEMPT AND
GOVERNMENT ENTITIES APR 04, 2007
DIVISION

Release Number: 201321036
Release Date: 5/24/2013 Person to Contact
Legend: Contact Telephone Number:
ORG = Name of ORG In Reply Refer to: TE/GE Review Staff

ORG

Dear

This is a Final Adverse Determination as to your exempt status under section 501(c)(4) of the Internal Revenue Code.

Our adverse determination was made for the following reasons:

ORG fails to meet the requirement for exemption under IRC 501(c)(4). Section 1.501(c)(4)-1(b) Treasury Regulations reads, "Local associations of employees described in section 501(c)(4) are expressly entitled to exemption under section 501(a). As conditions to exemption, it is required (1) that the membership of such an association be limited to the employees of a designated person or persons in a particular municipality, and (2) that the net earnings of the association be devoted exclusively to charitable, educational, or recreational purposes." Section 501(m)(1) of the Internal Revenue Code states, "An organization described in paragraph (3) or (4) of subsection (c) shall be exempt from tax under subsection (a) only if no substantial part of its activities consists of providing commercial-type insurance."

As a result of our recent audit of your organization's activities for the period ended December 31, 20xx, it was determined that a substantial part of your activities is providing commercial-type insurance to members; therefore, we are revoking your organization's exemption from Federal income tax under section 501(c)(4) of the Internal Revenue Code effective January 1, 19xx.

You have executed the Form 6018-A agreeing to this revocation, you have filed Form 1120-PIC for all tax years since 19xx, and you have indicated you will continue those filings with the appropriate Internal Revenue Campus.

You have the right to contact the office of the Taxpayer Advocate. However, you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers. You can call 1-877-777-4778 and ask for Taxpayer Advocate assistance. Or you can contact the Taxpayer Advocate from the site where the tax deficiency was determined by writing to:

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Taxpayer Advocate from the site where the tax deficiency was determined by writing to:
Internal Revenue Service, Office of Taxpayer Advocate

Taxpayer Advocate assistance cannot be used as a substitute for established IRS procedures, formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically correct tax determinations, nor extend the time fixed by law that you have to file a petition in the United States Tax Court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels, gets prompt and proper handling.

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

Sincerely yours,
Marsha A Ramirez
Director, EO Examinations

Enclosure:
Copy of Form 6018-A

DEPARTMENT OF THE TREASURY
Internal Revenue Service

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Legend:
ORG = Name of Organization
Address = Address of ORG Taxpayer Identification Number:
Form:
Date
Tax Year(s) Ended:
Person to Contact/ID Number:
Contact Numbers:
ORG Telephone:
Address

CERTIFIED MAIL — RETURN RECEIPT REQUESTED

Dear

We have enclosed a copy of our report of examination explaining why we believe an adjustment of your organization's exempt status is necessary.

If you do not agree with our position you may appeal your case. The enclosed Publication 3498, The Examination Process, explains how to appeal an Internal Revenue Service (IRS) decision. Publication 3498 also includes information on your rights as a taxpayer and the IRS collection process.

If you request a conference, we will forward your written statement of protest to the Appeals Office and they will contact you. For your convenience, an envelope is enclosed.

If you and Appeals do not agree on some or all of the issues after your Appeals conference, or if you do not request an Appeals conference, you may file suit in United States Tax Court, the United States Court of Federal Claims, or United States District Court, after satisfying procedural and jurisdictional requirements as described in Publication 3498.

Letter 3610 (04-2002)
Catalog Number 34801V

You may also request that we refer this matter for technical advice as explained in Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues. If a determination letter is issued to you based on technical advice, no further administrative appeal is available to you within the IRS on the issue that was the subject of the technical advice.

If you accept our findings, please sign and return the enclosed Form 6018, Consent to Proposed Adverse Action. We will then send you a final letter modifying or revoking exempt status. If we do not hear from you within 30 days from the date of this letter, we will process your case on the basis of the recommendations shown in the report of examination and this letter will become final. In that event, you will be required to file Federal income tax returns for the tax period(s) shown above. File these returns with the Ogden Service Center within 60 days from the date of this letter, unless a request for an extension of time is granted. File returns for later tax years with the appropriate service center indicated in the instructions for those returns.

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a United States court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. You may call toll-free 1-877-777-4778 and ask for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate at:

If you have any questions, please call the contact person at the telephone number shown in the heading of this letter. If you write, please provide a telephone number and the most convenient time to call if we need to contact you.

Letter 3610 (04-2002)
Catalog Number 34801V

Thank you for your cooperation.

Sincerely,

Marsha A. Ramirez
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Form 6018
Report of Examination
Envelope

Letter 3610 (04-2002)
Catalog Number 34801V

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG December 31, 20xx
Legend:

ORG = Name of ORG

Date = xx

Issues:

Whether ORG, classified as exempt under section 501(c)(4) of the Internal Revenue Code, should be revoked because providing commercial-type insurance is a substantial part of their activities.

Facts:

ORG was granted tax exempt status under section 501(c)(4) of the Internal Revenue Code. Effective January 1, 19xx, Internal Revenue Code 501(m) denied tax exemption where providing commercial-type insurance is a substantial part of an organization's activities. As a result, ORG began filing Form 1120-PIC in 19xx.

Law:

Internal Revenue Code 501(m) states, "An organization described in paragraph (3) or (4) of subsection (c) shall be exempt from tax under subsection (a) only if no substantial part of its activities consists of providing commercial-type insurance."

Taxpayer's Position:

ORG agrees that, as of January 1, 19xx, "Based on ORG's operations as a commercial insurer ORG no longer qualified for a federal income tax exemption."

Government's Position:

ORG is a commercial insurer. Providing commercial-type insurance is a substantial part of their activities. Internal Revenue Code 501(m) denies tax exempt status where providing commercial-type insurance is a substantial part of an organization's activities, so ORG no longer qualifies for tax-exempt status effective January 1, 19xx.

Form 886-A Department of the Treasury - Internal Revenue Service
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