IRS denies exemption to a member-funded medical aid plan seeking social welfare status

Plain-English summary

The IRS denied an unincorporated association's application for exemption under IRC § 501(c)(4). The association provided medical expense reimbursements only to members of a particular faith who paid membership fees. The IRS concluded that the arrangement primarily provided a direct economic benefit to members rather than promoting the common good and general welfare of the community. The association was told to file federal income tax returns and was given 30 days to protest the determination.

Ruling snapshot

• Question: Did the member-funded medical aid association qualify as a social welfare organization under IRC § 501(c)(4)?
• Outcome: Denied, the association did not qualify for exemption
• Key authorities: IRC §§ 501(a), 501(c)(4), 501(c)(15), 6110, and 7428; Treas. Reg. § 1.501(c)(4)-1(a)(2); Rev. Ruls. 54-394, 55-495, 62-167, 75-199, and 81-58

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

Release Number: 201409013 Contact Person:
Release Date: 2/28/2014

Date: December 5, 2013 Identification Number:

UIL Code: 501.04-00
Contact Number:

Employer Identification Number:
Form Required To Be Filed:

Tax Years:

Dear

This is our final determination that you do not qualify for exemption from Federal income tax
under Internal Revenue Code section 501(a) as an organization described in Code section
501(c)(4).

We made this determination for the following reason(s):

You do not meet the requirements of a social welfare organization as defined under
section 1.501(c)(4)-1(a)(2) of the Income Tax Regulations. You have not established that
you are primarily engaged in promoting the common good and general welfare of the
people of the community.

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.

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
4-800-829-1040 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,

Karen Schiller
Acting Director, Exempt Organizations
Rulings and 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

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

Date: September 5, 2013 Contact Person:

Identification Number:

Contact Number:

UIL Code 501.04-00
FAX Number:

Employer Identification Number:

Legend:

Year =
State =
Faith =
$x1 =
$x2 =
$x3 =
$x4 =
$x5 =

Dear

We have considered your application for recognition of exemption from Federal income tax
under Internal Revenue Code § 501(a). Based on the information provided, we have concluded
that you do not qualify for exemption under Code § 501(c)(4). The basis for our conclusion is
set forth below.

FACTS

You are an unincorporated association formed in Year in State. You are a membership
organization consisting exclusively of members of Faith. You provide a plan to help your
members with their medical expenses due to health, accident, or misfortune. You originally
applied for a determination of exemption under § 501(c)(15), but later requested exemption
under § 501(c)(4) instead.

Your quarterly membership fee is $x1 per adult and $x2 per child. Members make claims for
medical costs by submitting their medical bills to you for reimbursement each quarter. For each
claim, the member pays the first $x3. After the $x3 deductible is paid, you pay 80% of the claim
up to $x4. Costs over that amount are covered at 100%. For chronic illness, members pay only
one $x5 deductible per year, in addition to the regular quarterly membership fee, and you pay
the remainder of their covered medical expenses.

The medical expenses you cover include all major medical costs while a member is hospitalized
and any related costs for before or after the hospital stay, claims from accident or injury

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involving off road vehicles and maternity expenses. You do not cover pre-existing conditions,
items covered by any other aid, procedures inconsistent with Faith, and various other items
listed in your bylaws. Your bylaws state that there is no liability coverage, that each member
forfeits any legal action, and that those members not abiding by the rules may be canceled at
any time, though these terms are not explained.

Members of Faith are not required to join you, but only members of Faith may be your
members. You indicate that a board of directors is elected annually to administer the plan. No
salaries are paid to any officers or directors and all administration of the plan is conducted by
volunteers. You are supported completely by fees paid by members, along with some interest
income earned on the accumulated funds. You indicate that your assets will be distributed
proportionately among the members on dissolution. Your quarterly membership fees cover your
costs, and you maintain a large cash balance for future claims. You also have advanced
approval for a line of credit loan, if needed, to cover medical claims.

LAW

I.R.C. § 501(a) provides that an organization described in subsection (c) is exempt from income
taxation.

I.R.C § 501(c)(4) describes civic leagues or organizations not organized for profit but operated
exclusively for the promotion of social welfare, or certain local associations of employees, the
net earnings of which do not inure to the benefit of any private shareholder or individual.

I.R.C. § 501(c)(15) describes insurance companies, other than life, if the gross receipts do not
exceed $600,000 and more than 50 percent of the gross receipts consist of premiums, or in the
case of a mutual insurance company, if the gross receipts do not exceed $150,000 and more
than 35 percent of the gross receipts consist of premiums.

Treas. Reg. § 1.501(c)(4)-1(a)(2) provides that an organization is operated exclusively for the
promotion of social welfare if it is primarily engaged in promoting in some way the common
good and general welfare of the people of the community. An organization embraced within this
section is one which is operated primarily for the purpose of bringing about civic betterments
and social improvements.

Rev. Rul. 54-394, 1954-2 C.B. 131, describes an organization whose sole activity was to
provide television reception for its members on a cooperative basis in an area not readily
adaptable to ordinary reception. Members were required to contract for and to pay services and
installation fees. This organization did not qualify for exemption under § 501(c)(4) because it
operated for the benefit of its members, rather than for the promotion of social welfare.

Rev. Rul. 55-495, 1955-2 C.B. 259, involved an association providing life, sick, accident, and
other benefits to its members or their dependents, where membership was restricted to
individuals who subscribed to a designated religious creed, were of good character and health,
and had the ability to earn a livelihood. The organization was not entitled to exemption under
§ 501(c)(8), but it was held to be exempt under § 501(c)(4).

Rev. Rul. 62-167, 1962-2 C.B. 142, holds that an organization whose purpose was to construct
and maintain a television station so that satisfactory television would be available to the

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community in general qualified for exemption under § 501(c)(4). Membership was available to
all persons in the area and the organization's income was derived from membership fees and
donations. The organization transmitted television signals for the benefit of the entire
community, and it obtained memberships and contributions on a voluntary basis.

Rev. Rul. 75-199, 1975-1 C.B. 160, provides that a nonprofit organization that restricts its
membership to individuals of good moral character and health, who belong to a particular ethnic
group residing in a stated geographical area, and that provides benefits to members and to
beneficiaries of deceased members does not qualify for exemption under § 501(c)(4) because
the benefit to the community at large is minor and incidental. Rev. Rul. 75-199 modified Rev.
Rul. 54-394 by removing the conclusion that the organization in that revenue ruling was exempt
under § 501(c)(4).

Rev. Rul. 81-58, 1981-1 C.B. 331, amplifying Rev. Rul. 75-199, holds that a nonprofit police
officer association whose primary activity is providing retirement benefits to its members and
death benefits to the beneficiaries of members does not qualify as a social welfare organization.

In New York State Association of Real Estate Boards Group Insurance Fund v. Commissioner,
54 T.C. 1325 (1970), an association organized by a small group interested in obtaining group
insurance did not qualify for exemption because it offered its benefits to only a limited class of
its members and their employees. The court noted, “there is not in such an organization the
requisite civic concern to constitute social welfare” required for qualification under § 501(c)(4).
Where the primary benefit from an organization is limited to that organization's members, and
not provided to the community as a whole, the organization is not operated primarily for social welfare.

In Bethel Conservative Mennonite Church v. Commissioner, 746 F.2d 388 (7th Cir. 1984),
nonacq. AOD CC-1986-004, the court held that a church's medical aid plan, funded by
contributions and available to all members of the congregation in good standing and their
dependents, furthered religious purposes and was exempt under § 501(c)(3).

In Mutual Aid Association of Church of the Brethren v. U.S., 759 F.2d 792 (10th Cir. 1985), the
court held that an organization providing property and casualty insurance for church members
on the basis of assessed premiums is not primarily engaged in the promotion of the social
welfare for exemption under § 501(c)(4). The court concluded that the presence of a substantial
non-exempt purpose, namely providing insurance for its members in return for premiums,
precluded the organization's exempt status as an organization advancing religion or primarily
engaged in the promotion of social welfare.

ANALYSIS

You have applied for exemption from taxation under Internal Revenue Code § 501(a) as an
organization described in § 501(c)(4). You originally applied for exemption under § 501(c)(15).
To qualify for tax exempt status under IRC 501(c)(15), an organization must be operating as an
insurance company. You indicate that you are not an insurance company, therefore § 501(c)(15)
does not apply.

Organizations described in § 501(c)(4) include those not organized for profit but operated
exclusively for the promotion of social welfare. Section 1.501(c)(4)-1(a)(2)(i) of the regulations

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provides that an organization will promote social welfare if it is primarily engaged in promoting
the common good and general welfare of the people of the community. An organization is
embraced within this provision if it is operated primarily for the purpose of bringing about civic
betterments and social improvements.

Your operations are similar to those of the organizations described in several revenue rulings
and judicial decisions that deny recognition of exemption under § 501(c)(4) because they benefit
a limited group of private individuals. You are similar to the organization described in Rev. Rul.
54-394, supra, and the association described in Rev. Rul. 81-58, supra, by providing benefits on
a cooperative basis for the benefit of members, rather than the promotion of community welfare.
You are also similar to the organization described in Rev. Rul. 55-495, supra, that provided life,
sick, accident, or other benefits to members or their dependents. Rev. Rul. 75-199, supra, holds
that such an organization is not exempt under § 501(c)(4). You are not like the organization
described in Rev. Rul. 62-167, supra, because membership is not open to all persons in the
community and you only provide benefits to your members. Your primary economic benefit is
limited to your members, including upon dissolution, and not to the community as a whole, and
so you are not operated for social welfare. New York State Association, 54 T.C. at 1333.

You have not otherwise established that you promote social welfare. You provide assistance
with medical expenses only for the members of Faith, and not all the members of Faith, but only
those who have paid your membership fees. You have not provided any evidence that you
provide more than incidental benefit to a larger community. You are distinguishable from the
organization in Bethel Conservative Mennonite Church, 746 F.2d 388, because you do not
provide assistance to all members of a congregation, regardless of payment of fees, are not
funded by voluntary contributions and do not otherwise operate as a church congregation. You
are similar to the organization in Mutual Aid Association, 759 F.2d 792. Your primary activity is
reimbursing the medical expense claims of your members in exchange for their regular payment
of fees, which precludes exempt status as promoting social welfare. Id. at 795.

CONCLUSION

You have not established that you are promoting the common good and general welfare. You
have not established that the community as a whole may derive any benefit from your program
that is more than incidental. You have not established that you operate primarily for the purpose
of bringing about the civic betterments and social improvements. Instead, you provide a direct
economic benefit to your members and only your members benefit from your services. Because
you do not meet the requirements for a social welfare organization as defined under

§ 1.501(c)(4)-1(a)(2), you do not qualify for recognition of exemption under § 501(a) as an
organization described in § 501(c)(4).

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:

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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 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.

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

Internal Revenue Service
TE/GE (SE:T:EO:RA:T:4)

1111 Constitution Ave, N.W.
Washington, DC 20224

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,
Karen Schiller

Acting Director, Exempt Organizations
Rulings and Agreements