Healthcare insurer denied charitable exemption

Plain-English summary

An organization planned to sell comprehensive healthcare insurance for a monthly premium and later develop healthcare facilities. Insurance premiums were projected to produce 94 percent of its income, and medical payments for subscribers were expected to account for 94 percent of expenses. The IRS found that providing commercial-type insurance would remain a substantial activity even after facilities opened and that the insurance was neither substantially below cost nor limited to charitable recipients. Serving paying subscribers did not primarily benefit the community as a whole, and future clinics did not overcome the substantial commercial purpose. The IRS denied section 501(c)(3) exemption.

Ruling snapshot

• Question: Does an organization primarily selling healthcare insurance for a fee qualify as charitable under section 501(c)(3)?
• Outcome: denied
• Key authorities: IRC §§ 501(c)(3), 501(m); Treas. Reg. § 1.501(c)(3)-1; Geisinger Health Plan v. Commissioner, 985 F.2d 1210 (3d Cir. 1993); Florida Hospital Trust Fund v. Commissioner, 103 T.C. 140 (1994); IHC Health Plans, Inc. v. Commissioner, 325 F.3d 1188 (10th Cir. 2003)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Appeals Office

4330 Watt Avenue SA 7890 Employer Identification Number:
Sacramento, CA 95821-7012
Date: JAN 16 2020 Person to Contact:
Employee ID Number:
Number: 202015035 Tel:
Release Date: 4/10/2020 Fax:
UIL: 501.03-00

Certified Mail

Dear Sir:

This is a final adverse determination that you do not qualify for exemption from federal income tax under
Internal Revenue Code (the “Code”) section 501(a) as an organization described in Section 501(c)(3) of

the Code.
We made the adverse determination for the following reason(s):

Organizations described in section 501(c)(3) of the Internal Revenue Code and exempt from tax under
section 501(a) must be both organized and operated exclusively for exempt purposes. Your specific
purpose to provide healthcare insurance and healthcare for a fee indicates that a substantial part of your
activities involves providing commercial-type insurance and services to subscribers. Providing health
insurance and healthcare for a fee to your members does not exclusively benefit the community and
further charitable purposes. Your organization is not organized and operated exclusively for exempt

purposes within the meaning of section 501(c)(3).
Contributions to your organization are not deductible under section 170 of the Code.

You're required to file Federal income tax returns on Forms 1120, U.S. Corporation Income Tax Return.
Mail your form to the appropriate Internal Revenue Service Center per the form's instructions. You can
get forms and instructions by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM
(800-829-3676).

We'll make this letter and the proposed adverse determination letter available for public inspection under
Code section 6110 after deleting certain identifying information. We have provided to you, in a separate
mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the documents
attached that show our proposed deletions. If you disagree with our proposed deletions, follow the
instructions in Notice 437.

If you decide to contest this determination, you may file an action for declaratory judgment under the
provisions of section 7428 of the Code in either:

« United States Tax Court,
e The United States Court of Federal Claims,
e The United States District Court for the District of Columbia.

You must file a petition or complaint in one of these three courts within 90 days from the date we mailed
this determination letter to you. Contact the clerk of the appropriate court for rules and the appropriate
forms for filing petitions for declaratory judgment. You can write to the courts at the following addresses:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

US Court of Federal Claims
717 Madison Place, NW
Washington, DC 20005

U.S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, DC 20001

Note: We will not delay processing income tax returns and assessing any taxes due even if you file
petition for declaratory judgment under section 7428 of the Code.

Please refer to the enclosed Publication 892, How to Appeals an IRS Determination on Tax -Exempt
Status, for more information about the Appeals process.

You also have the right to contact the Taxpayer Advocate Service (TAS). TAS is an independent
organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax
problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS.
Advocate assistance, please contact the Taxpayer Advocate for the IRS office that issued this letter. You
If you qualify for TAS assistance, which is always free. TAX will do everything possible to help you. Visit
www.taxpayeradvocate.irs.gov or call 877-777-4778.

TAS assistance is not a substitute for established IRS procedures, such as the formal appeals process.
TAS 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.

If you have any questions, contact the person at the top of this letter.

Sincerely,

Appeals Team Manager

Enclosure: Publication 892

Department of the Treasury
YH) Internal Revenue Service
Cincinnati, OH 45201

Date: MAY 22 2019

Employer ID number:
Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

B = Date . 501.00-00
C = State 501.03-00
d dollars = Amount 501.36-01
Dear Applicant:

We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 501(a). We determined that you don’t qualify for exemption under IRC Section 501(c)(3).
This letter explains the reasons for our conclusion. Please keep it for your records.

Issues
Do you qualify for exemption under Section 501(c)(3) of the Code? No, for the reasons stated below.

Facts
You were formed on B in the State of C. Your Articles of Incorporation state that you are organized exclusively

for charitable purposes, including for such purposes, the making of distributions to organizations that qualify as
exempt organizations under Section 501(c)(3) of the Code. Your specific purpose is “to create insurance
company that provides HealthCare, with plans to ultimately open a facility for affordable healthcare to all.”

You plan to provide healthcare insurance and healthcare. You provided the following overview of your
activities:

1. Create the legal non-profit parent corporation (you). As such, create all necessary policies and

procedures.

2. Understand the requirements for state certification and licensure to become a healthcare insurance
provider.

3. Once you have achieved legal status, begin fundraising for marketing (website, social media,
conferences, seminars, etc.). You will also implement the infrastructure for your support.

4. Create the insurance company and start providing healthcare insurance.

5. Once insurance is being provided, create and implement a plan to develop, own and operate various

healthcare facilities.

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You provided a breakdown of your activities as follows:

Activities Year 1 | Year2 | Year3 | Year4 | Year 5

Marketing and Soliciting Donations 40% |20% 10% |10% 5%
Strategic Relationships 15% |10% |10% |10% |5%

Creation of Insurance Program 45%

Operation of Insurance Program 50% |50% |50% |30%

Planning for Potential Facilities 20 %

Development of Facilities 30% |30%

Operation of Facilities 60 %
Total 100% | 100% | 100% | 100% | 100%

You will provide full and complete healthcare insurance coverage for anyone and everyone in the State of C
based on the terms of the contract. The insured pays a monthly premium of d dollars per month and their
healthcare costs are covered. There are no deductibles and no payments after payment of the premium.

As you grow, you will create healthcare facilities to provide healthcare services partially funded via various
insurance reimbursable fees. You plan to set aside 75 percent of excess funds to develop your own healthcare
facilities based on the needs of the communities. You expect that your healthcare facility will offer medical,
mental, dental, and vision services. Your facilities will be open to the public and you will offer emergency
services regardless of ability to pay. The rates for your medical services will be cost plus 15 percent. You will
accept Medicaid and Medicare payments along with other forms of insurance.

Initially, your officers will conduct your activities. Once you are operational, your CEO will dedicate 100
percent of his time to your management and oversight. As you grow, you anticipate having compensated
employees. Your activities will be advertised via web-based solicitations and marketing. You are currently
advertising your services word of mouth.

You will be supported by donations and sales. You will solicit donations via online web-based and various
fundraising activities. Approximately 94 percent of your total projected income is sales income from insurance
premiums. Likewise, 94 percent of your expenses are for the medical payments for those participating in your
healthcare program. Other expenditures include fundraising, rent, professional fees, and miscellaneous
expenses.

Law
Section 501(c)(3) of the Code describes corporations organized and operated exclusively for charitable purposes

no part of the net earnings of which inures to the benefit of any private shareholder or individual.

Section 501(m)(1) of the Code provides that an organization described in Section 501(c)(3) or (4) shall be
exempt from tax under Section 501(a) only if no substantial part of its activities consists of providing
commercial-type insurance.

Section 501(m)(3)(A) of the Code provides that for purposes of this subsection, the term “commercial-type
insurance” shall not include insurance provided at substantially below cost to a class of charitable recipients.

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Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that to be exempt as an organization described in Section
501(c)(3) of the Code, an organization must be both organized and operated exclusively for one or more of the
purposes specified in such section. If an organization fails to meet either the organizational test or the

operational test, it is not exempt.

Treas. Reg. Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as “operated exclusively”
for one or more exempt purposes only if it engages primarily in activities that 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.

Rev. Rul. 80-287, 1980-2 C.B. 185, provides that a nonprofit lawyer referral service does not qualify for
exemption under Section 501(c)(3). The organization aided persons who did not have an attorney by helping
them select one, in exchange for a nominal service charge. Any attorney who was a member of a local bar
association could apply for placement on the referral list, in exchange for an application fee. Because a
substantial purpose of the organization was aiding the legal profession, the organization was not organized or
operated exclusively for charitable purposes, even though its lawyer referral service did provide some public

benefit.

In Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945), the Supreme Court held
that the presence of a single nonexempt purpose, if substantial in nature, will destroy the exemption regardless

of the number or importance of truly exempt purposes.

In B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), the organization sold consulting services to
various tax-exempt and non-profit organizations. The court concluded that those activities are not inherently
charitable because they are of the type typically conducted by for-profit organizations. While the court noted
that organizations providing services to Section 501(c)(3) organizations which they would otherwise have to
provide for themselves may qualify for exemption, the applicant was distinguished from those because the
organization did not limit its clientele to organizations exempt under Section 501(c)(3) of the Code.

In Federation Pharmacy Services, Inc. v. Commissioner, 625 F.2d 804 (1980), the court held that, while selling
prescription pharmaceuticals to elderly persons at a discount promotes health, the pharmacy did not qualify for
recognition of exemption on that basis alone. Because the pharmacy operated for a substantial commercial
purpose, it did not qualify for exemption under Section 501(c)(3) of the Code.

In Geisinger Health Plan v. Commissioner, 985 F.2d 1210 (1993), the court held that a pre-paid health care
organization that arranges for the provision of health care services only for its members, benefits its members,
not the community as a whole. Under the community benefit standard, the organization must benefit the
community as a whole to be recognized as promoting health in the charitable sense of Section 501(c)(3).

In Florida Hospital Trust Fund v. Commissioner, 103 T.C. 140 (1994), the Court stated that whether an
organization seeking exempt status happens to be competing with a commercial insurer at any point in time
simply begs the question whether granting exempt status will tend to provide the organization with an unfair
competitive advantage over commercial insurers. Focusing on Congress' obvious desire to provide a level
playing field for commercial insurers, the Court held that Section 501(m) applies to deny petitioners exempt
status. In employing the term “commercial-type” insurance, we understand that Congress intended for Section
501(m) to apply to those organizations providing any “type of insurance that can be purchased in the

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commercial market.” Accordingly, the Court found that the petitioners were providing commercial-type
insurance within the meaning of Section 501(m) and precluded from exemption under Section 501(c)(3).

In Nonprofits' Insurance Alliance of California v. United States, 32 Fed. Cl. 277 (1994), the Court considered
whether a group self-insurance risk pool with membership consisting of 487 unrelated nonprofit corporations
qualified as a tax-exempt organization. The organization was formed to provide reasonably priced liability
coverage to its members at stable prices not available from commercial insurers. Noting that the sale of
insurance is an inherently commercial activity ordinarily carried on by commercial for-profit companies, the
Court found the plaintiff's activities to be commercial in nature because plaintiff was engaged in the actual
underwriting of insurance policies and contracts with other firms to secure reinsurance for claims in excess of a
certain amount. The court found that plaintiff's activities possessed many of the attributes of a mutual insurance
company, such as accumulated profits that inure to the benefit of members. Further, noting that competition
with commercial firms is strong evidence of the predominance of a nonexempt commercial purpose, the court
said that, by providing insurance coverage and charging premiums, the plaintiff placed itself in competition
with other commercial insurance firms. Accordingly, the court held that the plaintiff had failed the operational
test under Section 501(c)(3) because of the existence of a substantial nonexempt, commercial purpose. The
court then said that, even assuming that plaintiff qualified as an organization described in Section 501(c)(3) of
the Code, plaintiff, serving as a group self-insurance risk pool, must demonstrate that Section 501(m)(1) of the

Code does not preclude its exempt status.

In Airlie Foundation v. IRS, 283 F. Supp. 2d 58 (2003), the court held that the organization did not meet the
requirements as described in Section 501(c)(3) of the Code because its operation of a conference facility was a
commercial activity. Thirty to forty percent of the organization’s revenue came from clients that that were of a
private or corporate nature. The Court concluded that the income from clients of a private or corporate nature

was a substantial amount.

The case IHC Health Plans, Inc. v. Comm'r, 325 F.3d 1188 (2003), involved an operator of health maintenance
organizations that served approximately one-quarter of Utah's residents and approximately one-half of its
Medicaid population. The court held that the organization failed to meet the community benefit standard to
qualify for exemption under Section 501(c)(3) because its sole activity was arranging for health care services
for its members, in exchange for a fee. The court said that providing health-care products or services to all in the
community is necessary but not sufficient to meet the community benefit standard. Rather, the organization
must provide some additional benefit that likely would not be provided in the community but for the tax
exemption, and that this public benefit must be the primary purpose for which the organization operates.

Application of law

You are not exempt under Section 501(c)(3) of the Code because you are not operated exclusively for charitable
purposes. Your stated purpose is to provide healthcare insurance and healthcare for a fee. You fail the
operational test required by Treas. Reg. 1.501(c)(3)-1(a)(1) and described in Treas. Reg. 1.501(c)(3)-1(c)(1)
because a substantial part of your activities includes providing commercial-type insurance, as discussed below.

Because you are offering insurance, we must consider whether your insurance offering violates the provision of
Section 501(m) of the Code. Section 501(m)(1) requires us to make two findings to determine if you are
precluded from exempt status under Section 501(c)(3). First, we must find that you provide “commercial-type
insurance.” Second, we must find that your activity of providing commercial-type insurance is a substantial part
of your total activities. The finding that you provide commercial-type insurance is not difficult. Your Articles of

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Incorporation and the description of your activities both indicate that your purpose is to provide healthcare
insurance. Your services are offered to anyone in the State of C willing to pay your stated fee of d dollars per
month in exchange for your absorption of their healthcare expenses. You do not meet any of the exceptions to
commercial-type insurance described in Section 501(m)(3), including Section 501(m)(3)(A), because you do
not provide insurance substantially below cost or limit the insured to a “class of charitable recipients.” Thus, we
must conclude that you provide commercial-type insurance described in Section 501(m).

Next, we consider whether your provision of commercial-type insurance is substantial. You will devote 100
percent of your efforts towards establishing and marketing your insurance program in your first year of
operations. In your second through fourth years of operation, you anticipate 50 percent of your total activities
will consist of operating your insurance program. Even once your healthcare facility is established in your fifth
year, you plan to spend 30 percent of your total activities on your insurance program. Based on the ruling in
Airlie Foundation, these amounts are substantial. Moreover, 94 percent of your revenue comes from insurance
sales and 94 percent of your expenses are for payments for the healthcare expenses of your insured. Therefore,
your provision of commercial-type insurance is substantial and precludes you from exemption under Section
501(c)(3) of the Code.

Providing health insurance for a fee to your members does not promote health or benefit the community in a
charitable manner. Selling a financial product, such as insurance, is an activity normally conducted by a for-
profit entity, as described in B.S.W. Group, Inc. Providing services of an ordinary commercial nature,
regardless of whether the undertaking is conducted on a nonprofit basis and is beneficial to the community, does
not further a charitable purpose, unless the service directly accomplishes a tax-exempt purpose, as explained in
Rev. Rul. 80-287. The sale of healthcare insurance does not exclusively further charitable purposes because
such activities serve a substantial non-exempt purpose.

Although you have some planned future activities, such as operating a healthcare clinic, which may further
exempt purposes, you have a substantial non-exempt purpose of providing healthcare insurance to your
members for a fee. As explained in Better Business Bureau of Washington, D.C., because you have a substantial
non-exempt purpose, you fail to qualify for exemption regardless of the number or importance of truly exempt
purposes.

You are similar to the organization described in Nonprofits' Insurance Alliance of California because you
provide insurance coverage for your members, which is an inherently commercial activity ordinarily carried on
by for-profit insurance companies. In Florida Hospital Trust Fund, the Court said that in employing the term
‘commercial-type’ insurance, we understand that Congress intended for Section 501(m) to apply to those
corporations providing any type of insurance that can be purchased in the commercial market. As you provide
any interested person in the state of C the opportunity to purchase healthcare insurance for a stated monthly fee,
you are providing a type of insurance that can be purchased in the commercial market. This activity is one that
is ordinarily carried on for a profit and not one that is exempt under Section 501(c)(3) of the Code.

Providing healthcare-related activities for the public is not, in and of itself, a basis for exemption. The
promotion of health has long been recognized as a charitable purpose under common law. However, not every
activity that generally promotes health furthers exclusively charitable purposes under Section 501(c)(3) of the
Code. For example, selling prescription pharmaceuticals promotes health, but pharmacies cannot qualify for
recognition of exemption under Section 501(c)(3) on that basis alone, as explained in Federation Pharmacy
Services, Inc.

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6

You are like the organization described in IHC Health Plans, Inc. because you are operated primarily for the
purpose of benefiting your paying subscribers. In this case, the Court found that the organization did not qualify
for exemption under Section 501(c)(3) of the Code solely because the community also derives health benefits
from its activities. Your activities benefit your members, like the organization described in Geisinger Health
Plan and not the community as a whole. This precludes you from exemption under Section 501(c)(3).

Conclusion
You are operated for the substantial non-exempt purpose of providing commercial-type healthcare insurance as
described in Section 501(m)(3) which benefits your members. Therefore, you do not qualify for exemption

under Section 501(c)(3) of the Code.
If you agree

If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from
you within 30 days, we'll issue a final adverse determination letter. That letter will provide information on

your income tax filing requirements.
If you don't agree

You have a right to protest if you don’t agree with our proposed adverse determination. To do so, send us a
protest within 30 days of the date of this letter. You must include:

* Your name, address, employer identification number (EIN), and a daytime phone number
* A statement of the facts, law, and arguments supporting your position
* A statement indicating whether you are requesting an Appeals Office conference

* The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization or your authorized representative

• The following declaration:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I have examined this request, or this modification to the
request, including accompanying documents, and to the best of my knowledge and belief, the request
or the modification contains all relevant facts relating to the request, and such facts are true, correct,

and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven’t
already done so. You can find more information about representation in Publication 947, Practice Before the

IRS and Power of Attorney.

We'll review your protest statement and decide if you gave us a basis to reconsider our determination. If so,
we’ll continue to process your case considering the information you provided. If you haven’t given us a basis

Letter 4034 (Rev. 11-2018)
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7
for reconsideration, we’ll send your case to the Appeals Office and notify you. You can find more information
in Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status.

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court later because the
law requires that you use the IRC administrative process first (IRC Section 7428(b)(2)).

Where to send your protest
Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address:

U.S. mail: Street address for delivery service:
Internal Revenue Service Internal Revenue Service

EO Determinations Quality Assurance EO Determinations Quality Assurance
Mail Stop 6403 550 Main Street, Mail Stop 6403

P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you
fax your statement, please contact the person listed at the top of this letter to confirm that they received it.

You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-
pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at
the top of this letter.

Contacting the Taxpayer Advocate Service

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your
taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you’ve tried but haven’t
been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS
will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

We sent a copy of this letter to your representative as indicated in your power of attorney.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K