Religious loss-sharing plans denied 501(c)(3) as private insurance-like activity

Plain-English summary

A religiously affiliated organization applied for 501(c)(3) status while operating two loss-sharing programs for members' property and vehicles. Participants enrolled property, paid assessments based on value, and received payments when covered losses occurred. The IRS found that this fee-based arrangement primarily provided a cooperative service to members and resembled commercial insurance. Although the organization sometimes helped members who had not paid or had omitted property from their enrollment, that discretionary process was not how most claims were handled. The IRS distinguished a court-approved church healthcare-sharing program because that program did not require members to contribute or subscribe before receiving benefits. Here the close link between fees and loss payments created a substantial private and commercial purpose, so the organization failed the operational test and did not qualify under section 501(c)(3).

Ruling snapshot

• Question: Do assessment-funded property and vehicle loss-sharing programs for members operate exclusively for charitable or religious purposes?
• Outcome: denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a), (c), (d); Rev. Rul. 69-175; Bethel Conservative Mennonite Church v. Commissioner; American Association of Christian Schools v. United States

Full text (IRS public release)

Department of the Treasury Date:

Internal Revenue Service 07/22/2024

Tax Exempt and Government Entities Employer ID number:
IRS PO Box 2508

Cincinnati, OH 45201

Person to contact:

Release Number: 202442009
Release Date: 10/18/2024
UIL Code: 501.03-00, 501.36-00

Dear

This letter is our final determination that you don't qualify for exemption from federal income tax under Internal
Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3). Recently, we sent
you a proposed adverse determination in response to your application. The proposed adverse determination
explained the facts, law, and basis for our conclusion, and it gave you 30 days to file a protest. Because we
didn't receive a protest within the required 30 days, the proposed determination is now final.

Because you don't qualify as a tax-exempt organization under IRC Section 501(c)(3), donors generally can't
deduct contributions to you under IRC Section 170.

We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c), by
sending them a copy of this final letter along with the proposed determination letter.

You must file the federal income tax forms for the tax years shown above within 30 days from the date of this
letter unless you request an extension of time to file. For further instructions, forms, and information, visit
www.irs.gov.

We'll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection after deleting certain identifying information, as required by IRC Section 6110. Read the
enclosed Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our
proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how
to notify us. If you agree with our deletions, you don't need to take any further action.

If you have questions about this letter, you can call the contact person shown above. If you have questions
about your federal income tax status and responsibilities, call our customer service number at 800-829-1040
(TTY 800-829-4933 for deaf or hard of hearing) or customer service for businesses at 800-829-4933.

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S

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

Enclosures:

Letter 437

Redacted Letter 4034
Letter 4038

cc:

Sincerely,

Stephen A. Martin

Director, Exempt Organizations

Rulings and Agreements

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201
Date: 05/29/2024

Employer ID number:

Person to contact:

Name:
ID number:
Telephone:
Fax:
Legend: UIL:
B = State 501.03-00
C = Date 501.36-00
D = Organization
E= Program
F = Program
G = Number
Dear

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 IRC Section 501(c)(3)? No, for the reasons stated below.

Facts

You incorporated in B on C. According to your Articles of Incorporation you are organized not for profit and
for charitable purposes as described in Section 501(c)(3) of the Internal Revenue Code (IRC) and in furtherance
thereof to engage in assisting and sharing the loss of property by members of the D and that in a measure it will
not be necessary to enter into general insurance companies. You attested in your response to our additional
information request that you have amended your organizing document to include an appropriate dissolution
clause.

Your Bylaws state that you are a fully-integrated auxiliary of the D and that you share common religious
doctrines, principles and practices with D. They further state that you will be listed as a subordinate, integrated
auxiliary in D’s yearbook and that your name will be submitted to the Internal Revenue Service each year as an
organization exempt from federal income tax under Section 501(c)(3) of the IRC of 1986 per the D’s group
exemption letter.

Your activities, as described in your application, are to assist your brethren in their loss. You accomplish this
through two programs, E and F. These activities precipitated from a concern amongst your brotherhood to

Letter 4034 (Rev. 01-2021)
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2

devise a plan to assist each other in cases of loss caused by the elements of destruction. Your brotherhood felt
that ways and means should be found to provide funds that would be available for immediate distribution
among the brotherhood if and when losses occurred.

Your programs are funded by assessment plans where members enroll their property in the plan and pay funds
based on the value of their property. Members that wish to enroll, apply to their local church representative who
submits the application to your office, where annual billings are sent out and the money is collected for
disbursement when losses take place. All funds are held for the payment of losses, and no funds are invested or
used for any purposes other than the payment for losses or overhead expenses. Approximately G participants
receive loss assistance annually.

Program E

Prospective participants notify their local office secretary of their intent to cover their property.
Valuators and the district secretary will determine the value of the property and submit a completed and
signed application to the main office. Applications from partnerships, corporations, or trusts where any
partner, shareholder, or member of the partnership, corporation or trusts is not a member of the D, shall
not be accepted.

You charge set rates based on the value of the property being insured. Participants in this program pay a
set deductible based on the valuation of the property, regardless of the type of loss.

Insurable properties include buildings and contents, machinery and equipment, livestock, short term
contracts, and builders’ contracts, owned by members of D.

Payable claims incidents include animal collision, collision, drowning, earthquake, electrocution,
explosion, fire, flood, hail, lightning, predators (to livestock), storm, suffocation, theft, upset, vandalism,
wind, etc.

Losses are reported on a loss report form that must include a description of the property, the amount of
the loss, and a detailed description of the loss.

Policies are terminated automatically when insured property is sold, unless the party who becomes the
owner is a member of the D. However, if the property is mortgaged, and the transfer is made to a non-
member, the policy shall remain in effect for a period of fifteen days after notice of transfer is given to
the lienholder.

Program F

Prospective participants submit an application to their local office secretary providing their personal
information, describing the vehicle(s) to be insured, and payment information. You charge set rates per
vehicle, depending on the type and value of the vehicle being insured. Participants in this program pay a
set deductible based on the type of car and type of incident that is to be covered.

Payable claims incidents include glass breakage, loss caused by projectiles, falling objects, fire, theft,
explosion, earthquake, windstorm, hail, water, flood, malicious mischief or vandalism, riot, civil
commotion, vehicle collision, animal collision, or hit and run collision, except where the other party’s

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liability insurance is responsible. The policy documents also contain provisions for towing and/or
storage fire department charges.

e Losses are reported on a loss report form that must include a description of the vehicle, a description of
the incident and estimates for the cost of repair/salvage from body shops. The loss payment cannot
exceed the current value of the vehicle.

You state that you help members even if they have not paid for membership. You further state that you also
help those that may have forgotten to add a new property to their list, or whose membership was cancelled due
to them failing to pay their dues. These individuals can submit a claim and your board of directors will take
these factors into consideration and may make donations to help the affected individual with their misfortunes.

You also issue loans to congregations and school buildings. Loans are issued for the purpose of building or
improving churches, school buildings, housing for schoolteachers, care facilities, guest houses, mission houses,
and other outreach programs.

You are primarily funded by assessment receipts, lease income, and administrative income. You receive
minimal donations annually. Your primary expenses are related to your loss payments, followed by payroll
expenses and then all other overhead expenses.

Law

IRC Section 501(c)(3) provides for the recognition of exemption from federal income tax of organizations
organized and operated exclusively for charitable, religious or educational purposes, provided that no part of its
net earnings inures to the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) provides that, in order to be exempt as an organization described
in IRC Section 501(c)(3), 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 which accomplish one or more of such
exempt purposes specified in IRC Section 501(c)(3). An organization will not be so regarded if more than an
insubstantial part of its activities is not in furtherance of an exempt purpose.

Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated exclusively
for one or more exempt purposes unless it serves a public rather than a private purpose. To meet this
requirement, it is necessary for an organization to establish that it is not organized or operated for the benefit of
private interests.

Revenue Ruling 69-175, 1969-1 C.B. 149, held that a nonprofit organization, formed by parents of pupils
attending a private school that provides school bus transportation for its members’ children, serves a private
rather than a public interest and does not qualify for exemption under IRC Section 501(c)(3). When a group of
individuals associate to provide a cooperative service for themselves, they are serving a private interest. The
organization enables the participating parents to fulfill their individual responsibility of transporting their

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children to school. Thus, the organization serves a private rather than a public interest. Accordingly, it is not
exempt from federal income tax under Section 501(c)(3).

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court
held that the presence of a single non-exempt purpose, if substantial in nature, will destroy the exemption
regardless of the number or importance of truly exempt purposes. The Court found that the trade association had
an “underlying commercial motive" that distinguished its educational program from that carried out by a
university.

In Bethel Conservative Mennonite Church v. Commissioner, 746 F.2d 388 (7th Cir. 1984), an organization, in
addition to operating a church, operated a program to share healthcare costs of church members. The church
collected contributions from church members which was used to pay the health care bills of other members of
the church. Significantly, there was no requirement that a church member contributed or subscribe to the
program in order to receive the benefits of the program. The court held that this healthcare sharing program was
sufficiently linked to the church's religious belief that it was operated primarily for a religious and thus exempt
purpose.

In American Association of Christian Schools Voluntary Employees Beneficiary Association Welfare Plan
Trust v. U.S., 850 F.2d 1510 (11th Cir. 1988), an organization formed a trust to provide health, hospital,
disability, life, accidental death and dismemberment, dental and prescription drug insurance to employees of
members' schools and their dependents and beneficiaries. The Court of Appeals found that the organization did
not operate for a religious purpose because it operated similar to an insurance business where the premiums
paid were directly linked to benefits being received by the members.

In Nonprofits’ Ins. Alliance of California v. U.S., 32 Fed. Cl. 277, 283 (1994), the court held that the
corporation which administered a self-insurance risk and provided commercial insurance was not entitled to tax
exempt status under IRC Section 501(c)(3) because it failed the operational test within Section 501(c)(3). Selling
insurance was inherently a commercial activity ordinarily carried on by a for-profit company, and these
commercial activities outweighed any nonexempt activity it offered to the public. The existence and amount of
accumulated profits and how much below cost the corporation was providing its services also factored into the
court's consideration.

In Capital Gymnastics Booster Club. Inc. v. C.I.R., T.C. Memo. 2013-193 (2013), the tax court ruled that an
organization that authorized members to raise funds for the benefit of their children served a private benefit.
The contributions did not generally benefit all the child athletes in the program but rather benefitted only the
children of the members who did the fundraising. Because the organization operated in a manner that promoted
substantial private benefit and not public interests, the organization did not operate exclusively for an exempt
purpose.

Application of law

IRC Section 501(c)(3) and Treas. Reg. Section 1.501(c)(3)-1(a)(1) set forth two main tests for an organization to
be recognized as exempt. An organization must be both organized and operated exclusively for purposes
described in Section 501(c)(3). Based on the information you provided, we conclude that you fail the
operational test.

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

5

You serve a private rather than a public interest because you confer benefits primarily to your members. You
operate a loss sharing program designed to mitigate losses to your enrolled members. Members pay monthly
fees based on the property enrolled, and in return, receive payments in the event that they suffer loss related to
their property. Like Capital Gymnastics Booster Club, your loss sharing plan does not provide substantial
benefits to the public, but rather exclusively benefits your members. Because your program only benefits your
members, you operate substantially for a private rather than a public interest as described in Treas. Reg. Section
1.501(c)(3)-1(d)(1)(ii). Consequently, you are providing a cooperative service for your members, like the
organization in Rev. Rul. 69-175, and are not operating exclusively for exempt purposes as described in IRC
Section 501(c)(3).

In Bethel Conservative Mennonite Church, the organization, in addition to operating a church, managed a
program to share healthcare costs of church members. The church collected contributions from church members
which were used to pay the health care bills of other members of the church. Significantly, there was no
requirement that a church member contribute or subscribe to the program in order to receive benefits from the
program. The court held that this healthcare sharing program was sufficiently linked to the church's religious
belief that it was operated primarily for a religious and thus exempt purpose. You are distinguishable from
Bethel because you operate under a fee-based subscription model. You require members to pay a monthly
subscription to enroll, and the receipt of loss sharing benefits is contingent on the payment of these fees. You do
have a process where individuals may have property covered that is not under the plan, but this is not the
process used by the majority of your claimants. As such, you are similar to American Association, which was
found to operate for nonexempt purposes because the healthcare benefits were closely linked to membership
fees. Because more than an insubstantial part of your operations are conducted in a commercial manner similar
to Nonprofits' Ins. Alliance of California, you are not exclusively operated for a religious purpose.

Qualification for exemption under IRC Section 501(c)(3) requires that an organization operate exclusively for
exempt purposes. Exclusivity with respect to Section 501(c)(3) does not mean "solely" or "without exception,"
but rather contemplates that any non-exempt activities be only incidental and less than substantial. See Treas.
Reg. Section 1.501(c)(3)-1(c)(1). This requirement is affirmed in Better Business Bureau Inc., where the court
held that the presence of a single non-exempt purpose, if substantial in nature, will preclude exemption
regardless of the number or importance of truly exempt purposes. You primarily operate programs for assisting
your members recover from the loss of their properties, through payments to cover these losses. By doing so,
you are serving substantial private interests of your members. You do not qualify for exemption under Section
501(c)(3).

Conclusion

Based on the facts and circumstances presented, you are not operated exclusively for exempt purposes as set
forth in Section 501(c)(3). By providing a means by which your members pay a monthly fee and in turn are
provided benefits, you are operating for a substantial non-exempt purpose. Your operations are not exclusively
charitable and resemble those of a trade or business. Therefore, you do not qualify for exemption under Section
501(c)(3).

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.

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

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
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 Determination 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

PO 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.

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

7

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. 01-2021)
Catalog Number 47628K