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GiftLaw Note:
ORG is applying for exemption under Section 501(c)(4). ORG is a membership association that provides its members access to limited medical indemnity benefits, discounts on products and services and information about health care and other topics.
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May 17, 2013 PLR 201319031 IRS Denies Exempt Status to Healthcare Research ORG
5/10/2013 (12/19/2012)
Dear * * *:
This decision revokes and supersedes our decision of August 31, 2012. 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 § 501(c)(4). The basis for our conclusion is set forth below.
FACTS
You incorporated as a non-profit corporation on Date1, under the name Name1 Your initial purposes were to receive, administer, and expend funds for charitable and educational purposes focused on tax reform. On Date2, you changed your name to Name2 and filed revised articles, changing your purposes to promote the adoption of "equitable health care policies" through research and public education. You filed a second amendment to your articles on Date3, expanding your purposes, limiting your membership to "small business employers, (including persons who are self-employed)," and amending your dissolution procedures. On Date4, you filed your latest amendments to your articles, expanding the membership to include "employees." Three years later, you amended your Bylaws to create a new category of members, called "Reciprocal Association Members," who are entitled to benefits by virtue of their membership in an association with which you have an agreement.
You mailed your application for exemption under § 501(c)(4) on July * * *, 20* * *, over twenty-five years after your incorporation.
The current purposes for which you are organized include: (1) promoting the adoption of equitable health-care policies; (2) engaging in nonpartisan research, study, and analysis of the health-care system for the benefit of your members and the public; (3) preparing educational materials and conducting educational activities in support of your general purposes; (4) sponsoring programs, including health-care benefit plans for the benefit of your members; (5) conducting and sponsoring forums, lectures, and debates.
You are a membership association that provides your members access to limited medical indemnity benefits, discounts on products and services, and information about health care and other topics. Membership is open to the public; anyone is eligible to participate in the programs by paying a fee, based on the programs chosen. Your members now include employers, both large and small, the self-employed, employees, and retirees. To become a member, a person must complete an application form and have the Board of Directors accept it. You have approximately 30,000 members from all 50 states.
Marketing Agreements
You have marketing agreements with multiple firms to sell your memberships. A firm receives a marketing fee for each type of membership it sells; fees are set out in each marketing agreement and you pay specific fees for each membership.
Your largest marketing agreement is with Marketer. The marketing agreement authorizes Marketer to sell your memberships to any interested individuals. The agreement establishes the guidelines for Marketer to properly represent and advertise for you by developing and managing "a marketing strategy to solicit individuals for membership." Only licensed insurance agents have authorization to sell memberships. For each product sold, Marketer receives a monthly commission as long as the member remains active. Marketer does not have authorization to sell to your existing members.
Products and Activities
You provide your members with discounts for various consumer programs and services, access to limited medical indemnity benefits ("indemnity benefits"), information on health care and other topics, and scholarship opportunities for medical related studies. Members choose the type of membership they want based on the products and services they choose. While most members purchase memberships that include the medical indemnity benefits, memberships are available without it. The indemnity benefits are only available in states where the covering insurance company has a license.
Depending on where they live and the plan they purchase, members have access to discounts on many common consumer purchases. You offer discount programs for roadside assistance, legal services, home warranties, extended service protection, auto protection, tradesmen referral services, travel, dent repairs, pet services, home protection services, funeral services, identity theft, magazines, and household appliances.
Your health-related programs and services include access to indemnity benefits, discounts on various health care services, and information on health care issues. The health care services include discounts on vision and dental care, prescription drugs, vitamins, and laboratory tests; call-in nurse and doctor lines; doctor evaluations; accident benefits; emergency medical transportation; term life insurance; hospital negotiation service; and international medical services. You provide information on general health care, diseases, injuries, treatments, providers, research programs, and clinical trials.
As stated in your literature, the indemnity benefits you offer are "limited," they do not cover all medical expenses nor provide comprehensive medical coverage. There are payment limits for medical services in addition to limited coverage for certain persons and for those with pre-existing conditions. If the member's costs exceed the stated limits, the member is responsible for payment of additional amounts; neither you nor the insurance company will pay the extra charges. The policies state, "This is not basic health insurance or major medical coverage and is not designed as a substitute for basic health insurance or major medical coverage."
Although you provide access to indemnity benefits, you are not an insurance company. You do not provide the actual coverage to your members, nor do you assume any risk of economic loss; a separate insurance company provides the indemnity benefit policies. For those members who either cannot afford an individual health insurance policy or do not qualify for an employer-provided plan, you provide them access to the indemnity benefits. You do not pay any of the premiums from your general funds; but rather collect the dues from the participating members and pay the insurance company the premiums along with the related marketing agreement fees to your marketing agencies.
You publish a magazine aimed at educating your readers on living a healthy lifestyle, accessing community resources, and improving their mental health and well-being. You mail the magazine to your members and any non-members who have requested a subscription; you also provide free copies to medical and physician offices throughout the United States and at various functions throughout the year. The magazine is also available to the public on your website for no charge and the web visitor may request you mail them a free print copy.
In addition to providing the magazine on your public website, you post information on Federal statutes and regulations that affect health care, proposed legislation relating to health-care policies, and how the member may contact their representatives in Washington, DC, and their own state. You also publish nonpartisan research and analysis regarding the health-care system in America.
You provide scholarships to students studying medical subjects, such as nursing, medical technology, dental hygiene, health-care assistance, and nutrition. The scholarship program awards five $* * * scholarships each year covering a two-year period ($* * * per academic year) and is available to all members, their children, and their grandchildren. Once applicants apply to the program, your selection committee selects the awardees based on need and scholastic excellence. You also fund a scholarship at University for students in the nursing school. The selection committee, which is the Board of Directors, does not take into consideration the age, gender, race, religion, or sexual orientation of the applicant, and the relatives (spouses, children, parents, etc.) of the selection committee are not eligible to receive a scholarship. The scholarship recipients do not need to continue their membership to renew the scholarship for the second year.
You state that you engage in advocacy for the health and well-being of your members and for promoting the adoption of equitable health-care policies. You are a member of Association1. Association2, and Association3. You also provide information on important health-care initiatives to federal and state legislatures and executive branch officials.
You count as charitable activities your donations of a small percentage of your monthly membership dues to your § 501(c)(3) charitable foundation and, if a member loses their job, or is otherwise unable to pay for their benefits, you will extend the member's current level of benefits coverage for three months.
LAW
Section 501(a) of the Internal Revenue Code provides that an organization described in § 501(c) is exempt from income taxation.
Section 501(c)(4) of the Code provides exemption from federal income tax for "[c]ivic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare," and whose net earnings do not inure to the benefit of any private shareholder or individual.
Section 1.501(c)(4)-1(a)(2)(i) of the Income Tax Regulations states that an organization primarily engaged in promoting the common good and general welfare of the people of the community is operated exclusively for the promotion of social welfare. This includes an organization operated primarily for bringing about civic betterments and social improvements.
Section 1.501(c)(4)-1(a)(2)(ii) explains that an organization whose primary activity is the carrying on of a business in a manner similar to for-profit organizations is not operated primarily for the promotion of social welfare.
Rev. Rul. 54-394, 1954-2 C.B. 131, stated that a nonprofit organization that provided antenna services only to its members to enable them to receive television reception was not exempt as a social welfare organization because the benefits were only available to members and not the community in general.
In Rev. Rul. 62-167, 1962-2 C.B. 142, a nonprofit organization whose primary activity was to retransmit TV signals, which were available to any television in the community, qualified for exemption under § 501(c)(4) because its activities benefited the community in general. Distinguishing Rev. Rul. 54-394, 1954-2 C.B. 131, in which the television services were available only to members of the organization who paid membership fees and monthly maintenance charges, this revenue ruling described an organization that operated its system for the benefit of all television owners in the community and obtained memberships and contributions on a voluntary basis. Therefore, the organization qualified for exemption under § 501(c)(4).
Rev. Rul. 73-349, 1973-2 C.B. 179, noted that an organization formed to purchase low-cost groceries for its members was not exempt as a social welfare organization even though membership was open to all individuals in the community. The members paid for the cost of the food and a monthly service charge to cover operating costs. It operated primarily for the private benefit of its members; any benefits to the community were not sufficient to meet the requirement that it operate primarily for the common good and general welfare of the people of the community.
An organization provided sick benefits to its members and paid death benefits to member's beneficiaries in Rev. Rul. 75-199, 1975-1 C.B. 160. Only individuals in a particular ethnic group in a certain geographical area who were of "good moral character and health" could become members. It was essentially a mutual self-interest organization, whose income provided direct and economic benefits to its members; any benefit to the larger community was minor and incidental. Therefore, it did not qualify for exemption under § 501(c)(4) of the Code. "Where the benefit from an organization is limited to that organization's members (except for some minor and incidental benefit to the community as a whole), the organization is not operated exclusively for the promotion of social welfare within the meaning of § 501(c)(4) of the Code."
Rev. Rul. 75-199, 1975-1 C.B. 160, distinguishes mutual benefit societies from social welfare organizations by comparing Rev. Rul. 54-394 with Rev. Rul. 62-167. One organization only benefited its members who paid membership fees and monthly charges (the mutual benefit society) while the other organization made their services available to everyone in the community (the social welfare organization).
The organization in Rev. Rul. 78-132, 1978-1 C.B. 157, facilitated the exchange of personal services among its members, which was open to all individuals in a particular community. The members received economic benefit even though they did not use cash for payment; every service had a corresponding credit hour amount, which the organization tracked for each member. The community realized minimal, if any, benefit from the organization. The organization was a private cooperative enterprise that operated primarily for its member's economic benefit and was not exempt as a social welfare organization under § 501(c)(4).
"[T]he exemption granted to social welfare . . . organizations is made in recognition of the benefit which the public derives from their social welfare activities and we think it only fair to determine a particular organization's right to an exemption largely on the basis of the effect its operations have on the public." People's Educational Camp Society, Inc. v. Commissioner, 331 F.2d 923, 932 (2d Cir. 1964), cert. denied, 379 U.S. 839 (1964).
The court in Contracting Plumbers Cooperative Restoration Corporation v. United States, 488 F.2d 684 (2d Cir. 1973), held that an organization did not promote the common good, even though its activities benefited the community, because only members could utilize its services. It repaired damage to city streets its members caused in the course of their plumbing activities, performing the repairs in proportion to the member's payment for the services. However, it would not repair damage created by non-member plumbers or other "enterprises that burrow into the city streets."
The organization in Mutual Aid Association of the Church of the Brethren v. United States, 759 F.2d 792 (10th Cir. 1985), provided property and casualty insurance to members of the church and their dependents. If a member left the church, the organization would cancel their insurance. The court determined that the church did not promote social welfare because it sold insurance. The organization operated as a mutual insurance company, not as a church. The court concluded that the presence of a substantial non-exempt purpose, such as insurance for its members in return for premiums, precluded the organization's exempt status under § 501(c)(4) as an organization primarily engaged in the promotion of social welfare.
In American Association of Christian Schools Voluntary Employees Beneficiary Association Welfare Plan Trust v. United States, 850 F.2d 1510 (11th Cir. 1988), a tax-exempt association of schools formed a trust to provide health, hospital, disability, life, accidental death and dismemberment, dental, and prescription drug insurance to its member schools' employees and their dependents and beneficiaries. Citing Mutual Aid Association of the Church of the Brethren, 759 F.2d 792, the court held that since the Trust had a substantial private purpose of providing insurance to its members in return for premiums, it was not an organization exclusively engaged in the promotion of social welfare under § 501(c)(4).
The organization in Vision Service Plan v. United States, No. 04-cv-1993, 2005 WL 3406321 (E.D. Cal. Dec. 12, 2005), provided eye care services to the employees of its subscriber companies. VSP claimed that it was exempt under § 501(c)(4) because it served broad segments of the community through direct services and charitable activities. The court found that servicing small employers or rural subscribers did not equate to promoting social welfare. Additionally, the services VSP provided for the Medicaid, Medicare, and Healthy Families contracts were profitable, its charitable activities were insubstantial compared to its profits, and the executive compensation packages, cost-cutting measures, and business practices with the public were paid and operated in a manner similar to for-profit organizations.
The tax court found that an insurance trust organization, created to provide its members access to insurance at group rates, was not exempt under § 501(c)(4). New York State Association of Real Estate Boards Group Insurance Fund v. Commissioner, 54 T.C. 1325 (1954), nonacq. on different grounds, 1974-2 C.B. 5, action on dec., 1974 AOD LEXIS 146 (Sept. 6, 1974). The organization offered benefits only to its employer members and their employees. "[W]here the primary economic benefit from an organization is limited to that organization's members, the organization is not operated exclusively for the social welfare within the meaning of the statute." Id. at 1333. The organization did not have "the requisite civic concern to constitute 'social welfare,' and therefore . . . [did] not qualify for tax exemption under § 501(c)(4)."
ANALYSIS/RATIONALE
Social Welfare
As described in § 501(c)(4), an organization organized as a nonprofit and operated exclusively for the promotion of social welfare may be exempt from federal income tax under § 501(a). An organization operates exclusively for the promotion of social welfare if it is primarily engaged in promoting the common good and general welfare of the people of the community; this includes organizations operated primarily for bringing about civic betterments and social improvements. See § 1.501(c)(4)-1(a)(2)(i).
If an organization operates primarily for the benefit of its members, rather than for the community as a whole, it is not operating exclusively for the promotion of social welfare. See N.Y. State Ass'n. of Real Estate Bds. Group Ins. Fund, 54 T.C. at 1333. "[W]here the primary economic benefit from an organization is limited to that organization's members, the organization is not operated exclusively for the social welfare within the meaning of the statute." Id. An organization's right to exemption under § 501(c)(4) depends "largely on the basis of the effect its operations have on the public." People's Educ. Camp Soc'ty, Inc., 331 F.2d at 932.
Even if the community benefits incidentally, an organization that provides its services exclusively, or at a preferential price, to its members does not promote the common good or general welfare. See Contracting Plumbers Coop. Restoration Corp., 488 F.2d at 687; see also Vision Service Plan, 2005 WL 3406321 at 4 ("It is frequently the case that an organization is found not to qualify under 501(c)(4) because it is operating primarily for the benefit of its members, rather than for the purpose of benefitting the community as a whole."). The organizations in Rev. Rul. 75-199 and Rev. Rul. 78-132 were both denied § 501(c)(4) exemption because the benefit to the community was minimal. The first organization provided sick benefits to its members and paid death benefits to member's beneficiaries. Rev. Rul. 75-199. Only individuals in a particular ethnic group in a certain geographical area who were of "good moral character and health" could become members. The organization was essentially a mutual, self-interest organization whose income provided direct and economic benefits to its members; any benefit to the larger community was minor and incidental. Similarly, the second organization facilitated the exchange of personal services among members, operating primarily for the private benefit of its members. Rev. Rul. 78-132. It was a private cooperative enterprise that operated primarily for its member's economic benefit; the community realized minimal, if any, benefit from the organization.
Similar to the organization in New York State Association of Real Estate Boards Group Insurance Fund, 54 T.C. 1325, you offer your members access to low cost indemnity benefits. Like the organization in Rev. Rul. 75-199, you are a mutual, self-interest organization, operating for the benefit of your members rather than the community as a whole. Your programs are not available to non-members; the only products non-members can access are the magazine and the information on your website. "[T]he fact that an organization promotes health care, or is part of the health care industry, does not, alone, ensure exempt status within the tax code." Vision Service Plan, 2005 WL 3406321 at 4.
Merely offering membership to anyone in the community does not fulfill the requirement to promote the common good and social welfare. See Rev. Rul. 73-349 (Organization that was open to all individuals in the community purchased low-cost groceries for its members, who paid for both the cost of the food and a monthly service charge, operated primarily for the private benefit of its members and had minimal benefits to the community). Although you accept all individuals that apply for membership and pay the appropriate fees, this is not enough to contribute to the social welfare of the community.
You state that besides providing access to low cost benefits and services to your members, you also publish a free healthy living magazine, contribute to your § 501(c)(3) foundation and other charitable organizations, and offer scholarships for medical related studies. In addition to posting the magazine on your public website, the website also presents information about federal health care laws and regulations so your members may easily contact their representatives in Washington, DC.
While the above activities are worthy, they are not your primary activities. Your magazine resembles public relations material more than a medical information magazine. Compared to your gross revenues, your average amount of charitable contributions from 20* * * - 20* * * is negligible, averaging less than * * * and * * * percent (* * * *%); additionally, the amount of contributions has decreased every one of the last four years. In 20* * * your charitable contributions were * * * percent (* * *%) of your gross receipts; 20* * * contributions were half percent (* * *%); 20* * * contributions were * * * percent (* * *%); and in 20* * *, contributions were less than * * * percent (* * *%). Even adding in the amounts spent on the magazine and scholarships, the figures do not noticeably change but merely jump to an average of * * * percent (* * *%) of your gross revenues for that four-year period.
You did not demonstrate that you are "primarily engaged in the promotion of social welfare." Vision Service Plan, 2005 WL 3406321 at 8. Rather, you are a "privately-devoted endeavor." Id. Like the members of the organization in Vision Service Plan, your members "enjoy the benefit of [the] services precisely to the extent that members use and pay for the services." Id. Serving only the interests of your members is clearly a non-exempt purpose. Additionally, you did not establish that any benefit the community might derive from your members having access to indemnity benefits and other discounted services is more than incidental, remote, and tenuous.
Therefore, because your activities benefit only your members, rather than the community as a whole, you do not operate primarily for bringing about civic betterments and social improvements under § 1.501(c)(4)-1(a)(2)(i).
Commerciality
If an organization's primary activity is carrying on a business with the public in a manner similar to for-profit organizations, then it does not operate primarily for the promotion of social welfare. Section 1.501(c)(4)-1(a)(2)(ii) For example, an organization that provided property and casualty insurance to members of its church was not exempt as a social welfare organization because selling insurance was its primary activity. Mutual Aid Assoc. of the Church of the Brethren, 759 F.2d at 796. It operated as a mutual insurance company, not as a church, it treated "its surplus and profit as would any mutual insurance company: the ultimate considerations . . . in creating and using its surplus and profit [were] to provide a reasonable and adequate security margin, and to provide better protection and service to its members." Id. (citations removed). Carrying on a business similar to a for-profit business as the primary activity precluded the organization's exempt status as one primarily engaged in the promotion of social welfare.
Likewise, the court found that Vision Service Plan operated for the benefit of its members and in a similar fashion to for-profit businesses. "VSP's services are most beneficial to private paying members, the subscribers and the enrollees. . . . [M]embers of VSP enjoy the benefit of VSP's services precisely to the extent that members use and pay for the services. Serving the interests of these private subscribers is clearly a non-exempt purpose." See Vision Service Plan, 2005 WL 3406321 at 8 (citations omitted). The court also noted that VSP remained competitive by paying brokers commissions to bring in new clients and that it paid more in brokerage fees than on charity work. Id. at 9.
You operate in a commercial manner by facilitating access for your members to purchase indemnity benefits and other discounted products and services in exchange for a fee, but you do not provide the services and products yourself. Additionally, you contract with marketing companies to sell your memberships to individuals, paying the companies fees based on the membership level sold; only licensed insurance agents have authorization to sell your memberships. Once a member joins and chooses an indemnity benefit, you collect the premiums as a part of the membership fee then remit the premiums to the insurance companies and pay the associated commission to the selling agents.
You are similar to the trust created by a tax-exempt association of schools to provide various kinds of insurance to its member schools' employees. Am. Ass'n of Christian Sch. Voluntary Employees Beneficiary Ass'n Welfare Plan Trust v. U.S., 850 F.2d 1510. The court stated that since the trust had "a substantial private purpose to provide insurance in return for premiums, it [was] not an organization exclusively engaged in the promotion of the social welfare." Id. at 1516.
You also provide members the ability to remain in the member programs for three months without charge when they have lost their job, other than for work-related misconduct or by voluntarily quitting. However, if a member was unemployed when they joined, they are not eligible for this program. This program does not promote social welfare as it only benefits your members.
In fiscal years 20* * * - 20* * *, you collected an average of $Value1 in fees from your members. During that same time, you paid an average of $Value2 for member benefits, which included indemnity benefit premiums and service fees, and an average of $Value3 in commissions to your marketing organizations, the majority of which went to Marketer. These two expenses combined account for an average of * * *% of your total expenses; adding the remaining expenses in, you spend very little on charitable or social welfare activities.
You operate for a substantial private purpose, selling indemnity benefits and other discounted services in exchange for a fee, and carry on activities similar to the activities of for-profit businesses. Because your primary activity is the carrying on of a business in a manner similar to for-profit organizations, you do not operate primarily for the promotion of social welfare and are not exempt under § 501(c)(4).
RULING
Based on the facts and circumstances, we find that you did not establish that you operate primarily for bringing about civic betterments and social improvements as required by § 1.501(c)(4)-1(a)(2)(i). Furthermore, you did not distinguish your activities from those carried on by for-profit businesses as required in § 1.501(c)(4)-1(a)(2)(ii). Because you do not operate exclusively for the promotion of social welfare as required by § 501(c)(4), you do not qualify for exemption under § 501(a).
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 must include the following declaration:
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. You should make this request 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. You can find all forms and publications mentioned in this letter 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:
* * *
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 she received your fax.
If you have any questions, please contact the person whose name and telephone number are in the heading of this letter.
Sincerely,
Holly O. Paz
Director, Rulings and Agreements
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