1

Appellants Florida Hospital Trust Fund (Trust Fund A) and

Florida Hospital Excess Trust Fund B (Trust Fund B) are

organizations established under Fla.Stat. § 627.357(2)(a) (1994)

to serve as medical malpractice risk management trust funds. 

Trust Fund A has twenty-three member hospitals. It provides

insurance in favor of each of its members on a claims made basis

United States Court of Appeals,

Eleventh Circuit.

No. 94-3377.

FLORIDA HOSPITAL TRUST FUND; Florida Hospital Excess Trust Fund

B; Florida Hospital Workers' Compensation Self-Insurance Fund,

Petitioners,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

Jan. 2, 1996.

Appeals from a Decision of the United States Tax Court.

Before TJOFLAT, Chief Judge, KRAVITCH, Circuit Judge, and HILL,

Senior Circuit Judge.

HILL, Senior Circuit Judge:

This tax appeal presents a narrow issue of first impression in

this Circuit and others: do three trust funds, organized to

provide a vehicle for small to mid-size member hospitals

reciprocally to "self" insure each other on a group basis against

hospital professional liability and workers' compensation claims,

qualify as tax-exempt "cooperative hospital service organizations"

for purposes of § 501(e) of the Internal Revenue Code of 1986, 26

U.S.C. § 501(e) (Code). Finding no clear error, we affirm the

decision of the Tax Court.

I. BACKGROUND

The salient facts are not in dispute. Appellants are three

trust funds1 that provide, through a board of trustees,
with coverage per member up to $250,000 per claim with an annual

aggregate limit of one million dollars. Trust Fund B has

twenty-six members. It provides to its members excess coverage

on a claims made basis for coverage per member up to ten million

dollars per claim with an annual aggregate limit of ten million

dollars, in excess of a minimum retention of $250,000 per claim,

and an annual aggregate retention of one million dollars. Both

Trust Fund A and Trust Fund B are managed by a service agent and

regulated by the Florida Department of Insurance. Each provide

for the selection of a board of trustees to exercise the rights

of the members. Appellant Florida Hospital Workers' Compensation

Self-Insurance Fund (Trust Fund C) is an organization established

under Fla.Stat. § 440.57 (1991) to serve as a group self insurer

fund. Trust Fund C has thirty-one members and is regulated by

the Florida Department of Labor and Security, Division of

Workers' Compensation. Members of the three funds are either

government-run hospitals within the meaning of I.R.C. §

501(e)(1)(B)(iii) or exempt charitable organizations described in

I.R.C. § 501(c)(3). Neither the funds nor the member hospitals

undertake to provide insurance to or for any entity other than a

member hospital. 

centralized, cooperative insurance services to their member

hospitals through the employment of actuaries, risk managers,

underwriters, accountants, and other insurance consultants. None

of the member hospitals are related. By written agreement, member

hospitals pool their resources reciprocally to self-insure, within

certain limits, against hospital professional and workers'

compensation liability. Under the terms of the two malpractice

liability funds agreements, the member hospitals jointly and

severally covenant and agree to pay the funds' obligations with the

right of indemnity among the members for each member's pro-rata

share of the obligation in accordance with a stated formula. Under

the terms of the workers' compensation fund agreement, the member

hospitals assume joint and several liability with respect to any

lawful awards entered against another member by the Division of

Workers' Compensation of the Florida Department of Labor and

Employment Security. The funds' only assets consist of their
 2

The Commissioner found:

You are not a cooperative hospital service organization

claims against member hospitals for their pro-rata share of fund

obligations. Insurance for each hospital is provided by all, with

the particular fund acting as agent for each. In practice, members

submit annually, aggregate amounts comparable to premiums based

upon an independent actuary's (or the National Council on

Compensation Insurance's) projection of each funds' anticipated

funding needs. Member payments—"premiums"—are later adjusted,

resulting in either an additional assessment or a refund or credit,

to reflect the particular trust fund's actual loss experience.

Each of the funds derive all of its income from amounts received

from member hospitals and investment income on such amounts. They

retain no earnings, allocating or paying all net income if any back

to member hospitals within eight and one-half months following the

close of each taxable year.

In 1990, the trust funds submitted to the Commissioner of the

Internal Revenue Service (Commissioner) applications for exemption

from tax under I.R.C. § 501(c)(3) (Forms 1023). Two of the funds

represented that their primary pose was to provide member hospitals

with coverage for hospital professional liability and the third

represented that its primary purpose was to provide workers'

compensation coverage to its members. The Commissioner issued

final adverse determination letters in 1992, denying the

applications on the basis that the trust funds' activities were not

covered by the list of exempt activities of cooperative hospital

service organizations under I.R.C. § 501(e).2
described in section 501(e) of the Code because you are

not organized and operated solely to perform on a

centralized basis one or more services described in

section 501(e)(1)(A) for two or more exempt hospitals. 

Further, a substantial part of your activities consists

of providing commercial-type insurance. Consequently,

section 501(m) precludes your exemption as an

organization described in section 501(c)(3). You are

not operated exclusively for exempt purposes within the

meaning of section 501(c)(3) of the Code. You are

operated for a substantial non-exempt commercial

purpose. Furthermore, you are a feeder organization

within the meaning of section 502. 

After exhausting their administrative remedies, the trust

funds filed petitions with the Tax Court seeking declaratory

judgments under I.R.C. § 7428(a) that they were "cooperative

hospital service organizations" under I.R.C. § 501(e) and therefore

exempt from tax. Adjudicating the case on a stipulated

administrative record, the Tax Court concluded they were not.

Finding no clear error, we affirm.

II. STANDARD OF REVIEW

The Tax Court's finding that these trust funds were not

organized and operated exclusively for exempt purposes is one of

fact, subject to a clearly erroneous standard of review; this

standard is not altered by the existence of stipulated facts.

American Ass'n of Christian Schools Voluntary Employees Beneficiary

Ass'n Welfare Plan Trust v. United States, 850 F.2d 1510, 1513

(11th Cir.1988) (citing Senior Citizens Stores, Inc. v. United

States, 602 F.2d 711, 713 (5th Cir.1979) and Church by Mail, Inc.

v. Commissioner, 765 F.2d 1387, 1390 (9th Cir.1985)). We review de

novo, however, the ultimate legal conclusion that the trust funds

do not qualify for tax exempt status. American Ass'n of Christian

Schools, 850 F.2d at 1513.
 3

Despite the seemingly broad general language of I.R.C. §

501(c)(3), I.R.C. § 501(e)(1)(A) is the exclusive list of the

specific types of cooperative hospital service organizations that

are encompassed within the scope of I.R.C. § 501 as charitable

organizations. HCSC-Laundry v. United States, 450 U.S. 1, 4, 101

S.Ct. 836, 838, 67 L.Ed.2d 1 (1981) (a cooperative organization

III. DISCUSSION

Congress enacted I.R.C. § 501(e) in 1968. See Revenue and

Expenditure Control Act of 1968, Pub.L. 90-364, § 109(a), 82 Stat.

269. It provides that a cooperative hospital service organization

shall be treated as an organization organized and operated

exclusively for charitable purposes pursuant to I.R.C. § 501(c)(3)

if:

(1) such organization is organized and operated solely—

(A) to perform, on a centralized basis, one or more of

the following services which, if performed on its own behalf

by a hospital which is an organization described in subsection

(c)(3) and exempt from taxation under subsection (a), would

constitute activities in exercising or performing the purpose

or function constituting the basis for its exemption: data

processing, purchasing, warehousing, billing and collection,

food, clinical, industrial engineering, laboratory, printing,

communications, record center, and personnel (including

selection, testing, training, and education of personnel)

services; and

(B) to perform such services solely for two or more

hospitals each of which is—

(i) an organization described in subsection (c)(3) which

is exempt from taxation under subsection (a).... (Emphasis

added).

In 1988, Congress amended I.R.C. § 501(e)(1)(A) to add the

parenthetical phrase "(including the purchasing of insurance on a

group basis )" after the word "purchasing" in the description of

qualified exempt activities (emphasis added). See Technical and

Miscellaneous Revenue Act of 1988, Pub.L. 100-647, § 6202(a), 102

Stat. 3730 (TAMRA '88).3
established to provide laundry services for its member hospitals

did not qualify for exempt status as laundry services were not

among those listed in I.R.C. § 501(e)(1)(A)). 

 4

The Commissioner issued G.C.M. 39122, CC: EE-36-82

(January 25, 1984), concluding that an organization formed by two

closely related (but legally separate) hospitals for the purpose

of providing malpractice and general comprehensive insurance on a

self-insurance basis did not qualify for an exemption under

I.R.C. § 501(c)(3) as the provision of various insurance services

on a cooperative basis is not one of the specifically enumerated

services permitted under I.R.C. § 501(e)(1)(A). But see Rev.Rul.

78-41, 1978-1 C.B. 148 (where a self-insurance trust created by a

single exempt hospital for the sole purpose of accumulating and

holding funds to be used to satisfy malpractice claims against

the hospital, and from which the hospital directs the

bank-trustee to make payments to claimants, was determined by the

Commissioner to be operated exclusively for charitable purposes

and exempt from tax under I.R.C. § 501(c)(3)). 

The trust funds contend that the statute was amended in

response to an overly restrictive position4 being taken by the

Commissioner, finding support for this position in the

Congressional Conference Report to TAMRA '88:

The provision clarifies that the purchasing activities that

may be carried on by a tax-exempt hospital service

organization include the acquisition, on a group basis, of

insurance (such as malpractice and general liability insurance

) for its hospital members. The provision applies to

purchases made before, on, or after the date of enactment.

(Emphasis added).

H.R.Rep. No. 1104, 100th Cong., 2d Sess. 209, 1988-3 C.B. 699.

The trust funds argue that this statutory language should be

broadly construed as Congress was effectively interchanging the

words "acquisition" or "providing" with the word "purchasing." The

legislative history, they claim, broadens the scope of qualified

insurance activities for I.R.C. § 501(e) purposes. They contend

the amendment should be viewed in the historical setting of the

late 1980's, when insurance coverage for hospitals in Florida was

in a state of crisis, with no known method of acquiring primary or
 5

The trust funds contend that the effect of this

interpretation is that a group insurance policy must be purchased

from a licensed insurance carrier that would hold and own all

reserves, provide all services, and collect all premiums,

negating the need to create a separate entity known as a

cooperative hospital service organization. This interpretation,

the trust funds argue, is also incorrectly premised on the

availability of such insurance in the marketplace. 

 6

Commercial insurance companies do, themselves, insure,

taking on the risks of loss in return for premiums. Here, the

funds are set up so that they have no ultimate risk, having the

right to enforced "contributions" from the member hospitals,

pro-rata, to cover all losses and expenses. Indeed, even if one

or more members should become insolvent, apparently each other

member remains liable for the losses of any member, with a right

of indemnity—perhaps a hollow right—against the insolvent ones. 

excess professional liability insurance. To view the amendment to

I.R.C. § 501(e)(1)(A) restrictively, the trust funds argue, would

effectively nullify the parenthetical language added by TAMRA '88

and discriminate in favor of larger hospitals with the financial

strength to self-insure on an in-house basis.

The Tax Court disagreed. Finding that the plain and ordinary

meaning, United States v. American Trucking Associations, Inc., 310

U.S. 534, 543-44, 60 S.Ct. 1059, 1063-64, 84 L.Ed. 1345 (1940), of

the "fairly specific" statute should be construed narrowly, the Tax

Court refused to view the terms "purchasing" and "providing"

interchangeably. From its perspective, the plain meaning of the

phrase "purchasing of insurance on a group basis" denotes a

commercial transaction in which a cooperative hospital service

organization negotiates and executes the purchase of insurance for

its membership as a group.5

 The Tax Court found that "[f]ar from

purchasing insurance, petitioners have assumed the role of

insurer,"6 extending insurance benefits in return for premiums

received based on the risks involved—the same as those typically
 7

In the alternative, the Tax Court ruled that the services

that the trust funds provided to the hospitals was that of

providing "commercial-type insurance" under I.R.C. § 501(m),

another reason to deny exemption. As we affirm the Tax Court's

finding that the trust funds do not qualify for exemption under

I.R.C. § 501(e)(1)(A), we do not reach this alternative holding. 

 8Code section 502, the feeder organization provision, was

born of congressional concern that exempt organizations involved

in otherwise commercial enterprises might enjoy an unfair

competitive advantage over taxable businesses operating in the

same industry. See Revenue Act of 1950, Pub.L. 814, § 301(b), 64

Stat. 953; S.Rept. 2375, 81st Cong., 2d Sess. 28-29, 35 (1950),

1950-2 C.B. 483, 504-505, 509. 

provided by commercial insurance companies.7

From a public policy standpoint, we empathize with the trust

funds' position. It does appear that the Tax Court's

interpretation may inadvertently yet unfairly discriminate in favor

of large tax-exempt and governmental hospitals or hospital systems

with the advantage of in-house self-insurance while denying this

method of acquiring insurance to small to mid-size hospitals. This

is ironic given the stipulated fact that no commercial insurer

carrier even wanted the smaller hospitals' business in the late

1980's. By definition, therefore, there can be no overriding

anti-competitive concerns about the trust funds' operation in the

insurance marketplace as a tax-exempt entity, enjoying an unfair

advantage vis-a-vis their for-profit competitors. 8

 Even so,

however, we find no clear error in the Tax Court's finding of fact

that these trust funds were not organized and operated exclusively

for exempt purposes.

 Strictly speaking, the member hospitals are not

"self-insuring" themselves through these trusts. See Rev.Rul. 78-

41, supra note 4. Neither are they "purchasing" insurance on a
 9

The methodology employed here by the member hospitals is

very similar to a rather antiquated risk spreading organization

called a "reciprocal insurance exchange." The reciprocal

exchange idea was that each member agreed to pay its pro-rata

share to cover the liabilities of any of the members who might

suffer a loss through liability. Several forms were created. An

"attorney-in-fact" would be appointed for the subscribers to the

reciprocal exchange. Each one of the members or subscribers

would execute a document appointing the attorney-in-fact to act

for it and to do the things that would accomplish the purpose of

the funds. That is, the attorney-in-fact would be instructed to

collect from each subscriber a pro-rata amount based upon the

risk and exposure of that member, and, hold it in a fund. 

Whenever any reciprocal exchange member suffered a loss, the

attorney-in-fact would investigate it, adjust it, defend it, and,

either pay it off or defeat it. The cost to do this was taken

from the monies provided by the subscribers. If the fund ran

low, the attorney-in-fact was entitled to notify each member and

each member would pay the pro-rata amount necessary to replenish

the fund. Here, the member hospitals, in creating their "trust

funds," seem to have been aiming at this type of reciprocal

exchange arrangement. 

 10We have great respect for Article I, Section 1 of the

United States Constitution that confers the power to legislate

upon the men and women of Congress. It doesn't confer that power

upon us, the judiciary, and it is inappropriate to patronize

group basis through these trusts. What these member hospitals are

doing is providing insurance to each other, on a reciprocal basis,

using trust vehicles as their chosen method of operation. 9

 Each

member insures—each is liable for the losses. From a statutory

construction standpoint, however, it is clear that included in

I.R.C. § 501(e)(1)(A)'s list of exempt activities is the

"purchasing of insurance on a group basis" and omitted from this

list is the "providing of insurance, reciprocally to each other, on

a group basis," HCSC-Laundry v. United States, 450 U.S. at 4, 101

S.Ct. at 838, and while we recognize the apparent need expressed in

the position of the trust funds, we find that the law, as written,

does not grant them tax-exempt status. It is not the role or power

of the judiciary to remedy a legislative statute by opinion.10 As
Congress by noting their imperfect work and quietly correcting

it. Archer-Daniels-Midland Co. v. United States, 37 F.3d 321,

324 (7th Cir.1994) (Hill, J., dissenting dubitante ). The

judiciary should neither assume the responsibility nor usurp

authority not delegated to it. Roberts v. Austin, 632 F.2d 1202,

1215 (5th Cir.1980) (Hill, J., concurring specially), cert.

denied, 454 U.S. 975, 102 S.Ct. 527, 70 L.Ed.2d 395 (1981). 

the Supreme Court stated in HCSC-Laundry, at 8, 101 S.Ct. at 840,

"Congress easily can change the statute whenever it is so

inclined."

IV. CONCLUSION

We affirm the decision of the Tax Court.

AFFIRMED.