internal_revenue_service te_ge technical_advice_memorandum t- lu l sal area manager eo examinations taxpayer's name taxpayer's address taxpayer's id no years involved conference held e m p p ‘ issues does continue to qualify for exemption under sec_501 of the internal_revenue_code as an organization described in sec_501 in the event that l does not continue to qualify for exemption under sec_501 of the code as an organization described in sec_901 what would be the effective date of revocation do the administrative services l provides to self-insured employers constitute an unrelated_trade_or_business under sec_513 of the internal_revenue_code do the laboratory services l provides for participating providers and enrollees constitute an unrelated_trade_or_business under sec_513 of the code background facts l formerly known as m is a nonprofit membership corporation that was incorporated on state of a where it is authorized to perform its activities under the general nonprofit corporation law of the article il of l’s articles of incorporation as amended in which was in effect at date at date and at date provided that the specific and primary purpose for which this corporation is formed is to defray and assume the costs of professional by establishing a fund from periodic_payments by subscribers or beneficiaries from which fund said costs may be paid l's principal activity consists of contracting with employers health maintenance organizations hmos insurance_companies and political subdivisions collectively subscribers to arrange for the provision for for the subscribers’ employees or members enrollees by professionals with whom l contracts participating providers l also operates a laboratory that produces various products including services or letter to l recognizing l as tax-exempt under sec_501 a of the code as an organization described in sec_501 l’s status as an organization described in sec_501 continued up through the tax years under examination - the internal_revenue_service issued a determination as of date l had __ affiliated organizations located in states other than a which were engaged in substantially the same activities as l collectively these organizations are referred to as l affiliates in general each l affiliate was organized as a non-profit corporation under the laws of the state where it performed its activities in addition as of december l owned all of the stock of a for-profit corporation that was engaged in the business and all of the stock of several other for-profit corporations that were engaged ir activities members l’s restated bylaws ‘bylaws’ provide that its members consist of two classes director members and participating members bylaws art sec_1 director members are persons who are members of l’s board_of directors bylaws art sec_1 director members also include public members public members are defined as individuals who are neither or other providers nor employees of l or any of its affiliate organizations nor _ any persons who have anv significant financial interest in any entity or organization providing any person who is a spouse of any of the aforementioned individuals or other health care services to the corporation nor bylaws art sec_1 participating members are defined as a ll persons who are licensed to practice with the provisions of code of the state of a and with the rules and regulations set forth in of the business and professions in a and who comply of the a administrative code bylaws art sec_1 although not explained in the bylaws a participating member in l is provider contract with l known as a participating agreement thus the terms participating member and participating provider’ refer to the same individual _ and who has entered into a governance l’s board_of directors consists of between eight and fifteen persons a majority of the director members must be participating members and or persons who are panel members of one or more of l affiliates the remainder of the directors must be public members a quorum consists of percent of the director members bylaws art i sec_1 as of the dates below the composition of l’s board was as follows art viii of l’s participating members l affiliates total public members total includes one retired l is licensed under the - pursuant to bylaws provides for the establishment o committee as required by the committee must regularly and timely make recommendations and reports to the board_of directors which must act upon the committee’s recommendations the which is elected by l’s subscribers consists of five members three of whom must be subscribers or enrollees one of whom must be a member of the board_of directors and one of whom must be a participating member bylaws art vill sec_4 the committee committee which must meet at least quarterly makes the final_decision on all matters relating to rates or fees to be paid for professional services to participating members defined below which includes l’s participating members as well as participating members of l affiliates bylaws art viii sec subscribers and enrollees on date l had enrollees a breakdown of these subscribers and enrollees appears at exhibit subscribers and enrollees and enrollees consist of the following subscribers and eull risk subscribers are organizations that pay l a per enrollee per month fixed amount in return for which their enrollees and their dependents are entitled to receive certain benefits from l's participating providers these benefits vary in aeneral benefits include the riaht to receive _ - inat are provided by the participating provider a administrative service plan subscribers are generally large self-insured organizations for which l provides administrative services only aso including processing and paying claims l processes and pays the claims and the subscriber’s self-insured plan reimburses l for all claim settlement expenses l receives an administrative fee based on the number of eligible participants in a plan or a percentage of the value of the claims filed each month similar to full risk arrangements under administrative service plan arrangements enrollees and their dependents are entitled to receive certain benefits from l’s participating providers these benefits vary aeneral benefits include the riaht to receive in that are provided by the participating provider commercial plan subscribers are employers of all sizes that offer as a benefit for their employees health plan subscribers are enrollees or by insurance_companies to their clients plans offered by hmos to their political_subdivision subscribers are state and local governments and agencies of state and local governments that offer as a benefit for their employees medicare subscribers are plans offered by hmos or insurance_companies to their enrollees who participate in their medicare supplemental insurance programs medicare covers the but medicare does no hmos and insurance_companies to arrange for their enrollees and clients for the provision of services that medicare does not cover thus l contracts with medicaid subscribers are __ plans offered by hmos or insurance_companies to their enrollees who qualify tor medicaid these plans provide medicaid beneficiaries with examination by a participating provider thus l contracts with hmos and insurance_companies to arrange for the services for their medicaid enrollees and clients provision of participating provid the term participating providers has the same meaning as participating members as stated in bylaws art sec_1 these are persons who are licensed e- to practice not stated in the rvlawe a particioatina member or participating provider in lis in the state of a and who otherwise comply with a law although provider contract with l known as a participating agreement _ and who has entered into a revenues ‘l's activities result in the receipt of revenues from various sources exhibit for to l’s total revenues were dollar_figure the principal sources of l’s revenues are administrative services represents revenues from administrative service plan subscribers as described above claims prepaid subscribers with fewer than enrollees the rates are community rated for subscribers with or more enrollees the charges are experience rated charges received from subscribers for interest interest and dividends received and gains and losses on investments other reverv's ‘ ---1g miscellaneous sources of revenue such as participating providers and intercompany_transactions eliminated when separate company general ledgers are consolidated for non-l patients reapplication fees for surplus at the end of and l’s accumulated surplus was as follows exhibit date dollar_figure date date employees as of date and l had and employeés respectively working in a variety of functions see exhibit activiti l states that it engages in the following community benefit activities a medicare and medicaid as described above a large portion of l’s enrollees consist of medicare and medicaid beneficiaries l states that as a result of participating in these programs l has absorbed extensive underwriting losses exhibit the term retention represents that portion of the rate charge that l has allocated internally toward administrative expenses l retains this amount and does not ultimately distribute it in addition l states that the fees it charges under its medicare and medicaid programs are substantially discounted exhibit the l discounts represent reductions from the standard l administrative service fees which l charges its subscribers the participating provider discounts represent reductions from the - standard fees which participating providers normally charge their non-l patients for equivalent services b these services are available for students up to age or through graduation from high school and whose families earn up to percent of the poverty level and do not participate in anothe insurance b- program the children and their families select a participating provider who provides the services and is then paid_by l or an affiliate l collaborates with local charitable organizations which identify the children who are eligible for the program l incurred the following expenditures_for this program in a dollar_figure the number of students served by this program ina were c child health assistance program children in l began a oroaram called to low-income children in a in provides benefited program these expenditures consisted of dollar_figure discounts which are reductions from the standard fees participating providers normally charge their non-l patients for equivalent of l discounts which are reductions from the standard l administrative service fees l charges its subscribers and dollar_figure incurs associated with this program of l undemriting losses which consists of expenses which l of expenditures under this of participating provider under this program l l incurred dollar_figure services dollar_figure this program in d l’s proaram encouraaes providers tor annual checkups to visit their l participating educational brochures tc operating an information line for questions mailing follow-up materials and conducting surveys in of expenditures_for this program which relates to persons within a as well as outside the state this program consists of mailing enrollees educating participating providers l incurred dollar_figure a e patient newsletter the vewsletter is part of an overall consumer awareness program to educate the general_public on the importance of program was developed in in l incurred expenditures of dollar_figure and the first issue was produced and distributed in for this program which relates to persons within a as well as outside the state these expenses covered the distribution of copies which l sent to participating providers where they were available for distribution to enrollees and to other patients of the participating providers approximately copies were used as marketing materials this f disaster relief program l collaborates with the services to victims of national disasters in a who a result of these disasters to provide immediate l provides claim forms to the services free of charge to victims whose to assist these victims l gives every chapter of the for free services participatina providers provide free and provides in addition claim forms and l incurred dollar_figure services in program g l reimburses these providers for these and dollar_figure of expenditures_for this the purpose of the program is to collect and share medical information with health_plans and employer groups the program consists of building automated systems specifically data warehouses to collect and store information the program also emphasizes improving the overall quality of the data examples of how this data has been used are e providina information to health_plans for use in their report to the providing information to health_plans to assist their disease management programs such as e conducting internal studies on diseases detected during an examination with an emphasis on early detection and prevention of the health_plans and subscriber groups with which l shares this information consist of l's subscribers and subscribers of l affiliates located throughout the united_states generic data may be reported in l’s patient newsletter available online as well as in participating providers’ offices none of this data has been shared with other non-profit organizations or government agencies of the subscribers are l subscribers located ina some of the which is in operating this program for l incurred expenses of dollar_figure for hardware software and staff resources necessary to develop the data warehousing environment l laboratory when a participating provider orders for an enrollee the participatina provider utilizes the services of an optical laboratory to prepare the reauired the participating provider may use any one of over independent laboratories with which l has contracted or may use the in-house laboratory operated by l l laboratory l operates the l laboratory from the participating provider the enrollee or the participating provider mav provide the or the participatina provider mav order it the enrollee obtains if the participating the l laboratory also pertorms participating providers with respect to l affiliates described below for the benefit of their enrollees as well as their non-enrollee natients however the l laboratory does not perform not participating providers or to other organizations from represented for the respective year throuar l’s revenues from the operation of the l laboratory respectively of the total revenues l reported on form issue does l continue to qualify for exemption under sec_501 of the internal_revenue_code as an organization described in sec_501 internal_revenue_code applicable law sec_501 of the code provides that an organization described in subsection c is exempt from income_taxation sec_501 of the code refers to civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare sec_1_501_c_4_-1 of the regulations states in general a civic_league_or_organization may be exempt as an organization described in sec_501 if - i ii it is not organized or operated for profit and it is operated exclusively for the promotion of social welfare promotion of social welfare i ii in general an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community an organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements nor is an organization operated primarily for the promotion of social welfare if its primary activity is with the general_public in a manner similar to organizations which are operated for profit carrying on a business revenue rulings in revrul_54_394 1954_2_cb_131 an organization’s sole activity was to provide television reception for its members on a cooperative basis in an area not readily adaptable to ordinary reception members were required to contract for and to pay services and installation fees in concluding that this organization did not qualify for exemption under sec_501 of the code this revenue_ruling stated when an organization’s only activity is to provide television reception on a cooperative basis to its members who contract and pay for such services such organization is held to operate for the benefit of its members rather than for the promotion of the welfare of mankind in revrul_55_311 1955_1_cb_72 the members of a local association of employees consisted solely of the employees of a particular corporation the association operated a bus for the convenience of its members the association's income was derived from bus fares used to pay for the operation of the bus since the bus operated primarily for the benefit of the association’s members this revenue_ruling concluded that the association did not qualify for exemption under sec_501 of the code in revrul_62_167 1962_2_cb_142 an organization’s purpose was to construct and maintain a reflector-type television station capable of receiving signals of television stations and reproducing these signals so that satisfactory television would be available to community in general membership was available to all persons in the area and the organization’s income was derived from membership fees and donations the reflector-type equipment received signals from three television stations and retransmitted these signals into the community the signals retransmitted by the reflector-type apparatus were available to any television in the community this revenue_ruling distinguished revrul_54_394 supra because in that revenue_ruling the television services were available only to members of the organization and only pursuant to a contract requiring the payment of membership fees and monthly maintenance charges however in this revenue_ruling the organization operated its system for the benefit of all television owners in the community it retransmitted television signals for the benefit of the entire community and it obtained memberships and contributions on a voluntary basis therefore the organization qualified for exemption under sec_501 of the code in revrul_73_349 1973_2_cb_179 an organization was formed to purchase groceries for its membership at the lowest possible prices it received orders from its members consolidated them and purchased the food in quantity each member paid for the cost of his food and each member was assessed an equal monthly service charge for the monthly operating costs membership was open to all individuals in a particular community this revenue_ruling stated that the organization was a private v lake forest inc infra this ruling stated that the organization cooperative enterprise for the economic benefit or convenience of its members citing commissioner operated primarily for the private benefit of members any benefits to the community were not sufficient to meet the requirement of the regulations that the organization operate primarily for the common good and general welfare of the people of the community accordingly it did not qualify for exemption under sec_501 of the code in revrul_75_199 1975_1_cb_160 an organization provided sick benefits for its members and paid death_benefits to the beneficiaries of members membership in the organization was restricted to individuals of good moral character and health who belonged to a particular ethnic group and resided in a stated geographical area the organization's activities consisted of holding monthly meetings and maintaining an established system for the payment of sick and death_benefits its income was derived primarily from membership dues and was used to pay benefits to members and for miscellaneous operating_expenses in concluding that this organization did not qualify for exemption under sec_501 of the code this revenue_ruling found that it was essentially a mutual self-interest organization its income was used to provide direct and economic benefits to members and any benefit to the larger community was minor and incidental this revenue_ruling stated 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 sec_501 of the code in revrul_78_69 1978_1_cb_156 an organization was formed by residents of a suburban community to provide bus transportation during rush hours between the community and the major employment centers in the metropolitan area during that time regular bus service was inadequate the organization contracted for buses and drivers planned their routes and schedules and arranged for volunteers to collect the fares on each trip although everyone may ride the organization’s buses for the established fare almost all riders live in the community since revenue from fares was not always sufficient to meet the organization's expenses the organization sought and received financial assistance from different governmental units this revenue_ruling found that the organization was providing a useful service to all members of the community the bus service provided was not commercially available and was subsidized by governmental financial assistance participation in the organization's activities was open to all community residents and volunteers carried out its activities this method of operation indicated that the organization was not carrying on a business ae with the general_public in a manner similar to organizations that are operated for profit as a result since it promoted the common good and general welfare of the people of the community it qualified for exemption under sec_501 of the code in revrul_81_58 1981_1_cb_331 an association of officers of a police department in a community promoted the professional development of its members educated the public to recognize and appreciate the value of the service of the members and provided a lump-sum payment to each member upon retirement or a lump-sum payment to beneficiaries upon the member's death its primary sources of income were from contributions by the general_public and through public fund-raising events upon joining the organization members are required to pay a nominal one- time membership fee in concluding that the organization did not qualify for exemption under sec_501 of the code this revenue_ruling described the organization as essentially a mutual self-interest type organization its income was used to provide direct economic benefits to members in relying on revrul_75_199 supra the ruling stated although the class of employees benefited by the organization consist of police officers engaged in the performance of essential and hazardous pubic services and there is an incidental benefit provided by the organization to the larger community the fact remains that the primary benefits from the organization are limited to its members case law in 305_f2d_814 cir lake forest was organized as a nonprofit membership corporation it entered into an agreement with a federal government agency to purchase two u s defense housing projects consisting of one-story residential buildings divided into dwelling units lake forest proposed to devote these properties to a cooperative nonprofit use as homes for its members the number of members in the corporation was limited to the number of dwellings available preference in membership was given to inadequately housed veterans of world war ii then to inadequately housed veterans of world war i then to veterans of world wars regardless of present housing accommodations and then to other eligible persons a member was entitled to purchase the right to perpetually use a dwelling_unit at a specific price a member would pay monthly principal and interest and a monthly operating fee a member could transfer his perpetual use only to a member of his family if a member desired to leave the residence lake forest had a right to purchase the perpetual use but if it did not the member could sell the use to anyone acceptable to lake forest in reversing the tax_court the court_of_appeals concluded that lake forest did not qualify for exemption under sec_501 of the code the court first concluded that lake forest did not meet the dictionary definition of civic stating while the advantages offered by lake forest are available to all citizens eligible for membership the benefits are not municipal or public in their nature nor are they bestowed upon the commonality as such _158_f2d_272 cir lake forest is not a movement of the citizenry or of the community rather at most it is a venture - - unquestionably praiseworthy - - for securing its members living quarters f 2d pincite the court also concluded that lake forest did not meet the dictionary definition of social or welfare stating it does not propose to offer a service or program for the direct betterment or improvement of the community as a whole citations omitted it is not a charitable corporation in law or equity for its contribution is neither to the public at large nor of a public character citations omitted lake forest does of course furnish housing to a certain group of citizens but it does not do so on a community basis itis a public- spirited but privately-devoted endeavor its work in part incidentally redounds to society but this is not the social welfare of the tax statute whatever the nature of the rights or privileges thus afforded persons other than members it is a circumstance too insubstantial to qualify the entire activity of the corporation as in the social welfare size of membership in ratio to local population is not controlling on whether an organization is civic’ or social the number affected is not the criterion a private project may touch an appreciable segment of the people of a large physical area and yet for want of the considerations mentioned not be converted into a civic or social undertaking classification as civic or social depends on the the benefactor emphasis added the court_of_appeals concluded t he property has been sold to a private corporation having no civic community or public status and permitted - - though as a last classification - - to sell shelter not only to veterans but even generally to other eligible persons without delimitation unless each preceding class exercises its preference in days while the occupancy preferences may contribute to the promotion of social welfare they do not overbalance the private nature of the project - the court distinguished u s v pickwick electric membership corp 158_f2d_272 cir by stating pickwick dealt with a situation embraced by the statute the taxpayer was a public_utility corporation organized and run to provide electric energy for several counties under a program authorized and encouraged by the state of tennessee one of its purposes was to bring electricity to many communities which had none as well as to speed the improvement of rural electrification of the area generally the service and membership could be enjoyed by the public at large and on a nonprofit basis although a commercial benefit it was available to citizens as citizens and promotive of social welfare f 2d pincite - in 39_tc_756 a nonprofit membership corporation that was created in purchased nearly big_number acres of land in the pocono mountains of pennsylvania to carry on studies and continue the development of certain liberal and progressive social programs tamiment’ its membership was limited to persons in the organization was recognized as tax-exempt under the predecessor of sec_501 of the code and in it was recognized as exempt under sec_501 except for to tamiment never received any contributions through tamiment earned substantial profits so that its accumulated surplus grew from about dollar_figure in to about dollar_figure million in by tamiment had become the largest and one of the most modern summer vacation resorts in pennsylvania by this time the facilities at tamiment had been enlarged and improved to a point where they were sufficient to provide accommodations for more than guests the resort was open to the public it operated competitively with other mountain resorts in new york city newspapers and it advertised in magazines and in multicolored brochures where it was described as a luxurious resort for summer vacations tamiment included attractively furnished cottages a large central dining hall bungalows an administration building a library a lecture and concert hall a large ballroom building taverns a clubhouse and dining terrace overlooking the lake an 18-hole gulf course another large clubhouse overlooking the golf course and containing a cocktail lounge a large theater building tennis courts and a beach house on the lake where swimming and fishing were available and more than canoes and rowboats in addition there were extensive facilities for conducting team sport activities tamiment also offered organized programs for guests who were interested in the in addition lectures pertaining to subjects of general interest theater music and art were presented once a week for the fiscal years ended date through percent of tamiment s total revenues were derived from operating the tamiment resort percent of total revenues were used for operating_expenses percent of total revenues was expended for social welfare activities and percent of total revenues consisted of contributions and donations to other organizations on september of each of the following fiscal years tamiment’s accumulated surplus was dollar_figure big_number big_number big_number big_number the irs revoked tamiment’s tax-exemption under sec_501 of the code the tax_court sustained this revocation finding that tamiment was primarily engaged in the operation of the resort at tamiment and that its activities in operating said resort did not in themselves constitute and were not merely incident to the promotion of social welfare t c pincite the tax_court concluded that tamiment’s operation of this resort when considered in relation to its activities as a whole precluded it from qualifying for exemption under sec_501 of the code for several reasons first tamiment’s activities in operating the resort were not exclusively or even principally or primarily for the promotion of social welfare within the meaning of the statute citing lake forest inc supra the tax_court stated - p etitioner’s activities in maintaining and operating the large resort at tamiment were not directed to and did not result in providing benefits either for the public at large or for any community as a whole rather the facilities and activities at said resort were devoted principally and primarily to providing living accommodations meals and a variety of recreational and cultural programs for the personal benefit of paying guests who were attracted to the resort because it was an enjoyable and luxurious place for summer vacations and who were willing and able to pay the substantial daily or weekly overall rates which petitioner charged true it is that both the recreational and cultural activities provided did benefit those who participated in them but when the same are considered in light of the facts that they were furnished for financial consideration and were paid for by the guests as part of the package rates charged therefor we think it would be overstretching the meaning and intent of the tax exemption statute to include them within the ambit of promotion of social welfare t c pincite - second the tax_court was convinced that the operation of tamiment was its primary activity and not merely incidental to those social welfare activities that it carried on in this regard the tax_court stated what is even more significant is the fact that petitioner's total revenues from all sources were disposed of principally in handling the operating_expenses of said resort in enlarging and improving the resorts’ facilities and in making additions to petitioner's accumulated surplus and that by comparison only a relatively insignificant portion of such total revenues was expended in the promotion of social welfare activities ibid in addition the tax_court compared tamiment’s revenues and social welfare activities to its accumulated surplus for each of the years ended date to the tax_court concluded by stating we find that the crucial factor in light of the evidence is that the sales aspect of plaintiffs work looms so large as to overshadow all else t c pincite analysis organizations described in sec_501 of the code include civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare sec_1 c -1 a of the regulations provides that an organization is operated 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 these regulations also state that an organization is embraced within this provision if it is operated primarily for the purpose of bringing about civic betterments and social improvements to make this determination with respect to l it is necessary to consider all of the facts and circumstances surrounding l’s activities to ascertain whether lis operated exclusively for social welfare purposes it is also necessary to determine the extent to which l’s activities constitute commercial rather than social welfare activities l contends that the it engages in various social welfare activities these contentions are discussed below a medicare and medicaid at date medicare and medicaid and small_employer enrollment was as follows see exhibit medicare medicare does not cover all of an individual’s health care services such as prescription drugs and medicines thus many medicare beneficiaries purchase supplemental health care insurance to cover health care services that are not covered this additional coverage may be obtained from a health insurance_company or an hmo similarly medicare covers only a portion of the total health care services relating tc _ purchases supplemental medicare insurance from an insurance_company or hmo additional thus when a medicare_beneficiary services are often included in the present case various health insurance_companies and hmos subcontract with l for l to arrange for the provision of services to their medicare clients or enrollees l has not established that this activity is significantly distinguishable from the same activity carried on by for-profit c -1 a ii of the regulations service arrangers under section medicaid in recent years many states have changed from traditional indemnity insurance to a managed care system for the provision of health care services to their medicaid population thus the state medicaid agencies contract with insurance_companies and hmos to arrange for the provision of health care services to eligible medicaid beneficiaries since these companies often cannot provide all of the contracted health care services themselves such as and organizations to provide these services services these companies frequently subcontract with other in the present case various health insurance_companies and hmos subcontract with l for l to arrange for the provision of services to their medicaid clients or enrollees l has not established that this activity is significantly distinguishable from the same activity carried on by for-profit c -1 a ii of the regulations service arrangers under section l points out that it operates its medicare and medicaid programs at a loss services for individuals who are generally thereby promoting social welfare by underwriting costs for government programs aimed at arranging for the provision of considered as medically underserved however if l’s administrative expenses retention are added back these programs actually operate at a profit for most years see exhibit moreover l’s involvement with medicare and medicaid is more a matter of securing contracts from other health insurance_companies and hmos which provide coverage for these populations than contracting directly as a medicare or medicaid arranger therefore rather than underwriting unprofitable programs that support socially responsible government programs l’s medicare and medicaid programs have both an economic and business_purpose underpinning b l’s or low-income students whose families qualify neither for employer health insurance nor government assistance ervices program provides in order to determine the extent of this program it is appropriate to compare l’ sec_2xpenditures with its gross revenue and total expenditures and with iis accumulated surplus see people’s fducational camp societv inc supra exhibit l’s expenditures_for its combined was less than gross revenues and less combined total expense combined was less expenditures ir proaram in anc of its of its average of its combined and accumulated surplus at ana these data indicate that in relation to l’s total activities l’s program represents an extremely minor part of l’s total activities c child health assistance program l states that in _ under this proaram l incurred dollar_figure of expenditures and benefited expenditures or not l on this basis in representing an average of children an average of per child however dollar_figure of these percent represent discounts absorbed by participating providers of expenditures_for this program l incurred only dollar_figure per child exhibit l’s expenditures_for its child assistance proaram in was slightly more than _ of its of its gross revenues and total expenses in additio expenditures in was only slightly more than of its accumulated surplus at these data indicate that on a per child basis and in relation to l’s total activities l’s child health assistance program represents an extremely minor part of l’s total activities d this program is directed to encourage l enrollees to visit their participatina providers for annual checkups for detection of while this program is beneficial it is directed toward enrollees and not toward members of the general_public who are not enrollees furthermore this program aims to benefit not just enrollees of l in a but also enrollees in l affiliates outside of a which is_ outside l's community l's expenditures_for its of it sec_1 program in gross revenues and was less than of its total expenses in addition l’s expenditures in its accumulated surplus at was only sliahtlv more than of these data indicate that in relation to l’s total activities l’s program represents an extremely minor part of l’s total activities ae e patient newsletter under this program l distributed a health care newsletter however the distribution was limited to its participating providers who made the newsletter available to their patients both enrollees and non-enrollees by limiting distribution to its participating providers l did not distribute the newsletter to members of the general_public except for those patients of participating providers who were not enrollees furthermore this program aims to benefit not just enrollees of l ina but also enrollees in l affiliates outside of a which is outside l’s community l’s expenditures_for its newsletter in was less than of its gross revenues and ot its was only slightly more tha total expenses in addition l’s patient newsletter expenditures in of its accumulated surplus af these data indicate that in relation to l’s total activities the patient newsletter represents an extremely minor part of l’s total activities f disaster relief program under this program l reimburses participating providers who provide free services however l has not demonstrated the to victims extent to which it publicizes this program either to the to its participating providers or to victims this may be why l incurred respectively for this program in addition only dollar_figure when measured in relation to l's gross revenues total expenses and accumulated surplus this program represents an extremely minor part of l's total activities and dollar_figure and in to local l's exnenditures for its disaster relief program in and disaster relief program in wi its average accumulated surplus ai of its combined of its and was only and gross revenues total expenses in addition l’s of these data indicate that in relation to l’s total activities the disaster relief program represents an extremely minor part of l’s total activities g under this program l collects and shares medical information with health_plans and employer groups which data is used to provide information for to assist their disease management programs and in conducting internal studies on diseases detected during 2xamination however this information is distributed only to heaith plans and employer groups which are l’s subscribers in a and subscribers of l affiliates located elsewhere in the country none of this data is shared with other non- profit organizations or government agencies therefore although l has incurred substantial amounts for this program plans members of the community who are not l’s the information under this program directly benefits only subscribers of l dollar_figure and subscribers of l affiliates and indirectly benefits only the enrollees in these subscribers’ subscribers subscribers of l affiliates or enrollees in their benefit from this program therefore because this program benefits subscribers and their enrollees almost exclusively rather than the community as a whole this program does not constitute a social welfare activity under sec_1_501_c_4_-1 of the regulations di - plans do not sec_1_501_c_4_-1 of the regulations requires that an organization be operated exclusively for the promotion of social welfare sec_1_501_c_4_-1 provides that an organization is operated 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 l contends that much of its activities constitute social welfare activities the services l arranges for its medicaid enrollees and its small_employer group enrollees are considered to benefit the general community because these persons are generally considered as being medically underserved in addition l engages in some other activities that benefit the general community however whether considered both quantitatively and qualitatively all of these activities represent only a very minor part of l’s total activities instead l’s activities principally benefit its enrollees rather than persons who are medically underserved for example in are considered as benefiting the community in general constituted less than l’s expenditures that of l’s total revenues approximately of its total expenses ana see exhibit percent of its accumulated surplus at persons who are considered as medically underserved comprise approximately percent of l’s enrollment and enrollees in large employer groups and members of large health_plans comprise approximately percent of l’s enrollment see page exhibit simply because l arranges ervices for a large number of persons in the cammunity and engages in a small amount of social welfare activities does not establish that it is a social_welfare_organization within the meaning of sec_501 of the code as the court_of_appeals stated in commissioner v lake forest inc supra classification as civic or social depends on the character - - as public or private - - of the benefits bestowed of the beneficiary and of the benefactor l's social welfare activities during the examination years whether considered in relation to l’s total revenues total expenses accumulated surplus or total enrollment are minor incidental and insignificant see people’s educational camp society inc v commissioner supra therefore based on any measure it cannot be said that l is primarily engaged in promoting the common good and general welfare of the people of the community within the meaning of sec_1_501_c_4_-1 of the regulations further a nonprofit corporation whose activities benefit primarily its enrollees rather than the general_public does not promote the common good and general welfare of the people of the community within the meaning of sec_1_501_c_4_-1 of the regulations depending on how a particular organization operates the same activities may cause different results under sec_501 of the code revrul_54_394 supra and revrul_62_167 supra both involved the provision of television services but since the organization in the latter ruling provided services to the entire community rather than just to its members it qualified for exemption as a social_welfare_organization similarly revrul_55_311 supra and revrul_78_69 supra both involved the provision of bus transportation in the former ruling the bus service benefited the organization's members but in the latter ruling the community as a whole benefited from the bus service and thus qualified for exemption as a social_welfare_organization since l's activities benefit its enrollees almost exclusively its activities do not promote the common good and general welfare of the people of the community within the meaning of sec_1_501_c_4_-1 of the regulations finally sec_1_501_c_4_-1 a ii of the regulations states that an organization is not operated primarily for the promotion of social welfare if its primary activity is carrying on a business with the general_public in a manner similar to organizations which are operated for profit including arranging for the provision of services for medicare and medicaid beneficiaries are significantly distinguishable from the same activities carried on by for- profit l has not established that its activities ervice organizations in conclusion based on all the facts and circumstances l has not established that it is operated primarily for the purpose of bringing about civic betterments and social improvements within the meaning of sec_1_501_c_4_-1 of the regulations l’s operations benefit almost exclusively its enrollees its social welfare activities in relation to its total activities are minor incidental and insignificant finally l has not established that its activities are significantly distinguishable from the same activities carried on by a business operated for profit as required in sec_1 c - a ii thus lis not primarily engaged in promoting the common good and general welfare of the people of the community as a result it is not operated exclusively of the promotion of social welfare within the meaning of sec_1_501_c_4_-1 consequently l does not continue to qualify for exemption under a of the code as an organization described in sec_501 issue if l does not continue to qualify for exemption under sec_501 of the code as an organization described in sec_501 what would be the effective date of revocation the commissioner te_ge pursuant to the authority under sec_7805 of the code has exercised this authority to grant retroactive relief to l with respect to the revocation of its exemption under sec_501 therefore the effective date of revocation will be the date of the letter from the area manager to l notifying l that its exemption under sec_501 of the code has been revoked issue do the administrative services l provides to self-insured employers constitute an unrelated_trade_or_business under sec_513 of the internal_revenue_code issue do the laboratory services l provides for participating providers and enrollees constitute an unrelated_trade_or_business under sec_513 of the code applicable law sec_501 of the code provides that an organization described in subsection c is exempt from income_taxation sec_511 of the code provides that the unrelated_business_taxable_income of organizations described in sub sec_501 is subject_to taxation sec_512 of the code provides that the term unrelated_business_taxable_income means the net_income an organization derives from an unrelated_trade_or_business regularly carried on sec_513 of the code provides that the term unrelated_trade_or_business means any trade_or_business the conduct of which is not substantially related to the exercise or performance by such organization of its tax-exempt purpose sec_513 of the code provides that an unrelated_trade_or_business does not include any trade_or_business which is carried on by a sec_501 c organization primarily for the convenience of its members students patients officers or employees sec_1_513-1 of the income_tax regulations states in part activities of producing or distributing goods or performing services from which a particular amount of gross_income is derived do not lose identity as trade_or_business merely because they are carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which may or may not be related to the exempt_purpose of an organization sec_1_513-1 of the regulations provides that in determining whether a trade_or_business from which a particular amount of gross_income derives is regularly carried on the frequency and continuity with which the activities productive of the income are conducted and the manner in which they are pursued should be considered for example specific business activities are considered regularly carried on if they manifest a frequency and continuity and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations sec_1_513-1 of the regulations provides that a trade_or_business carried on by an organization is related to its tax-exempt purpose if the conduct of the business activities has a causal relationship to the achievement of the organization’s tax-exempt purpose it is substantially related if the causal relationship is a substantial one thus the activity must contribute importantly to the accomplishment of the organization’s tax-exempt purpose whether an activity contributes importantly to the accomplishment of the organization’s tax-exempt purpose depends in each case upon the facts and circumstances involved sec_1_513-1 of the regulations provides that in determining whether activities contribute importantly to the accomplishment of an exempt_purpose the size and extent of the activities involved should be considered in relation to the nature and extent of the exempt_function which they purport to serve revrul_78_435 1978_2_cb_181 involved a sec_501 organization whose primary activity was the operation of a clinic providing various rehabilitation services to handicapped persons including those with hearing deficiencies the clinic tested and evaluated the hearing of its patients with hearing deficiencies and recommended types of hearing aids that may be necessary in each case patients who wish to purchase hearing aids from the clinic may do so upon purchase the clinic fitted the hearing aids to insure maximum assistance to the patients in the correction or alleviation of their hearing deficiencies this revenue_ruling held that the sale of hearing aids as an integral part of the clinic’s program to test and evaluate patients with hearing deficiencies contributes importantly to the clinic’s purpose of promoting the health of such persons sec_7805 of the code provides that the internal_revenue_service may prescribe the extent if any to which any ruling shail be applied without retroactive effect in revrul_78_289 1978_2_cb_180 the irs revoked the ruling letter that it had previously sent to an organization recognizing it as exempt from federal_income_tax under sec_7805 of the code this revocation was effective prospectively the irs also determined that the organization regularly carried on a business activity that was not substantially related to the performance of the organization’s tax-exempt purpose when sec_7805 is applied in the case of the revocation of an organization’s exemption_letter the revocation is effective at a later date than would be the case if sec_7805 relief were not applied until that effective date the organization is treated as though it were exempt from federal_income_tax under sec_501 a issue analysis do the administrative services l provides to self-insured employers constitute an unrelated_trade_or_business under sec_513 of the internal_revenue_code l's subscribers fall into two categories full risk and aso full risk subscribers are organizations that have a prepaid arrangement with l under which they pay l a per enrollee per month fixed amount in return for which their enrollees and their dependents are entitled to receive certain providers these benefits vary in gener benefits from l’s participating participating provider that are provided by the aso subscribers are generally large self-insured organizations that pay l for providing administrative services including processing and paying claims l processes and pays the claims and the subscriber's self-insured plan reimburses l for all claim settlement expenses l receives an administrative fee based on the number of eligible participants in a plan or a percentage of the value of the claims filed each month similar to full risk arrangements under administrative service plan arrangements enrollees and their dependents are entitled to receive certair l’s participating providers these benefits varv benefits from included in the total services that full risk subscribers receive from l in return for their fixed payments are billing and processing activities under aso plans which are self-funded arrangements l charges the subscriber a separate fee for the performance of these services under both programs these services are necessary and integral parts of l’s overall activities of arranging for the provision o enrollees for under sec_1_513-1 of the regulations a trade_or_business carried on by an organization is substantially related to its tax-exempt purpose if the conduct of the business activities has a substantial causal relationship to the achievement of the organization's tax-exempt purpose thus the trade_or_business must contribute importantly to the accomplishment of the organization's tax-exempt purpose as described above the commissioner te_ge has exercised her discretion to grant l relief under sec_7805 to limit the retroactive effect of this revocation until the date the service notifies l that its exempt status under sec_501 has been revoked therefore under revrul_78_289 supra until that date the service treats l as though it were exempt from federal_income_tax under sec_501 a under revrul_78_289 during the sec_7805 relief period arranging for services for enrollees is treated as though it furthered social the provision of welfare purposes under sec_501 these activities consist of performing services for full risk subscribers and for aso subscribers therefore because the services l performs for aso subscribers are necessary and integral parts of l’s overall activities of arranging for the provision of services for enrollees these services contribute importantly to the accomplishment of l’s purported tax-exempt purpose as a result these services have a substantial causal relationship to the achievement of l’s purported tax-exempt purpose under sec_1_513-1 of the regulations consequently these activities are substantially related to l’s exercise or performance of its purported tax-exempt purpose under sec_513 of the code issue do the laboratory services l provides for participating providers and enrollees constitute an unrelated_trade_or_business under sec_513 of the code in revrul_78_435 supra a sec_501 clinic that provided rehabilitation services to handicapped persons including those with hearing deficiencies the clinic tested and evaluated the hearing of its patients with hearing deficiencies and recommended types of hearing aids that may be necessary in each situation patients who wished to purchase hearing aids from the clinic could do so in which case the clinic fitted the hearing aids to insure maximum assistance to the patients in the correction or alleviation of their hearing deficiencies based on these facts this revenue_ruling held that sale of hearing aids as an integral part of the organization's program to test and evaluate patients with hearing deficiencies contributes importantly to the clinic’s purpose of promoting the health of such persons an important fact in revrul_78_435 was that the tax-exempt health care provider that performed the testing and evaluation services for its patients also sold the hearing aids to the patients and fitted them to each patient in the present case an enrollee is entitled to receive froma participating provider if the participating provider determines that the enrollee needs to have his her prescribe the the participating provider will recommend or needed the enrollee is free to anvwhere however since the enrollee is in addition if the enrotiee chooses to participating provider the additional charges when the participating provider orders ihe enrollee is responsible for paying the for the enrollee the participating provider is free to trom any raboratory such as the l laboratory or an independent laboratory approved by l under revrul_78_289 during the sec_7805 relief period arranging for services for enrollees is treated as though it furthered social the provision of welfare purposes under sec_501 in revrul_78_435 the tax-exempt health care provider in connection with the provision of specific health care services to its patients sold to its patients certain medical equipment to help alleviate the patients’ maladies in the present case l is not a health care provider but an arranger of services for the beneficiaries of its subscribers the health care providers are the participating providers in addition l does not sell thus the present situation differs markedly from revrul_78_435 asa supplier 0’ professionals l has the same relationsnip with participating providers as an independent supplier c professional the fact that l is also the arranger of t the enrollees does not enhance l's retauonsnip with the participating provider as a supplier of services by the participating provider for has with any - products therefore l’s sale ot does not contribute importantly to furthering l's purported tax-exempt purpose of arranging for the provision of services to enrollees the participating provider provides services and to the enrollee pursuant to l's contract with the subscriber l is a third-party that pays the participating provider the contracted amount for the if the participating provider purchases vendor to the participating provider the enrollee is not a patient of l and the enrollee is not a customer of l since the enrollee is not purchasing the only relationship the enrollee has with l is that of a third-party beneficiary of the contractual arrangement between l and the enrollee’ sec_3 from the l laboratory l is also a subscriber since the participating provider is free tc laboratory including the l laboratory the enrollee from any approved laboratory services the l laboratory performs for the participating provider are no different than the laboratory services an independent laboratory performs for the participating provider the laboratory services performed by the l laboratory are not unique indeed participating providers use approximately independent commercial services as does the l laboratory the participating providers contribute no more importantly to the accomplishment of l's purported tax-exempt purpose than do the independent commercia laboratory services the l laboratory performs for the laboratories to perform the same laboratory services performed by the for the laboratories _ therefore the services the l laboratory performs for the participating provider do not contribute importantly to the accomplishment of l’s purported tax-exempt- conclusion sec_1 l does not continue to qualify for exemption under sec_501 of the code as an organization described in sec_501 c and the determination_letter recognizing l as an organization described in sec_901 should be revoked since the commissioner te_ge has granted relief under sec_7805 of the code the effective date of revocation will be the date of the letter from the area manager to l notifying l that its exemption under sec_501 of the code has been revoked the administrative services l provides to self-insured employers do not constitute an unrelated_trade_or_business under sec_513 of the internal_revenue_code the laboratory services l provides for participating providers and enrollees constitute an unrelated_trade_or_business under sec_513 ‘of the code a copy of this memorandum is to be given to the organization sec_6110 of the code provides that it may not be used or cited by others as precedent - end - redacted


internal_revenue_service number release date index number ------------------------- ------------------------------------ ------------------- -------------------------------- ty ------- legend department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ------------------------ id no ------------------ ---------------------------------------------------- telephone number ---------------------- refer reply to cc intl b06 plr-103933-18 date date ------------------------------------ taxpayer law firm ---------------------------------------------- partnership -------------------------- partner --------------------------------------------------------------------------------------------------- -------------------------------------------------------------------- partner --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- partner --------------------------------------------------------------------------------------------------- ---------------------------------- president ------------------------- date ------------------------ date ---------------------------- date --------------------------- dear ---------------- this responds to a letter dated date submitted by law firm requesting that the internal_revenue_service service grant taxpayer an extension of time under sec_301_9100-1 and sec_301_9100-3 to file form 4876-a election to be treated as an interest_charge_disc for taxpayer’s first taxable_year the rulings contained in this letter are based upon information and representations submitted by taxpayer and law firm and accompanied by penalties of perjury statements executed by the appropriate parties this office has not verified any of the plr-103933-18 materials submitted in support of the request for rulings they are subject_to verification on examination facts taxpayer is a domestic_corporation wholly owned by partnership which is equally owned by partner partner and partner taxpayer was incorporated on date and was intended to be treated as an interest charge domestic_international_sales_corporation ic-disc president of taxpayer relied on law firm for advice and assistance with arranging for taxpayer to qualify as an ic-disc including preparation and filing of form 4876-a taxpayer executed form 4876-a on date and law firm in its affidavit avers that it mailed this form to the irs but is unclear why the irs did not receive it on date taxpayer’s form 1120-ic-disc interest charge domestic_international_sales_corporation return was filed for its taxable_year ended date taxpayer later received correspondence from the service stating that it had received a form 1120-ic- disc for taxpayer but had not received a form 4876-a for taxpayer law firm submitted this request for relief on behalf of taxpayer under sec_301_9100-3 for an extension of time to file form 4876-a law and analysis sec_992 of the internal_revenue_code code provides that an election by a corporation to be treated as a disc1 shall be made by such corporation for a taxable_year at any time during the 90-day period immediately preceding the beginning of the taxable_year except that the secretary may give his consent to the making of an election at such other times as he may designate sec_992 of the code provides that such election shall be made in such manner as the secretary shall prescribe and shall be valid only if all persons who are shareholders in such corporation on such first day of the first taxable_year for which such election is effective consent to such election temp sec_1_921-1t provides in part that a corporation electing ic- disc status must file form 4876-a and that a corporation electing to be treated as an ic-disc for its first taxable_year shall make its election within days after the beginning of that year sec_301_9100-1 provides in part that the commissioner in exercising the commissioner’s discretion may grant a reasonable extension of time under the rule sec_1 as used in this letter the terms ic-disc and disc have the same meaning plr-103933-18 set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that a regulatory election is an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin for this purpose an election includes an application_for relief in respect of tax sec_301_9100-3 provides that requests for extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that the grant of relief will not prejudice the interests of the government in the present situation the election described in temp sec_1_921-1t is a regulatory election as defined in sec_301_9100-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer an extension of time provided that taxpayer satisfies the standards for relief set forth in sec_301_9100-3 based on the facts and representations submitted with taxpayer’s ruling_request we conclude that taxpayer satisfies sec_301_9100-3 accordingly taxpayer is granted an extension of time of days from the date of this ruling letter to file form 4876-a such filing will be treated as a timely election to be treated as an ic-disc for taxpayer’s first taxable_year the granting of an extension in this ruling letter is not a determination that taxpayer is in fact eligible to make the election or to claim ic-disc status or benefits see sec_301_9100-1 taxpayer should attach a copy of this ruling letter to its form 4876-a and federal_income_tax return for the taxable years to which this letter applies this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent except as expressly provided herein this letter does not express or imply any opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter plr-103933-18 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely christopher j bello branch chief branch international enclosures cc


internal_revenue_service number release date index number ------------------------- ------------------------------ ------------------------------------------- ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ----------------- telephone number --------------------- refer reply to cc psi b01 plr-134378-09 date date legend x --------------------------------------------------- -------------------------- state d1 d2 -------- ------------------ -------------------- dear ------------- this letter responds to a letter dated date written on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts according to the information submitted x was incorporated under state law on d1 x’s shareholders intended for x to be an s_corporation as of d2 however x’s form_2553 election by a small_business_corporation was not timely filed x requests a ruling that it will be recognized as an s_corporation effective d2 plr-134378-09 law and analysis sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 may be made by a small_business_corporation for any taxable_year at any time during the preceding_taxable_year or at any time during the taxable_year and on or before the 15th day of the third month of the taxable_year sec_1362 provides that if a a small_business_corporation makes an election under sec_1362 for any taxable_year and b such election is made after the 15th day of the third month of the taxable_year and on or before the 15th day of the third month of the following taxable_year then such election shall be treated as made for the following taxable_year sec_1362 provides that if a an election under sec_1362 is made for any taxable_year determined without regard to sec_1362 after the date prescribed by sec_1362 for making the election for the taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make the election the secretary may treat the election as timely made for the taxable_year and sec_1362 shall not apply x did not file a timely election to be treated as an s_corporation under sec_1362 effective d2 x has however established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective d2 within days from the date of this letter x must submit a properly completed form_2553 with a copy of this letter attached to the appropriate service_center except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether x otherwise qualifies as an s_corporation for federal tax purposes plr-134378-09 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely faith p colson faith p colson senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures a copy of this letter a copy for sec_6110 purposes