A.3. Insurance Activities

(1) Exempt organizations often arrange for the provision of insurance benefits to

their members for a fee. In some cases, this activity may be an exempt function (for example, Section 501(c)(8) fraternal organizations and Section 501(c)(9) VEBAs). In other cases, it may constitute unrelated business.

(2) In United States v. American Bar Endowment, 477 U.S. 105 (1986), the

Supreme Court held that a Section 501(c)(3) organization’s insurance program constituted both the sale of goods and the performance of services and, therefore, was a trade or business for purposes of the tax on unrelated business income.

a. American Bar Endowment (ABE) was the group policyholder and

administrator of insurance policies offering life, disability, and medical coverage.

b. ABE negotiated premium rates with insurers and selected which insurer

would provide coverage.

c. It compiled a list of its members, solicited their insurance business,

collected premiums, transmitted premiums to the insurer, maintained files on each policyholder, answered members’ questions concerning insurance policies, and screened claims for benefits.

d. Insured members were required to agree that all dividends refunded by

the insurer will be paid to ABE to further its charitable and educational activities.

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e. The Court stated that assembling a group of better than average

insurance risks, negotiating on their behalf with insurance companies, and administering a group policy are activities engaged in by private commercial entities in order to make a profit.

f. In addition to concluding that amounts derived from the insurance

activities were unrelated business taxable income, the Court also concluded that none of the individuals insured had established that any portion of their premium payments constituted a charitable deduction.

(3) Similar insurance activities of organizations described in Section 501(c)(6) have

also been held to constitute unrelated trade or business. See:

a. Illinois Association of Professional Insurance Agents, Inc. v.

Commissioner, 801 F. 2d 987 (7th Cir. 1986)

b. Professional Insurance Agents of Michigan v. Commissioner, 726 F. 2d

1097 (6th Cir. 1984)

c. Carolinas Farm & Power Equipment Dealers Ass’n v. United States, 699

F. 2d 167 (4th Cir. 1983)

d. Louisiana Credit Union League v. United States, 693 F. 2d 525 (5th Cir.

(4) However, in Independent Insurance Agents of Northern Nevada, Inc. v. United

States, 44 AFTR 2d 79-5880, 79-2 USTC 9601 (D. Nev. 1979), the court held that income realized from managing the insurance needs of tax-supported public agencies was related to the tax-exempt purpose of a business league under Section 501(c)(6). In this case, the organization acted as an insurance broker on behalf of a city, a county, a public school district, a fire department, a fair and recreational board, and a public hospital. The IRS didn’t acquiesce in this decision. See IRS AOD-1980-117 (September 28, 1979) and IRS AOD1981-108 (April 30, 1981).