Section 501(m), as currently written, was added to the Code by section 1012(a) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2390-2391. ¹¹ The House Ways and Means Committee report strongly indicates that Congress intended a broad definition of the term "commercial-type insurance" when it added the current version of section 501(m). ¹² See H. Rept. 99-426, at 662-665 (1985), 1986-3 C.B. (Vol. 2) 1, 662-665. Pertinent portions of the House report read as follows:

2. Taxation of Tax-Exempt Organizations Engaged in Insurance Activities (sec. 1012 of the bill and sec. 501(m) of the Code)

Present Law

* * *

The providing of insurance benefits by an organization otherwise described in sec. 501(c)(3) generally is considered a commercial activity1994 U.S. Tax Ct. LEXIS 37">*51 that does not meet the requirements for tax-exempt status. For example, if two or more unrelated tax-exempt organizations pool funds for the purpose of accumulating and holding funds to be used to satisfy malpractice claims against the organizations, the organization holding the pooled funds is not entitled to tax exemption because the activity (i.e., the provision of insurance) is inherently commercial in nature.

* * *

Reasons for Change

The committee is concerned that exempt charitable and social welfare organizations that engage in insurance activities are engaged in an activity whose nature and scope is so inherently commercial that tax exempt 102 T.C. 745">*753 status is inappropriate. The committee believes that the tax-exempt status of organizations engaged in insurance activities provides an unfair competitive advantage to these organizations. The committee further believes that the provision of insurance to the general public at a price sufficient to cover the costs of insurance generally constitutes an activity that is commercial.

* * *

Explanation of Provision

Under the bill, an organization described in sections 501(c)(3) and (4) of the Code is exempt from tax 1994 U.S. Tax Ct. LEXIS 37">*52 only if no substantial part of its activities consists of providing commercial-type insurance. For this purpose, no substantial part has the meaning given to it under present law applicable to such organizations. See, e.g., Haswell v. U.S., 500 F.2d 1133">500 F.2d 1133 (Ct. Cl. 1974); Seasongood v. Commissioner, * * * [227] F.2d 907 (6th Cir. 1955); * * *

* * *

commercial-type insurance generally is any insurance of a type provided by commercial insurance companies. * * *

[Fn. ref. omitted; citations omitted; emphasis added.]

1994 U.S. Tax Ct. LEXIS 37">*53 Several aspects of the House report deserve comment. First, in the portion entitled "Present Law", the House report provides an example which describes petitioner's situation almost perfectly: two or more unrelated tax-exempt organizations pooling funds in a separate entity "to be used to satisfy malpractice claims against the organizations". And in that example, the House report unequivocally states that "the organization holding the pooled funds is not entitled to tax exemption because the activity (i.e., the provision of insurance) is inherently commercial in nature." Significantly, the House report refers generically to "insurance", and its reference to malpractice insurance was introduced by the phrase "For example". Certainly, there is no basis whatsoever to conclude that automobile liability insurance would not be regarded the same as malpractice insurance in this context.

In the portion entitled "Reasons for Change", the House report again refers in general terms to "insurance" activity, which it describes as "an activity whose nature and scope is so inherently commercial that tax exempt status is inappropriate." H. Rept. 99-426, supra at 664, 1986-3 C.B. (Vol. 2) at 664.

1994 U.S. Tax Ct. LEXIS 37">*54 Also, the portion of the House report captioned "Explanation of Provision" states that "commercial-type insurance 102 T.C. 745">*754 generally is any insurance of a type provided by commercial insurance companies." H. Rept. 99-426, supra at 665, 1986-3 C.B. (Vol. 2) at 665 (emphasis added). It is clear from the passages in the report of the House Ways and Means Committee that the term "commercial-type insurance", as used in section 501(m), encompasses every type of insurance that can be purchased in the commercial market. ¹³

Every relevant aspect of the administrative record indicates that petitioner provides "commercial-type insurance" 1994 U.S. Tax Ct. LEXIS 37">*55 within the meaning of section 501(m). First, the purpose of the insurance pool established by petitioner is to shift the risk of potential tort liability from each of the individual insured paratransit organizations to petitioner. Through its receipt of premiums from multiple member organizations, petitioner diversifies the risk of liability for each individual member. The fact that petitioner in addition peripherally provides education and other forms of assistance to help member organizations control and manage losses does not alter the fact it fundamentally provides a means for spreading their individual risks of tort liability. Furthermore, the type of insurance petitioner offers to its members is basic automobile liability insurance, a type of insurance provided by a number of commercial insurance carriers.

Finally, the manner in which petitioner insures its members clearly bespeaks a commercial nature. Petitioner does not offer insurance to members based on need, or even at a uniform charge. Instead it determines member contributions by reference to factors affecting the level of risk insured by petitioner, e.g., total number of vehicles, number of passengers1994 U.S. Tax Ct. LEXIS 37">*56 per vehicle, radius of operation, etc. In short, petitioner calculates member premiums actuarially in precisely the same way that commercial insurers determine premiums for their customers. The commercial hue of such insurance fee arrangements has been noted by courts in cases decided under "pre-section 501(m)" law. See, e.g., American Association of Christian Sch. Voluntary Emp. Beneficiary Association Welfare Plan Trust v. United States, 663 F. Supp. 275">663 F. Supp. 275, 663 F. Supp. 275">277-278 (M.D. Ala. 1987), affd. 850 F.2d 1510">850 F.2d 1510, 850 F.2d 1510">1513-1514 (11th 102 T.C. 745">*755 Cir. 1988); Mutual Aid Association of the Church of the Brethren v. United States, 759 F.2d 792">759 F.2d 792, 759 F.2d 792">795-796 (10th Cir. 1985). Moreover, it should also be noted that petitioner directly insures members only up to a $ 100,000 level of coverage. Coverage above $ 100,000 is effected through reinsurance obtained by petitioner in the commercial market.

Petitioner on brief argues that Congress, by using the phrase "commercial-type insurance" in section 501(m), intended to cover only those situations where insurance is offered to the general public. Petitioner relies on the1994 U.S. Tax Ct. LEXIS 37">*57 following sentence in the House report:

The committee further believes that the provision of insurance to the general public at a price sufficient to cover the costs of insurance generally constitutes an activity that is commercial. [H. Rept. 99-426, supra at 664, 1986-3 C.B. (Vol. 2) at 664.]

This reference to the "general public" was deleted from the report of the Staff of the Joint Committee on Taxation in its General Explanation of the Tax Reform Act of 1986, at 504 (J. Comm. Print 1987). Furthermore, it must be remembered that section 501(m) was enacted to restrict rather than enlarge the categories of organizations that qualify for tax-exempt status under section 501(c)(3). And it is obvious from the example cited in the "Present Law" section of the House report that insurance pool arrangements -- including those, which like petitioner, involve unrelated, tax-exempt organizations -- were viewed as taxable activities even prior to enactment of section 501(m). The fact that the insurance provided by such pools was not available to the general public did not prevent them from having taxable status.

Moreover, if Congress had intended the phrase1994 U.S. Tax Ct. LEXIS 37">*58 "commercial-type insurance" in section 501(m)(1) to apply only to insurance available to the general public, then it would not have needed to enact the exceptions in section 501(m)(3)(C) and (D)¹⁴ to the definition of commercial-type insurance. 102 T.C. 745">*756 Both section 501(m)(3)(C) ("property or casualty insurance provided * * * by a church or convention * * * for such church or convention") and section 501(m)(3)(D) ("retirement or welfare benefits * * * [provided by] a church or a convention * * * for the employees * * * of such church or convention") describe insurance arrangements to which members of the general public clearly would not have access. Viewed against this backdrop of statutory provisions and legislative history, petitioner's argument is simply unpersuasive. Petitioner clearly provides "commercial-type insurance" as defined in section 501(m).

1994 U.S. Tax Ct. LEXIS 37">*59 Even if, as we have concluded above, petitioner does provide "commercial-type insurance" within the meaning of section 501(m)(1), it is not disqualified from tax exemption under section 501(a) by reason of section 501(m) if the proscribed activity, i.e., provision of commercial-type insurance, is not a "substantial part" of petitioner's overall activities. Sec. 501(m)(1). The House report states that the phrase "no substantial part", for purposes of section 501(m), "has the meaning given to it under present law applicable to such organizations. See, e.g., Haswell v. United States, 500 F.2d 1133">500 F.2d 1133 (205 Ct. Cl. 1974">205 Ct. Cl. 1974); Seasongood v. Commissioner, 1227 [sic] F.2d 907 (6th Cir. 1955)". H. Rept. 99-426, supra at 664, 1986-3 C.B. (Vol. 2) at 664. The cases referred to in the House report defined substantiality in regard to an organization's legislative or political activities. However, as the House report makes clear, Congress obviously intended to rely on that existing body of law in defining the term "substantial" for purposes of the proscription in section 501(m)(1) on insurance activities. In Seasongood v. Commissioner, 227 F.2d 907">227 F.2d 907, 227 F.2d 907">912 (6th Cir. 1955),1994 U.S. Tax Ct. LEXIS 37">*60 revg. 22 T.C. 671">22 T.C. 671 (1954), the Court of Appeals concluded that where "less than 5% of the time and effort of * * * [an organization] was devoted to * * * activities * * * found to be 'political'", such political activities "were not in relation to all of its other activities substantial, within the meaning of the section." In Haswell v. United States, 205 Ct. Cl. 421">205 Ct. Cl. 421, 205 Ct. Cl. 421">443-444, 500 F.2d 1133">500 F.2d 1133 (1974), the 102 T.C. 745">*757 Court of Claims held that where an organization applied approximately 16 to 20 percent of its total expenditures toward political activities during the years 1967 and 1968, its political activities were "more than [an] insubstantial" part of its overall activities, and therefore the organization did not qualify for tax exemption under section 501(c)(3).

We recognize that neither Seasongood nor Haswell purported to fix an automatic percentage for substantiality. Nevertheless, even the most cursory examination of petitioner's operations reveals that its insurance-related expenditures far exceed the percentages involved in Seasongood and Haswell. For example, on the basis of the figures1994 U.S. Tax Ct. LEXIS 37">*61 provided in petitioner's letter dated July 19, 1991, petitioner's "Total Claims Expenses" during the calendar years 1988, 1989, and 1990 were 40.11 percent, 67.74 percent, and 74.64 percent, respectively, of its total expenditures during each of those years. ¹⁵ Petitioner's insurance activities are unquestionably a substantial part of its operations within the meaning of section 501(m).

Petitioner nonetheless contends that it should not be denied tax exemption by reason of section 501(m), because it falls1994 U.S. Tax Ct. LEXIS 37">*62 within the exception in section 501(m)(3)(A) applicable to "insurance provided at substantially below cost to a class of charitable recipients". Petitioner's contention is without merit.

Passing the question whether petitioner's tax-exempt members are the "class of charitable recipients" contemplated by the statute, it is clear that petitioner has in any event failed to insure them at "substantially below cost", within the meaning of section 501(m)(3)(A). In an attempt to clarify the meaning of this phrase, the House report states "See, e.g., Rev. Rul. 71-529, 1971-2 C.B. 234 (relating to the meaning of substantially below cost)." H. Rept. 99-426, supra at 665, 1986-3 C.B. (Vol. 2) at 665. Rev. Rul. 71-529, 1971-2 C.B. 234, involved an organization formed to aid tax-exempt educational institutions "by assisting them to manage more 102 T.C. 745">*758 effectively their endowment or investment funds". ¹⁶ In the ruling, it was stated that

Most of the operating expenses of the organization, including the costs of the services of the investment counselors and the custodian banks, 1994 U.S. Tax Ct. LEXIS 37">*63 are paid for by grants from independent charitable organizations. The member organizations pay only a nominal fee for the services performed. These fees represent less than fifteen percent of the total costs of operation. [Id.]

The ruling concluded that, by performing such functions for the tax-exempt institutions at "a charge that is substantially below cost," the organization was "performing a charitable activity within the meaning of section 501(c)(3) of the Code." Id.

Applying this standard1994 U.S. Tax Ct. LEXIS 37">*64 to petitioner's operations, as described in its July 19, 1991, letter to the IRS, it is clear that petitioner comes nowhere near the mark. Revenues from member contributions, i.e., the sum of the amounts designated as "application fees" and "premiums-pooled layer", totaled $ 328,065, $ 930,327, and $ 1,212,757, respectively, for the years 1988, 1989, and 1990. Petitioner's total expenditures, including in-kind expenses (i.e., donated services), totaled $ 542,918, $ 1,164,381, and $ 1,444,429, respectively, during each of those years. Thus, even if we accept petitioner's questionable inclusion of its so-called in-kind expenses in its total expenditures, ¹⁷ its revenues from member contributions as a percentage of total expenditures are 60.43 percent, 79.90 percent, and 83.96 percent for the years 1988, 1989, and 1990, respectively. If in-kind expenses are subtracted, 102 T.C. 745">*759 then member contributions approach 100 percent of petitioner's total expenditures during each of those years.

1994 U.S. Tax Ct. LEXIS 37">*65 Petitioner also contends that "in determining substantially below costs the test should be applied against its administrative operating costs only" rather than its total expenditures, "including * * * [costs relating to] members' pool claim payments or reserve accounts." (Pet. Opening Brief at 11.) However, nothing in the legislative history or elsewhere supports such a notion. Indeed, the ruling cited in the House report, Rev. Rul. 71-529, 1971-2 C.B. 234, in describing the percentage of organizational costs attributable to member fees, specifically refers to "the total costs of [the organization's] operation." (Emphasis added.) Moreover, petitioner's contention flies in the face of common sense. It would require that, in determining whether insurance was provided at a price substantially below cost, we exclude from the calculation the very costs that relate to the insurance itself.

Petitioner further argues that in determining what is substantially below cost, we should look to the percentages referred to in 500 F.2d 1133">Haswell v. United States, supra, and other cases. But Haswell and the other cases have no relevance in this connection. 1994 U.S. Tax Ct. LEXIS 37">*66 The House report is quite clear on this point. Haswell is relevant only in determining the substantiality of an organization's commercial type insurance activities vis-a-vis its other activities. It is not the standard to be used in determining whether such insurance has been provided at substantially below cost. Petitioner does not qualify for the exception in section 501(m)(3)(A) for insurance provided at substantially below cost to a charitable class of recipients.

In view of the conclusion that we have reached in respect of section 501(m), we need not consider the Government's alternative positions that petitioner is disqualified for exemption either because it does not otherwise qualify as a section 501(c)(3) organization or because it is a feeder organization within the meaning of section 502.

Decision will be entered for respondent.