(2) such organization is organized and operated on a cooperative basis and allocates or pays, within 8 1/2 months after the close of its taxable year, all net earnings to patrons on the basis of services performed for them; * * *

* * *

For purposes of this title, any organization which, by reason of the preceding sentence, is an organization described in subsection (c)(3) and exempt from taxation under subsection (a), shall be treated as a hospital and as an organization referred to in section 503(b)(5).

[Emphasis added.]

In sum, section 1994 U.S. Tax Ct. LEXIS 53">*70 501(e) sets forth the standards that an organization must satisfy to qualify as a cooperative hospital service organization, including a statutory list of the services that such an organization may provide for its member hospitals. See HCSC-Laundry v. United States, 450 U.S. 1">450 U.S. 1, 450 U.S. 1">8 (1981). As discussed in more detail below, Congress amended section 501(e)(1)(A) in 1988 by adding the parenthetical phrase "(including the purchasing of insurance on a group basis)" immediately after the word "purchasing".

Despite the enactment of section 501(e), disputes continued to arise concerning the exempt status of various types of hospital cooperatives. In Rev. Rul. 69-160, 1969-1 C.B. 147, the Commissioner denied section 501(e) exempt status to a cooperative organization established to provide personnel training, data processing, purchasing, and laundry services for its member hospitals. Relying on H. Conf. Rept. 1533, 90th Cong., 2d Sess. 43 (1968), 1968-2 C.B. 801, 814, the 103 T.C. 140">*150 Commissioner concluded that section 501(e)(1)(A) sets forth an exclusive list of the services that a cooperative1994 U.S. Tax Ct. LEXIS 53">*71 hospital service organization may provide and remain qualified for exempt status. The Commissioner denied the requested exemption because the organization was providing laundry services, a service not listed in subsection (e)(1)(A). Confronted with similar facts, we held that a cooperative organization established to provide laundry services for its member hospitals is a feeder organization under section 502. See 74 T.C. 213">Associated Hosp. Servs., Inc. v. Commissioner, supra.

Ultimately, the issue of the exempt status of cooperative laundries made its way to the Supreme Court. Specifically, in 450 U.S. 1">HCSC-Laundry v. United States, supra at 8, the Supreme Court held that a cooperative organization established to provide laundry services for its member hospitals does not qualify for exempt status on the ground that laundry services are not listed in section 501(e)(1)(A).

Putting section 501(e) and cooperative hospital service organizations aside for the moment, we turn our attention to section 501(m), a provision designed to restrict the exempt status of organizations (such as Blue Cross and Blue Shield) involved in commercial type insurance1994 U.S. Tax Ct. LEXIS 53">*72 activities. See H. Rept. 99-426, at 662-665 (1986), 1986-3 C.B. (Vol. 2) 1, 662-665. Section 501(m), codified under the Tax Reform Act of 1986, Pub. L. 99-514, sec. 1012(a), 100 Stat. 2390, provides in pertinent part:

SEC. 501(m). Certain Organizations Providing Commercial-Type Insurance Not Exempt From Tax. --

(1) Denial of tax exemption where providing commercial-type insurance is substantial part of activities. -- An organization described in paragraph (3) or (4) of subsection (c) shall be exempt from tax under subsection (a) only if no substantial part of its activities consists of providing commercial-type insurance.

Section 501(m)(1) provides that an organization is not entitled to exempt status under section 501(a) if a substantial part of its activities consists of providing commercial type insurance. While section 501(m) does not contain an affirmative definition of "commercial-type insurance", subsection (m)(3) provides a list of five types of activities that are not considered to fall within the meaning of the term, none of which relates to the types of insurance involved in this case.

103 T.C. 140">*151 Recently, in Paratransit Ins. Corp. v. Commissioner, 102 T.C. 745">102 T.C. 745 (1994),1994 U.S. Tax Ct. LEXIS 53">*73 we sustained the Commissioner's determination denying tax exempt status to a California corporation organized for the purpose of providing automobile liability insurance to tax-exempt social service organizations. In particular, we agreed with the Commissioner that the corporation was providing "commercial-type insurance" within the meaning of section 501(m).

The final development bearing upon the issues raised in this case concerns, as noted above, a 1988 amendment to section 501(e) clarifying that a cooperative hospital service organization may purchase insurance. In particular, section 6202(a) of the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647, 102 Stat. 3730, provided for an amendment to subsection (e)(1)(A) to add the parenthetical phrase "(including the purchasing of insurance on a group basis)" after the word "purchasing". There is little in the way of legislative history explaining the 1988 amendment to section 501(e). H. Conf. Rept. 100-1104, at 209 (1988), 1988-3 C.B. 473, 699, states in pertinent part:

2. Purchasing of insurance by tax-exempt hospital service organizations

Present Law

Section 501(e) provides tax-exempt1994 U.S. Tax Ct. LEXIS 53">*74 status for hospital service organizations operated solely to perform, on a centralized basis, one or more of the following enumerated services: purchasing, data processing, warehousing, billing and collection, food, clinical, industrial engineering, laboratory, printing, communications, record center, and personnel services.

House Bill

No provision.

Senate Amendment

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.

Conference Agreement

The conference agreement follows the Senate amendment.

In sum, a tax-exempt hospital service organization may purchase insurance on a group basis for its member hospitals.

103 T.C. 140">*152 With the foregoing as background, we return to the central question of whether petitioners qualify for tax-exempt status. The parties focus on two issues: (1) Whether petitioners are engaged in "purchasing insurance on a group basis" as contemplated under section 501(e)(1)(A) and1994 U.S. Tax Ct. LEXIS 53">*75 (2) whether petitioners' activities consist of "providing commercial-type insurance" within the meaning of section 501(m). Our task is to properly construe the disputed statutory provisions.

In cases requiring statutory construction, it is well established that the statute is to be construed so as to give effect to its plain and ordinary meaning unless to do so would produce absurd or futile results. United States v. American Trucking Associations, Inc., 310 U.S. 534">310 U.S. 534, 310 U.S. 534">543-544 (1940). Moreover, where a statute is clear on its face, we require unequivocal evidence of legislative purpose before construing the statute so as to override the plain meaning of the words used therein. Huntsberry v. Commissioner, 83 T.C. 742">83 T.C. 742, 83 T.C. 742">747-748 (1984).

We begin with petitioners' contention that they qualify for exempt status under section 501(e)(1)(A) as cooperative hospital service organizations. Section 501(e)(1)(A) provides in pertinent part that a cooperative hospital service organization shall be treated as an organization organized and operated exclusively for charitable purposes if the organization performs1994 U.S. Tax Ct. LEXIS 53">*76 one of the specific services listed therein. Petitioners rely on the portion of subsection (e)(1)(A) that provides that a cooperative hospital service organization may engage in "the purchasing of insurance on a group basis".

Notably, no issue has been raised as to whether petitioners' activities involve "insurance" as defined by the Supreme Court, this Court, and others. See Helvering v. LeGierse, 312 U.S. 531">312 U.S. 531, 312 U.S. 531">539 (1941) (holding that an insurance transaction must involve risk-shifting and risk-distribution); AMERCO & Subs. v. Commissioner, 96 T.C. 18">96 T.C. 18, 96 T.C. 18">38 (1991), affd. 979 F.2d 162">979 F.2d 162 (9th Cir. 1992); Harper Group & Subs. v. Commissioner, 96 T.C. 45">96 T.C. 45, 96 T.C. 45">57 (1991), affd. 979 F.2d 1341">979 F.2d 1341 (9th Cir. 1992); Sears, Roebuck & Co. v. Commissioner, 96 T.C. 61">96 T.C. 61, 96 T.C. 61">96-97 (1991), supplemented by 96 T.C. 671">96 T.C. 671, affd. in part, revd. in part 972 F.2d 858">972 F.2d 858 (7th Cir. 1992). Under the circumstances, 103 T.C. 140">*153 we assume, without deciding, that the arrangements in question constitute1994 U.S. Tax Ct. LEXIS 53">*77 insurance.

As a result, we are left to decide whether petitioners' activities amount to "purchasing" insurance. In addressing petitioners' argument on this point, we begin with the admonition that

Exemptions as well as deductions are matters of legislative grace, and a taxpayer seeking either must show that he comes squarely within the terms of the law conferring the benefit sought. [Nelson v. Commissioner, 30 T.C. 1151">30 T.C. 1151, 30 T.C. 1151">1154 (1958).]

The implications of the disputed phrase "purchasing of insurance on a group basis" is not further developed in section 501(e) or elsewhere in the Internal Revenue Code. Accordingly, we turn to the plain and ordinary meaning of the words used in the statute. 310 U.S. 534">United States v. American Trucking Associations, Inc., supra. From our 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. In so reading the phrase, we find that the operative word is "purchasing". Unfortunately for petitioners, 1994 U.S. Tax Ct. LEXIS 53">*78 we cannot agree that their activities amount to purchasing insurance.

Petitioners are organized and operated as separate entities under Florida law to provide a means by which their respective member hospitals can join together as a group to insure against professional liability (malpractice) and workers' compensation claims. In particular, petitioners provide centralized, cooperative insurance services to their member hospitals through the employment of actuaries, risk managers, underwriters, accountants, and other insurance consultants. Far from purchasing insurance, petitioners have assumed the role of the insurer. In the absence of specific statutory language permitting a cooperative hospital service organization to provide insurance services in this manner, we are compelled to conclude that petitioners' activities preclude them from qualifying for exempt status under section 501(e)(1)(A). See HCSC-Laundry v. United States, 450 U.S. 1">450 U.S. 1, 450 U.S. 1">8 (1981).

Looking past the plain language of the statute, petitioners assert that the legislative history of the provision indicates 103 T.C. 140">*154 that Congress intended the phrase "purchasing of insurance on a group1994 U.S. Tax Ct. LEXIS 53">*79 basis" to be broadly interpreted to permit cooperative hospital service organizations "to provide malpractice and general comprehensive insurance on a self-insurance basis." Petitioners further assert that Congress added the parenthetical phrase to subsection (e)(1)(A) in an effort to "override" the Commissioner's restrictive view of the provision as articulated in G.C.M. 39122 (Jan. 25, 1984) and G.C.M. 39764 (Oct. 13, 1988). We disagree.

As indicated, there is a paucity of legislative history on the provision. H. Conf. Rept. 100-1104 (1988), 1988-3 C.B. 473, 699, states in pertinent part:

Senate Amendment

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.

Although the preceding material supports petitioners' assertion that the phrase in question was added to "clarify" the law, there is no evidence to support 1994 U.S. Tax Ct. LEXIS 53">*80 petitioners' contention that Congress intended for the provision to be liberally or broadly construed. Given that section 501(e)(1)(A) was amended shortly after the enactment of section 501(m) (which limits the tax-exempt status of organizations providing commercial type insurance), a more plausible explanation is that Congress intended the amendment to serve as clarification that a cooperative hospital service organization may purchase insurance on behalf of its members without risking a violation of subsection (m). In any event, it cannot be said that the legislative history provides unequivocal evidence of legislative purpose sufficient to construe section 501(e)(1)(A) to override the plain meaning of the words used therein. Huntsberry v. Commissioner, 83 T.C. 742">83 T.C. 747-748.

Similarly, there is little support for petitioners' contention that Congress was attempting to express its disagreement with a particular general counsel memorandum. The legislative history does not contain a single citation of a general counsel memorandum. Moreover, petitioners' argument concerning G.C.M. 39122 is particularly suspect given1994 U.S. Tax Ct. LEXIS 53">*81 that Congress cited that particular G.C.M. with approval when 103 T.C. 140">*155 section 501(m) was enacted in 1986, a mere 2 years before the amendment to section 501(e). See H. Rept. 99-426, at 663 n.2 (1986), 1986-3 C.B. (Vol. 2) 1, 663 n.2.

Contrary to petitioners' view, our interpretation of section 501(e)(1)(A) is in harmony with the policies underlying the provision. It will be remembered that section 502 (the feeder organizations 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. S. Rept. 2375, 81st Cong., 2d Sess. 28-29, 35 (1950), 1950-2 C.B. 483, 504-505. (As discussed more fully below, similar concerns motivated Congress to enact section 501(m)). Giving due regard to these policy concerns, and viewing section 501(e) as the limited exception to section 502 that it is, see 450 U.S. 1">HCSC-Laundry v. United States, supra, we decline petitioners' invitation to enlarge upon the statutory language as written.

Petitioners contend that our interpretation1994 U.S. Tax Ct. LEXIS 53">*82 of section 501(e)(1)(A) renders the provision meaningless and produces a discriminatory result. In particular, petitioners maintain that a cooperative hospital service organization relegated to purchasing group insurance from licensed insurance carriers will provide no real benefits to its members. Further, petitioners find it unfair that their efforts to self-insure on a group basis render them ineligible for exempt status while a larger hospital with the financial strength to self-insure in-house is permitted to do so without jeopardizing its exemption. See Rev. Rul. 78-41, 1978-1 C.B. 148.

We disagree with the proposition that our interpretation of section 501(e)(1)(A) renders the provision meaningless. A cooperative hospital service organization that purchases insurance for its members on a group basis provides a valuable service to its member hospitals. Undoubtedly, member hospitals will realize direct savings due to the reduced need for in-house personnel required to handle insurance-related matters. See, e.g., Hospital Bureau of Standards & Supplies, Inc. v. United States, 141 Ct. Cl. 91">141 Ct. Cl. 91, 158 F. Supp. 560">158 F. Supp. 560, 158 F. Supp. 560">563 (1958).1994 U.S. Tax Ct. LEXIS 53">*83 In addition, member hospitals will likely benefit in the form of lower insurance premiums as a result of the cooperative's ability to use its size to negotiate from a position of power.

103 T.C. 140">*156 We likewise reject petitioners' contention that fairness and policy considerations mandate a ruling in their favor. While some might empathize with petitioners, the law simply does not provide for tax-exempt status under the circumstances presented. If a remedy is to be had at all, it must be obtained through legislative change.

2. Section 501(m)

Respondent determined in the alternative that section 501(m) operates to deny petitioners exempt status under section 501(a). While our analysis under section 501(e)(1)(A) provides an independent basis for denying petitioners the declaration they seek, we agree with respondent that section 501(m) serves as equally sound authority for reaching the same result.

Section 501(m) provides that an organization described in section 501(c)(3) is not entitled to exempt status under section 501(a) if a substantial part of its activities consists of providing commercial type insurance. As previously mentioned, the parties do not dispute that petitioners' 1994 U.S. Tax Ct. LEXIS 53">*84 activities involve "insurance". The parties do disagree, however, whether petitioners are "providing" insurance, and if so, whether the insurance is properly characterized as "commercial-type" insurance.

In the first instance, petitioners maintain that section 501(m) does not apply because their respective members (rather than petitioners themselves) are providing the insurance in question. Petitioners argue in pertinent part that

The Petitioners provide actuarial, accounting, underwriting, claims payment and other similar services, and hold assets to fund the program, but ultimately, it is the member hospitals of the Petitioners that provide the insurance. The Tax Commissioner has admitted * * * that the Petitioners employ an independent actuary to calculate the needed resources to meet the obligations that the member hospitals collectively have agreed to assume, plus operational expenses. If the Petitioners' expected claims and expenses exceed the resources on hand, the Petitioners assess the member hospitals. If the resources prove excessive, the excess is returned or allocated to the member hospitals. These procedures are in place because the member hospitals, not the 1994 U.S. Tax Ct. LEXIS 53">*85 Petitioners, are providing the insurance.

Contrary to petitioners' position, it is evident that petitioners are providing the insurance in question. The record in this case amply demonstrates that petitioners are established 103 T.C. 140">*157 as separate entities under Florida law to provide a means by which their respective member hospitals can join together as a group to insure against professional liability (malpractice) and workers' compensation claims. Moreover, it is petitioners, rather than their members, that provide the services essential to the administration of the insurance programs. Specifically, petitioners provide actuarial, accounting, underwriting, claims payment, and similar services. Given petitioners' integral and central role in the insurance programs, it follows that petitioners, not their members, are providing the insurance in question. Indeed, to adopt petitioners' position would be tantamount to ignoring petitioners as entities separate and distinct from their several members. This we cannot do. Cf. Moline Properties v. Commissioner, 319 U.S. 436">319 U.S. 436, 319 U.S. 436">438-439 (1943).

Nor are we persuaded that petitioners' practice of adjusting member1994 U.S. Tax Ct. LEXIS 53">*86 premiums to reflect actual (as opposed to projected) loss experience mandates a finding that petitioners' members are providing insurance. As we see it, this aspect of the insurance programs merely assures that petitioners operate on a "break-even" basis and serves as a means for petitioners to shift the risk of insurance losses from their individual members to the whole group. It is this characteristic, petitioners' ability to shift the risk of loss, that distinguishes petitioners (the insurers) from their members (the insured). Paratransit Ins. Corp. v. Commissioner, 102 T.C. 745">102 T.C. 745, 102 T.C. 745">754 (1994). Simply stated, we see no support in the record for the proposition that petitioners' members are providing insurance.

Petitioners argue in the alternative that the insurance in question is not "commercial-type" insurance within the meaning of section 501(m). Relying on a 1986 U.S. General Accounting Office report discussing the withdrawal of commercial insurance companies from the Florida market (a document which is not a part of the record in this case, nor have we been asked to take judicial notice of its existence), petitioners assert that it is nonsensical1994 U.S. Tax Ct. LEXIS 53">*87 to conclude that they are providing commercial type insurance. Petitioners argue that

103 T.C. 140">*158 Congress was concerned that tax-exempt organizations that engaged in insurance activities would enjoy an unfair advantage vis-a-vis their for-profit competitors. * * *

The problem that Code Section 501(m) was intended to address simply did not include the situation in Florida. In fact, the Petitioners were formed out of necessity, because commercial carriers refused to write the types of coverage offered by the Petitioners.

The term "commercial-type" insurance is not defined in section 501(m), nor is it defined elsewhere in the Internal Revenue Code. While, as already noted, section 501(m)(3)(A) does set forth a list of several activities that Congress expressly excepted from the reach of the term "commercial-type" insurance, petitioners do not contend, nor could they, that their activities fall within any of the exceptions.

Under the circumstances, we turn to the plain meaning of the words used in the statute. In employing the term "commercial-type" insurance, we understand that Congress intended for section 501(m) to apply to those organizations providing any "type of insurance that1994 U.S. Tax Ct. LEXIS 53">*88 can be purchased in the commercial market." 102 T.C. 745">Paratransit Insurance Corp. v. Commissioner, supra at 754. There is no dispute that hospital professional liability and workers' compensation insurance are normally offered by commercial insurers. Accordingly, we conclude that petitioners are providing commercial type insurance within the meaning of section 501(m).

We find explicit support for our conclusion that petitioners are providing "commercial-type" insurance as contemplated under section 501(m) in H. Rept. 99-426, at 663-665 (1986), 1986-3 C.B. (Vol. 2) 1, 663-665. The House report includes a discussion of the concerns leading to the enactment of section 501(m) as follows:

Present Law

* * *

The providing of insurance benefits by an organization otherwise described in sec. 501(c)(3) generally is considered a commercial activity 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 is1994 U.S. Tax Ct. LEXIS 53">*89 not entitled to tax exemption because the activity (i.e., the provision of insurance) is inherently commercial in nature. ²

Nevertheless, at least one major organization, which provides life insurance and annuities to employees of tax-exempt educational institutions, 103 T.C. 140">*159 has been recognized as a charitable organization by the IRS. [Fn. ref. omitted.]

* * *

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 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.

In addition, the availability of tax-exempt status under present law has allowed some large insurance entities to compete directly with commercial insurance companies. * * * [Citing the rise of Blue Cross/Blue Shield1994 U.S. Tax Ct. LEXIS 53">*90 organizations.]

* * *

Explanation of Provision

Under the bill, an organization described in sections 501(c)(3) and (4) of the Code is exempt from tax only if no substantial part of its activities consists of providing commercial-type insurance. * * *

In the case of such a tax-exempt organization, the activity of providing commercial-type insurance is treated as an unrelated trade or business (sec. 513) but, in lieu of the usual tax on unrelated trade or business taxable income, the unrelated trade or business activity is taxed under the rules relating to insurance companies (Subchapter L).

For this purpose, commercial-type insurance generally is any insurance of a type provided by commercial insurance companies. * * *

[Emphasis added.]

We note that H. Conf. Rept. 99-841, at II-346 (1986), 1986-3 C.B. (Vol. 4) 1, 346, generally follows the bill of the House Committee on Ways and Means with modifications that are not relevant to this discussion. Moreover, the specific concerns relating to unfair1994 U.S. Tax Ct. LEXIS 53">*91 competition articulated in the report of the House Committee on Ways and Means are echoed in the Staff of the Joint Comm. on Taxation, General Explanation of the Tax Reform Act of 1986, at 583-586 (J. Comm. Print 1987).

Although concerns relating to the activities of Blue Cross and Blue Shield organizations may have precipitated the 103 T.C. 140">*160 codification of section 501(m), see Shill, "Revocation of Blue Cross & Blue Shield's Tax-Exempt Status an Unhealthy Change? An Analysis of the Effect of the Tax Reform Act of 1986 on the Taxation of Blue Cross & Blue Shield and Health Insurance Activities", 6 B.U.J. Tax Law 147, 147 n.2 (1988), the report of the House Committee on Ways and Means quoted above reflects Congress' view that organizations engaged in insurance pooling or group self-insurance arrangements (including malpractice insurance) are involved in inherently commercial activities. Congress resolved to deny exempt status to organizations engaged in such activities in order to ensure that such organizations would not enjoy an unfair competitive advantage over their commercial counterparts.

As we see it, petitioners' activities clearly fall within the literal and intended scope1994 U.S. Tax Ct. LEXIS 53">*92 of section 501(m). In this regard, we reject petitioners' argument that the dearth of commercial insurers in the Florida market renders section 501(m) inapplicable in this case. In short, whether an organization seeking exempt status happens to be competing with a commercial insurer at any particular point in time simply begs the question whether granting exempt status will tend to provide the organization with an unfair competitive advantage over commercial insurers. Focusing on the latter issue, and Congress' obvious desire to provide a level playing field for commercial insurers, we hold that section 501(m) applies to deny petitioners exempt status.

In sum, we hold that petitioners do not qualify as organizations described in section 501(c)(3), and thus they are not exempt from Federal income taxation under section 501(a). In light of the foregoing, we see no need to address respondent's determination under section 502.

To reflect the foregoing,

Decisions will be entered for respondent.