## Facts

- California § 501(c)(3) health and human services nonprofits faced sharply increased liability insurance costs in “hard” markets, threatening continued operations.
- Member charities formed Nonprofits’ Insurance Alliance of California (NIAC) in 1988 as a California nonprofit mutual benefit corporation to provide liability coverage to eligible nonprofit members.
- NIAC operated as a group self-insurance risk pool: members paid an initial subscription fee and ongoing premiums; NIAC maintained reserves, obtained reinsurance, and met capitalization and regulatory requirements.
- NIAC obtained loans from charitable foundations on favorable terms to support capitalization and operations.
- NIAC priced coverage below commercial insurer rates, producing estimated member savings of about 53%, 35%, and 22% in its first three years.
- NIAC sought recognition as exempt under I.R.C. § 501(c)(3) and § 501(a); the IRS denied the application, concluding NIAC’s activities were commercial-type insurance within I.R.C. § 501(m).

## Issues

1. Whether NIAC was organized and operated exclusively for charitable purposes within I.R.C. § 501(c)(3) despite operating an insurance-type risk pool for member charities.
2. Whether a substantial part of NIAC’s activities constituted “providing commercial-type insurance” under I.R.C. § 501(m), precluding exemption.
3. Whether NIAC’s below-market pricing qualified for the § 501(m)(3)(A) exception for insurance provided “at substantially below cost to a class of charitable recipients.”

## Decision

- The Court of Federal Claims held NIAC was not entitled to recognition as a § 501(c)(3) organization.
- The court concluded NIAC’s primary activity—pooling risk and providing liability coverage in exchange for premiums—was commercial-type insurance under § 501(m).
- The court rejected NIAC’s reliance on the “substantially below cost” exception, finding NIAC’s pricing and structure resembled ordinary insurance operations rather than charitable, below-cost assistance.
- Judgment was entered for the United States, sustaining the IRS’s denial of exemption.

## Legal Principles

- For federal tax purposes, an arrangement that includes risk shifting and risk distribution through premium-based coverage and pooling can be treated as insurance in substance.
- I.R.C. § 501(m) operates as a limiting provision: even if an entity supports charitable organizations, it is not exempt under § 501(c)(3) if a substantial part of its activities consists of providing commercial-type insurance.
- “Commercial-type insurance” focuses on the nature of the activity (insurance sold for premiums, reserves, reinsurance, and participation in regulated insurance markets), not the nonprofit form of the insurer or the exempt status of insureds.
- The § 501(m)(3)(A) exception for insurance provided “at substantially below cost” requires more than rates lower than commercial competitors; the overall economics and structure must reflect genuinely below-cost charitable provision rather than actuarially sound, standard insurance operations.

## Conclusion

The court upheld denial of § 501(c)(3) status to a nonprofit risk pool serving only charities because its central activity was commercial-type insurance within § 501(m), and its below-market premiums did not satisfy the statutory safe harbor for insurance provided at substantially below cost to charitable recipients.


Nonprofits’ Ins. All. of Cal. v. United States, 32 Fed. Cl. 277 (Fed. Cl. 1994)