## Facts

- Paratransit Insurance Corporation (PIC) was formed in 1988 as a California nonprofit mutual benefit insurance corporation.
- PIC’s members were tax-exempt social service organizations operating transportation programs for elderly, disabled, and needy individuals.
- PIC provided automobile liability insurance to its members.
- PIC set premiums using actuarial factors (e.g., deductibles, number of vehicles, passenger volume, and operating radius), and members paid fixed fees per insured vehicle.
- PIC pooled premiums and fees to pay claims and cover operating expenses; it operated as a self-supporting insurer rather than relying on charitable contributions to subsidize coverage.
- PIC’s rates were generally 20% to 80% lower than those available from commercial insurers for similar coverage.
- The IRS determined PIC did not qualify for exemption under I.R.C. § 501(c)(3); PIC sought declaratory relief in the Tax Court under I.R.C. § 7428 based on a stipulated administrative record.

## Issues

1. Whether PIC qualified as an organization described in I.R.C. § 501(c)(3) and exempt from tax under I.R.C. § 501(a).
2. Whether a substantial part of PIC’s activities consisted of providing “commercial-type insurance” within the meaning of I.R.C. § 501(m)(1), barring exemption.
3. Whether PIC’s insurance fell within the I.R.C. § 501(m)(3)(A) exception for insurance “provided at substantially below cost.”

## Decision

- The Tax Court sustained the Commissioner’s denial of exempt status.
- The court held that a substantial part of PIC’s activities consisted of providing commercial-type insurance under § 501(m)(1).
- The court held that PIC did not satisfy the § 501(m)(3)(A) exception because its insurance was not provided at substantially below PIC’s own cost.

## Legal Principles

- I.R.C. § 501(m)(1) restricts exemption for otherwise qualifying § 501(c)(3) organizations if a substantial part of their activities consists of providing commercial-type insurance.
- Whether insurance is “commercial-type” turns on the nature of the activity (e.g., underwriting and pricing methods comparable to commercial insurers), not on the charitable status of insureds or the downstream public benefit.
- The § 501(m)(3)(A) exception is cost-based: charging less than commercial competitors does not suffice if premiums and fees cover claims and operating expenses and the organization does not consistently provide coverage for less than its total cost.
- Where the insurance function is the organization’s central activity, it constitutes a “substantial part” for purposes of § 501(m)(1).

## Conclusion

PIC was not exempt under § 501(a) because providing actuarially priced automobile liability coverage to members was a substantial activity constituting commercial-type insurance under § 501(m), and PIC did not show that it provided insurance at substantially below its own cost under § 501(m)(3)(A).


Paratransit Ins. Corp. v. Commissioner, 102 T.C. 745 (1994)