Internal Revenue Service
Revenue Ruling
Rev. Rul. 73-452
1973-2 C.B. 183
Sec. 501
IRS Headnote
Business league; insurance claimants guaranty organization. An organization
created under State statute to pay claims against insolvent fire and
casualty insurance companies qualifies for exemption as a business league
under section 501(c)(6) of the Code where membership in the organization is
required of all insurance companies writing fire and casualty insurance in
the State and its income is derived from membership assessments and claims
against the assets of the insolvent companies.
Full Text
Rev. Rul. 73-452
Advice has been requested whether the organization described below
qualifies for exemption from Federal income tax under section 501(c)(6) of
the Internal Revenue Code of 1954.
The organization is a nonprofit corporation created by State statute to pay
claims against insolvent insurance companies. All insurance companies
writing fire and casualty insurance in the State are required by statute to
be members of the organization.
The organization services and pays claims on policies issued by insurance
companies that have been adjudicated to be insolvent. Any person whose
claim is paid by the organization is deemed by State statute to have
assigned his rights under the policy to the organization to the extent of
his recovery from the organization. The organization periodically files
with the receiver or liquidator of the insolvent insurance company
statements of the claims paid by the organization and estimates of
anticipated claims on the organization to preserve the rights of the
organization against the assets of the insolvent insurance company.
The organization's income is from membership assessments, required by
statute, based on premiums written and amounts collected on claims against
the assets of insolvent insurance companies. Its disbursements are for
claims and miscellaneous administrative expenses.
Section 501(c)(6) of the Code provides for the exemption from Federal
income tax of business leagues not organized for profit, no part of the net
earnings of which inures to the benefit of any private shareholder or
individual.
Section 1.501(c)(6)-1 of the Income Tax Regulations defines a business
league as an association of persons having some common business interest,
the purpose of which is to promote such common interest. Its activities
should be directed towards the improvement of business conditions in one or
more lines of business as distinguished from the performance of particular
services for individual persons.
By assuring the payment of the above described claims and providing means
for their orderly liquidation, the organization is serving a quasi-public
function imposed by law which is directed at relieving a common cause of
hardship and distress of broad public concern in the field of insurance
protection. This function also serves an important common business interest
of the industry by meeting a widespread need which is incident to the field
of insurance, could not be effectively met in the ordinary course of the
individual insurance businesses of the members, and does not directly
enhance the profitability of such individual businesses.
Since the claims paid by the organization are assigned to the organization
by the original claimants, their payment does not cause any net earnings to
inure to the benefit of the insolvent insurance companies. The added
protection the organization's program affords policyholders is required by
the State of all fire and casualty companies and does not create any
competitive advantage for the member companies. It thus appears that the
organization's activities do not constitute the performance of particular
services for its individual members but are instead directed towards the
improvement of business conditions in a line of business. See Rev. Rul.
71-155, 1971-1 C.B. 152.
Accordingly, the organization is exempt from Federal income tax under
section 501(c)(6) of the Code.
Even though an organization considers itself within the scope of this
Revenue Ruling, it must file an application on Form 1024, Exemption
Application, in order to be recognized by the Service as exempt under
section 501(c)(6) of the Code. The application should be filed with the
District Director of Internal Revenue for the district in which is located
the principal place of business or principal office of the organization.
See section 1.501(a)-1 of the regulations.
