Florida Hospital Trust Fund v. Commissioner

United States Court of Appeals,

Eleventh Circuit.

No. 94-3377.

FLORIDA HOSPITAL TRUST FUND; Florida Hospital Excess Trust Fund
B; Florida Hospital Workers' Compensation Self-Insurance Fund,
Petitioners,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

Jan. 2, 1996.

Appeals from a Decision of the United States Tax Court.

Before TJOFLAT, Chief Judge, KRAVITCH, Circuit Judge, and HILL,
Senior Circuit Judge.

HILL, Senior Circuit Judge:

This tax appeal presents a narrow issue of first impression in

this Circuit and others: do three trust funds, organized to

provide a vehicle for small to mid-size member hospitals

reciprocally to "self" insure each other on a group basis against

hospital professional liability and workers' compensation claims,

qualify as tax-exempt "cooperative hospital service organizations"

for purposes of § 501(e) of the Internal Revenue Code of 1986, 26

U.S.C. § 501(e) (Code). Finding no clear error, we affirm the

decision of the Tax Court.

I. BACKGROUND

The salient facts are not in dispute. Appellants are three

trust funds1 that provide, through a board of trustees,

1
Appellants Florida Hospital Trust Fund (Trust Fund A) and
Florida Hospital Excess Trust Fund B (Trust Fund B) are
organizations established under Fla.Stat. § 627.357(2)(a) (1994)
to serve as medical malpractice risk management trust funds.
Trust Fund A has twenty-three member hospitals. It provides
insurance in favor of each of its members on a claims made basis
centralized, cooperative insurance services to their member

hospitals through the employment of actuaries, risk managers,

underwriters, accountants, and other insurance consultants. None

of the member hospitals are related. By written agreement, member

hospitals pool their resources reciprocally to self-insure, within

certain limits, against hospital professional and workers'

compensation liability. Under the terms of the two malpractice

liability funds agreements, the member hospitals jointly and

severally covenant and agree to pay the funds' obligations with the
right of indemnity among the members for each member's pro-rata

share of the obligation in accordance with a stated formula. Under

the terms of the workers' compensation fund agreement, the member

hospitals assume joint and several liability with respect to any

lawful awards entered against another member by the Division of

Workers' Compensation of the Florida Department of Labor and

Employment Security. The funds' only assets consist of their

with coverage per member up to $250,000 per claim with an annual
aggregate limit of one million dollars. Trust Fund B has
twenty-six members. It provides to its members excess coverage
on a claims made basis for coverage per member up to ten million
dollars per claim with an annual aggregate limit of ten million
dollars, in excess of a minimum retention of $250,000 per claim,
and an annual aggregate retention of one million dollars. Both
Trust Fund A and Trust Fund B are managed by a service agent and
regulated by the Florida Department of Insurance. Each provide
for the selection of a board of trustees to exercise the rights
of the members. Appellant Florida Hospital Workers' Compensation
Self-Insurance Fund (Trust Fund C) is an organization established
under Fla.Stat. § 440.57 (1991) to serve as a group self insurer
fund. Trust Fund C has thirty-one members and is regulated by
the Florida Department of Labor and Security, Division of
Workers' Compensation. Members of the three funds are either
government-run hospitals within the meaning of I.R.C. §
501(e)(1)(B)(iii) or exempt charitable organizations described in
I.R.C. § 501(c)(3). Neither the funds nor the member hospitals
undertake to provide insurance to or for any entity other than a
member hospital.
claims against member hospitals for their pro-rata share of fund

obligations. Insurance for each hospital is provided by all, with

the particular fund acting as agent for each. In practice, members

submit annually, aggregate amounts comparable to premiums based

upon an independent actuary's (or the National Council on

Compensation Insurance's) projection of each funds' anticipated

funding needs. Member payments—"premiums"—are later adjusted,

resulting in either an additional assessment or a refund or credit,

to reflect the particular trust fund's actual loss experience.

Each of the funds derive all of its income from amounts received

from member hospitals and investment income on such amounts. They

retain no earnings, allocating or paying all net income if any back

to member hospitals within eight and one-half months following the

close of each taxable year.

In 1990, the trust funds submitted to the Commissioner of the

Internal Revenue Service (Commissioner) applications for exemption

from tax under I.R.C. § 501(c)(3) (Forms 1023). Two of the funds

represented that their primary pose was to provide member hospitals

with coverage for hospital professional liability and the third

represented that its primary purpose was to provide workers'

compensation coverage to its members. The Commissioner issued

final adverse determination letters in 1992, denying the

applications on the basis that the trust funds' activities were not

covered by the list of exempt activities of cooperative hospital

service organizations under I.R.C. § 501(e).2

2
The Commissioner found:

You are not a cooperative hospital service organization
 After exhausting their administrative remedies, the trust

funds filed petitions with the Tax Court seeking declaratory

judgments under I.R.C. § 7428(a) that they were "cooperative

hospital service organizations" under I.R.C. § 501(e) and therefore

exempt from tax. Adjudicating the case on a stipulated

administrative record, the Tax Court concluded they were not.

Finding no clear error, we affirm.

II. STANDARD OF REVIEW

The Tax Court's finding that these trust funds were not

organized and operated exclusively for exempt purposes is one of

fact, subject to a clearly erroneous standard of review; this

standard is not altered by the existence of stipulated facts.

American Ass'n of Christian Schools Voluntary Employees Beneficiary

Ass'n Welfare Plan Trust v. United States, 850 F.2d 1510, 1513

(11th Cir.1988) (citing Senior Citizens Stores, Inc. v. United

States, 602 F.2d 711, 713 (5th Cir.1979) and Church by Mail, Inc.

v. Commissioner, 765 F.2d 1387, 1390 (9th Cir.1985)). We review de

novo, however, the ultimate legal conclusion that the trust funds

do not qualify for tax exempt status. American Ass'n of Christian

Schools, 850 F.2d at 1513.

described in section 501(e) of the Code because you are
not organized and operated solely to perform on a
centralized basis one or more services described in
section 501(e)(1)(A) for two or more exempt hospitals.
Further, a substantial part of your activities consists
of providing commercial-type insurance. Consequently,
section 501(m) precludes your exemption as an
organization described in section 501(c)(3). You are
not operated exclusively for exempt purposes within the
meaning of section 501(c)(3) of the Code. You are
operated for a substantial non-exempt commercial
purpose. Furthermore, you are a feeder organization
within the meaning of section 502.
 III. DISCUSSION

Congress enacted I.R.C. § 501(e) in 1968. See Revenue and

Expenditure Control Act of 1968, Pub.L. 90-364, § 109(a), 82 Stat.

269. It provides that a cooperative hospital service organization

shall be treated as an organization organized and operated

exclusively for charitable purposes pursuant to I.R.C. § 501(c)(3)

if:

(1) such organization is organized and operated solely—

(A) to perform, on a centralized basis, one or more of
the following services which, if performed on its own behalf
by a hospital which is an organization described in subsection
(c)(3) and exempt from taxation under subsection (a), would
constitute activities in exercising or performing the purpose
or function constituting the basis for its exemption: data
processing, purchasing, warehousing, billing and collection,
food, clinical, industrial engineering, laboratory, printing,
communications, record center, and personnel (including
selection, testing, training, and education of personnel)
services; and

(B) to perform such services solely for two or more
hospitals each of which is—

(i) an organization described in subsection (c)(3) which
is exempt from taxation under subsection (a).... (Emphasis
added).

In 1988, Congress amended I.R.C. § 501(e)(1)(A) to add the

parenthetical phrase "(including the purchasing of insurance on a

group basis )" after the word "purchasing" in the description of

qualified exempt activities (emphasis added). See Technical and

Miscellaneous Revenue Act of 1988, Pub.L. 100-647, § 6202(a), 102

Stat. 3730 (TAMRA '88).3

3
Despite the seemingly broad general language of I.R.C. §
501(c)(3), I.R.C. § 501(e)(1)(A) is the exclusive list of the
specific types of cooperative hospital service organizations that
are encompassed within the scope of I.R.C. § 501 as charitable
organizations. HCSC-Laundry v. United States, 450 U.S. 1, 4, 101
S.Ct. 836, 838, 67 L.Ed.2d 1 (1981) (a cooperative organization
 The trust funds contend that the statute was amended in

response to an overly restrictive position4 being taken by the

Commissioner, finding support for this position in the

Congressional Conference Report to TAMRA '88:

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.
(Emphasis added).

H.R.Rep. No. 1104, 100th Cong., 2d Sess. 209, 1988-3 C.B. 699.

The trust funds argue that this statutory language should be

broadly construed as Congress was effectively interchanging the

words "acquisition" or "providing" with the word "purchasing." The

legislative history, they claim, broadens the scope of qualified

insurance activities for I.R.C. § 501(e) purposes. They contend

the amendment should be viewed in the historical setting of the

late 1980's, when insurance coverage for hospitals in Florida was

in a state of crisis, with no known method of acquiring primary or

established to provide laundry services for its member hospitals
did not qualify for exempt status as laundry services were not
among those listed in I.R.C. § 501(e)(1)(A)).
4
The Commissioner issued G.C.M. 39122, CC: EE-36-82
(January 25, 1984), concluding that an organization formed by two
closely related (but legally separate) hospitals for the purpose
of providing malpractice and general comprehensive insurance on a
self-insurance basis did not qualify for an exemption under
I.R.C. § 501(c)(3) as the provision of various insurance services
on a cooperative basis is not one of the specifically enumerated
services permitted under I.R.C. § 501(e)(1)(A). But see Rev.Rul.
78-41, 1978-1 C.B. 148 (where a self-insurance trust created by a
single exempt hospital for the sole purpose of accumulating and
holding funds to be used to satisfy malpractice claims against
the hospital, and from which the hospital directs the
bank-trustee to make payments to claimants, was determined by the
Commissioner to be operated exclusively for charitable purposes
and exempt from tax under I.R.C. § 501(c)(3)).
excess professional liability insurance. To view the amendment to

I.R.C. § 501(e)(1)(A) restrictively, the trust funds argue, would

effectively nullify the parenthetical language added by TAMRA '88

and discriminate in favor of larger hospitals with the financial

strength to self-insure on an in-house basis.

The Tax Court disagreed. Finding that the plain and ordinary

meaning, United States v. American Trucking Associations, Inc., 310

U.S. 534, 543-44, 60 S.Ct. 1059, 1063-64, 84 L.Ed. 1345 (1940), of

the "fairly specific" statute should be construed narrowly, the Tax

Court refused to view the terms "purchasing" and "providing"

interchangeably. From its 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.5 The Tax Court found that "[f]ar from

purchasing insurance, petitioners have assumed the role of

insurer,"6 extending insurance benefits in return for premiums

received based on the risks involved—the same as those typically

5
The trust funds contend that the effect of this
interpretation is that a group insurance policy must be purchased
from a licensed insurance carrier that would hold and own all
reserves, provide all services, and collect all premiums,
negating the need to create a separate entity known as a
cooperative hospital service organization. This interpretation,
the trust funds argue, is also incorrectly premised on the
availability of such insurance in the marketplace.
6
Commercial insurance companies do, themselves, insure,
taking on the risks of loss in return for premiums. Here, the
funds are set up so that they have no ultimate risk, having the
right to enforced "contributions" from the member hospitals,
pro-rata, to cover all losses and expenses. Indeed, even if one
or more members should become insolvent, apparently each other
member remains liable for the losses of any member, with a right
of indemnity—perhaps a hollow right—against the insolvent ones.
provided by commercial insurance companies.7

From a public policy standpoint, we empathize with the trust

funds' position. It does appear that the Tax Court's

interpretation may inadvertently yet unfairly discriminate in favor

of large tax-exempt and governmental hospitals or hospital systems

with the advantage of in-house self-insurance while denying this

method of acquiring insurance to small to mid-size hospitals. This

is ironic given the stipulated fact that no commercial insurer

carrier even wanted the smaller hospitals' business in the late

1980's. By definition, therefore, there can be no overriding

anti-competitive concerns about the trust funds' operation in the

insurance marketplace as a tax-exempt entity, enjoying an unfair
8
advantage vis-a-vis their for-profit competitors. Even so,

however, we find no clear error in the Tax Court's finding of fact

that these trust funds were not organized and operated exclusively

for exempt purposes.

Strictly speaking, the member hospitals are not

"self-insuring" themselves through these trusts. See Rev.Rul. 78-

41, supra note 4. Neither are they "purchasing" insurance on a

7
In the alternative, the Tax Court ruled that the services
that the trust funds provided to the hospitals was that of
providing "commercial-type insurance" under I.R.C. § 501(m),
another reason to deny exemption. As we affirm the Tax Court's
finding that the trust funds do not qualify for exemption under
I.R.C. § 501(e)(1)(A), we do not reach this alternative holding.
8
Code section 502, the feeder organization 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. See Revenue Act of 1950, Pub.L. 814, § 301(b), 64
Stat. 953; S.Rept. 2375, 81st Cong., 2d Sess. 28-29, 35 (1950),
1950-2 C.B. 483, 504-505, 509.
group basis through these trusts. What these member hospitals are

doing is providing insurance to each other, on a reciprocal basis,
9
using trust vehicles as their chosen method of operation. Each

member insures—each is liable for the losses. From a statutory

construction standpoint, however, it is clear that included in

I.R.C. § 501(e)(1)(A)'s list of exempt activities is the

"purchasing of insurance on a group basis" and omitted from this

list is the "providing of insurance, reciprocally to each other, on

a group basis," HCSC-Laundry v. United States, 450 U.S. at 4, 101

S.Ct. at 838, and while we recognize the apparent need expressed in

the position of the trust funds, we find that the law, as written,

does not grant them tax-exempt status. It is not the role or power

of the judiciary to remedy a legislative statute by opinion.10 As

9
The methodology employed here by the member hospitals is
very similar to a rather antiquated risk spreading organization
called a "reciprocal insurance exchange." The reciprocal
exchange idea was that each member agreed to pay its pro-rata
share to cover the liabilities of any of the members who might
suffer a loss through liability. Several forms were created. An
"attorney-in-fact" would be appointed for the subscribers to the
reciprocal exchange. Each one of the members or subscribers
would execute a document appointing the attorney-in-fact to act
for it and to do the things that would accomplish the purpose of
the funds. That is, the attorney-in-fact would be instructed to
collect from each subscriber a pro-rata amount based upon the
risk and exposure of that member, and, hold it in a fund.
Whenever any reciprocal exchange member suffered a loss, the
attorney-in-fact would investigate it, adjust it, defend it, and,
either pay it off or defeat it. The cost to do this was taken
from the monies provided by the subscribers. If the fund ran
low, the attorney-in-fact was entitled to notify each member and
each member would pay the pro-rata amount necessary to replenish
the fund. Here, the member hospitals, in creating their "trust
funds," seem to have been aiming at this type of reciprocal
exchange arrangement.
10
We have great respect for Article I, Section 1 of the
United States Constitution that confers the power to legislate
upon the men and women of Congress. It doesn't confer that power
upon us, the judiciary, and it is inappropriate to patronize
the Supreme Court stated in HCSC-Laundry, at 8, 101 S.Ct. at 840,

"Congress easily can change the statute whenever it is so

inclined."

IV. CONCLUSION

We affirm the decision of the Tax Court.

AFFIRMED.

Congress by noting their imperfect work and quietly correcting
it. Archer-Daniels-Midland Co. v. United States, 37 F.3d 321,
324 (7th Cir.1994) (Hill, J., dissenting dubitante ). The
judiciary should neither assume the responsibility nor usurp
authority not delegated to it. Roberts v. Austin, 632 F.2d 1202,
1215 (5th Cir.1980) (Hill, J., concurring specially), cert.
denied, 454 U.S. 975, 102 S.Ct. 527, 70 L.Ed.2d 395 (1981).