Medical association scores victories on insurance program, placement service.

A recent case, American Academy of Family Physicians (AAFP), DC Mo., 1995, provided good news for exempt organizations. AAFP was a national professional association of family practitioners described in Sec. 501 (c) (6). As part of its service to its members, AAFP sponsored various group insurance programs. A wholly owned subsidiary (ISI) handled all of the administrative duties connected with the insurance programs.

AAFP created a committee to investigate, develop, prepare and conduct the insurance activities. The committee received semiannual reports from ISI on its activities, and approved any changes in policies. The insurance premiums were paid to an insurance company. The company established appropriate reserves out of the premiums and paid interest on the reserves to AAFP.

The IRS contended that AAFP was engaged in the insurance business and that the interest was taxable as an integral part of that business. AAFP contended that the interest was not taxable because Sec. 512 (b) excludes interest income from the categories of income taxable to trade associations.

The Tax Court disagreed. It held that the AAFP committee did not have control over the insurance business; ISI did. The committee's activities were conducted merely to determine which products best suited its members' needs. Therefore, AAFP was not engaged in a trade or business, and the interest was not taxable.

AAFP also conducted a placement service, with which family physicians could register. Members were not charged anything, and nonmembers paid only a nominal fee. Organizations seeking to hire a family physician could receive referrals by paying a fee that varied by membership status.

The Service contended that the placement activities were unrelated to AAFP's exempt purposes. The parties stipulated that the appropriate distribution of physicians was relate purpose. The court concluded that the referral service furthered this objective by facilitating the exchange of information between health providers and physicians. Consequently, AAFP's purposes were served by the program and the income was not taxable.