Nonprofits' Insurance Alliance of California v. United States

OPINION

This case is before the court after argument on plaintiff’s action for a declaratory judgment pursuant to 26 U.S.C. § 7428(a) (Supp. V 1993). The central question presented is whether plaintiff, an organization formed to administer a group self-insurance risk pool, qualifies for tax-exempt status under section 501(a) of the Internal Revenue Code of 1954, 26 U.S.C. § 501(a) (1988) (the “I.R.C.”). Section 501(a) indicates that organizations described in I.R.C. § 501(c)(3) shall be exempt from taxation. First to be decided is whether plaintiff’s organization constitutes an “exempt organization” as that term is defined in I.R.C. § 501(c)(3). Assuming that plaintiff’s organization satisfies this definition, the issue becomes whether plaintiff is precluded from qualifying as tax-exempt by operation of I.R.C. § 501(m)(l), which disallows exemption for the provision of commercial-type insurance, or whether plaintiff’s exempt status is preserved under I.R.C. § 501(m)(3)(A) because it provides insurance “at substantially below cost.”

FACTS

On September 15, 1988, the Nonprofits’ Insurance Alliance of California (“plaintiff”), a group self-insurance risk pool with a membership consisting entirely of nonprofit organizations, was incorporated under the California Corporations Code (the “California Code”) as a “mutual benefit corporation.” Section 5005.1 of the California Code, enacted in response to concerns of California nonprofit organizations regarding the price and *279availability of commercial insurance, authorizes the existence of such group self-insurance pools. According to the terms of section 5005.1, plaintiffs insurance pooling arrangement neither qualifies as insurance, nor is subject to regulation under the California Insurance Code. In addition, plaintiff qualifies as a tax exempt charitable organization for purposes of California state income and franchise tax law.1

In April 1990 plaintiff applied to the Internal Revenue Service (the “IRS”) requesting exempt status under I.R.C. § 501(c)(15) as an insurer with premiums not exceeding the statutory threshold.2 The IRS conferred the status on June 20, 1990. On August 7,1991, after recognizing that its premiums exceeded the statutorily designated amount required for exemption under I.R.C. § 501(c)(15), plaintiff submitted an application, dated June 20, 1991, for recognition of exempt status under I.R.C. § 501(c)(3) as an insurer operated exclusively for exempt purposes. On June 15, 1992, the IRS issued a proposed ruling denying plaintiffs request for exemption. Plaintiff protested by letter dated July 10, 1992, and the IRS issued a final decision denying plaintiffs exemption application on February 24, 1993. The grounds cited to support the denial included:

You are not operated exclusively for exempt purposes. You are operating for a substantial nonexempt, commercial purpose. Furthermore, because a substantial part of your activities consists of providing commercial-type insurance you are disqualified from exemption by virtue of section 501(m) of the Code. Finally, because you provide services to unrelated exempt organizations, you are a “feeder” within the meaning of section 502 of the Code.

On May 24, 1993, plaintiff filed suit in the United States Court of Federal Claims seeking a declaration pursuant to I.R.C. § 7428(a) that it qualifies as an exempt corporation under section 501(c)(3). Disposition of this action hinges on the following factual allegations set forth in the administrative record concerning the nature of plaintiffs corporation.

In support of its application for exempt status under I.R.C. § 501(c)(3), dated June 20,1991, plaintiff described itself as an organization formed “to provide reasonably priced liability coverages to its [nonprofit] members at stable prices not available from commercial insurers.” Plaintiff’s formation took place in response to the results of a study conducted by the Liability Insurance Task Force, a group sponsored by the California Association of Nonprofits. The Task Force reported that California nonprofit organizations had encountered difficulties obtaining affordable insurance and had endured periods of large price increases, coverage reductions, and cancellations. Nonprofit organizations particularly are affected by price increases because their rigid budget structure and funding schedule disables them from swiftly adapting to market changes.

According to the Task Force Study, the existence of an insurance risk-pool enables member organizations to pool their risks and resources so as to secure insurance at regular prices on a continual basis. Plaintiff maintains that by providing insurance at stable prices, it “directly advances the charitable purposes of nonprofit organizations because it substantially impacts the services that those organizations ... [can] provide.” Plf s Br. filed Feb. 22,1994, at 7. As plaintiff notes:

While there was no concern regarding periods of a “soft” market (i.e., a market in which insurance coverage was readily available to nonprofit organizations at a reasonable cost), the advent of a “hard” market (i.e., a market in which insurance coverage was either unavailable to nonprofits entirely, or was available only at highly inflated costs) could and would make it much more difficult, or even fin-*280possible, for nonprofit corporations to continue their charitable missions____

Id. at 3-4.

Plaintiff provides four basic activities to its member organizations, which include “providing liability insurance,” Plf s Br. filed Feb. 22, 1994, at 5, developing educational materials and making educational presentations, providing loss control and risk management services free of charge, and serving as a resource for insurance-related questions by operating a toll-free telephone line. As plaintiff admitted in its section 501(c)(3) application, “[c]ommercial insurers provide similar coverages, but at wildly fluctuating prices----” Nonetheless, plaintiff maintains that its corporation differs from other commercial insurance companies in that plaintiff provides insurance at substantially below cost to its members and further provides loss control and risk management services free of charge. Plaintiff also argues that it differs from a commercial insurance company because it shares claims and loss data with the community in an attempt to encourage commercial' companies to adjust their rates favorably toward nonprofit organizations.

Plaintiffs membership consists entirely of nonprofit organizations that both qualify as tax-exempt organizations under I.R.C. § 501(e)(3) and operate to fund or provide health or human services. The materials submitted by plaintiff in support of its exemption application indicate a membership of approximately 487 unrelated nonprofits. The membership composition profile reveals that 31 percent of the organizations promote human service and community improvement; 25 percent serve mental health, developmental disabilities, and other health related issues; 12 percent promote shelter, jobs, and nutrition; 15 percent serve the interests of arts and education; and the remaining 17 percent are uncategorized in terms of a specific charitable focus.

An organization seeking membership in plaintiffs organization must complete a membership application to be approved by the Board of Directors. Membership remains contingent on whether the nonprofit organization makes timely payment of both its premium payments and one-time “contribution” or membership fee. Failure to make the requisite payments results in termination of all membership benefits. The one-time nonrefundable membership fee serves as a contribution to the operating surplus of the corporation and is approximately 10 percent of the member’s commercial general liability premium. Once the payments are made, each member becomes an owner of the corporation. The benefits of ownership include the guarantee that any profits received by plaintiff will inure only to the benefit of the owners in the form of reduced future insurance premiums.

In terms of insurance coverage, plaintiff provides commercial general liability, automobile liability, employer’s' non-owned and hired automobile liability, and miscellaneous professional liability. Plaintiff determines the amount of a member’s premium payment based on a variety of criteria set forth in the membership application form. Such factors ■ include, but are not limited to, potential hazards, the type of services provided by the organization, the existence of a safety program, and past claims history. Annual member premiums ranged from $69.00 to $92,-328.00 in 1990, and typical liability limits were an annual aggregate of between $1 and $2 million.

To complement the in-house underwriting, plaintiff contracts with other companies to provide reinsurance for any risks in excess of $50,000.00. Several of these companies require plaintiff to maintain a two-to-one ratio of net premiums to surplus. Plaintiff contends that the standard insurance industry financial guidelines also recommend that insurers maintain a similar ratio of premiums to surplus.

Plaintiff achieved the requisite surplus level, after receiving $1.3 million in loans from six foundations, including the Ford Foundation. Each foundation entered into a separate loan agreement with plaintiff concerning the terms and conditions of the loan. The Ford Foundation loan, which is representative of all the loan agreements, 1) was evidenced by a promissory note; 2) characterized the creditor as unsecured; 3) specified a 2 percent rate of interest; 4) included certain financial reporting requirements; 5) specified *281terms of default; and 6) indicated a repayment schedule. The loan agreement, dated September 18, 1989, further stated that plaintiff must make payments on principal and interest from earned surplus and that such payments shall be made only when an Actuary “certifies] that [the] Borrower had Earned Surplus as of the ... [relevant payment date] in an amount which equaled or exceeded the amount of ... [the] payment.” The agreement also indicated that in cases wherein the interest or principal payments exceed earned surplus, the borrower shall pay to the lender the amount of earned surplus accrued as of the specified payment date.3 Finally, the loan agreement stipulated in section 3.3 that “th[e] Loan Agreement and the Note (the “Loan Documents”) will constitute the legal, valid and binding obligations of the borrower----”

Plaintiff and defendant dispute the proper characterization of the foundation loans. Plaintiff emphasizes the charitable nature of the loans, claiming that the loans constitute a subsidy or “contribution[ ]” rather than “true debt.” Plfs Br. filed June 1, 1994, at 15. Plaintiff also notes that the IRS characterized these loans as “program-related investments” for purposes of the tax consequences to the respective foundations. Plaintiff argues that “[fimplicit in ... [this] ruling is ... [the IRS’] classification of the ‘loans’ as grants for purposes of IRC § 4945(h) and 4945(d)(4) (sic)....” Defs Reply to Plfs Response to Defs Prop. Findings of Fact No. 11, filed July 21, 1994 (citation omitted). In contrast, defendant emphasizes the strict terms of the loan agreements and argues that the financial arrangements between plaintiff and the foundations can be interpreted in no way other than as loan agreements.

Plaintiff also received grants from twelve foundations in the amount of $330,100.00 to cover plaintiff’s initial operating costs. Other entities donated $31,055.00 in equipment and $60,536.00 toward risk management programs.

DISCUSSION

1. Declaratory judgments under I.B.C. § 7128(a)

I.R.C. § 7428(a) authorizes the Court of Federal Claims to entertain an action for a declaratory judgment concerning an organization’s initial qualification as an organization described in section 501(c)(3). In order to invoke section 7428(a), the party seeking the declaration must exhaust all administrative remedies and file its action within 90 days of the date of receiving the IRS’ final adverse determination regarding its application for exempt status. 26 U.S.C. §§ 7428(b)(2), (b)(3). Plaintiff satisfied both of these jurisdictional prerequisites.

The scope of review, particularly in initial qualification cases, is limited to the materials contained in the administrative record. Easter House v. United States, 12 Cl. Ct. 476, 482 (1987) (citing cases), aff'd, 846 F.2d 78 (Fed.Cir.) (Table), cert, denied, 488 U.S. 907, 109 S.Ct. 257, 102 L.Ed.2d 246 (1988). Although in some circumstances the court may rely on evidence outside the record, this evidence can be considered only where the party has made a showing of good cause. Because plaintiff has made no such showing, review is confined to the record provided to the court.

The legislative history of section 7428 indicates that this court should follow Tax Court practices with respect to declaratory judgments. S.Rep. No. 938, 94th Cong., 2d Sess. 588 (1975), reprinted in 1976 U.S.C.C.AN. 2897, 4012; see Church of Visible Intelligence That Governs the Universe v. United States, 4 Cl.Ct. 55, 60 (1983) (holding Congress contemplated that the Claims Court — now the Court of Federal Claims— would follow Tax Court practices in declaratory judgment eases). Specifically, Tax Court Rule of Practice and Procedure 217, addressing declaratory judgment actions, provides that the facts contained in the administrative record are deemed true. Easter House, 12 Cl.Ct. at 482; Church of the Visible Intelligence, 4 Cl.Ct. at 60. Rule 217 *282further assigns plaintiff the burden of proving that the IRS erred in making its final determination. Id. Therefore, plaintiff must establish that the IRS improperly denied section 501(c)(3) tax-exempt status and that the grounds supporting the denial as set forth in the IRS’ final adverse determination letter dated February 24,1993, are incorrect. Easter House, 12 Cl.Ct. at 482 (citations omitted).

2. Tax-exempt status under I.R.C. § 501(c)(3)

Income tax exemptions are matters of legislative grace which the courts have consistently strictly construed. Trustees of the Graceland Cemetery Improvement Fund v. United States, 206 Ct.Cl. 609, 623, 515 F.2d 763, 770 (1975) (citing cases); Haswell v. United States, 205 Ct.Cl. 421, 433, 500 F.2d 1133,1140 (1974), cert, denied, 419 U.S. 1107, 95 S.Ct. 779, 42 L.Ed.2d 803 (1975); Universal Life Church, Inc. v. United States, 13 Cl.Ct. 567, 580 (1987), aff'd, 862 F.2d 321 (Fed.Cir.1988) (Table). Accordingly, the organization generating income must pay federal income taxes unless the organization falls squarely within the parameters of a listed exemption from taxation. Mutual Aid Ass’n of Church of the Brethren v. United States, 759 F.2d 792, 794 (10th Cir.1985) (citing HCSC-Laundry v. United States, 450 U.S. 1, 5, 101 S.Ct. 836, 838, 67 L.Ed.2d 1 (1981) (per curiam)). The exemption at issue in this case is conferred by I.R.C. § 501(c)(3).

According to I.R.C. § 501(a), an organization described in section 501(c)(3) qualifies for tax-exempt status.4 Section 501(c)(3) defines exempt organizations, in pertinent part, as

Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific testing for public safety, literary or educational purposes, or to foster national or international amateur sports competition ... or for the prevention of cruelty to children or animals, no part of the net earnings of which inure to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda or otherwise attempting, to influence legislation____

(Emphasis added.) With respect to I.R.C. § 501(c)(3), the parties dispute only whether plaintiff operates exclusively for an exempt purpose.5

An organization operates exclusively for an exempt purpose when “it engages primarily in activities which accomplish one or more of ... [the] exempt purposes specified in section 501(c)(3)____” Treas.Reg. 1.501(c)(3)-l(c)(l), 26 C.F.R. § 1.501(c)(3)-1(c)(1) (1994). “[T]he presence of a single ... [nonexempt] purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly ... [exempt] purposes____” Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279, 283, 66 S.Ct. 112, 114, 90 L.Ed. 67 (1945); see also Church of the Visible Intelligence, 4 Cl.Ct. at 61 (same); Treas.Reg. 1.501(c)(3)-l(c)(l) (stating that organization is not operated exclusively for exempt purpose “if more than an insubstantial part of its activities is not in furtherance of an exempt purpose”). The issue of wheth*283er an organization has a substantial nonexempt purpose is a question of fact to be resolved based on the evidence presented in the administrative record. Living Faith, Inc. v. Commissioner, 950 F.2d 365, 371 (7th Cir.1991) (citing, inter alia, B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352, 357, 1978 WL 3344 (1978)). Facts concerning an organization’s tax designation under state law bear little or no weight in the section 501(c)(3) analysis. Easter House, 12 Cl.Ct. at 482-83; G.C.M. 39,737 (May 24, 1988).

In a letter dated February 24, 1993, the IRS denied plaintiffs application for an exemption under section 501(c)(3) due to the finding that plaintiff was operated for “a substantial nonexempt, commercial purpose.” Plaintiff disputes this characterization, maintaining that the fact an organization operates in a manner similar to a commercial entity is not dispositive of the section 501(c)(3) exemption analysis. Plaintiff further argues that the focus of the section 501(c)(3) inquiry must be on the purposes of the organization, not its activities.

It is defendant’s- position that an organization qualifies as having an exempt purpose “ ‘only if it engages primarily in activities which accomplish’ that purpose.” Defs Br. filed Apr. 25, 1994, at 11 (citing Treas.Reg. § 1.501(c)(3) — 1(c)(1)). Defendant also contends that the critical inquiry centers on what the organization accomplishes and the manner in which it achieves its goals. According to defendant, the good-faith assertions on behalf of plaintiff’s officers play no role in the section 501(c)(3) inquiry, especially in situations where the objective facts of the record describe a substantial nonexempt, commercial purpose.

As plaintiff properly notes, the critical inquiry under the operational test is on the “purposes towards which an organization’s activities are directed ..., not [on] the nature of the activities themselves.” B.S.W. Group, 70 T.C. at 356-57. Several courts, however, have indicated that the purposes of an organization may be inferred from the manner of its operations. Living Faith, 950 F.2d at 372 (citing cases); see also Universal Life, 13 Cl.Ct. at 583 (stating that an organization’s activities are indicative of its purposes); Presbyterian & Reformed Pub. Co. v. Commissioner, 743 F.2d 148, 155 (3d Cir. 1984) (stating that ends can be inferred from selected means).

Plaintiff is also correct that the sole fact that an organization constitutes a trade or business does not, in and of itself, bar the organization from exemption under section 501(c)(3), so long as the operation of the trade or business furthers the exempt purpose. See Treas.Reg. 1.501(c)(3)-l(e)(l). In evaluating an entity engaged in a commercial activity, a determination must be made regarding “ “whether the business activities of the taxpayer are incidental to its charitable objectives, or whether, in fact, the converse is true.’ ” American Inst. for Economic Research v. United States, 157 Ct.Cl. 548, 555, 302 F.2d 934, 937-38 (1962), cert, denied, 372 U.S. 976, 83 S.Ct. 1109, 10 L.Ed.2d 141 (1963) (quoting Scripture Press Found. v. United States, 152 Ct.Cl. 463, 471, 285 F.2d 800, 805 (1961), cert., denied, 368 U.S. 985, 82 S. Ct. 597, 7 L.Ed.2d 523 (1962)).

The courts have developed various factors to consider in determining whether an organization promotes a forbidden nonexempt purpose under section 501(c)(3). American Inst. for Economic Research, 157 Ct.Cl. at 556, 302 F.2d at 938; B.S.W. Group, 70 T.C. at 357. The manner in which an organization conducts its activities; the commercial hue or nature of those activities; the competitive nature of the activities; the existence of accumulated profits; and the provision of free or below cost services are factors that have been considered. Living Faith, 950 F.2d at 372 (citations omitted); see also American Inst. for Economic Research, 157 Ct.Cl. at 692, 302 F.2d at 938 (ruling that competition with commercial firms constitutes strong evidence of a substantial nonexempt purpose); Peoples Translation Serv./Newsfront Int’l v. Commissioner, 72 T. C. 43, 50,1979 WL 3767 (1979) (noting that taxpayer’s method of pricing services below cost is relevant to section 501(c)(3) inquiry); B.S.W. Group, 70 T.C. at 359 (stating that the fact an organization conducts a trade or “business with an apparently commercial character ... [as its] sole activity weighs *284heavily against exemption”). These cases instruct that although none of these factors alone is dispositive of an organization’s status under section 501(c)(3), the factors evaluated together can be determinative.

Plaintiff did not address any of these factors in its briefs. To support the position that it does not engage in a substantial nonexempt purpose, plaintiff instead relies on Hospital Bureau of Standards and Supplies, Inc. v. United States, 141 Ct.Cl. 91, 158 F.Supp. 560 (1958), and Northern California Cent. Serv., Inc. v. United States, 219 Ct.Cl. 60, 591 F.2d 620 (1979), which involved hospital cooperatives. These cases do not undertake an analysis of the aforementioned factors; instead, they examine the nature of the relationship between the services the taxpayer seeking exemption offers and its member organizations. In addition, plaintiff asserts that almost all of its activities “consist of assisting its member charitable organizations to secure affordable and stable insurance coverage, as well as provid[e] ... other insurance-related services.” Plfs Br. filed Feb. 22, 1994, at 27. By providing such assistance, plaintiff contends that it “directly advances the charitable purposes of [its member] nonprofit organizations” and therefore cannot be held to advance a nonexempt purpose. Id. at 7. Prior to discussing the cases upon which plaintiff relies, the court addresses the traditional factors underlying the section 501(c)(3) inquiry.

Plaintiff exists solely for the purpose of selling insurance to nonprofit exempt organizations at the lowest possible cost on a continued, stable basis. Selling insurance undeniably is an inherently commercial activity ordinarily carried on by a commercial for-profit company. Plaintiff even admitted in its application for exempt status under section 501(c)(3), dated June 20, 1991, that “[c]ommercial insurers provide similar coverages, but at wildly fluctuating prices____” (Emphasis added.) Plaintiff attempts to temper this admission by noting that plaintiff differs from commercial insurance companies in that it provides insurance at substantially below cost and provides loss control and risk management services free of charge. Moreover, plaintiff maintains that, unlike commercial insurance companies, it shares claims and loss data with the community in order to facilitate adjustment of commercial rates in a manner more favorable to nonprofit organizations.

Despite these differences the nature and operation of plaintiff’s activities are commercial in nature. For example, plaintiff engages in the actual underwriting of insurance policies and contracts with other firms to secure reinsurance for claims in excess of $50,000.00, activities generally carried out by commercial for-profit entities. In addition, plaintiffs policies provide that the benefits of membership cease immediately when a member fails to make timely payment of either the contribution fee or premium payments. Thus, similar to a commercial insurance company, benefits cease with a corresponding failure to pay premiums. See Federation Pharmacy Serv., Inc. v. Commissioner, 72 T.C. 687, 692,1979 WL 3712 (1979), affd, 625 F.2d 804 (8th Cir.1980) (noting that membership benefits terminate with failure to pay, making organization no more charitable than commercial cooperative).

Finally, as defendant aptly notes, plaintiff shares many of the characteristics of a commercial mutual insurance company. Mutual insurance companies generally are exempt from taxation under I.R.C. § 501(c)(15), provided that their annual premiums do not exceed $350,000.00. Mutual insurance companies which, like plaintiff, fail to qualify under section 501(c)(15) ordinarily seek exemption under I.R.C. § 501(c)(3) or § 501(c)(4). American Ass’n of Christian Sch. Voluntary Employees Beneficiary Assoc. Welfare Trust Plan v. United States, 850 F.2d 1510 (11th Cir.1988); Mutual Aid, 759 F.2d 792; Bethel Conservative Mennonite Church v. Commissioner, 746 F.2d 388 (7th Cir.1984).

Mutual Aid involved an organization formed to provide insurance to members of the Church of Brethren. The organization’s income derived primarily from insurance premiums, a one-time membership contribution, and funds earned from the investment of insurance premiums. The court held that although plaintiff’s purpose is religiously based, plaintiff operated as a mutual insur-*285anee company, primarily providing property insurance — “an admitted commercial activity.” Mutual Aid, 759 F.2d at 796.

In characterizing plaintiff as a mutual insurance company, the court focused on the fact that the taxpayer engaged in underwriting practices similar to those conducted in the commercial sector, required premium payments, and paid claims only after receiving the relevant documentation. Finally, the court noted that the taxpayer treated surplus and profit similar to any other mutual insurance company, in that ‘“[t]he ultimate considerations of ... [Mutual Aid] in creating and using its surplus and profit are to provide a reasonable and adequate security margin, and to provide better protection and service to its members____’” Id. (citation omitted). Thus, in Mutual Aid the similarities between the taxpayer and a mutual insurance company directed the court to find that the taxpayer did not qualify as exempt under section 501(c)(4). See American Ass’n, 850 F.2d at 1514 (holding plaintiff not exempt under I.R.C. § 501(c)(3) because it operated like a mutual insurance company, collecting premiums and engaging in underwriting practices consistent with those of the industry); Paratransit Ins. Corp. v. Commissioner, No. 28342-91X, 102 T.C. 745, slip op. at 15, 1994 WL 259241 (June 14, 1994) (noting commercial hue of group self-insurance risk pools).

Taxpayers in both Mutual Aid and American Ass’n analogized their cases to Bethel, wherein the court found a company organized to provide insurance exempt under I.R.C. § 501(c)(3). Both these courts, however, distinguished Bethel as a case involving only voluntary donations and no premiums. See American Ass’n, 850 F.2d at 1514 (distinguishing Bethel as a case wherein “members’ contributions ... were not tied to the market value of the insurance benefits received”). “[T]he insurance plan in Bethel operated like a church funded by voluntary offerings, [as opposed to] the plan in Mutual Aid [which] operated as a mutual insurance company.” Id.

Plaintiff, like the insurers in Mutual Aid and American Ass’n, charges premiums based on the coverages requested and the apparent risks as evidenced from each member’s application. The premiums ranged in value from $69.00 to $92,328.00 in 1990, depending on the attendant risks, such as lack of a safety plan or past claims history. Plaintiff also charges a one-time membership fee, as did the insurer in Mutual Aid. Although plaintiff has received donations to assist in the initial operating costs of the organization, unlike the insurer in Bethel, it has not received donations sufficient to distinguish it from a commercial mutual insurance company.6 In Bethel the insurer charged no premiums or membership fees and, instead, took voluntary contributions at church each Sunday. Coverage was provided to church members regardless of whether they contributed. In contrast, plaintiff charges premiums of up to $92,328.00 per year dependant upon the amount of risk involved and the type of coverage sought. Membership benefits cease in plaintiff’s organization immediately when a member fails to pay the requisite membership fee or premiums, a scenario not contemplated by the arrangement deemed exempt in Bethel.

Plaintiff also resembles a commercial mutual insurance company in that all profits retained by the corporation inure to the benefit of the members in the form of reduced future insurance premiums. Although plaintiff may not possess every attribute characteristic of a mutual insurance company, it possesses a majority of the qualifying characteristics, which only further enhances the determination that plaintiff is presumptively commercial in nature. Whenever an organization conducts a trade or “business with an apparently commercial character ... [as its] sole activity, ... that fact weighs heavily against exemption.” B.S.W. Group, 70 T.C. at 359. Even accepting plaintiff’s good-faith assertions of charitable intent and exempt purposes, plaintiff cannot deny the commercial hue of its operations. See Scripture Press Found., 152 Ct.Cl. at 469-70, 285 F.2d *286at 804 (ruling that taxpayer’s activities, not the intensity of its religious convictions, control exemption); Universal Life, 13 Cl.Ct. at 584 (same).

Although the commercial nature of plaintiff’s activities bears on the I.R.C. § 501(c)(3) analysis, it alone is not dispositive. The competitive nature of the activities is also pertinent. In fact “[c]ompetition with commercial firms is strong evidence of the predominance of nonexempt commercial purposes____” B.S.W. Group, 70 T.C. at 358. American Institute for Economic Research, which involved a trust that published an investment bulletin, addressed the issue of competition with commercial entities. Members of the trust paid for subscriptions to the bulletin. Plaintiff characterized these payments as voluntary charitable contributions, but the court disagreed, noting that “subscribers receive full value in exchange for their money____” 157 Ct.Cl. at 556, 302 F.2d at 938. The court further noted that to obtain a “contribution,” plaintiff had to proffer something of value in return. In holding that plaintiff failed to qualify under section 501(c)(3), the court stated that “th[e] necessity or purpose to provide such information and service as would be desired by the public places plaintiff in competition with other commercial organizations providing similar services____” Id. Plaintiff also provides a service, insurance coverage, desired by the public, and by charging premiums and a one time “contribution fee,” plaintiff places itself in competition with other commercial insurance firms.

Plaintiff admitted in its section 501(e)(3) application that it “provides[s] similar coverages” to that of a commercial entity. In describing its services, plaintiff explains that its existence stems from the cyclical, unstable commercial insurance markets. According to plaintiff, the cycle spans between periods of low insurance availability and high prices, i.e., a hard market, and periods where insurance coverage is “readily available” at “reasonable cost,” i.e., a soft market. Plfs Br. filed Feb. 22, 1994, at 4. Although plaintiff maintains that it was created in response to a particularly devastating hard market, plaintiff conceded in a letter dated January 23, 1992, to the IRS, that it “was created in what is becoming the longest soft market in history.” In that same letter, plaintiff further conceded that “[d]uring the present ‘soft market,’ when insurance carriers are very competitive, ... carriers [often] pric[e] the larger nonprofits at 50 percent of the pricing recommended by the Insurance Services Office,” a statistical organization that gathers claims data and publishes advisory premiums.” (Emphasis added.) Notwithstanding plaintiff’s contention that it saves its members at least 25 percent over commercial prices during the soft period of the cycle, plaintiff cannot deny that it competes with other commercial insurers during that period — a period which has existed since plaintiff’s inception.

Plaintiff further notes in the January 23, 1992 letter that “[r]egardless of whether ... [it] is saving nonprofits 25 percent or 100 percent [in insurance costs] today, the real benefit ... will be recognized over time____” Plaintiff may be correct, but this court must analyze the record before it. Plaintiff admits that the insurance industry is facing one of the longest soft periods in the history of the industry, a period where plaintiff concedes insurance is “readily available” at “reasonable cost” from commercia