Applying the Charitable Trust and Cy Pres Doctrines

When a nonprofit changes to for-profit status, its nonprofit mission can no longer be fulfilled. However, under the charitable trust doctrine, changes to a corporation’s form do not nullify its historical charitable obligations. Instead, the law requires that the nonprofit’s assets be preserved and continue to be used for charitable purposes.

Where to Find Evidence of a Nonprofit Corporation’s Charitable Purpose

• Articles of incorporation, by-laws, enabling statutes, or other incorporating documents.
• Advertising, marketing materials, annual reports, fundraising materials, and statements to regulators.
• Magazine and newspaper articles about the nonprofit.
• History of the nonprofit corporation, including involvement in health promotion, health coverage of otherwise uninsurable populations, special discounts or rate reimbursements, and other community efforts.
• Filings made with regulatory agencies responsible for oversight of nonprofit corporations, including I.R.S. Form 990 (a form containing financial data which nonprofits with annual revenues greater than $25,000 are required to file annually with the I.R.S.) and reports that insurance companies must file annually with state regulators. Click here for more about I.R.S Form 990.
• Donations, grants, gifts and other contributions.
• Applications for tax-exemptions.

Examples of How the Charitable Trust and Cy Pres Doctrines Operate

• The board of a nonprofit hospital in Massachusetts altered its articles of incorporation, effectively erasing evidence of the organization’s charitable history and obligations. A court rejected the hospital’s argument that the law allowed it to amend its purpose to include any charitable activity. Instead, the court said that the hospital was required to devote its funds to similar, not contradictory, charitable purposes. The court also affirmed the public’s interest in assuring that the funds it contributed would be used for similar public charitable purposes.
• In a proposed merger between Blue Cross and Blue Shield of New Jersey and Anthem Insurance Company, Inc. (a large out-of-state mutual insurance company), both parties denied that Blue Cross and Blue Shield of New Jersey had ever been a charitable corporation, despite explicit language in state law to the contrary. Because it argued it was not a charitable organization, Blue Cross and Blue Shield said it had no obligation to protect its charitable assets. New Jersey courts, however, ruled against the plan, holding that Blue Cross and Blue Shield of New Jersey was a “charitable and benevolent institution.”

The Charitable Trust and Cy pres Doctrines Apply to Blue Cross and Blue Shield Plans

Many Blue Cross and Blue Shield plans have denied their nonprofit charitable status. They claim that they are not nonprofit organizations and therefore are not required to preserve their assets because:

1. since 1987, when the tax law changed, they have not received full federal tax exemptions**;
2. they are/were social welfare organizations; and
3. they do not provide goods or services free of charge.

However, the majority of Blue Cross and Blue Shield plans were organized with charitable or broad public purposes for decades, and they received full federal tax-exempt status for close to fifty years. In addition, trust laws in most states declare that an organization does not have to give away its services or products to be classified as charitable. The fact that Blue Cross and Blue Shield subscribers pay for the services they receive does not erase the plan’s historical charitable obligations. Thus, in almost every state in the country where a Blue Cross and Blue Shield plan has not already changed to a for-profit stock company, it is currently nonprofit or has a significant nonprofit history.

** As of January 1, 1987, the federal government removed the full tax-exempt status of Blue Cross and Blue Shield (BCBS) plans and created a special tax class for BCBS organizations under Section 833 of the tax code. However, under Section 833, BCBS plans still are entitled to special tax deductions that are not available to other insurers.

Publications

Decisions by courts and regulators holding Blue Cross/Blue Shield Plans to charitable trust obligations (PDF).

Blue Cross and Blue Shield: A Historical Compilation (PDF). This packet of material contains the following materials:

• Blue Cross and Blue Shield: A History of Charitable and Benevolent Health Insurance Plans
• Blue Cross/Blue Shield State Histories
• Blue Cross/Blue Shield Insurer Histories
• Blue Cross/Blue Shield Stories: Community Participation Makes a Difference
• Chart: Blue Cross/Blue Shield Affiliation and Status
• Chart: Blue Cross/Blue Shield Assets Set Aside