HLD, v. 31 n. 6 (June 2003)
Tenth Circuit Denied Health Plans Tax Exempt Status Because
HMOs Were Not Operated Exclusively For Charitable Purposes
The Tenth Circuit, in an opinion issued April 9, 2003, denied
three affiliated health plans of Utah-based Intermountain Health Care (IHC)
tax-exempt status under � 501(c)(3) of the Internal Revenue Code of 1986. The
court concluded that the affiliates were not operated exclusively for
charitable purposes as required for tax exemption.
IHC operated three separate health maintenance organizations
(Health Plans) through its affiliates. The Internal Revenue Service (IRS)
issued final adverse determination letters against each Health Plan stating
that they did not qualify for tax-exempt status as an organization described in
� 501(c)(3) of the Internal Revenue Code of 1986. The Health Plans filed
petitions with the U.S. Tax Court challenging the IRS' determinations. The Tax
Court issued three separate opinions, upholding retroactive revocation of
exempt status for one of the Health Plans and confirming the previous denial by
the IRS for the other two Health Plans. IHC Health Plans, Inc. v.
Commissioner, TC Memo. No. 2001-246 (T.C. Sept. 19, 2001); IHC Group,
Inc. v. Commissioner, TC Memo. No. 2001-247 (T.C. Sept. 19, 2001); IHC
Care, Inc. v. Commissioner, TC Memo. No. 2001-248 (T.C. Sept. 19, 2001); See
HLD, v. 29, n. 11, p. 95. IHC appealed.
The appeals court first considered whether the Health Plans'
proffered purpose was a charitable purpose under � 501(c)(3). The court found
that "the promotion of health for the benefit of the community" was in fact a
charitable purpose. Next, the court turned to the issue of whether the Health
Plans operated primarily for the stated purpose. Applying the "community
benefit" standard, the appeals court noted that "the existence of some
incidental community benefit is insufficient. Rather, the magnitude of the
community benefit conferred must be sufficient to give rise to a strong
inference that the organization operates primarily for the purpose of
benefiting the community." Taking into consideration Revenue Ruling 69-545,
which demonstrated that an organization cannot satisfy the community benefit
standard solely based on the fact that it offers healthcare services to
everyone in the community, the appeals court articulated a test for tax
exemption that a healthcare organization "must make its services available to
all in the community plus provide additional community or public
benefits." The appeals court held that none of the three Health Plans could
satisfy this "plus" test because none operated primarily for the benefit of the
community. Explaining, the appeals court noted that the Health Plans (1)
provide virtually no free or below cost healthcare services, (2) did not
conduct research or offer free educational programs, and (3) offered a benefit
only to their subscribers and not to the general public. The appeals court also
took into consideration the commercial nature of the Health Plans as providers
of group insurance and not direct providers of healthcare services. The
commercial nature of an activity alone does not "necessarily preclude tax
exemption," said the appeals court, but "inspire[s] doubt as to the entity's
charitable purpose." See Mutual Aid Ass'n of Church of the Brethren v.
United States, 759 F.2d 792 (10th Cir. 1985).
Next, the appeals court considered whether the Health Plans
qualified for tax-exempt status as an "integral part" of a tax-exempt
affiliate. Under the integral part doctrine, "where an organization's sole
activity is an 'integral part' of an exempt affiliate's activities, the
organization may derive its exemption from that of its affiliate." Geisinger
Health Plan v. C.I.R., 30 F.3d 494 (3d Cir. 1994). The appeals court
concluded that the Health Plans did not have the required nexus between their
activities and those of their exempt affiliate to qualify for the integral part
exception. Thus, the appeals court affirmed the Tax Court's decision denying
the Health Plans tax-exempt status.
IHC Health Plans, Inc. v. Commissioner, Nos.
01-9013, 01-9014, 01-9015 (10th Cir. Apr. 10, 2003) (25 pages).