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Tenth Circuit Denied Health Plans Tax Exempt Status Because HMOs Were Not Operated Exclusively For Charitable Purposes


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).

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