IHC Health Plans, Inc. v. Commissioner of Internal Revenue (I)

Brief Fact Summary.

Intermountain Health Care Health Plans, Inc. (Plaintiff) brought suit in the United States Tax Court seeking a declaratory judgment to reverse the Commissioner of Internal Revenue’s (Defendant) decision to revoke their non-profit tax-exempt status.

Synopsis of Rule of Law.

A health care corporation must be primarily operated for charitable purposes in order to qualify for tax-exempt status under 26 U.S.C. § 501(c)(3).

Facts.

Intermountain Health Care (IHC) formed a subsidiary, IHC Health Services (Health Services), as a Utah non-profit corporation.  Health Services operated twenty-two hospitals in Utah and Idaho, and during the years of 1997 through 1999, Health Services provided $1.2 billion in unreimbursed medical care to Medicaid patients and another $91 million in unreimbursed care to indigent patients.  The Commissioner of Internal Revenue (Commissioner) (Defendant) recognized Health Services as having tax-exempt status under § 501(c)(3).  Later, IHC formed three additional subsidiary health care companies: IHC Health Plans (Health Plans) (Plaintiff), IHC Care, Inc. (Care) and IHC Group, Inc. (Group) to operate as health maintenance organizations (HMOs).  The Commissioner (Defendant) would later conclude that, pursuant to § 501(c)(3), none of these three subsidiaries was operating exclusively for exempt purposes.  The Defendant revoked Plaintiff’s exempt status and determined that Care and Group were not entitled to the exemption.  Health Plans (Plaintiff), Care and Group brought suit in the United States Tax Court seeking a declaratory judgment to reverse Defendant’s ruling.  The Tax Court affirmed the Defendant’s ruling in a separate opinion for each of the three corporate entities.  Plaintiff became the successor in interest to Care and Group and brings this appeal on behalf of all three entities.

Issue.

Must a health care corporation be primarily operated for charitable purposes in order to qualify for tax-exempt status under 26 U.S.C. § 501(c)(3)?

Held.

(Tacha, C.J.)  Yes.  A health care corporation must be primarily operated for charitable purposes in order to qualify for tax-exempt status under 26 U.S.C. § 501(c)(3).  This evaluation involves a two-part test.  First it must be determined if the purpose of the corporation is “charitable,” and second the corporation must operate primarily to serve this purpose.  To be charitable the corporation must participate in activities that provide a benefit to the public.  The public benefit is accepted in exchange for lifting the tax burden and is not a benefit the community actually chooses, but instead is one that supplements or advances the work of public institutions already supported by tax revenues.  The magnitude of this benefit must give a strong inference that the primary purpose of the organization is to operate for the benefit of the community.  Under the “community benefit” analysis, a number of factors are relevant including how many people are eligible to receive the benefit, if the benefit provided is free or below-cost, if funds are used for research and education, and if the benefit is provided to persons participating in governmental programs such as Medicare or Medicaid.  The court also examines the composition of the corporation’s board of trustees when making its determination to see if the community’s interests will be represented by the Board.  In this case, Plaintiff charges premiums for the medical services it provides to its members.  Plaintiff’s HMO membership is offered to a large cross-section of the community, but it is so offered for the purpose of making profits.  Care and Group limited their membership to employees working for large employers, which does not provide a widespread community benefit.  Plaintiff does not engage in any medical research or provide free health education to the public.  The Board of Trustees composition had been changed to represent the community, however, given the lack of services provided to benefit the community, this factor becomes irrelevant.  The decision of the Tax Court to affirm the Commissioner’s decision that these three corporate entities do not qualify for exempt status pursuant to § 501(c)(3) is affirmed.

Discussion.

The two-part inquiry to determine tax-exempt status is clearly a fact intensive inquiry that must be used on a case-by-case basis.  Consequently, the way the health care corporation structures its HMOs can be the determining factor to qualify for exempt status.  If an HMO engages in health care research that will ultimately benefit the community and provide below cost memberships, free health education, indigent emergency services, etc., to a large cross-section of the community, it will probably qualify.  IHC’s fourth subsidiary, Health Services, retained its tax exempt status, but it would appear the unreimbursed services offered by Health Services alone could not be used to convey tax-exempt status to Health Plans (Plaintiff), Care or Group.