1994 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

7-27-1994

Geisinger Health Plan v. Comm. IRS

Precedential or Non-Precedential:

Docket 93-7699

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Recommended Citation

"Geisinger Health Plan v. Comm. IRS" (1994). 1994 Decisions. Paper 95.

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1 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

___________ 

No. 93-7699 

___________ 

GEISINGER HEALTH PLAN 

 Appellant, 

 vs. 

COMMISSIONER OF INTERNAL REVENUE SERVICE 

 Appellee. 

___________ 

APPEAL FROM THE DECISION OF 

THE UNITED STATES TAX COURT 

(No. 90-20793) 

___________ 

ARGUED MAY 19, 1994 

BEFORE: BECKER and LEWIS, Circuit Judges, 

and IRENAS, District Judge.

0

(Filed July 27, 1994) 

___________ 

Lawrence J. Goode 

Frederick J. Gerhart (ARGUED) 

Melissa B. Rasman 

Dechert Price & Rhoads 

4000 Bell Atlantic Tower 

1717 Arch Street 

Philadelphia, Pennsylvania 19103-2793 

 Attorneys for Appellant

 

0* Honorable Joseph E. Irenas, United States District Judge for 

the District of New Jersey, sitting by designation. 
2 

Gary R. Allen 

Teresa E. McLaughlin (ARGUED) 

United States Department of Justice 

Tax Division 

P. O. Box 502 

Washington, D.C. 20044 

 Attorneys for Appellee

___________ 

OPINION OF THE COURT 

___________ 

LEWIS, Circuit Judge. 

 In Geisinger Health Plan v. Commissioner of Internal 

Revenue, 985 F.2d 1210 (3d Cir. 1993) ("Geisinger I"), we held 

that the Geisinger Health Plan ("GHP"), a health maintenance 

organization ("HMO"), was not entitled to exemption from federal 

income taxation as a charitable organization under 26 U.S.C. 

§ 501(c)(3). We remanded the case for determination of whether 

GHP was entitled to exemption from taxation by virtue of being an 

integral part of the Geisinger System (the "System"), a 

comprehensive health care system serving northeastern and 

northcentral Pennsylvania. We will affirm the Tax Court's 

decision that it is not exempt as an integral part of the System. 

I. 

 GHP is a prepaid health care plan which contracts with 

health care providers to provide services to its subscribers. The 

facts relevant to GHP's function are detailed in our opinion in 

Geisinger I, and we need not repeat them here. Instead, far more 
3 

relevant to this appeal is GHP's relationship with the Geisinger 

System and its other constituent entities, a relationship which 

we must examine in some detail to decide the issue before us. 

 The Geisinger System consists of GHP and eight other 

nonprofit entities, all involved in some way in promoting health 

care in 27 counties in northeastern and northcentral 

Pennsylvania. They are: the Geisinger Foundation (the 

"Foundation"), Geisinger Medical Center ("GMC"), Geisinger Clinic 

(the "Clinic"), Geisinger Wyoming Valley Medical Center ("GWV"), 

Marworth, Geisinger System Services ("GSS") and two professional 

liability trusts. All of these entities are recognized as exempt 

from federal income taxation under one or more sections of the 

Internal Revenue Code. 

 The Foundation controls all these entities, as well as 

three for-profit corporations. It has the power to appoint the 

corporate members of GHP, GMC, GWV, GSS, the Clinic and Marworth, 

and those members elect the boards of directors of those 

entities. The Foundation also raises funds for the Geisinger 

System. Its board of directors is composed of civic and business 

leaders in the area. 

 GMC operates a 569-bed regional medical center. As of 

March 31, 1988, it had 3,512 employees, including 195 resident 

physicians and fellows in approved postgraduate training 

programs. It accepts patients without regard to ability to pay, 

including Medicare, Medicaid and charity patients. It operates a 

full-time emergency room open to all, regardless of ability to 

pay. It also serves as a teaching hospital. 
4 

 GWV is a 230-bed hospital located in Wilkes-Barre, 

Pennsylvania. It accepts patients regardless of ability to pay, 

and it operates a full-time emergency room open to all, 

regardless of ability to pay. 

 The Clinic provides medical services to patients at 43 

locations throughout the System's service area. It also conducts 

extensive medical research in conjunction with GMC and physicians 

who perform medical services for GMC, GWV and other entities in 

the Geisinger System. As of March 31, 1988, it employed 401 

physicians. It accepts patients without regard to their ability 

to pay. 

 Marworth operates two alcohol detoxification and 

rehabilitation centers and offers educational programs to prevent 

alcohol and substance abuse. 

 GSS employs management and other personnel who provide 

services to entities in the Geisinger System. 

 As we noted in Geisinger I, the Geisinger System 

apparently decided to create GHP after GMC experimented with a 

pilot prepaid health plan between 1972 and 1985. The experience 

was positive, and the Geisinger System formed GHP to provide its 

own prepaid health plan. 

 It organized GHP as a separate entity within the System 

(as opposed to operating it from within the Clinic, GMC or GWV) 

for three reasons. First, HMOs in Pennsylvania are subject to 

extensive regulation by the Commonwealth's Departments of Health 

and Insurance. See generally 40 P.S. §§ 1551 et seq. Operating 

GHP separately enables other entities in the System to avoid 
5 

having to comply with the burdensome requirements associated with 

that regulation. Second, those administering the System believe 

it preferable for GHP's organization and management to remain 

separate from those of the System's other entities because it 

serves a wider geographic area than any of those other entities. 

Finally, under Pennsylvania law at least one-third of GHP's 

directors must be subscribers. 28 Pa. Code § 9.96(a). 

Establishing GHP as a separate entity avoids disrupting the 

governance of the other Geisinger System entities to comply with 

this requirement. For example, establishing an HMO within GMC 

would have required GMC to canvass its board of directors to 

ensure that one-third of them subscribed to the HMO. If they did 

not, GMC would have had to amend its by-laws or other governing 

documents to add directorships so that one-third of the directors 

were subscribers. Incorporating GHP separately eliminates the 

need for such reorganization. 

 For the year which ended June 30, 1987, GHP generated 

8.8 percent of the aggregate gross receipts of the five health 

care providers0 in the Geisinger System. At the time this case 

was first submitted to the Tax Court, projections indicated that 

by June 30, 1991, GHP would generate 14.35 percent of the 

System's aggregate gross receipts.0

 

0 These are GHP, GMC, GWV, the Clinic and Marworth. GHP is 

included among these five health care "providers" although, 

as noted in Geisinger I, GHP itself provides no health care 

but instead arranges that its subscribers will receive 

health care from others. Geisinger I, 985 F.2d at 1213. 

0 Because it is likely that many GHP subscribers would have 

used Geisinger facilities before purchasing GHP coverage (as 

insureds of Blue Cross or private insurers), this percentage 
6 

 GHP's interaction with other Geisinger System entities 

is varied. Its most significant contact is with the Clinic, from 

which it purchases the physician services its subscribers require 

by paying a fixed amount per member per month, as set forth in a 

Medical Services Agreement. Eighty-four percent of physician 

services are provided by doctors who are employees of the Clinic; 

the remaining 16 percent are provided by doctors who are not 

affiliated with the Clinic but who have contracted with the 

Clinic to provide services to GHP subscribers. GHP has similarly 

entered into contracts with GMC and GWV, as well as 20 

non-related hospitals. When its subscribers require hospital 

care, these hospitals provide it pursuant to the terms of their 

contracts, for either a negotiated per diem charge or a 

discounted percentage of billed charges. GHP has also contracted 

with GSS to purchase office space, supplies and administrative 

services. 

 Except in emergency situations, only physicians who 

either work for the Clinic or have contracted with the Clinic may 

order that a GHP subscriber be admitted to a hospital. When such 

admission is ordered, it generally must be to GMC, GWV or one of 

the 20 other hospitals with which GHP has contracted. The only 

exceptions to this requirement are in a medical emergency outside 

of GHP's service area or when approved in advance by GHP's 

medical director; in those instances, a subscriber may be 

 

does not necessarily represent a net increase in utilization 

of Geisinger facilities by virtue of GHP's existence. 
7 

admitted to a hospital with which GHP has no contractual 

relationship. 

 GHP has also entered into contracts with pharmacies, 

durable medical equipment suppliers, ambulance services and 

physical therapists. Those entities' services are available to 

subscribers only (1) in a medical emergency or (2) when 

prescribed by a doctor who is employed by the Clinic or who is 

under contract with the Clinic to provide care to GHP 

subscribers. 

 The Tax Court considered GHP's role in the Geisinger 

System when, on remand from Geisinger I, it decided that GHP did 

not qualify for exempt status under the integral part doctrine. 

Geisinger Health Plan v. Commissioner of Internal Revenue, 100 

T.C. 394 (1993) ("Geisinger II"). The court first distinguished 

a series of "group practice cases," in which incorporated groups 

of doctors on hospital or faculty medical staffs were held to be 

exempt from taxation as integral parts of the tax-exempt 

hospitals or medical schools with which they were associated. The 

Tax Court found that those cases did not control its decision 

because "[f]or [them] to apply here, the population of [GHP's] 

subscribers would have to overlap substantially with the patients 

of the related exempt entities [and t]he facts indicated that it 

does not." Geisinger II, 100 T.C. at 404. Moreover, it held, 

GHP was not entitled to tax-exempt status as an integral part of 

the System because it would produce unrelated business income for 

the Clinic, GMC or GWV if one of those entities were to absorb 

its activities. Id. at 404-06. A timely appeal followed; as 
8 

noted previously, we will affirm, although we will do so on 

grounds which differ from those on which the Tax Court rested. 

Specifically, because we deem it unnecessary to decide, we will 

not reach the issue whether GHP would produce unrelated business 

income if it were part of some entity created by merging its 

operations with one of the other Geisinger System entities. 

II. 

 Generally, separately incorporated entities must 

qualify for tax exemption on their own merits. Mutual Aid 

Association of the Church of the Brethren v. United States, 759 

F.2d 792, 795 n.3 (10th Cir. 1985); cf. Moline Properties, Inc. 

v. Commissioner of Internal Revenue, 319 U.S. 436 (1943). In 

Geisinger I, we decided that GHP cannot qualify for tax exemption 

on its own merits. The question before us now is whether it 

comes within the "integral part doctrine," which may best be 

described as an exception to the general rule that entitlement to 

exemption is derived solely from an entity's own characteristics. 

See Internal Revenue Service ("IRS") brief at 20 (regulation 

providing basis for doctrine "implies that an organization whose 

sole activity is an `integral part' of the exempt activities of a 

related charity may derive its exemption from that of its 

affiliate"). As it did with the issue of whether it was entitled 

to exemption standing alone, see Geisinger I, 985 F.2d at 1214, 

GHP bears the burden of proving entitlement to exemption under 

the integral part doctrine. Also as in Geisinger I, 985 F.2d at 

1212, we will apply plenary review, both because of the 

stipulated administrative nature of the record and because we 
9 

focus on a test which differs from that upon which the Tax Court 

relied in rendering its decision. Cf. Inwood Laboratories, Inc. 

v. Ives Laboratories, Inc., 456 U.S. 844, 855 n.15 (1982) (citing 

United States v. Singer Manufacturing Co., 374 U.S. 174, 194-95 

n.9 (1963) (even when reviewing findings of fact subject to 

clearly erroneous review, appellate court may decide case as a 

matter of law if the factfinder applied an improper standard to 

the facts)). 

A. 

 In Geisinger I, we described the integral part doctrine 

as follows: 

The integral part doctrine provides a means 

by which organizations may qualify for 

exemption vicariously through related 

organizations, as long as they are engaged in 

activities which would be exempt if the 

related organizations engaged in them, and as 

long as those activities are furthering the 

exempt purposes of the related organizations. 

Geisinger I, 985 F.2d at 1220. The Tax Court on remand stated: 

The parties agree that an organization is 

entitled to exemption as an integral part of 

a tax-exempt affiliate if its activities are 

carried out under the supervision or control 

of an exempt organization and could be 

carried out by the exempt organization 

without constituting an unrelated trade or 

business. 

Geisinger II, 100 T.C. at 402; see 26 C.F.R. §1.502-1(b). 

 GHP argues that these statements require us to examine 

whether the Clinic or GMC could retain tax-exempt status if it 

were to absorb GHP. It thus compares the attributes of a 

hypothetically merged Clinic/GHP or GMC/GHP entity to the 

attributes of the HMO held to be exempt in Sound Health 
10 

Association v. Commissioner, 71 T.C. 158 (1978), acq. 1981-2 

C.B. 2.0 Concluding that the merged entity would display more 

indicia of entitlement to exemption than the Sound Health HMO, 

GHP urges that it is exempt because of the characteristics of the 

hypothetical merged entity. Despite its superficial appeal, we 

reject this argument and hold that the integral part doctrine 

does not mean that GHP would be exempt solely because either GMC 

or the Clinic could absorb it while retaining its tax-exempt 

status. While this is a necessary condition to applying the 

doctrine, it is not the only condition. GHP is separately 

incorporated for reasons it found administratively and 

politically advantageous. While it may certainly benefit from 

that separate incorporation, it must also cope with the 

consequences flowing from it. Cf. Moline Properties, 319 U.S. at 

438-39. 

 We acknowledge that interpreting the integral part 

doctrine in the manner GHP urges might enable entities to choose 

their organizational structures based on efficiency concerns 

rather than perverting those concerns by making tax 

considerations relevant. In our view, however, there are 

countervailing policy concerns which justify determining each 

entity's tax status based upon its own organizational structure. 

 

0 In Sound Health, the Tax Court ruled exempt an HMO which 

charged subscribers fees based upon a community rating 

system, subsidized the dues of subscribers who could not 

afford to pay, provided health care services (sometimes at 

no or a reduced charge) to both subscribers and members of 

the general public, treated emergency patients regardless of 

ability to pay and offered public educational programs 

regarding health. 
11 

It is less complex and more certain for courts and administrators 

to assess an entity's tax status in light of its unique 

organizational composition and its association with another 

entity, and only to have to take into account some hypothetical 

combination of organizations as a second step in those relatively 

rare instances when an organization meets the other precondition 

of integral part status we set forth below. See II.C. infra. We 

recognize that it may appear overly technical to tax GHP 

differently from a GMC/GHP or a Clinic/GHP combination, for 

instance, merely because it is incorporated separately. On the 

other hand, to tax GHP differently merely because it is related 

to those entities, without searching for indicia that its 

association with them enhances its own tax-exempt 

characteristics, would be inconsistent with the narrow 

construction generally accorded tax exemptions. See Bingler v. 

Johnson, 394 U.S. 741, 752 (1969); Commissioner of Internal 

Revenue v. Jacobson, 336 U.S. 28, 48-49 (1949); Storall 

Manufacturing Co., Inc. v. United States, 755 F.2d 664, 665 (8th 

Cir. 1985). 

 Accordingly, we will determine whether GHP is exempt 

from taxation when examined not only in the context of its 

relationship with the other entities in the System, but also 

based upon its own organizational structure. In doing so, we 

bear in mind that we are not bound by the description of the 

integral part doctrine set forth in dicta in Geisinger I. 

B. 
12 

 As the Tax Court recognized, 100 T.C. at 401, the 

integral part doctrine is not codified. Its genesis may be found 

in a phrase contained within a regulation which speaks of a 

subsidiary being exempt "on the ground that its activities are an 

integral part of the activities of the parent organization." 26 

C.F.R. § 1.502-1(b); see generally General Counsel Memorandum 

39,830 (August 30, 1990).0 This reference to the doctrine is 

only fully understood, however, when one considers it in the 

context of the regulation and the statute it implements. Section 

502 of the Internal Revenue Code (the "feeder organization rule") 

provides that an organization engaged in a trade or business for 

profit will be taxed even if it pays all of its profits over to 

an exempt organization. 26 U.S.C. § 502(a). See generally 9 

Merten's Law of Federal Income Taxation § 34.01 at 5. The 

regulation interpreting this section of the Code makes clear that 

[i]n the case of an organization operated for 

the primary purpose of carrying on a trade or 

business for profit, exemption is not allowed 

. . . on the ground that all the profits of 

such organization are payable to one or more 

[exempt] organizations . . . . 

26 C.F.R. § 502-1(b). 

 The integral part doctrine arises from an exception to 

this "feeder organization" rule. Regulation 502-1(b) states that 

despite the general rule of taxation of "feeder organizations," 

 

0 We cite this General Counsel memorandum, which was issued in 

connection with GHP's application for exemption, Loren 

Callan Rosenzweig, Geisinger, HMOs and Health Care Reform, 

Taxes, January 1994, at 20, 23 n.27, as providing helpful 

background regarding the integral part doctrine. We do not 

adopt its legal conclusions. 
13 

[i]f a subsidiary organization of a taxexempt organization would itself be exempt on 

the ground that its activities are an 

integral part of the exempt activities of the 

parent organization, its exemption will not 

be lost because, as a matter of accounting 

between the two organizations, the subsidiary 

derives a profit from its dealings with the 

parent organization[.] 

26 C.F.R. § 1.502-1(b) (emphasis added). To illustrate how this 

exemption might apply to an entity, the regulation describes "a 

subsidiary organization which is operated for the sole purpose of 

furnishing electric power used by its parent organization, a taxexempt organization, in carrying out its educational activities." 

Id.

0 See also Rev. Rul. 78-41, 1978-1 C.B. 148 (trust existing 

solely as a repository of funds set aside by nonprofit hospital 

for the payment of malpractice claims against the hospital, and 

as the payor of those claims, was exempt as an integral part of 

the hospital); Rev. Rul. 63-235, 1963-2 C.B. 210 (incidental 

publication and sale of law journals did not prevent journal 

corporation from being exempt as "adjunct to" an exempt law 

school); Rev. Rul. 58-194, 1958-1 C.B. 240 (bookstore used almost 

exclusively by university faculty and students was exempt as an 

integral part of the university with which it was associated). 

 GHP contends that as long as it would not generate 

unrelated business income if it were merged into any one of the 

other Geisinger System entities, it is exempt as an integral part 

of the System. The Tax Court, in fact, utilized unrelated 

 

0 Although the regulation speaks in terms of parent and 

subsidiary entities, the IRS does not contend that we should 

consider only GHP's relationship with its parent, the 

Foundation, in deciding this appeal. 
14 

business income concepts in analyzing GHP's claim for exemption. 

See Geisinger II, 100 T.C. at 404-07 (citing, inter alia, HiPlains Hospital v. United States, 670 F.2d 528 (5th Cir. 1982); 

Carle Foundation v. United States, 611 F.2d 1192 (7th Cir. 

1979)). We agree that an entity seeking exemption as an integral 

part of another cannot primarily be engaged in activity which 

would generate more than insubstantial unrelated business income 

for the other entity. That much is demonstrated by the remainder 

of 26 C.F.R. § 1.502-1(b), which cautions that 

the subsidiary organization is not exempt 

from tax if it is operated for the primary 

purpose of carrying on a trade or business 

which would be an unrelated trade or business 

(that is, unrelated to exempt activities) if 

regularly carried on by the parent 

organization. For example, if a subsidiary 

organization is operated primarily for the 

purpose of furnishing electric power to 

consumers other than its parent organization 

(and the parent's tax-exempt subsidiary 

organizations), it is not exempt since such 

business would be an unrelated trade or 

business if regularly carried on by the 

parent organization. Similarly, if the 

organization is owned by several unrelated 

exempt organizations, and is operated for the 

purpose of furnishing electric power to each 

of them, it is not exempt since such business 

would be an unrelated trade or business if 

regularly carried on by any one of the 

tax-exempt organizations. 

Id. 

 Although 26 C.F.R. § 502-1(b) clearly makes the absence 

of activity constituting an unrelated trade or business a 

necessary qualification for the operation of the integral part 

doctrine, because this regulation speaks in terms of 

disqualification from exemption rather than qualifications for 
15 

exemption, it does not indicate or explain whether there are any 

other necessary qualifications -- the issue we face in this case. 

 Both the revenue rulings cited earlier and case law 

similarly fail to state a comprehensive rule to assist in 

determining when an entity is exempt as an integral part of 

another. In Squire v. Students Book Corp., 191 F.2d 1018 (9th 

Cir. 1951), for example, the court ruled that a corporation 

operating a bookstore and restaurant which sold college texts, 

was wholly owned by a college, used college space free of charge, 

served mostly faculty and students, and devoted its earnings to 

educational purposes was exempt because it "obviously bears a 

close and intimate relationship to the functioning of the 

[c]ollege itself." Squire, 191 F.2d at 1020. It did not, 

however, provide further explication for its rationale. See also

University of Maryland Physicians, P.A. v. Commissioner of 

Internal Revenue, 41 T.C.M. (CCH) 732 (1981); University of 

Massachusetts Medical School Group Practice v. Commissioner of 

Internal Revenue, 74 T.C. 1299 (1980), acq. 1980-2 C.B. 2; B.H.W. 

Anesthesia Foundation, Inc. v. Commissioner of Internal Revenue, 

72 T.C. 681 (1979), nonacq. 1980-2 C.B. 2; B.S.W. Group, Inc. v. 

Commissioner of Internal Revenue, 70 T.C. 352 (1978); Brundage v. 

Commissioner of Internal Revenue, 54 T.C. 1468 (1970), acq. in

result 1970-2 C.B. xix (addressing "integral part" issue in 

deduction context). 

C. 

 Distilling § 1.502-1(b) and these cases into a general 

rule leads us to conclude that a subsidiary which is not entitled 
16 

to exempt status on its own may only receive such status as an 

integral part of its § 501(c)(3) qualified parent0 if (i) it is 

not carrying on a trade or business which would be an unrelated 

trade or business (that is, unrelated to exempt activities) if 

regularly carried on by the parent, and (ii) its relationship to 

its parent somehow enhances the subsidiary's own exempt character 

to the point that, when the boost provided by the parent is added 

to the contribution made by the subsidiary itself, the subsidiary 

would be entitled to § 501(c)(3) status. 

 Whether income received by an HMO operated by an entity 

which also directly operates a health care facility would be 

deemed unrelated business income was answered in the negative by 

Sound Health. Nevertheless, this is a complex issue which will 

probably be further explored by the courts and Congress as the 

entities which pay for health care, and those which provide it, 

begin to intertwine. Because we find that GHP does not meet the 

second prong of the integral part test articulated above, we need 

not probe the legal soundness of the Sound Health opinion. 

 In considering whether the boost received by GHP from 

its association with GMC or the Clinic might be sufficient, when 

added to its own contribution, to merit § 501(c)(3) treatment, we 

must first look at the nature of the boost which was sufficient 

in those instances where the integral part doctrine has been 

 

0 Although we refer to the entity seeking application of the 

integral part doctrine as the "subsidiary" and the current 

holder of the § 501(c)(3) exemption as the "parent," we 

recognize that the relationship, as in this case, may be 

that of entities controlled by a common parent or some other 

form of affiliation. 
17 

applied. The electric company discussed in 26 C.F.R. § 502-1(b), 

for example, would not be entitled to an exemption standing 

alone, because the provision of electric power to others is not a 

charitable purpose. 

 However, the fact that the electric company is a 

subsidiary of an exempt university eliminates the characteristic 

which prevented the company from being exempt on its own. As a 

subsidiary of the university, the electric company acquires the 

purpose of the university -- it produces electricity solely for 

the purpose of allowing education to occur.0 The "boost" it 

receives from its association with the educational institution 

transforms it from a company without to a company with a 

charitable purpose and thus enables it to qualify for tax-exempt 

status as an integral part of that institution. Like the 

electric company, the bookstores in Squire and Rev. Rul. 58-194, 

and the law journal in Rev. Rul. 63-235 had insufficiently 

charitable purposes to qualify for exempt status when considered 

alone. Selling books or a journal to the general public is not 

educational enough to qualify for exempt status as a charitable 

institution. But because these particular bookstores and this 

particular law journal were subsidiaries of universities and 

aided the universities' exempt missions of educating their 

students, the purposes of the bookstores and journal became more 

 

0 The regulation presupposes that the entity seeking exemption 

derives a profit from serving its parent. 26 C.F.R. 

§ 502-1(b). 
18 

charitable, and they were entitled to an exemption.0 Absent 

receipt of such a "boost," we do not think that an institution is 

entitled to a tax exemption as an integral part. To hold 

otherwise might enable an organization that is not entitled to an 

exemption on its own to become tax-exempt merely because it 

happens to be controlled by an organization that is itself 

exempt. 

 

0 As noted previously, see infra page 14, Rev. Rul. 78-41, 

1978-1 C.B. 148 provides another example of a situation in 

which the IRS has ruled that an organization is exempt as an 

integral part of its parent's exempt functions. In Rev. 

Rul. 78-41, the IRS ruled that a trust existing solely as a 

repository of funds set aside by a nonprofit hospital for 

the payment of malpractice claims against the hospital, and 

as the payor of those claims, was exempt as an integral part 

of the hospital. To some extent, this revenue ruling is 

consistent with our understanding of the integral part 

doctrine based upon the statute and the case law: A trust 

established to pay claims may not be charitable standing 

alone, but by collecting funds for the payment of, and 

paying, solely the malpractice claims filed against a 

nonprofit hospital, this trust was serving the hospital's 

charitable purpose of promoting health by enhancing the 

hospital's ability to continue in business. Cf. Rev. Rul. 

73-313, 1973-2 C.B. 174 (organization created to build and 

offer medical office building and facilities at a reasonable 

rent to attract a doctor to an isolated area which 

previously lacked medical services was "a method of 

promoting health in the legal sense of the term in the law 

of charity and, therefore, a charitable purpose"). It is 

also true, however, that to some extent this revenue ruling 

conflicts with 26 U.S.C. § 502 and 26 C.F.R. 

§ 1.513-1(d)(3), which, taken together, provide that the 

financing of exempt activities neither renders otherwise 

taxable entities exempt from taxation nor transforms 

unrelated business income into income which is substantially 

related to an exempt purpose and is thus exempt from 

taxation. Because of the tension we perceive between this 

revenue ruling and the statute and regulations, we will not 

rely on Rev. Rul. 78-41 in our analysis. 
19 

 Here, we do not think that GHP receives any "boost" 

from its association with the Geisinger System. In Geisinger I, 

we determined that while GHP helps to promote health, it does not 

do so for a significant enough portion of the community to 

qualify for tax-exempt status on its own. See Geisinger I, 985 

F.2d at 1219-20. Cf. Rev. Rul. 69-545, 1969-2 C.B. 117 

(promotion of health is a charitable purpose "provided that the 

class [served] is not so small that its relief is not of benefit 

to the community"). And, unlike the electric company, university 

bookstores or law journal in the regulations and case law, the 

contribution that GHP makes to community health is not increased 

at all by the fact that GHP is a subsidiary of the System rather 

than being an independent organization which sends its 

subscribers to a variety of hospitals and clinics. 

 As our examination of the manner in which GHP interacts 

with other entities in the System makes clear, its association 

with those entities does nothing to increase the portion of the 

community for which GHP promotes health -- it serves no more 

people as a part of the System than it would serve otherwise. It 

may contribute to the System by providing more patients than the 

System might otherwise have served, thus arguably allowing the 

System to promote health among a broader segment of the community 

than could be served without it, but its provision of patients to 

the System does not enhance its own promotion of health; the 

patients it provides -- its subscribers -- are the same patients 

it serves without its association with the System. To the extent 

it promotes health among non-GHP-subscriber patients of the 
20 

System, it does so only because GHP subscribers' payments to the 

System help finance the provision of health care to others. An 

entity's mere financing of the exempt purposes of a related 

organization does not constitute furtherance of that 

organization's purpose so as to justify exemption. Cf. 26 U.S.C. 

§ 502 ("[a]n organization . . . shall not be exempt from taxation 

under section 501 on the ground that all of its profits are 

payable to one or more organizations exempt from taxation under 

section 501"). Thus, it is apparent that GHP merely seeks to 

"piggyback" off of the other entities in the System, taking on 

their charitable characteristics in an effort to gain exemption 

without demonstrating that it is rendered "more charitable" by 

virtue of its association with them. 

D. 

 It has not escaped our attention, of course, that both 

our decision today and our decision in Geisinger I may either set 

the tone for, or be superseded by, legislative activity in the 

near future. The executive and the legislative branches are 

currently debating the appropriate parameters of future 

governmental involvement in the provision and financing of health 

care in this country. The legislation which may result could 

significantly transform the structure and financing of health 

care delivery systems in ways both anticipated and unanticipated. 

Academic commentary on our decision in Geisinger I reinforces our 

common-sense impression that questions regarding the tax-exempt 

status of integrated delivery systems under 26 U.S.C. § 501(c)(3) 

may be addressed during these debates. See generally Loren 
21 

Callan Rosenzweig, Geisinger, HMOs and Health Care Reform, Taxes, 

January 1994, at 20; Kenneth L. Levine, Geisinger Health Plan 

Likely to Adversely Affect HMOs and Other Health Organizations, 

J. Taxation, August 1993, at 90. 

 Whatever changes are wrought by the legislature in the 

future, however, today we are constrained to apply the law in its 

current form and to construe tax exemptions narrowly. Our 

interpretation of the integral part route to exemption under 

section 501(c)(3) reflects those constraints. Obviously, we 

express no opinion as to whether HMOs, whether structured like 

GHP or like the Sound Health HMO, can or should be exempt from 

federal income taxation after whatever transformation of the 

health care industry may be forthcoming. 
22 

III. 

 In sum, GHP does not qualify for exemption as an 

integral part of the Geisinger System because its charitable 

character is not enhanced by virtue of its association with the 

System. We will affirm the decision of the Tax Court. 
23 
24