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1

UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF CALIFORNIA

VISION SERVICE PLAN,

NO. CIV. S-04-1993 LKK/JFM

Plaintiff,

v.

O R D E R

UNITED STATES OF AMERICA,

Defendant.

 /

In 1960, Vison Service Plan (“VSP”) was granted status as a

tax-exempt organization. In 1999, the IRS commenced an examination

of VSP. The IRS concluded that VSP was not entitled tax-exempt

status under Internal Revenue Code, 26 U.S.C., (“IRC”), Section

501(c)(4). Def.’s SUF, 1. The IRS issued a final adverse

determination letter to VSP, revoking its IRC Section 501(c)(4)

status, effective prospectively from January 1, 2003. Def.’s SUF,

2. The following year, VSP paid the tax owed on its 2003 earnings,

and then filed this suit. 

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2

Pending before the court are cross-motions for summary

judgment. VSP seeks a determination that it is a social welfare

organization under 501(c)(4), a refund of its income tax payment

for 2003 and an order that the United States issue it a private

letter recognizing VSP’s status under 501(c)(4). The United States

seeks summary judgment on the grounds that VSP does not qualify for

exemption under 501(c)(4). 

II.

STANDARDS

Summary judgment is appropriate when it is demonstrated that

there exists no genuine issue as to any material fact, and that the

moving party is entitled to judgment as a matter of law. Fed. R.

Civ. P. 56(c); See also Adickes v. S.H. Kress & Co., 398 U.S. 144,

157 (1970); Sicor Limited v. Cetus Corp., 51 F.3d 848, 853 (9th

Cir. 1995).

Under summary judgment practice, the moving party

[A]lways bears the initial responsibility of

informing the district court of the basis for

its motion, and identifying those portions of

"the pleadings, depositions, answers to

interrogatories, and admissions on file,

together with the affidavits, if any," which

it believes demonstrate the absence of a

genuine issue of material fact.

Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). "[W]here the

nonmoving party will bear the burden of proof at trial on a

dispositive issue, a summary judgment motion may properly be made

in reliance solely on the 'pleadings, depositions, answers to

interrogatories, and admissions on file.'" Id. Indeed, summary

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3

judgment should be entered, after adequate time for discovery and

upon motion, against a party who fails to make a showing sufficient

to establish the existence of an element essential to that party's

case, and on which that party will bear the burden of proof at

trial. See id. at 322. "[A] complete failure of proof concerning

an essential element of the nonmoving party's case necessarily

renders all other facts immaterial." Id. In such a circumstance,

summary judgment should be granted, "so long as whatever is before

the district court demonstrates that the standard for entry of

summary judgment, as set forth in Rule 56(c), is satisfied." Id.

at 323.

If the moving party meets its initial responsibility, the

burden then shifts to the opposing party to establish that a

genuine issue as to any material fact actually does exist.

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,

586 (1986); See also First Nat'l Bank of Ariz. v. Cities Serv. Co.,

391 U.S. 253, 288-89 (1968); Sicor Limited, 51 F.3d at 853. 

In attempting to establish the existence of this factual

dispute, the opposing party may not rely upon the denials of its

pleadings, but is required to tender evidence of specific facts in

the form of affidavits, and/or admissible discovery material, in

support of its contention that the dispute exists. Fed. R. Civ.

P. 56(e); Matsushita, 475 U.S. at 586 n.11; See also First Nat'l

Bank, 391 U.S. at 289; Rand v. Rowland, 154 F.3d 952, 954 (9th Cir.

1998). The opposing party must demonstrate that the fact in

contention is material, i.e., a fact that might affect the outcome

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4

of the suit under the governing law, Anderson v. Liberty Lobby,

Inc., 477 U.S. 242, 248 (1986); Owens v. Local No. 169, Assoc. of

Western Pulp and Paper Workers, 971 F.2d 347, 355 (9th Cir. 1992)

(quoting T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n,

809 F.2d 626, 630 (9th Cir. 1987), and that the dispute is genuine,

i.e., the evidence is such that a reasonable jury could return a

verdict for the nonmoving party, Anderson, 477 U.S. 248-49; see

also Cline v. Industrial Maintenance Engineering & Contracting Co.,

200 F.3d 1223, 1228 (9th Cir. 1999).

In the endeavor to establish the existence of a factual

dispute, the opposing party need not establish a material issue of

fact conclusively in its favor. It is sufficient that "the claimed

factual dispute be shown to require a jury or judge to , 04-

1993resolve the parties' differing versions of the truth at trial."

First Nat'l Bank, 391 U.S. at 290; See also T.W. Elec. Serv., 809

F.2d at 631. Thus, the "purpose of summary judgment is to 'pierce

the pleadings and to assess the proof in order to see whether there

is a genuine need for trial.'" Matsushita, 475 U.S. at 587

(quoting Fed. R. Civ. P. 56(e) advisory committee's note on 1963

amendments); see also International Union of Bricklayers & Allied

Craftsman Local Union No. 20 v. Martin Jaska, Inc., 752 F.2d 1401,

1405 (9th Cir. 1985).

In resolving the summary judgment motion, the court examines

the pleadings, depositions, answers to interrogatories, and

admissions on file, together with the affidavits, if any. Rule

56(c); See also In re Citric Acid Litigation, 191 F.3d 1090, 1093

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(9th Cir. 1999). The evidence of the opposing party is to be

believed, see Anderson, 477 U.S. at 255, and all reasonable

inferences that may be drawn from the facts placed before the court

must be drawn in favor of the opposing party, see Matsushita, 475

U.S. at 587 (citing United States v. Diebold, Inc., 369 U.S. 654,

655 (1962) (per curiam)). Nevertheless, inferences are not drawn

out of the air, and it is the opposing party's obligation to

produce a factual predicate from which the inference may be drawn.

See Richards v. Nielsen Freight Lines, 602 F. Supp. 1224, 1244-45

(E.D. Cal. 1985), aff'd, 810 F.2d 898, 902 (9th Cir. 1987).

Finally, to demonstrate a genuine issue, the opposing party

"must do more than simply show that there is some metaphysical

doubt as to the material facts. . . . Where the record taken as a

whole could not lead a rational trier of fact to find for the

nonmoving party, there is no 'genuine issue for trial.'"

Matsushita, 475 U.S. at 587 (citation omitted).

III.

ANALYSIS

 The issue to be resolved in the cross-motions is whether VSP

qualifies for tax exempt status under 26 U.S.C. § 501(c)(4).

Below, I explain why plaintiff’s motion for summary judgment must

be denied and defendant’s motion for summary judgment must be

granted. 

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1 Because resolution of these motions require a factintensive inquiry, the court will eschew a separate exposition of

the facts. The facts discussed during the analysis section are

undisputed, unless indicated otherwise.

6

A. APPLICABLE LAW1

A taxpayer seeking exemption from taxation has the burden of

proving by clear and convincing proof that he is within a specific

exemption clause. Club Gaona, Inc. v. United States, 167 F.Supp.

741, 746 (S.D. Cal. 1958). 

Section 501(c)(4) of the Internal Revenue Code (26 U.S.C.A.

§ 501(c)(4)) provides federal tax exemption to a social welfare

organization. Section 501 provides, in pertinent part, that

"organizations not organized for profit but operated exclusively

for the promotion of social welfare" shall be exempt from taxation.

26 U.S.C. §§ 501(a) and 501(c)(4)(A). 

Although the words “exclusively” and “primarily” have

different meanings, courts interpret the word “exclusively” 

to mean, “primarily.” See American Women Buyers Club, Inc. v.

United States, 338 F.2d 526, 528 (2nd Cir. 1964)(“The word

‘exclusively’ as used in the statute has not been given a strict

interpretation . . . but rather has been interpreted to mean

‘primarily.’”)(citing Debs Memorial Radio Fund, Inc. v.

Commissioner, 148 F.2d 948, 952 (2nd Cir. 1945)). 

In like fashion, the regulations provide:

An organization is operated exclusively for the

promotion of social welfare if it is primarily engaged

in promoting in some way the common good and general

welfare of the people of the community. An organization

embraced within this section is one which is operated primarily

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2 Defendant places great reliance of cases addressing

qualification for tax exempt status under § 501(c)(3). That

reliance is inapposite. Section 501(c)(3)and (c)(4) address

different circumstances and have different criteria for exemption.

Moreover, the three 503(c)(3) cases discussed by VSP are

distinguishable as they involve actual health care providers or

HMOs. As discussed in the text, plaintiff is not a health care

provider. 

7

for the purpose of bringing about civic betterments and social

improvements.

26 C.F.R. § 1.501(c)(4)-1(a)(2).

The regulations go on to provide that an organization is not

operated primarily for the promotion of social welfare if its

primary activity is "carrying on a business with the general public

in a manner similar to organizations which are operated for

profit." 26 C.F.R. § 1.501(c)(4)-1(a)(2)(ii).

In essence, VSP must establish that it is (1) not organized

for profit; and (2) that it operates primarily for the promotion

of social welfare. 26 C.F.R. § 1.501(c)(4)-1(a)(I)& (ii). As I

explain below, VSP is unable to demonstrate satisfaction of either

of the two requisite criteria.2

B. THE PROMOTION OF SOCIAL WELFARE

Plaintiff maintains that it qualifies for exemption under 501

(c)(4) because “it is operated primarily for the promotion of

social welfare.” Pl.’s Mot. for Summ. J. at 2:20. VSP claims to

serve broad segments of the community through direct services as

well as through charity work. While VSP’s charitable work is

admirable, VSP cannot establish that it operates primarily for the

promotion of social welfare within the meaning of the tax

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regulations.

The Treasury regulation provides that:

An organization embraced within this section is one

which is operated primarily for the purpose of bringing

about civic betterments and social improvements. 

26 C.F.R. § 1.501(c)(4)-1(a)(2). 

Thus, to qualify an organization must be “a community movement

designed to accomplish community ends.” Erie Endowment v. United

States, 316 F.2d 151, 156 (3d Cir. 1962).

It is frequently the case that an organization is found not

to qualify under 501(c)(4) because it is operating primarily for

the benefit of its members, rather than for the purpose of

benefitting the community as a whole. See, e.g., Contracting

Plumbers Co-op. Restoration Corp. v. United States, 488 F.2d 684,

686 (2d Cir. 1973) (plumbers cooperative not tax exempt as benefits

were proportional to member’s financial involvement); American

Women Buyers, 338 F.2d at 528 (association not tax exempt as

majority of benefits were for members and did not promote social

welfare). In sum, where organizations provide substantially

different benefits to the public as compared to its private

members, it is not “primarily” devoted to social welfare as

required by Section 501(c)(4). Id. at 687. In essence, even

though there may be aspects of the organization that greatly

benefit society, if the majority of the organization’s services

benefit private members, the organization cannot qualify for an

exemption under 501(c)(4). Moreover, it has also been held that

“[t]he presence of a single substantial non-exempt purpose

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9

precludes exempt status regardless of the number or importance of

the exempt purpose.” Contracting Plumbers, 588 F.2d at 686. 

Finally, it is pertinent to the instant case to note that the fact

that an organization promotes health care, or is part of the health

care industry, does not, alone, ensure exempt status within the tax

code. See IHC Health Plans Inc. v. Commissioner of Internal

Revenue, 325 F.3d 1188, 1197 (10th Cir. 2003).

 The test for qualification under 501(c)(4) is stringent.

For instance, in Commissioner of Internal Revenue v. Lake Forest,

Inc., 305 F.2d 814 (4th Cir. 1962), the court found that a

membership-based organization involved in providing housing for

veterans did not qualify. The court explained: 

Lake Forest does, of course, furnish housing to a

certain group of citizens but it does not do so on a

community basis. It is a public-spirited but

privately-devoted endeavor. Its work in part

incidentally redounds to society but this is not the

'social welfare' of the tax statute.

C.I.R. v. Lake Forest, Inc., 305 F.2d at 818. The court further

explained that classification as “‘civic’ or ‘social’ depends upon

the character – as public or private – of the benefits bestowed,

of the beneficiary, and of the benefactor.” Id. 

As applied to the case at bar, the court concludes that

despite VSP’s charity work, the membership-based structure as well

as the types of services offered, demonstrate that VSP’s primary

activity is not the promotion of social welfare. I begin this part

of the analysis with an examination of VSP’s service structure. 

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1. VSP’s Clients

Plaintiff argues that VSP serves a broad cross section of the

California community. See Pl.’s Mot. for Summ. J. at 27:12-16.

While this may be true, VSP’s primary activity is to defray and

assume “the costs of professional vision care by establishing a

fund from periodic payments by subscribers or beneficiaries, from

which fund said costs may be paid.” Decl. of Jeremy N. Hendon, Ex.

A, VSP’s Articles of Incorporation, at Article II. VSP contracts

with employers, health maintenance organizations, insurance

companies, and political subdivisions (“subscribers”) to arrange

for the provision of vision care services and vision supplies to

the subscribers’ employees or members (“enrollees”). Def.’s SUF,

3. 

VSP provides services to subscribers and through them, to

enrollees. A non-enrolled individual may not simply walk in off

the street to receive care. Def. SUF, 6. Although VSP does

provide services through charity programs, these services to nonenrollees are not, comparatively, substantial. Much like the

organizations at issue in Lake Forest or Contracting Plumbers

Cooperative, the benefits that VSP provides to the public are

incidental and not the primary purpose of VSP. VSP’s primary

purpose is to serve VSP’s paying members. 

VSP argues that there are several factors favoring a finding

of tax exempt status. They note that (1) many of VSP’s subscribers

are small businesses, a consideration under the Internal Revenue

Manual in evaluating tax exempt status, Pl.’s SUF 27; (2) many VSP

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3 There is nothing pejorative in the term, it simply notes

a functional difference between providers, and an organization that

arranges for the provision of services.

11

doctors serve areas designated as medically needy or under served.

Pl.’s SUF, 90-91.; (3) VSP provides vision care for many Medicaid

and Medicare participants; and (4) VSP services low income children

through the California Healthy Families Child Heath Assistance

Program (“Healthy Families”), Pl.’s SUF, 30. The court now

addresses each of these contentions. 

a. Small Employers & Servicing Rural Areas

Servicing small employers or rural subscribers and enrollees

does not equate to promoting social welfare. See Def. Opp’n at 24:

14-22. Small employers or rural employers are still paying for

VSP’s services and VSP is making a profit from these contracts.

VSP submits that the Internal Revenue Manual lists servicing

smaller employers and rural enrollees as a factor in determining

if an HMO qualifies for exemption under 501(c)(4). See Pl.’s Mot.

for Summ. J. 27:20-22. This argument is unavailing. Even

assuming arguendo the binding character of the manual, a dubious

proposition, VSP is not an HMO, i.e. it does not provide medical

services, it is instead what is known in the trade as a bundler.3

b. Medicaid, Medicare and Healthy Families enrollees

VSP argues that servicing Medicaid, Medicare and Healthy

Families participants is a central part of how VSP promotes social

welfare.

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4 Defendant’s example is helpful in understanding how it is

that VSP does not absorb the loss: 

For example, suppose the customary doctor fee was $100

12

In 2003, VSP covered more than 2.1 million Medicaid and

Medicare participants for vision care. These enrollees comprised

31.4% of VSP's total enrollment. Pl.’s SUF, 29. Combined with the

children VSP served through Heathy Families, these three groups of

enrollees represented 41.5% of VSP’s total enrollment in 2003. VSP

submits that it suffered substantial losses from providing services

to Medicaid, Medicare and Healthy Families participants. See

Pl.’s SUF, 35. VSP argues that these facts support a finding that

VSP is primarily engaged in promoting social welfare. The court

cannot agree. 

First, VSP competitively bid for the Medicaid, Medicare and

Healthy Families contracts. See Def.’s Mot. for Summ. J., Hendon

Dec., Ex. H at 137-41. As defendant notes: 

The criterion for an Enrollee to receive VSP's services

is not whether such person is a member of a medically

underserved population. Rather, the criterion is

whether the Enrollee is an employee or member of a

paying Subscriber (e.g., the State of California) which

contracts with VSP for a fee. That is, VSP does not

focus on individuals who need medical care, but focuses

on its Subscribers with whom VSP contracts for a fee. 

Def. Mot. for Summ. J. at 11:15-19. 

Second, in calculating the alleged losses, VSP includes

discounts given by participant doctors. This does not appear

appropriate. As the court understands it, the providing doctor

incurs the loss and not VSP.4 Therefore, the court does not accept

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per patient and the reduced doctor fee for Subscribers

with Medicare enrolles was $75 per patient; VSP does not

suffer a $25 loss because, while it receives $75 per

patient from the Subscriber, it is required to pay the

doctor provider only $75 per patient, not $100. Thus,

there is no net “loss” to VSP. The doctor is the only

participant who arguably suffers a “loss.” 

Def. Opp’n at 27:15-19.

Moreover, even there the “loss” suffered by the provider is

only as compared to his usual fee.

13

as accurate the alleged “losses” as calculated by plaintiff. See

Pl. Mot. for Summ. J., Cochran Dec., Ex. K. 

Third, from all that appears, the Medicaid, Medicare and

Healthy Families programs are profitable for VSP. As defendant

maintains, if VSP refused to reduce its fees for these contracts,

“VSP would lose a substantial volume of business, albeit at reduced

fees.” Def.’s Opp’n to Pl. Mot. for Summ. J. at 27:23-26.

Fourth, VSP claims that in 2003, excluding doctor discounts,

VSP spent $4,296,055.00 on discounts and underwritten losses for

Medicare, Medicaid and Healthy Families participants. Pl’s. Mot.

for Summ. J., Cochran Dec. Ex. N. Even if the court accepts VSP’s

numbers as accurate, this expenditure of $4,296,055.00 is a

relatively small fraction of VSP’s net income for 2003, which was

$34,487,626.00, id., and an even smaller fraction of VSP’s gross

income for 2003, which was $425 million. Def.’s Mot. for Summ. J.,

Hendon Dec., Ex. K.

 Even if the court concluded that servicing these specific

enrollees could constitute promoting social welfare, these

enrollees make up less than half of VSP’s total enrollment, thus

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again negating a conclusion that VSP is “primarily engaged” (much

less exclusively engaged) in promoting social welfare. 

While VSP does in fact offer services to these groups, it is

also very clear that servicing these particular enrolles is not

VSP’s primary activity. Put directly, VSP is operating primarily

for the benefit of its subscribers rather than for the purpose of

benefitting the community as a whole. This conclusion precludes

VSP from exemption under 501(c)(4). See, e.g., Contracting

Plumbers, 488 F.2d at 686; American Women Buyers Club, 338 F.2d

at 528.

2. VSP’s Charity Services

Plaintiff maintains that VSP provides free vision care to

“substantial numbers of non-enrollees under VSP’s charity

programs.” Pl.’s SUF, 23. It is true that VSP provides vision

care services to non-enrollees. Nonetheless, the provision of

these services is comparatively small, and again, does not

establish that VSP is primarily engaged in promoting social

welfare. 

There are two main programs through which non-enrollees might

receive vision care services: the Sight for Students program and

disaster relief efforts. 

a. Sight for Students

This program targets children of families earning up to 200%

of the poverty level and who do not participate in other eyecare

insurance programs. VSP's free services under the program include

eye examinations, eyeglasses, medically-necessary contact lenses,

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vision therapy and low vision treatment. These services are

available for students up to age 18 or through graduation from high

school. Pl.’s SUF, 37. The Sight for Students children and their

families select a VSP doctor and present a VSP service

authorization (voucher). The VSP doctor then provides services and

is paid standard VSP contract rates by VSP or a local VSP

affiliate. VSP or an affiliate bears the cost of the providers'

services and of the glasses or contacts provided under the plan.

Pl.’s SUF, 39. 

In 2003, VSP spent $2.8 million dollars on this program, Pl.’s

Mot. for Summ. J., Cochran Dec., Ex. N, and provided services for

12,558 children. Id., Ex. H. When one compares $2.8 million,

however, with VSP’s net or gross income, it appears that the amount

spent on this program is not substantial. Indeed, children

receiving care under the Sight for Students program constituted

only .19% of VSP’s total enrollment. Taken together, these facts

support a finding that VSP is not primarily engaged in the

promotion of social welfare.

b. Disaster Relief Services

In conjunction with the American Red Cross, VSP also

contributes to disaster relief by providing free exams and

replacement glasses to disaster victims. VSP provides vouchers to

chapters of the American Red Cross for free services. Disaster

victims may present these authorizations to VSP providers to

receive free examinations and glasses, for which VSP reimburses the

providers. Pl.’s SUF, 41.

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In 2003, VSP provided services for 285 people compared to a

total enrollment of 6 million, Pl.’s Mot. for Summ. J., Cochran

Dec., Ex. H, and spent roughly $73,132.00. Id. Again, compared

to either VSP’s net income or gross income, the amount spent on

disaster relief services is minimal.

3. VSP’s Community Outreach and Community Education

In addition to providing services to non-enrollees, VSP also

engages in educational and community outreach. These programs

include: (1) Get Focused Campaign; (2) Health Care Vision Project;

(3) Vision USA; (4) Eye on Health Patient Newsletter; (5)

Optometric Education and Research; (6) Clinical Guidelines and

Algorithms; and (7) Paid Time Off for Volunteer Service. See Pl.’s

Mot. for Summ. J. at 34-36. VSP claims that these programs, in

conjunction with the services provided to Medicaid, Medicare and

Health Families participants, support a finding that it is

primarily engaged in the promotion of social welfare. The court

cannot agree.

While these programs are admirable and important, they do not

demonstrate VSP being primarily involved in the promotion of social

welfare. In 2003, VSP spent $3,893,496.00 on these programs. See

Pl.’s Mot. for Summ. J., Cochran Dec., Ex N. This includes the

Sight for Students Program, as well as disaster relief services.

Again, this is a very small fraction of VSP’s gross or net income

for 2003. 

Plaintiff submits that, taken together, VSP’s charity work and

service to Medicaid, Medicare and Healthy Families participants

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demonstrates that VSP should be exempt under the requirements of

501(c)(4). VSP’s own numbers do not support such a conclusion. 

In 2003, VSP spent roughly 8 million dollars on charity work.

See Pl.’d Mot. for Summ. J., Cochran Decl., Ex. N. This number

does not include doctor discounts, but does include the costs that

VSP allegedly incurred providing services to Medicaid, Medicare and

Healthy Families participants. 

Even assuming that VPS’s calculations are accurate, eight

million dollars is 24% of VSP’s 2003 net income and an even smaller

percentage of VSP’s gross income. In sum, these programs and

services do not demonstrate that VSP is primarily engaged in the

promotion of social welfare. While VSP does contribute to the

betterment of society, like the organization in Lake Forest, it is

a “publicly spirited but privately-devoted endeavor.” Lake Forest,

305 F.2d at 818. VSP’s work “incidentally redounds to society but

this is not the ‘social welfare’ of the tax statute.” Id. 

Put directly, the court must conclude that VSP’s services are

most beneficial to private paying members, the subscribers and the

enrollees. Like the members of the plumbers cooperation in

Contracting Plumbers, members of VSP enjoy the benefit of VSP’s

services precisely to the extent that members use and pay for the

services. Contracting Plumbers, 488 F.2d at 687. Serving the

interests of these private subscribers is clearly a non-exempt

purpose. Id. This non-exempt purpose destroys VSP’s exemption

status, regardless of the number or importance of truly exempt

purposes. Id; American Women Buying Club, 338 F.2d at 528.

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C. NOT OPERATING FOR PROFIT

Plaintiff submits that VSP was organized as a non-profit and

operates like one. VSP points to its by-laws, which provides in

pertinent part: 

This Corporation shall operate as a nonprofit

corporation and shall be organized and operated

exclusively for the promotion of social welfare within

the meaning of Section 501(c)(4) of the Internal Revenue

Code of 1986, as amended, or any successor provision.

The Corporation shall maintain and operate a voluntary

nonprofit vision care plan to provide care to

subscribers to such plan under contracts which entitle

the subscribers to certain eye care; to provide eye care

to medically underserved persons, whether or not

subscribers to such plan; to provide public education

regarding vision and vision care; to perform such

services in a manner that benefits the community; and to

engage in any and all lawful activities necessary and

incidental thereto.

Pl.’s SUF, 3. 

The issue, however, is not whether plaintiff is a nonprofit

corporation for corporation law purposes, but whether it is one for

federal tax purposes. 

To qualify for an exemption under 501(c)(4), an organization

must establish that it operates exclusively for the promotion of

social welfare. According to the Treasury regulations, an

organization is not operated primarily for the promotion of social

welfare if its primary activity is "carrying on a business with the

general public in a manner similar to organizations which are

operated for profit." 26 C.F.R. § 1.501(c)(4)-1(a)(2)(ii). 

Moreover, a corporation that devotes much of its revenues to

improving its ability to compete commercially through accumulation

of large surpluses and expansion of its income producing facilities

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is not entitled to exemption under Section 501(c)(4). People’s

Educational Camp Soc. Inc. v. C.I.R., 331 F.2d 923, 932 (2d Cir.

1964). 

In this regard, I begin by noting that VSP engages in costcutting measures common to for-profit businesses. For example, a

portion of VSP's bonus structure paid to its employees is directly

tied to reducing VSP's costs. Def.’s SUF, 24. See also Def.’s

SUF, 25 and 26. (discussing other ways that VSP cuts costs).

Second, VSP strives to remain competitive in ways that do not

appear to be consistent with the operations of a non-profit. For

example, VSP pays commissions to brokers who bring new clients.

In 2003, VSP paid $19 million in broker commissions. (This is more

than VSP spent on charity work in 2003, Pl.’s Mot. for Summ. J.,

Cochran Dec., Ex. N). The broker’s commission is calculated based

on the revenue that VSP receives from each new client. Def.’s SUF,

29. See also Def.’s SUF, 30-31.

 Moreover, the court is unable to agree with plaintiff that

no one profits from its activities. Although VSP’s by-laws provide

that VSP has no equity owners who are entitled to share in its net

earnings, in fact VSP executives and officers receive bonuses that

are taken directly from the net earnings. See Def.’s Resp. to

Pl.’s SUF, 4 (discussing VSP executive bonuses and how bonuses are

calculated). Furthermore, VSP offers its executives high salaries

and other forms of compensation that are more consistent with a

for-profit corporation than an non-profit. For example, Roger

Valine, the Chief Executive Officer of VSP, although not required

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to work full time, was paid a $395,000 base salary for 2003, in

addition to a sizable bonus plan. Def.’s SUF, 37 & 44. Chief

officers and executives are also provided with luxury company cars.

See Def.’s SUF, 47-49. VSP specifically targeted the executives’

salaries to median market levels, making no distinction between

salaries paid to executives working at for-profit businesses, and

executives working at non-profit entities. Def.’s SUF, 38. See

also Def.’s SUF, 40-41;47-49 (describes other ways that executives

are compensated).

The court concludes that VSP carries on business with the

public "in a manner similar to organizations which are operated for

profit." 26 C.F.R. § 1.501(c)(4)-1(a)(2)(ii). Therefore, VSP

does not operate primarily for the promotion of social welfare. 

D. CONCLUSION

Plaintiff has failed to establish that it qualifies for exempt

status under 501(c)(4). VSP is not operated “exclusively for the

promotion of social welfare" as provided for in 501(c)(4). For

these reasons, summary judgment for the defendant, United States,

is GRANTED. Summary judgment for the plaintiff, VSP, is DENIED.

The Clerk is directed to ENTER judgment accordingly and CLOSE the

case.

IT IS SO ORDERED.

DATED: December 12, 2005.

/s/Lawrence K. Karlton 

LAWRENCE K. KARLTON

SENIOR JUDGE

UNITED STATES DISTRICT COURT

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