Opinion ID: 163334
Heading Depth: 4
Heading Rank: 4

Heading: The resulting test

Text: 44 In summary, under section 501(c)(3), a health-care provider must make its services available to all in the community plus provide additional community or public benefits. The benefit must either further the function of government-funded institutions or provide a service that would not likely be provided within the community but for the subsidy. Further, the additional public benefit conferred must be sufficient to give rise to a strong inference that the public benefit is the primary purpose for which the organization operates. In conducting this inquiry, we consider the totality of the circumstances. Geisinger I, 985 F.2d at 1219. With these principles in mind, we proceed to review the Tax Court's decision in the present case. 2. The Tax Court correctly defined charitable and applied the appropriate legal test under 501(c)(3). 45 Petitioners first contend that the Tax Court erred in its conclusion regarding the applicable law. Based upon our discussion supra, we disagree. The Tax Court correctly recognized the promotion of health for the benefit of the community as a charitable purpose. Health Plans, 82 T.C.M. at 602 ([I]t is now well settled that the promotion of health for the benefit of the community is a charitable purpose.). Further, the Tax Court considered the community-benefit requirement based on the totality of the circumstances. 21 Id. at 604 (The community benefit test requires consideration of a variety of factors that indicate whether an organization is involved in the charitable activity of promoting health on a community-wide basis.... Considering all the facts and circumstances ... we conclude that petitioner did not provide a meaningful community benefit.). Thus, the Tax Court did not err in determining the applicable law. 46 3. The Tax Court correctly concluded that petitioners do not operate primarily to promote health for the benefit of the community. 47 Petitioners next argue that the Tax Court erred in concluding that petitioners did not operate primarily for the benefit of the community. We disagree. 48 a. Nature of the product or service and the character of the transaction 49 In this case, we deal with organizations that do not provide health-care services directly. Rather, petitioners furnish group insurance entitling enrollees to services of participating hospitals and physicians. Petitioners determine premiums using two methods: (1) an adjusted community rating for individuals and small employers; and (2) past-claims experience for large employers. Thus, as in Church of the Brethren, petitioners sell[ ] insurance coverage ... extend[ing] benefits in return for a premium based generally on the risk assumed. 759 F.2d at 795. In other words, petitioners primarily perform a risk-bearing function. Cf. Bloche, supra, at 399. In Church of the Brethren, as in the instant case, the commercial nature of this activity inspired doubt as to the entity's charitable purpose. 759 F.2d at 795; cf. Federation Pharmacy Servs., Inc. v. C.I.R., 72 T.C. 687, 691-92, 1979 WL 3712 (1979), aff'd 625 F.2d 804 (8th Cir.1980) (noting that selling pharmaceuticals is an activity that is normally carried on by a commercial profitmaking enterprise[]). Where, as here, [i]t is difficult to distinguish the plaintiff corporation from a mutual insurance company, Hassett v. Assoc. Hosp. Serv. Corp. of Mass., 125 F.2d 611, 614 (1st Cir.1942), we must carefully scrutinize the organization's operation. 22 Cf. Church of the Brethren, 759 F.2d at 795; Am. Ass'n of Christian Schools Voluntary Employees Beneficiary Ass'n Welfare Plan Trust by Janney v. United States, 850 F.2d 1510, 1516 (11th Cir.1988) (Since the Trust has a substantial private purpose to provide insurance in return for premiums, it is not an organization exclusively engaged in the promotion of the social welfare.). 23 b. Free or below-cost products or services 50 The fact that an activity is normally undertaken by commercial for-profit entities does not necessarily preclude tax exemption, particularly where the entity offers its services at or below-cost. Cf. Bloche, supra, at 311 n. 31. But petitioners provide virtually no free or below-cost health-care services. 24 All enrollees must pay a premium in order to receive benefits. 25 As the Eighth Circuit has recognized, [a]n organization which does not extend some of its benefits to individuals financially unable to make the required payments [generally] reflects a commercial activity rather than a charitable one. Federation Pharmacy Servs., Inc. v. C.I.R., 625 F.2d 804, 807 (8th Cir.1980). Further, the fact that petitioners in no way subsidize dues for those who cannot afford subscribership distinguishes this case from the HMOs in Sound Health Ass'n v. C.I.R., 71 T.C. 158, 1978 WL 3393 (1979), and Geisinger I, 985 F.2d at 1219. 51 We acknowledge, as did the Tax Court, that petitioners' adjusted community rating system[] likely allowed its enrollees to obtain medical care at a lower cost than might otherwise have been available. Care, 82 T.C.M. at 625; Group, 82 T.C.M. at 615. Again, however, selling services at a discount tells us little about the petitioners' purpose. Many profitmaking organizations sell at a discount. Federation Pharmacy, 72 T.C. at 692, 1979 WL 3712, aff'd 625 F.2d 804 (8th Cir.1980). In considering price as it relates to an organization's purpose, there is a qualitative difference between selling at a discount and selling below cost. 26 52 In sum, petitioners sole activity is arranging for health-care services in exchange for a fee. To elevate the attendant health benefit over the character of the transaction would pervert Congress' intent in providing for charitable tax exemptions under section 501(c)(3). Contrary to petitioners' insinuation, the Tax Court did not accord dispositive weight to the absence of free care. Neither do we. Rather, it is yet another factor that belies petitioners' professions of a charitable purpose. 27 53 c. Research and educational programs 54 Nothing in the record indicates that petitioners conducted research or offered free educational programs to the public. 28 This bolsters our conclusion that petitioners did not operate for the purpose of promoting health for the benefit of the community. 55 d. The class eligible to benefit 56
57 As the Tax Court noted, [Health Plans] offered its [coverage] to a broad cross-section of the community including individuals, the employees of both large and small employers, and individuals eligible for Medicaid benefits. Health Plans, 82 T.C.M. at 604. In fact, in 1999, Health Plans' enrollees represented twenty percent of Utah's total population and fifty percent of Utah residents eligible for Medicaid benefits. 29 58 Nevertheless, even though almost all Utahans were potentially eligible to enroll for Health Plans coverage, the self-imposed requirement of membership tells us something about Health Plans' operation. As the Third Circuit noted in Geisinger I: 59 The community benefitted is, in fact, limited to those who belong to [the HMO] since the requirement of subscribership remains a condition precedent to any service. Absent any additional indicia of a charitable purpose, this self-imposed precondition suggests that [the HMO] is primarily benefitting itself (and, perhaps, secondarily benefitting the community) by promoting subscribership throughout the areas it serves. 60 985 F.2d at 1219. Further, while the absence of a large class of potential beneficiaries may preclude tax-exempt status, its presence standing alone provides little insight into the organization's purpose. Offering products and services to a broad segment of the population is as consistent with self promotion and profit maximization as it is with any charitable purpose. 61
62 Neither Care nor Group offered their health plans to the general public. Rather, both Care and Group limited their enrollment to employees of large employers (employers with 100 or more employees). Thus, as the Tax Court found, [Care and Group] operate[d] in a manner that substantially limit[ed][the] universe of potential enrollees. Care, 82 T.C.M. at 625; Group, 82 T.C.M. at 615. Based on this finding, the Tax Court correctly concluded that neither Care nor Group promoted health for the benefit of the community. 63