Opinion ID: 163334
Heading Depth: 2
Heading Rank: 4

Heading: Whether Petitioners Qualify for Tax-Exempt Status as an Integral Part of Health Services.

Text: 68 Petitioners contend that even if they do not qualify for tax exemption standing alone, they qualify based on the fact that their activities are an integral part of Health Services, essential to Health Services in accomplishing its tax-exempt purpose. We disagree. 69 In general, separately incorporated entities must qualify for tax exemption on their own merits. Geisinger Health Plan v. C.I.R., 30 F.3d 494, 498 (3d Cir.1994) ( Geisinger II ) (citing Church of the Brethren, 759 F.2d at 795 n. 3). Several circuits, however, have recognized a so-called exception to this general rule, commonly called the integral-part doctrine. See, e.g., id. ([The] `integral part doctrine' ... may best be described as an exception to the general rule that entitlement to exemption is derived solely from an entity's own characteristics.); Tex. Learning Tech. Group v. C.I.R., 958 F.2d 122, 126 (5th Cir.1992); Squire v. Students Book Corp., 191 F.2d 1018, 1020 (9th Cir. 1951). 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 II, 30 F.3d at 498; see also Geisinger I, 985 F.2d at 1220 (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.). 70 To the extent the integral-part doctrine rests on a derivative theory of exemption, it runs contrary to two fundamental tenets of tax law: (1) the doctrine of corporate entity, under which a corporation is a separate and distinct taxable entity; 30 and (2) the canon of statutory interpretation requiring strict construction of exemptions from taxation. 31 Bingler, 394 U.S. at 751-52, 89 S.Ct. 1439. IHC separately incorporated Health Services, Health Plans, Care, and Group. It cannot now escape the tax consequences of that choice, no matter how bona fide its motives or longstanding its arrangements. Nat'l Carbide Corp. v. C.I.R., 336 U.S. 422, 439, 69 S.Ct. 726, 93 L.Ed. 779 (1949). Further, we reject petitioners' contention that the integral-part doctrine constitutes a less rigorous road to tax exemption. The rigor of the charitable-purpose requirement remains constant, regardless of the theory upon which the taxpayer bases its entitlement to tax exemption under section 501(c)(3). 71 Nevertheless, to the extent the integral-part doctrine recognizes that we should consider the totality of the circumstances in determining an organization's purpose, the doctrine is in accord with our section 501(c)(3) jurisprudence. One of the myriad factors we may consider in determining an organization's purpose is whether an essential nexus exists between an organization seeking tax exemption and a tax-exempt affiliate. The example cited in the Treasury Regulations aptly illustrates the point: a subsidiary organization which is operated for the sole purpose of furnishing electric power used by its parent organization, a tax-exempt educational organization, in carrying on its educational activities. 32 26 C.F.R. § 1.502-1(b). In other words, as we interpret the integral-part doctrine, it simply recognizes that [t]he performance of a particular activity that is not inherently charitable may nonetheless further a charitable purpose. Rev. Rul. 69-572, 1969 WL 19169. The overall result in any given case is dependent on why and how that activity is actually being conducted. Id. (emphasis added). 72 Using the example cited in Treasury Regulation 1.502-1(b), if we were to consider the nature of the subsidiary's activity in isolation — furnishing electricity — we would have no indication that the subsidiary serves an exempt purpose. On the other hand, when we look at the totality of the circumstances, it becomes clear that the subsidiary's activity furthers the exempt purpose of education: the product provided is essential; the subsidiary furnishes its product solely to the tax-exempt affiliate; 33 and the tax-exempt parent exercises control over the subsidiary. These facts, considered in conjunction with the exempt purpose for which the tax-exempt parent operates, support a strong inference that the subsidiary operates for the same exempt purpose as does the parent. 73 In this case, we need not decide whether petitioners provide a service necessary to Health Services in conducting its exempt activities. The required nexus between the activities of petitioners and Health Services is lacking. As the Tax Court noted, petitioner[s]' enrollees received approximately 20 percent of their physician services from physicians employed by or contracting with Health Services, while petitioner contracted for the remaining 80 percent of such physician services directly with independent physicians. Health Plans, 82 T.C.M. at 606. Thus, unlike the subsidiary furnishing electricity in Treasury Regulation § 1.502-1(b), petitioners do not function solely to further Health Services' performance of its exempt activities. Rather, a substantial portion (eighty percent) 34 of petitioners' enrollees received physician services from physicians with no direct link to [Health Services]. 35 Health Plans, 82 T.C.M. at 606. Thus, our consideration of petitioners' connectedness to Health Services in no way detracts from our earlier conclusion that petitioners do not qualify for a charitable tax exemption under section 501(c)(3).