Opinion ID: 2019452
Heading Depth: 1
Heading Rank: 2

Heading: Qualification of the Plaintiff for Exemption.

Text: The answers by the city to the plaintiff's complaints deny that the plaintiff operated as a nonprofit corporation, and allege that its operations have exceeded the powers granted to it by the legislature and are ultra vires. However, unsubstantial ultra vires acts which did not convert the plaintiff into a corporation operated for profit, or otherwise materially change the character of its operations from that of a hospital-service corporation, would not be sufficient to destroy the exemption conferred by sub. (8) of sec. 182.032, Stats. 1955 and 1957. The city's brief points to no ultra vires activities which are inconsistent with its character as a hospital-service corporation. The various affidavits set forth the operations of the plaintiff in detail. It has been very difficult for this court to determine from the city's brief what facts are relied upon by the city to establish that the plaintiff has exceeded its powers under sec. 182.032, Stats., and has been guilty of ultra vires activities. Apparently the city is not here pressing such issue but rather is relying on alleged ultra vires activities to establish that the plaintiff is not in fact operating as a nonprofit corporation. There apparently are but two of such questioned activities. The first involves the plaintiff's relations with Health Service, Inc. Among the investments, in which the surplus funds of the plaintiff are invested, is an investment in the capital stock of Health Service, Inc., which cost $10,000 and is now valued at $23,000. Certain contracts are also entered into between the plaintiff and it. The second alleged unlawful activity is that the plaintiff has recognized as a participating hospital one whose nonprofit status has been questioned and is now under investigation. Under the provisions of sec. 181.05, Stats., the city clearly has no right to raise the issue of ultra vires activities in this litigation. Such statute limits the raising of such issue to three specified types of proceeding, and this is not one of them. In none of such three specified types of action would the city be a proper party to raise the ultra vires issue. Nonprofit hospital-service corporations are defined in sub. (2) (a) of sec. 182.032, Stats., as corporations formed without capital stock, operated not for profit and exclusively for the purposes in this section set forth, and which declare no dividend, benefit, or pecuniary profit, to be paid to or received by any of their members, directors, or officers. The affidavits disclose without dispute that the operations of the plaintiff corporation meet such test. The denials and allegations of the city's answers are insufficient to raise a jury issue in view of the undisputed facts of the affidavits. Laughnan v. Griffiths (1955), 271 Wis. 247, 251, 73 N. W. (2d) 587, and Home Savings Bank v. Bentley (1958), 5 Wis. (2d) 19, 23, 92 N. W. (2d) 377. The city stresses a fact that the income of the plaintiff from the fees collected from its subscribers has exceeded the amounts that the plaintiff has disbursed to the participating and service hospitals for hospital service supplied to the subscribers and their dependents. Over the twenty-year period of 1940-1959, inclusive, the claims paid by the plaintiff for hospital service have amounted to 91.1 per cent of the plaintiff's income. The fact that plaintiff's income exceeds its disbursements does not necessarily destroy its nonprofit character. Whether dividends or other pecuniary benefits are contemplated to be paid to its members is generally the test to be applied to determine whether a given corporation is organized for profit. Read v. Tidewater Coal Exchange (1922), 13 Del. Ch. 195, 116 Atl. 898, 904. The later Delaware case of Southerland v. Decimo Club (1928), 16 Del. Ch. 183, 192, 142 Atl. 786, 790, states the test of whether the making of a profit prevents a corporation from being one not for profit as follows: If the facts and circumstances show the business to be such in character and volume as to indicate that the engaging in business and the making of profits therefrom for the benefit of its members is the principal or one of the principal objects of the corporation, rather than a thing which is subordinate and merely incidental to the principal object of its existence, it is reasonable to conclude that the corporation cannot be called one which is organized `not for profit.' In the instant case the articles forbid any payments being made to the members. Furthermore, the fact that there is some margin of income over outgo does not militate against the objectives for which the plaintiff was organized, but rather promotes such objectives. This is because a hospital-service corporation should build up reasonable reserves to guard against the contingency of future claims exceeding income. The previously mentioned 1959 special report of the Wisconsin insurance department states (p. 17): While large reserves are not necessary because of the nature of the Blue Cross operation, sound business policy of any fiduciary dictates maintenance of some reserve. If such reserves are not consumed in the payment of future claims, they will pass on dissolution of the plaintiff corporation to the nonprofit participating hospitals, not to the individual members of the corporation. We attach no significance to the fact that the nonprofit status of one of such participating hospitals is now in issue. This is because we must assume that, when dissolution occurs, the provisions of plaintiff's articles of incorporation for distribution of assets will be observed, and that such distribution will only be made to nonprofit participating hospitals. The brief of the city also points out that in 1959 the plaintiff realized from investments the sum of $160,000 income; and that it also receives approximately $300,000 income from Blue Shield, for acting as enrolling and billing agent for such organization, which is a nonprofit plan for sickness care pursuant to sec. 148.03, Stats. Plaintiff's total net income for 1959 was $2,318,425. Sub. (7) of sec. 182.032, authorizes the plaintiff to invest its funds as provided in secs. 206.34 and 206.35, relating to investments of domestic life insurance companies. Likewise, sub. (2) (e) of sec. 182.032 expressly authorizes the plaintiff to act as enrolling and billing agent for Blue Shield. Therefore, the legislature contemplated that the nonprofit hospital-service corporations would have these additional sources of income when it granted tax exemption to them. The city further points to some other minor and miscellaneous sources of income. We consider them to be too trivial in nature to warrant discussion. Sub. (2) (c) of sec. 182.032, Stats., authorizes the plaintiff's board of directors to do all things necessary, proper, or incidental to the exercise of the powers granted to a nonprofit hospital-service corporation by sec. 182.032. We are satisfied that all of such miscellaneous income is derived from activities which the directors in good faith deemed necessary, proper, or incidental to carrying out of the general purposes of the plaintiff corporation. We, therefore, determine that the plaintiff is in fact a nonprofit hospital-service corporation and qualifies for tax exemption under sub. (8) of sec. 182.032, Stats. 1955 and 1957.