Court Opinion

ID: 9394988
Source: CourtListenerOpinion
Date Created: 2023-05-16 19:01:50.895236+00
Date Added: 2024-06-11T17:19:04.508248
License: Public Domain

United States Tax Court

                               T.C. Memo. 2023-62

 MEMORIAL HERMANN ACCOUNTABLE CARE ORGANIZATION,
                    Petitioner

                                           v.

               COMMISSIONER OF INTERNAL REVENUE,
                           Respondent

                                     —————

Docket No. 4412-22X.                                            Filed May 16, 2023.

                                     —————

Anthony J. DeRiso III, Gerald M. Griffith, and Kathryn Keneally, for
petitioner.

Marie E. Small and Mary Michelle M. McCarthy, for respondent.

                          MEMORANDUM OPINION

       KERRIGAN, Chief Judge: In a final adverse determination letter
dated December 14, 2021, respondent denied petitioner exemption from
federal income tax under section 501(a). 1 Petitioner exhausted its
administrative remedies as required by section 7428(b)(2) and Rule
210(c)(4) and on March 10, 2022, timely filed a Petition with this Court
seeking a declaratory judgment that it is entitled to exempt status as an
organization described under section 501(c)(4).

       The disposition of an action for declaratory judgment involving
the initial qualification or classification of an exempt organization will
be made on the basis of the administrative record. Rule 217(a). This

        1  Unless otherwise indicated, all statutory references are to the Internal
Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references
are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant
times, and all Rule references are to the Tax Court Rules of Practice and Procedure.

                                 Served 05/16/23
                                     2

[*2] case has been submitted without trial pursuant to Rule 122. The
parties filed a Stipulation to the Administrative Record, which is the
only source of the factual summary that follows. See Rules 122,
217(b)(1) and (2).

                               Background

      When the Petition was timely filed, petitioner’s principal place of
business was in Texas.

       Petitioner is a nonprofit corporation incorporated on January 23,
2012, under the laws of the State of Texas. Petitioner’s recertification
of formation describes it as an accountable care organization (ACO),
Memorial Hermann Accountable Care Organization (MHACO),
organized and controlled by its sole member Memorial Hermann Health
System (MHHS). MHHS is a nonprofit corporation organized under the
laws of the State of Texas and is exempt from federal income tax under
section 501(a) as an organization described by section 501(c)(3).

       Petitioner’s bylaws state that the board of directors consist of nine
or ten members, four of whom are specified officers of MHHS, and one
of whom is chair of Memorial Hermann Physician’s Network (MHMD),
a sister organization to petitioner. The remaining four directors are
elected directors. The elected directors include two physicians—
including a primary care physician who participates in MHACO—and a
Medicare fee-for-service beneficiary served by MHACO.

I.    Petitioner as an Accountable Care Organization

       Petitioner defines an ACO as “a group of doctors, hospitals, and
other health care providers, who come together voluntarily to give
coordinated high-quality care to Medicare and other patients.” As an
ACO petitioner coordinates care for participating patients. Some of
these patients are enrolled in Medicare, while others are covered by
health insurance plans offered by commercial payors. A patient
participates in MHACO when they are assigned to petitioner by either
the Centers for Medicare & Medicaid Services (CMS) or a commercial
payor. MHACO cannot coordinate a person’s health care unless it has
access to the person’s records via the CMS or an insurer.

      Petitioner contracts with its sister corporation, MHMD, to
provide petitioner with a physician network that participates in care
coordination activities and case management personnel. Individual
physicians enter into network participation agreements with MHACO
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[*3] or MHMD. These medical providers contract with petitioner to
coordinate and provide care for patients in exchange for a share of the
payments that petitioner receives under its shared savings programs.
Patients do not pay fees to petitioner. CMS permits Medicare
beneficiaries to voluntarily identify an ACO physician or practitioner as
his or her primary care provider for the purpose of being assigned to an
ACO. Patients are not, however, limited to ACO providers and may see
the provider of their choosing regardless of affiliation with petitioner.

II.   Shared Savings Plans

       Petitioner participates in a number of shared savings programs
involving the coordination of care for both Medicare and non-Medicare
patients. As of November 2019, MHACO was responsible for 451,580
patients. Of these patients, 45,046 are Medicare beneficiaries who
participate in MHACO through the Medicare Shared Savings Program
(MSSP) administered by CMS.           An additional 35,143 Medicare
beneficiaries participate in MHACO via private health plans that are
paid for by the CMS. In total, 18% of MHACO patient participants are
Medicare beneficiaries. The remaining 82%, or 371,391 patients,
participating in MHACO receive health coverage from private payors.

      A.     The MSSP

       The MSSP is a program created by the Secretary of the
Department of Health and Human Services (HHS) to promote
accountability for care of Medicare beneficiaries, improve the
coordination of Medicare fee-for-service items and service, encourage
investment in infrastructure, and redesign care processes for high
quality and efficient service delivery. Patient Protection and Affordable
Care Act, Pub. L. No. 111-148, § 3022, 124 Stat. 119, 395 (2010). Under
this program groups of healthcare service providers and suppliers that
have established a mechanism for shared governance and that meet the
criteria specified by HHS are eligible to participate in the MSSP as
ACOs. The MSSP is governed by CMS. If CMS concludes that an ACO
meets quality performance standards and has achieved savings against
a benchmark established by CMS, it is eligible to receive a payment from
CMS equal to a portion of the total savings.

       Beginning in 2012 petitioner participated in the MSSP. Pursuant
to the MSSP petitioner receives a financial distribution from CMS if the
assigned beneficiaries’ health care improves while costs are decreased.
The financial distribution is referred to as a shared savings payment,
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[*4] which is a percentage of the cost savings of beneficiaries’ healthcare
calculated on the basis of CMS’s cost benchmarks. These benchmarks
are derived from the Healthcare Effectiveness Data and Information Set
(HEDIS), a set of metrics developed by the National Committee on
Quality Assurance under contract with CMS.

       CMS has articulated governance requirements for participation
in the MSSP program. See 42 C.F.R. § 425.106 (2015). If petitioner were
to cease participation in the MSSP, MHHS would be permitted to
restructure the board so that it did not meet CMS’s governance
requirements for participation in the MSSP.

       B.    Commercial Payor Shared Savings Plans

       In addition to the MSSP program, petitioner also negotiates
shared savings plans with commercial payors.                Under these
arrangements, the shared savings payments petitioner receives are
determined similarly to the MSSP shared savings payments in that
payment may be earned when a specific metric, defined with reference
to HEDIS and cost savings, is met. The metrics and categories
considered under the non-MSSP shared savings plans vary with respect
to the specific attributes of the patient population covered by the non-
Medicare shared savings agreement.           Under these agreements,
performance is measured, at least in part, on the basis of cost savings to
the commercial payors. The reduced cost of care directly benefits the
commercial payors; from 2014 through 2019, these savings totaled over
$70 million, with savings reaching approximately $15 million per year
for 2016 and 2018.

       In addition to the commercial payors involved in petitioner’s non-
MSSP activities, the healthcare providers participating in MHACO also
receive a benefit from the commercial shared savings plans. A portion
of the shared savings payments petitioner receives from commercial
payors is distributed to participating healthcare providers as an
incentive to participate in MHACO. The aggregate payments to
healthcare providers for 2017, 2018, and 2019 equaled approximately
$42 million, $20 million, and $18 million, respectively.

III.   Exhaustion of Administrative Remedies

       Petitioner filed with respondent Form 1024, Application for
Recognition of Exemption Under Section 501(a), dated December 7,
2017, seeking recognition as an organization described in section
501(c)(4). Petitioner’s application represented that it seeks “to improve
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[*5] the health and social welfare of vulnerable patient populations of
its parent. . . . [Its] activities are focused on patients with complex or
chronic conditions and who otherwise may have challenges navigating
the healthcare system effectively.” The application provided financial
information and other information related to petitioner’s fiscal years
ending June 30, 2013, through and including June 30, 2017.

       Respondent issued a letter on April 15, 2019, requesting
additional information supporting petitioner’s application. In response
petitioner provided additional financial information relating to the fiscal
year ending June 30, 2018, and prior years. On January 16, 2020,
respondent issued a proposed adverse determination letter concluding
that petitioner is not described in section 501(c)(4). In the proposed
adverse determination letter, respondent asserts that petitioner does
not qualify as an organization described under section 501(c)(4) because
the activities it conducts under its non-MSSP programs do not serve the
public.    Rather, respondent asserts that petitioner’s non-MSSP
programs primarily benefit the insurance companies and healthcare
providers with which petitioner contracts.

       Petitioner filed a protest with the IRS Independent Office of
Appeals (Appeals) on March 16, 2020. The protest included information
updated through November 2019. On September 8, 2020, respondent
responded to petitioner’s protest with a rebuttal in which he declined to
reconsider his proposed adverse determination.            Appeals held
conferences with petitioner on June 29 and July 14, 2021. On December
14, 2021, respondent issued to petitioner a final adverse determination
letter stating that petitioner was “not organized and operated for the
purposes of promoting the social welfare and providing a community
benefit.”

                               Discussion

I.    Scope and Standard of Review

       Section 7428(a)(1)(E) confers jurisdiction on the Court to make a
declaration in a case of actual controversy involving a determination by
the Commissioner with respect to the initial qualification or continuing
qualification of an organization as an organization described in section
501(c)(4) which is exempt from tax under section 501(a).

       The scope of the Court’s review is limited to the Stipulated
Administrative Record pursuant to Rule 217. See Hous. Law. Referral
Serv., Inc. v. Commissioner, 69 T.C. 570, 577 (1978) (“To allow . . . facts
                                    6

[*6] not otherwise in the administrative record be introduced in
evidence by testimony or stipulation in a section 7428 declaratory
judgment proceeding would convert that proceeding from a judicial
review of administrative action to a trial de novo.”). Petitioner bears the
burden of proving that the Commissioner’s determination is incorrect.
See Rule 142(a); Partners in Charity, Inc. v. Commissioner, 141 T.C. 151,
162 (2013). The scope of our inquiry is “limited to the propriety of the
reasons given by the Commissioner for denying an organization’s
application for exemption,” rather than a de novo review of the
administrative record. IHC Health Plans, Inc. v. Commissioner, T.C.
Memo. 2001-246, slip op. at 29, aff’d, 325 F.3d 1188 (10th Cir. 2003).

II.   Section 501(c)(4)

       Section 501(a) generally exempts from taxation an organization
described in subsection (c)(4). To qualify as an organization described
in section 501(c)(4), an entity must show that it is (1) a civic
organization, (2) not organized for profit, and (3) operated exclusively
for the promotion of social welfare. See People’s Educ. Camp Soc’y, Inc.
v. Commissioner, 331 F.2d 923, 929 (2d Cir. 1964), aff’g 39 T.C. 756
(1963); Treas. Reg. § 1.501(c)(4)-1(a)(1). Additionally, a qualifying
organization must show that “no part of [its] net earnings . . . inures to
the benefit of any private shareholder or individual.” § 501(c)(4)(B).

       Respondent does not disagree that petitioner is a civic
organization organized not for profit. Rather respondent argues that
petitioner does not operate exclusively for the promotion of social
welfare. Respondent asserts that “petitioner does not primarily promote
the common good and general welfare of the Greater Houston
Community because it operates primarily for the benefit of commercial
payors.”

       The standard for tax-exempt status prescribed by section
501(c)(4) requires that an organization be “operated exclusively for the
promotion of social welfare.” An organization will be found to operate
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.” Treas. Reg. § 1.501(c)(4)-1(a)(2)(i). An
organization will not be deemed to operated exclusively for the
promotion of social welfare if it “is carrying on a business with the
general public in a manner similar to organizations which are operated
for profit.” Id. subdiv. (ii).
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[*7] The Supreme Court has held “operated exclusively” to mean that
the presence of a single, substantial nonexempt purpose will preclude
exempt status, regardless of the number or importance of exempt
purposes. See Better Bus. Bureau of Wash., D.C., Inc. v. United States,
326 U.S. 279, 283 (1945). Regarding section 501(c)(4) organizations
specifically, courts have adopted the same standard and have held that
a single substantial nonexempt purpose will preclude exemption as a
social welfare organization.        See Contracting Plumbers Coop.
Restoration Corp. v. United States, 488 F.2d 684, 686 (2d Cir. 1973)
(“[T]he presence of a single substantial non-exempt purpose precludes
exempt status regardless of the number or importance of the exempt
purposes.”); People’s Educ. Camp Soc’y, Inc., 39 T.C. at 772.

       In the context of section 501(c)(4), courts have held that an
organization that operates primarily for the benefit of its members,
rather than for the benefit of the community as a whole, is not an
organization described by section 501(c)(4). See Contracting Plumbers
Coop. Restoration Corp., 488 F.2d at 687 (holding an organization that
provides “substantial and different benefits to both the public and its
private members” is not “‘primarily’ devoted to the common good” as
required by section 501(c)(4)), Commissioner v. Lake Forest, Inc., 305
F.2d 814, 818 (4th Cir. 1962) (holding an organization that is “public-
spirited but privately-devoted” may benefit the community incidentally
but does not qualify as a section 501(c)(4) organization), rev’g and
remanding 36 T.C. 510 (1961).

       Many cases dealing with section 501(c)(4) involve organizations
that fail to qualify as section 501(c)(4) organizations because, despite
providing an “undisputed benefit to the people,” the presence of a
substantial nonexempt purpose precluded exemption from federal
income tax. See Contracting Plumbers Coop. Restoration Corp., 488 F.2d
at 686. For example, in Vision Service Plan the taxpayer’s primary
activity was contracting with insurance companies and other healthcare
providers to arrange for vision care service and discounted vision
supplies for enrolled employees or members, but individual members of
the public could not enroll in the taxpayer’s plans. The district court
stated that while the taxpayer contributed to the betterment of society,
its work “incidentally redounds to society but this is not the ‘social
welfare’ of the tax statute.” Vision Serv. Plan v. United States, No.
CIVS041993LKKJFM, 2005 WL 3406321, at *8 (E.D. Cal. Dec. 12, 2005)
(quoting Commissioner v. Lake Forest, Inc., 305 F.2d at 818), aff’d, 265
F. App’x 650 (9th Cir. 2008).
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[*8] III.   Analysis

       Petitioner fails to qualify as an organization described by section
501(c)(4) because its non-MSSP activities primarily benefit its
commercial payor and healthcare provider participants, rather than the
public, and therefore constitute a substantial nonexempt purpose.
While petitioner’s stated goal of providing affordable healthcare to
patients is an admirable one, the provision of healthcare alone is
insufficient to qualify for recognition of exemption under section
501(c)(4). See Vision Serv. Plan, 2005 WL 3406321, at *4. Petitioner’s
non-MSSP activities benefit primarily the commercial payors and
healthcare providers with which it contracts. To that end, petitioner
contravenes the requirements of section 501 by conducting business
with the public in a manner similar to a for-profit business. See Treas.
Reg. § 1.501(c)(4)-1(a)(2)(ii).

       Furthermore, petitioner has failed to demonstrate that its non-
MSSP activities benefit the public. There is no evidence that petitioner
has coordinated with the State of Texas to administer healthcare to the
Greater Houston community, and petitioner has not otherwise shown
that its non-MSSP activities promote the common good and general
welfare of the community. Here, as in Vision Service Plan, any benefit
that the public may derive from petitioner’s non-MSSP activities is
incidental to the benefits received by the commercial payors and
healthcare providers.

IV.    Conclusion

       We find that petitioner has not met its burden of showing that it
is an organization described under section 501(c)(4). Petitioner’s non-
MSSP activities primarily benefit commercial payors and healthcare
providers and thereby constitute a substantial nonexempt purpose
precluding petitioner from qualifying as an organization described by
section 501(c)(4). Petitioner has not demonstrated that its non-MSSP
activities promote the common good and general welfare of the
community, nor has petitioner shown that its nonexempt activities
otherwise benefit the public. For these reasons, we agree with
respondent’s determination that petitioner does not qualify for
exemption from federal income tax under section 501.

       To reflect the foregoing,

       An appropriate decision will be entered.