(November 24, 2008) The U.S. Supreme Court will soon decide whether to review a case where the Internal Revenue Service (IRS) revoked the tax-exempt status of a California company.
The issue before the court highlights a major debate in the non-profit arena over what activities deserve tax exemption.
The California-based company, Vision Service Plan (VSP), is the largest not-for-profit managed vision care company in the United States, serving 55 million members.
In 1960, VSP was granted exemption from federal income taxes, pursuant to § 501(c)(4) of the Internal Revenue Code. In 2003, following an examination conducted in 1999, the IRS issued a final adverse determination letter, revoking tax-exempt status for VSP’s California corporation as of January 1, 2003, without any change in statutory or regulatory law and without any change in the operations of VSP.
According to the IRS, a non-profit health care organization that limits its benefits to a class of subscribers is no long eligible for tax-exempt status, unless it also provides some as-yet-unquantified, unspecified amount of “community benefits.”
On December 12, 2005, Judge Lawrence K. Karlton granted the United States’ motion for summary judgment, deciding that “VSP is not operated ‘exclusively for the promotion of social welfare’ as provided for in 501 (c) 4.”
VSP appealed to the U.S. Court of Appeals for the 9th Circuit. Appellate argument was heard on December 5, 2007. The district court decision was affirmed on January 30, 2008.
The memorandum disposition issued by the 9th Circuit stated: “while VSP offers some public benefits, they are not enough for us to conclude that VSP is primarily engaged in promoting the common good and general welfare of the community.”
On March 13, 2008, VSP filed a motion for rehearing/reconsideration by all the judges of the 9th Circuit, which was denied. On August 7, 2008, VSP asked the U.S. Supreme Court to review the case.
In its request for review, VSP argues that the appellate court’s ruling calls into question the tax exemptions for all non-profit health care organizations, including not just otherwise qualified health plans and HMOs, but also hospitals, nursing homes and others.
“This case is being monitored closely by tax-exempt not-for-profits across the country,” said Ken Starr, former U.S. solicitor general, and a member of VSP’s legal team. “Not-for profits are forced to ask themselves this question — if this can happen to a company that has had a tax exemption for more than 40 years, hasn’t changed their business philosophy to focus on the community and suddenly has their tax exemption revoked without a clear explanation, could we be next?”
VSP tells the Supreme Court that the revocation of the company’s not-for-profit status threatens established tax practices and congressional intent alike, and jeopardizes the tax-exempt status of an important segment of the economy. The ruling that VSP’s “public benefits” were “not enough” to justify a tax exemption for an HMO provides the industry with no guidance at all, where guidance is urgently required, VSP wrote.
If the court agrees to consider the case, it likely will hear oral arguments in February or March 2009.