Ihc Health Plans, Inc. v. C.I.R.

• Decision Date: 09 April 2003
• Docket Number: No. 01-9014.,No. 01-9015.,No. 01-9013.,01-9013.,01-9014.,01-9015.
• Citation: 325 F.3d 1188
• Parties: IHC HEALTH PLANS, INC., on its own behalf and as successor in interest to IHC Group, Inc., and IHC Care, Inc., Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

325 F.3d 1188

IHC HEALTH PLANS, INC., on its own behalf and as successor in interest to IHC Group, Inc., and IHC Care, Inc., Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 01-9013.

No. 01-9014.

No. 01-9015.

United States Court of Appeals, Tenth Circuit.

April 9, 2003.

COPYRIGHT MATERIAL OMITTED

Douglas M. Mancino (Robert C. Louthian, III, Robert E. Kohn, and David L. Hirsch, with him on the briefs), McDermott, Will & Emery, Los Angeles, California, appearing for the Appellant.

Teresa E. McLaughlin, Attorney, Tax Division, Department of Justice (Eileen J. O'Connor, Assistant Attorney General, and Gary R. Allen, Attorney, Tax Division, Department of Justice, with her on the brief), Washington, DC, appearing for the Appellee.

Before TACHA, Chief Circuit Judge, HOLLOWAY, and EBEL, Circuit Judges.

TACHA, Chief Circuit Judge.

I. Background¹

IHC Health Plans, Inc. ("Health Plans"), on its own behalf and as successor in interest to IHC Care, Inc. ("Care") and IHC Group, Inc. ("Group") (collectively "petitioners"),² appeals the Tax Court's decision denying petitioners' request for tax exemption under 26 U.S.C. § 501(c)(3). We have jurisdiction to review the Tax Court's decision under 26 U.S.C. § 7482(a)(1). The sole issue presented in this appeal is whether petitioners qualify for tax-exempt status under 26 U.S.C. § 501(c)(3) as organizations operated exclusively for charitable purposes.

A. The IHC Integrated Delivery System

1. The formation of IHC

In 1970, the Church of Jesus Christ of Latter Day Saints ("LDS Church") formed Health Services Corporation, later renamed Intermountain Health Care, Inc. ("IHC"), as a Utah nonprofit corporation. IHC assumed ownership and control of fifteen hospitals previously owned by the LDS Church. In 1975, the LDS Church transferred control of IHC to an independent board of trustees, comprised of persons representative of the community. The Internal Revenue Service ("IRS") has consistently recognized IHC as a charitable, tax-exempt organization.

2. The formation of Health Services

As part of its plan to streamline and integrate its provision of health-care services, IHC formed IHC Health Services, Inc. ("Health Services") in 1982 as a Utah nonprofit corporation. In 1983, IHC transferred its hospitals and substantially all the assets necessary to its operation to Health Services. IHC then ceased operating hospitals directly and assumed the role of a parent company, with Health Services as IHC's principal health-care services organization. IHC is Health Services' sole corporate member and the board of trustees of IHC and Health Services are comprised of the same individuals.

At the end of 1999, Health Services operated twenty-two hospitals located in Utah and Idaho, employing approximately 300 primary care physicians and 100 specialist physicians in its Physician Division; it separately employed approximately 120 physicians in its Hospital Division. All Health Services hospitals participated in the Medicare and Medicaid programs for inpatient and outpatient hospital services. Between 1997 and 1999, Health Services provided nearly $1.2 billion in health-care services, without reimbursement, to patients covered by Medicare, Medicaid, and other governmental programs. During that same period, Health Services furnished more than $91 million in free health-care services to indigent patients.

The Commissioner has recognized Health Services as a tax-exempt organization under section 501(c)(3).

3. Health Plans, Care, and Group

In order to further integrate its provision of health-care services, IHC formed Health Plans, Care, and Group to operate as health maintenance organizations ("HMOs") within the IHC Integrated Delivery System. A detailed description of each organization is set forth in Sections I(B)-(D), infra.

4. IHC's role as parent company

IHC's board of trustees maintained governance power and control over Health Plans, Care, and Group. In particular, IHC had the authority, directly and indirectly, to elect petitioners' boards of trustees. IHC, Health Services, and petitioners shared many of the same corporate officers.³ IHC conducted petitioners' strategic planning, established their priorities, and attempted to implement their business plans on an enterprise basis. Also, Health Services provided petitioners with centralized management services, including human resources, legal services, public relations, and treasury functions.⁴

B. Health Plans

In 1983, IHC created Health Plans to operate as a state-licensed HMO and preferred provider organization ("PPO"). IHC was the sole corporate member of Health Plans and possessed the power to remove members from Health Plans' board of trustees. Health Plans offered health plans to small-employer groups, large-employer groups, and individuals, including Medicaid recipients.⁵

In 1999, the population of Utah was approximately 2,130,000. Health Plans enrolled 416,370 Utahans in its various plans, or approximately twenty percent of Utah's total population. In 1999, approximately 73,503 Utahans were enrolled in a Medicaid managed-care program. Health Plans enrolled 35,902 of these individuals, or approximately fifty percent of Utah's total Medicaid population.

In determining premiums, Health Plans applied an "adjusted community rating" for individuals and small-employer groups, adjusting its rates for risk factors such as age and gender. For large-employer groups, Health Plans used a "past claims experience" method in determining premiums.

In June 1985, the IRS recognized Health Plans as tax exempt under section 501(c)(3). The Commissioner subsequently revoked Health Plans' tax exemption in 1999.

C. Care

In 1985, IHC formed Care to operate as a "direct contract" HMO, offering federally-qualified health plans in conjunction with Health Plans.⁶ Health Plans incorporated Care as a subsidiary because the HMO Act of 1973, 42 U.S.C. § 300e-9, precluded Health Plans from operating a federally-qualified HMO within the same corporate entity in which it operated a state-licensed HMO. Health Plans was Care's sole corporate member, and Care used the same network of health-care providers as Health Plans.

Care only offered its IHC Care health plan to employers with more than 100 employees. Care used an adjusted community rating methodology to determine IHC Care premiums, as required for all federally-qualified HMOs. See 42 C.F.R. § 417.104(a)(3), (b). Between 1996 and 1998, Care also offered IHC Senior Care, a Medicare "risk" health plan it has since discontinued.

On April 28, 1986, Care applied for tax exemption under section 501(c)(3). The Commissioner denied Care's request in a final adverse determination letter on June 16, 1999.

D. Group

In 1991, IHC formed Group to operate as a federally-qualified "group" model HMO. IHC separately incorporated Group because, at the time of Group's formation, the Health Care Financing Administration⁷ prohibited a single corporation from operating two different types of federally-qualified HMOs. Health Plans was Group's sole corporate member.

Group offered its SelectMed health plan exclusively to employers with 100 or more employees. To determine the amount of the premium under the SelectMed plan, Group relied upon an adjusted community rating methodology. Enrollees in the SelectMed plan received a variety of health-care services at no additional charge through Group's "Core Wellness Program." Between 1993 and 1998, Group also offered a Medicare "cost" health plan, IHC Senior Care, which it has since discontinued.

In 1991, Group filed an application for tax exemption under section 501(c)(3). The Commissioner denied Group's request in a final adverse determination letter on June 16, 1999.

E. The Commissioner's Decision

In 1999, the Commissioner concluded that neither Health Plans, Care, nor Group operated exclusively for exempt purposes under section 501(c)(3). The Commissioner alternatively concluded that Health Plans and Care were not entitled to tax-exempt status under section 501(m)(1), which precludes tax-exempt status where a "substantial part of [an organization's] activities consists of providing commercialtype insurance." 26 U.S.C. § 501(m)(1). Accordingly, the Commissioner revoked Health Plans' tax-exempt status, retroactive to January 1, 1987, and denied exemptions to Care and Group.

Health Plans, Care, and Group brought suit in the United States Tax Court, seeking a declaratory judgment reversing the Commissioner's adverse determinations. On September 25, 2001, the Tax Court affirmed the Commissioner's conclusions in three separate opinions. IHC Health Plans, Inc. v. Commissioner, 82 T.C.M. (CCH) 593 (2001); IHC Group, Inc. v. Commissioner, 82 T.C.M. (CCH) 606 (2001); IHC Care, Inc. v. Commissioner, 82 T.C.M. (CCH) 617 (2001).⁸ This appeal followed.

II. Discussion

A. Standard of Review

We review Tax Court decisions "in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury." 26 U.S.C. § 7482(a)(1). "Thus, we review factual questions for clear error, legal questions de novo, and mixed questions of law and fact either for clear error or de novo, depending on whether the question is primarily factual or legal." Consolidated Mfg. Inc. v. C.I.R., 249 F.3d 1231, 1236 (10th Cir.2001) (citation omitted). The appropriate legal standard for determining whether an organization operates for a "charitable" purpose is a legal question, which we review de novo. Whether an organization in fact operates exclusively for a charitable purpose, however, is a question of fact, which we review for clear error. Florida Hosp. Trust Fund v. C.I.R., 71 F.3d 808, 810 (11th Cir.1996); Living Faith, Inc. v. C.I.R., 950 F.2d 365, 371 (7th Cir.1991). As the taxpayer claiming entitlement to exemption, petitioners bear the burden of proof. Living Faith, 950 F.2d at 370 (citing cases).

B. Overview of Applicable Law

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