## Facts

- IHC Care, Inc. (IHC Care) was a Utah nonprofit corporation that operated health-maintenance organizations (HMOs) as part of the Intermountain Health System.
- IHC Care was affiliated with IHC Health Services, Inc. (Health Services), a recognized § 501(c)(3) organization that operated hospitals and employed physicians and that provided a significant volume of charity services to indigent patients.
- IHC Care marketed and sold HMO coverage primarily to employees of employers with more than 100 employees.
- IHC Care set premiums using an adjusted community-rating approach, but it did not maintain a program that subsidized premiums for low-income individuals or otherwise provided free or reduced-cost membership coverage based on inability to pay.
- IHC Care arranged medical care for its enrollees through contracts with physicians and hospitals, including both Health Services-affiliated providers and independent providers.
- Nearly 80% of the physician services received by IHC Care’s enrollees were provided by physicians with no direct connection to Health Services.
- Services obtained from independent hospitals were used for specialty care not available through Health Services or for care in locations where Health Services did not operate facilities.
- The Commissioner of Internal Revenue issued a final adverse determination denying IHC Care’s application for recognition as exempt under § 501(c)(3), concluding it was not operated exclusively for an exempt purpose.
- IHC Care filed a petition for declaratory judgment under I.R.C. § 7428. The matter was submitted on the administrative record, without trial.

## Issues

1. Whether IHC Care was organized and operated exclusively for charitable (or other exempt) purposes within the meaning of I.R.C. § 501(c)(3), entitling it to exemption under § 501(a) and classification under § 170(c)(2).
2. Whether operating a risk-bearing HMO that sold coverage to large employer groups for premiums, without meaningful subsidized coverage or comparable charity activity, constituted a substantial nonexempt commercial purpose.
3. Whether IHC Care’s affiliation with a charitable hospital-and-physician organization (Health Services) and participation in a coordinated health system was sufficient to treat IHC Care as exempt notwithstanding its own HMO operations.

## Decision

- The Tax Court sustained the Commissioner’s adverse determination.
- The court held IHC Care was not an organization described in I.R.C. § 501(c)(3) (and therefore not within § 170(c)(2)) and was not entitled to exemption under § 501(a).
- The court concluded that IHC Care’s primary activity was the provision of prepaid, risk-bearing health coverage in exchange for premiums, conducted in a manner similar to commercial HMOs and insurers.
- The court rejected the claim that Health Services’ charity care and exempt hospital operations could be treated as IHC Care’s own charitable operations for purposes of the § 501(c)(3) operational test.

## Legal Principles

- To qualify under § 501(c)(3), an organization must be operated exclusively for exempt purposes; the presence of a substantial nonexempt purpose defeats exemption even if the organization also engages in some exempt-type activity.
- For health-care organizations that are not themselves hospitals, “community benefit” requires more than serving paying enrollees on generally commercial terms; the organization must show meaningful charitable activity or relief for those unable to pay (for example, subsidized or free access, or other substantial charitable programs tied to its own operations).
- An HMO whose principal function is to assume and manage health-care cost risk and to sell coverage in exchange for premiums can be viewed as conducting commercial-type activity inconsistent with § 501(c)(3) when charity elements are insubstantial.
- Affiliation with, or participation in a coordinated arrangement with, a § 501(c)(3) hospital system does not by itself confer exemption on a related HMO; the applicant’s own activities and purposes control the § 501(c)(3) analysis.
- In a § 7428 declaratory judgment case submitted on the administrative record, the court evaluates whether the Commissioner’s determination was correct based on that record.

## Conclusion

In IHC Care, Inc. v. Commissioner, the Tax Court upheld the IRS’s denial of § 501(c)(3) recognition because IHC Care operated primarily as a premium-based, risk-bearing HMO serving large employer groups, with too little charitable activity in its own operations to satisfy the operational test, and its relationship with a charitable hospital affiliate did not change the commercial character of IHC Care’s core business.


IHC Care, Inc. v. Commissioner, 82 T.C.M. 617 (2001)