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Under 26 U.S.C.S. § 501(c)(3), an organization must meet three requirements in order to qualify for tax exemption: (1) the corporation must be organized and operated exclusively for exempt purposes; (2) no part of the corporation's net earnings may inure to the benefit of any shareholder or individual; and (3) the corporation must not engage in political campaigns or, to a substantial extent, in lobbying activities.
IHC Health Plans, Inc. on its own behalf and as successor in interest to IHC Care, Inc., and IHC Group, Inc. (collectively, “HMOs”) appealed the Tax Court's decision denying their request for tax exemption under 26 U.S.C. § 501(c)(3). The HMOs furnished group insurance entitling enrollees to services of participating hospitals and physicians. All enrollees paid a premium in order to receive benefits.
Did the HMOs qualify for tax-exempt status under 26 U.S.C. § 501(c)(3) as organizations operated exclusively for charitable purposes?
The appellate court agreed with the tax court and determined that the promotion of health for the benefit of the community was a charitable purpose but the HMOs did not operate primarily for the purpose of promoting health for the benefit of the community. The HMOs primarily performed a risk-bearing function, and the HMOs provided virtually no free or below-cost health-care services. The HMOs did not conduct research or offer free educational programs to the public. Two of the HMOs did not offer their health plans to the general public. Also, the HMOs did not qualify for tax-exempt status as an integral part of another subsidiary of their parent company that furnished free health-care services.