IHC Health Plans v. Comm'r of Internal Revenue,
No. 14600-99X (T.C. Sept. 19, 2001)

A Utah health maintenance organization ("HMO") affiliated with a large health care corporation, which operated exclusively for a tax-exempt purpose under section 501(c)(3), brought this action to challenge an adverse ruling of the IRS that denied the HMO tax-exempt status under section 501(c)(3) and 170(c)(2). The United States Tax Court affirmed the IRS's ruling denying the exemption. In reaching this determination, the court first analyzed whether the HMO satisfied the "community benefit test" and concluded that it did not. The factors noted by the court in reaching this conclusion included the following: (1) the HMO did not offer free medical care to the needy; (2) it did not institute any program whereby individuals were permitted to become members while paying reduced premiums; (3) the HMO's scheme of rating members for coverage inferred that the HMO was benefitting larger employers; and (4) The lack of community at large representation on the HMO's board of trustees further inferred that the HMO predominantly served the private interests of the larger employers participating in its plans.

Although the HMO did not pass the "community benefit test," the court recognized that the HMO could still be granted 501(c)(3) exempt status if it passed the "integral part test." After an extensive analysis, the court concluded that the HMO did not pass this test either. It noted "Petitioner's operations were not essential to or substantially related to [the parent corporation's] exempt functions."