                       T.C. Memo. 2001-248



                     UNITED STATES TAX COURT



                  IHC CARE, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14601-99X.            Filed September 19, 2001.


     Douglas M. Mancino, James L. Malone III, and Robert C.

Louthian III, for petitioner.

     Mark A. Weiner, Kirk M. Paxson, Don R. Spellman, and Kenneth

M. Griffin, for respondent.


                       MEMORANDUM OPINION


     WELLS, Chief Judge:     In a final adverse determination

letter, respondent determined that IHC Care, Inc. (petitioner),

did not qualify as an organization described in sections

501(c)(3) and 170(c)(2) and was not entitled to exemption from

Federal income tax pursuant to section 501(a).    Unless otherwise
                                - 2 -

indicated, section references are to sections of the Internal

Revenue Code, as amended, and Rule references are to the Tax

Court Rules of Practice and Procedure.     Petitioner filed a timely

petition for declaratory judgment pursuant to section 7428(a)

challenging respondent’s determination letter.    At the time the

petition was filed, petitioner’s principal place of business was

in Salt Lake City, Utah.

     The administrative record was submitted to the Court

pursuant to Rule 217(b)(1).    The facts contained in the

administrative record are assumed to be true for purposes of this

proceeding.   See Rule 217(b)(1).   The case was submitted to the

Court by joint motion of the parties pursuant to Rule 122.    The

parties agree that petitioner has satisfied all jurisdictional

requirements.    See sec. 7428(b); Rule 210(c).

                              Background

     By way of a brief introduction, petitioner, along with its

sister corporation IHC Group, Inc. (Group), and their common

parent, IHC Health Plans, Inc. (Health Plans), operated health

maintenance organizations and were part of a number of companies

comprising the so-called Intermountain Health System.    Petitioner

offered health plans to the employees of employers with more than

100 employees.    At the same time that respondent denied

petitioner’s application for tax-exempt status, respondent denied

Group’s application for tax-exempt status and revoked Health
                                 - 3 -

Plans’ tax-exempt status.1    For completeness, we have provided a

detailed description of the various entities comprising the

Intermountain Health System.

I.   The Intermountain Health System

A.   Intermountain Health Care, Inc.

      Between 1882 and 1970, the Church of Jesus Christ of Latter-

Day Saints (LDS Church) constructed or purchased 15 hospitals in

the States of Utah, Idaho, and Wyoming.     During 1970, LDS Church

organized Intermountain Health Care, Inc. (IHC), as a nonprofit

corporation under the laws of the State of Utah.     LDS Church

organized IHC for the purpose of assuming ownership and control

of LDS Church hospitals.     During 1975, LDS Church relinquished

control of IHC.   Respondent recognized IHC as an organization

described in section 501(c)(3) that is exempt from taxation

pursuant to section 501(a).

      Over a period of several years, IHC organized a group of

affiliate corporations for the purpose of forming a comprehensive

health care network with operations in Utah and surrounding

states.

B.   IHC Health Services, Inc.

      During 1983, IHC organized a nonprofit affiliate, IHC Health


1
    Respondent’s determinations to deny IHC Group, Inc.’s
application for tax-exempt status and to revoke IHC Health Plans,
Inc.’s tax-exempt status are the subjects of the Court’s opinions
in IHC Group, Inc. v. Commissioner, T.C. Memo. 2001-247 and IHC
Health Plans, Inc. v. Commissioner, T.C. Memo. 2001-246.
                                  - 4 -

Services, Inc. (Health Services).     IHC transferred substantially

all of its assets, including its hospital properties, and

substantially all of its liabilities, to Health Services.

Respondent recognized Health Services as an organization

described in section 501(c)(3) that is exempt from taxation

pursuant to section 501(a).

     Health Services conducted its activities through two

divisions, the hospital division and the physician division,

which are described in detail below.

     1.   The Hospital Division

     Health Services’ hospital division comprised 23 hospitals

(including 2,644 licensed beds) located in Utah and Idaho.    All

Health Services hospitals, with the exception of Primary

Children’s Medical Center (Primary Children’s) and McKay-Dee

Institute for Behavioral Medicine (McKay-Dee Institute), were

general acute care hospitals that provided inpatient and

outpatient services, and varying levels of emergency, ancillary,

and specialized services.   The scope of services varied with the

size of the hospital and the needs of the particular community.

All Health Services hospitals participated in the Medicare and

Medicaid programs for inpatient and outpatient hospital services,

and for a number of free-standing ambulatory care services such

as ambulatory surgery, home health care, and kidney dialysis.
                                - 5 -

      Primary Children’s specialized in pediatric care in the

Intermountain West (defined generally as the area covering

eastern Nevada, western Colorado, and the States of Utah, Idaho,

Wyoming, and Montana).   The McKay-Dee Institute operated a free-

standing psychiatric and behavioral health facility located in

Ogden, Utah.

      During 1998, Health Services provided $42 million worth of

charity services to indigent patients.

      2.   The Physician Division

      As of December 31, 1998, Health Services’ physician division

employed 245 primary care physicians (general internists, family

practitioners, and pediatricians) and 215 specialist physicians.

The physicians generally practiced in Health Services’ clinics

and other community-based settings.

C.   IHC Health Plans, Inc.

      During 1983, IHC organized Health Plans as a nonprofit

affiliate for the purpose of establishing a State-licensed health
                                 - 6 -

maintenance organization (HMO)2.    IHC was Health Plans’ sole

corporate member.

     Health Plans was licensed to operate an HMO in the State of

Utah and was permitted to offer a variety of health plans to

individuals and employers in the communities that it served.

Health Plans did not own any medical facilities or employ any

physicians.     Health Plans offered its plans to:   (1) Individuals

and their families; (2) the employees of both large and small

employers; and (3) individuals covered by Medicaid.     Health Plans

operated the largest HMO within the IHC system and the State of

Utah.     In June 1985, respondent recognized Health Plans as an

organization described in section 501(c)(3) that is exempt from

taxation pursuant to section 501(a).



2
     Utah Code Ann. sec. 31A-8-101(5) (1999 Repl.) defines the
term “Health maintenance organization” (HMO) as follows:

           (5) “Health maintenance organization” means any
        person, other than an insurer licensed under Chapter 7
        or an individual who contracts to render professional
        or personal services that he performs himself, which:

                  (a) furnishes at a minimum, either directly
             or through arrangement with others, basic health
             care services to an enrollee in return for prepaid
             periodic payments agreed to in amount prior to the
             time during which the health care may be
             furnished; and

                  (b) is obligated to the enrollee to arrange
             for or to directly provide available and
             accessible health care.
                                 - 7 -

D.   Federally-Qualified HMOs3


3
     HMOs are defined for purposes of Federal law under 42 U.S.C.
sec. 300e(a) (1994) which provides:

      (a) “Health maintenance organization” defined

           For purposes of this subchapter, the term “health
      maintenance organization” means a public or private
      entity which is organized under the laws of any State
      and which (1) provides basic and supplemental health
      services to its members in the manner prescribed by
      subsection (b) of this section, and (2) is organized
      and operated in the manner prescribed by subsection (c)
      of this section.

     42 U.S.C. sec. 300e(b)(1) (1994) provides in pertinent part
that an HMO generally will provide basic health services to its
members without limitations as to time or cost for a fixed
payment from each member that is determined under a community
rating system and is paid on a periodic basis without regard to
the dates health services are provided. 42 U.S.C. sec.
300e(b)(2) (1994) provides that HMOs may also provide members
with supplemental health services (defined in 42 U.S.C. sec.
300e-1(2) (1994)) for a separate fee that is fixed under a
community rating system.

     42 U.S.C. sec. 300e(b)(3)(A) (1994) provides that at least
90 percent of physician services provided as basic health
services to an HMO enrollee shall be provided through: (1) the
members of the HMO’s physician staff (staff model HMO); (2) a
medical group (medical group model HMO); (3) an individual
practice association (IPA model HMO); (4) physicians who have
contracted with the HMO for the provision of such services
(direct contract model HMO), or (5) any combination of these
models. See Health Care Plan, Inc. v. Aetna Life Ins. Co., 966
F.2d 738, 739 n.3 (2d Cir. 1992); 42 C.F.R. sec. 417.100 (1991)
(definitions); Boisture, Assessing The Impact Of Health Care
Reform On The Formation Of Tax-Exempt Health Care Providers And
HMO’s, 62 Tax Notes 1181, 1184 (Feb. 28, 1994).

     42 U.S.C. sec. 300e(c)(1) (1994) provides that HMOs shall
have a fiscally sound operation, adequate provision against the
risk of insolvency, and assume full financial risk on a
prospective basis for the provision of basic health services.
However, 42 U.S.C. sec. 300e(c)(2) (1994) provides that HMOs may
                                                   (continued...)
                              - 8 -

     1.   IHC Care, Inc.

     In January 1985, Health Plans organized petitioner as a

nonprofit affiliate for the purpose of establishing a federally

qualified direct contract model HMO.4    Health Plans was

petitioner’s sole corporate member.     Petitioner’s articles of

incorporation stated that petitioner

     is organized and shall be operated exclusively for
     charitable, educational, or scientific purposes as
     described in section 501(c)(3) * * *.

          In furtherance of such purposes, the Corporation
     may develop and operate alternative health care
     delivery plans and financing systems such as a health
     maintenance organization to provide cost-effective and


3
 (...continued)
obtain insurance: (1) For the cost of providing a member with
more than $5,000 in basic health services for any one year; (2)
for the cost of basic health services provided to a member by a
source outside the HMO due to an emergency; and (3) for not more
than 90 percent of the amount by which its costs for any fiscal
year exceeds 115 percent of its income. Additionally, the
section states that HMOs may enter into arrangements under which
physicians and/or health care institutions assume all or part of
the risk on a prospective basis for the provision to enrollees of
basic health services.
4
     The Health Maintenance Organization Act of 1973 (the HMO
Act), Pub. L. 93-222, 87 Stat. 914, codified a number of
provisions governing the organization and operation of federally
qualified HMOs. Under the HMO Act, an HMO was required to satisfy
both State licensing requirements and additional federally
mandated conditions pertaining to benefits, availability and
accessibility of services, fiscal soundness, and quality
assurance. The HMO Act provided federally qualified HMOs with
certain marketing advantages. In particular, under 42 U.S.C.
sec. 300e-9 (1976), a provision referred to as the so-called
dual-choice mandate, certain employers (generally those with more
than 25 employees) were obligated to offer their employees the
option of enrolling in a federally qualified HMO.
                                - 9 -

      high quality care to members of the community,
      including elderly and disadvantaged persons, and it may
      conduct research and educational demonstration projects
      with various health care delivery systems.

      Petitioner was licensed to operate an HMO in the State of

Utah and was subject to regulation by the Utah Insurance

Commissioner.    Petitioner used the same network of health care

providers used by Health Plans.

      2.   IHC Group, Inc.

      In July 1991, Health Plans organized Group as a nonprofit

affiliate for the purpose of establishing a federally qualified

medical group model HMO.5    Health Plans was Group’s sole

corporate member.

      Group was licensed to operate an HMO in the State of Utah

and was subject to regulation by the Utah Insurance Commissioner.

      IHC had effective control of Health Plans, petitioner, and

Group by virtue of its authority (direct and indirect) to elect

their boards of trustees.    Health Plans, petitioner, and Group

shared the same officers and trustees.

II.   Petitioner’s Operations

      Health Plans structured its health plans in conjunction with


5
     Group was considered a closed panel, medical group model HMO
because Group contracted for physician services with physician
medical groups and required its enrollees to agree to coordinate
all of their medical care through a primary care physician (PCP)
or so-called gatekeeper. In cases in which the PCP determined
that an enrollee should be seen by a medical specialist, the PCP
generally was expected to refer the enrollee to a specialist
within the PCP’s medical group.
                              - 10 -

petitioner’s and Group’s health plans in order to offer potential

enrollees a range of health services and pricing options.     Health

Plans provided general and administrative services to petitioner

and Group including marketing, sales, enrollment, customer

service, claims processing, underwriting and actuarial

services, provider relations and contracting, management

information systems, and general accounting services.

      Petitioner operated as an open panel, direct contract model

HMO offering health plans known as IHC Care and IHC Senior Care.

In short, as petitioner did not itself provide health care

services, it arranged for its enrollees to receive such services

by contracting directly with individual physicians (rather than a

physician medical group) to provide health services to its

enrollees.

A.   IHC Care Health Plan

     Petitioner offered its IHC Care health plan solely to

employers with more than 100 employees.6   Petitioner collected

premiums from its enrollees and arranged for them to receive

comprehensive health care services, including preventive care,

outpatient services, inpatient hospital services, emergency



6
     Health Plans also offered a plan known as IHC Care. The
principal differences between petitioner’s IHC Care plan and the
IHC Care plan offered by Health Plans related to the methodology
applied in determining premiums and the enrollees’ degree of
access to primary care physicians. See IHC Health Plans, Inc. v.
Commissioner, T.C. Memo. 2001-246.
                              - 11 -

services, out-of-area services, and miscellaneous services such

as ambulance and pharmacy services.

     To participate in petitioner’s IHC Care health plan, an

employer was required to enter into a master group contract.

Thereafter, during annual open enrollment periods, the employer’s

individual employees were permitted to enroll in the health plan

and select the benefit package of his or her choice.   Although

petitioner did not deny membership to enrollees with preexisting

medical conditions, petitioner denied full coverage for certain

preexisting conditions during the first 12 months of membership.

     Petitioner did not own or operate any medical facilities,

nor did it directly employ any physicians or other health care

professionals.   Petitioner fulfilled its obligation to arrange

for its IHC Care enrollees to receive physician services by

contracting with a panel of 1,165 primary care physicians and

specialist physicians to provide such services.   Approximately 83

percent of these physicians were independent physicians while the

remaining 17 percent of the physician panel was composed of

physicians employed by Health Services.   Petitioner required all

such physicians to have staff privileges at one of Health

Services’ hospitals.
                               - 12 -

     Petitioner relied upon an adjusted community rating

methodology to determine IHC Care premiums.7   Petitioner’s rating

methodology included adjustments for actual enrollee utilization

rates during the preceding year and a projection of the cost of

services expected to be provided during the coverage period.

Petitioner’s premium formula also took into account the following

factors:    Age and sex, family size, industry, group effective

date, and benefit variations among different employer groups.

     Petitioner generally compensated independent primary care

and specialist physicians on a discounted fee-for-service basis.

The fee for each service was equal to the lesser of the

physician’s current prevailing fee or a maximum allowable fee

schedule.    Petitioner developed the maximum allowable fee

schedule based on its own studies of usual and customary charges

and an analysis of available market data.

     Petitioner compensated Health Services for the services of

its primary care and specialist physicians using various

methodologies including capitation and discounted fee-for-

service.    Under its capitation methodology, petitioner paid

Health Services a fixed monthly fee for each enrollee under the

care of Health Services’ physicians.




7
     See 42 C.F.R. sec. 417.104(b) (1991), which sets forth the
requirements for acceptable HMO community rating systems.
                             - 13 -

     Petitioner determined that, from 1985 to April 1994, its fee

schedule produced payments to primary care physicians that were

20 percent below mid-market rates.    For all physician services,

petitioner calculated that its fee schedule represented a

discount (relative to the amount billed) of approximately 14

percent in 1993, 20 percent in 1994, 28 percent in 1995, and 33

percent in 1996.

     Between 1985 and 1995, petitioner withheld between 10 and 20

percent of its payments to physicians, unless the physicians

achieved certain budgetary savings.   In 1996, petitioner

discontinued withholding payments to physicians.

     Prior to April 1996, petitioner made incentive payments to

physicians who controlled expenses and reduced the cost of

providing health care services to petitioner’s enrollees.

Eligible physicians received incentive payments for years in

which petitioner’s actual health care costs were less than its

projected costs.

     Approximately 21 percent of petitioner’s expenditures for

physician services was attributable to services provided by

physicians employed by Health Services.   The remaining 79 percent

of such expenditures was attributable to services provided by

independent physicians.

     Petitioner fulfilled its obligation to arrange for its

enrollees to receive hospital services by contracting with a
                              - 14 -

panel of hospitals including Health Services hospitals and a

limited number of independent hospitals.   Petitioner generally

compensated its contractor hospitals pursuant to a modified

diagnosis related group (DRG) payment system under which an

enrollee admitted to a hospital on either an inpatient or

outpatient basis would be assigned a DRG and the hospital would

be paid a fixed fee consistent with the DRG schedule.

     Approximately 90 percent of petitioner’s expenditures for

inpatient hospital services and approximately 91 percent of

petitioner’s expenditures for outpatient hospital services were

attributable to services provided by Health Services hospitals.

     A substantial portion of petitioner’s enrollees’ admissions

to independent hospitals were for admissions to either University

of Utah Medical Center (UMC) or Davis Hospital and Medical

Center.   In particular, Health Services entered into special

contracts with UMC to obtain services from UMC’s:   (1)

Intermountain Burn Center (the only certified burn center in the

region); (2) Neuropsychiatric Institute (to provide psychiatric

beds when LDS Hospital temporarily exceeded its inpatient

capacity); and (3) Pain Management Center.   Some UMC admissions

were related to a unique relationship between Primary Children’s

Hospital, a Health Services hospital dedicated to acute care

pediatric services, and UMC’s specialized genetic research and

other pediatric-related teaching and research programs.   In
                               - 15 -

addition, Health Plans, petitioner, and Group entered into

provider agreements with Davis Hospital and Medical Center,

located in Davis County, Utah, because there were no Health

Services hospitals in the immediate area.

      During the 2-year period including 1997 and 1998, UMC

accounted for approximately 50 percent of all inpatient hospital

services provided to petitioner’s enrollees by independent Utah

hospitals.    During the 2-year period including 1997 and 1998, UMC

accounted for approximately 42 percent of all outpatient hospital

services provided to petitioner’s enrollees by independent Utah

hospitals.

      Petitioner maintained a Core Wellness Program under which

its enrollees were provided health care information and a variety

of health care services at no additional charge.   Petitioner’s

Core Wellness Program included annual worksite health screenings,

group health risk profiles, a 24-hour nurse hotline, ergonomics

assessment and consulting, worksite health seminars, and a health

newsletter.   Petitioner did not offer its Core Wellness Program

to the general public.

B.   IHC Senior Care Health Plan

      Between 1996 and 1998, petitioner offered a Medicare “risk”

health plan known as IHC Senior Care (Senior Care plan).      Under

petitioner’s Senior Care plan, Medicare eligible enrollees agreed

to obtain their Medicare Part A (hospital services) and Medicare
                              - 16 -

Part B (physician services) from petitioner’s network of

providers, and petitioner was compensated by the Government for

each enrollee on a pre-paid, capitation basis.   Between 1993 and

1998, Group offered a Medicare “cost” health plan of the same

name.8

      Petitioner and Group ceased offering their respective Senior

Care plans effective December 31, 1998.   Petitioner terminated

its Senior Care plan in part due to the financial losses that it

incurred under the program.

C.   Enrollment

      As of September 30, 1997, petitioner had 22,258 enrollees,

including 15,006 enrollees in IHC Care and 7,252 enrollees in IHC

Senior Care.

D.   Lack Of Free/Low Cost Services

      Petitioner did not provide any charity care.   Petitioner did

not maintain a program designed to encourage or assist low income

persons, medically high-risk persons, persons located in

medically under-served areas, or elderly persons to enroll in its



8
     Under Group’s Senior Care plan, Medicare eligible enrollees
who paid the required premium were entitled to obtain physician
services (and a number of additional services not covered by
Medicare) from petitioner’s panel of primary care physicians and
specialists and were relieved of the obligation to pay any
deductible or co-insurance payments under Medicare Part B
(physician services). Enrollees in Group’s Senior Care plan
retained their eligibility for Medicare Part A (hospital
services) and continued to pay Medicare Part A premiums to the
Government.
                               - 17 -

health plans.    Petitioner did not subsidize premiums for persons

who were unable to afford its premiums, and petitioner did not

retain existing enrollees who failed to pay their premiums.

Petitioner did not conduct any medical, health care, or

scientific research.

III.   Petitioner’s Application for Exemption

       In 1986, petitioner filed with respondent an application for

recognition as an organization described in section 501(c)(3)

that is exempt from taxation pursuant to section 501(a).

Petitioner’s application stated that it intended to operate for

the charitable purpose of promoting health for the benefit of the

community.

       On October 29, 1998, respondent issued a final adverse

determination letter to petitioner denying its application for

tax-exempt status pursuant to section 501(c)(4).    The record does

not reflect the date that petitioner filed its application for

exemption under section 501(c)(4) or whether petitioner filed a

petition for declaratory judgment with the Court challenging

respondent’s determination under section 501(c)(4).

       On June 16, 1999, respondent issued a final adverse

determination letter to petitioner denying its application for

tax-exempt status pursuant to section 501(c)(3).    Respondent

determined that petitioner did not qualify as an organization

described in section 501(c)(3) on the ground that petitioner was
                              - 18 -

not operated exclusively for an exempt purpose.   In the

alternative, respondent determined that, even assuming that

petitioner qualified as an organization described in section

501(c)(3), petitioner was not entitled to tax-exempt status

because a substantial part of its activities consisted of

providing commercial type insurance within the meaning of section

501(m).

     On June 16, 1999, respondent also denied Group’s application

for tax-exempt status.   On July 21, 1999, respondent issued a

revocation letter to Health Plans revoking its status as an

organization described in section 501(c)(3).

                            Discussion

Section 501(c)(3)

     To qualify as an organization described in section 501(c)(3)

that is exempt from Federal income taxation pursuant to section

501(a), an organization generally must demonstrate:   (1) It is

organized and operated exclusively for certain specified exempt

purposes; (2) no part of its net earnings inures to the benefit

of a private shareholder or individual; (3) no part of its

activities constitutes intervention or participation in any

political campaign on behalf of any candidate for public office;

and (4) no substantial part of its activities consists of

political or lobbying activities.   See Fla. Hosp. Trust Fund v.

Commissioner, 103 T.C. 140, 145 (1994), affd. 71 F.3d 808 (11th
                              - 19 -

Cir. 1996); Am. Campaign Acad. v. Commissioner, 92 T.C. 1053,

1062 (1989).

     Qualification as an organization described in section

501(c)(3) not only provides an exemption from Federal income

taxes, but also generally permits the organization to solicit and

accept donations which normally are deductible by the donor

against his or her Federal taxes.   See sec. 170(c); Bob Jones

Univ. v. United States, 461 U.S. 574, 577-578 (1983).    With a few

minor differences, the organizations and requirements listed in

section 170(c)(2) are virtually identical to those described in

section 501(c)(3).   With limited exceptions not here relevant,

organizations described in the other paragraphs of section 501(c)

are not eligible to receive tax-deductible contributions.

     In the event the Commissioner determines that an

organization does not qualify for tax-exempt status, the

organization may (after exhausting its administrative remedies)

seek judicial review of the matter.    Section 7428(a) confers

jurisdiction on the Tax Court, among other courts, to make a

declaration with respect to the initial or continuing

qualification of an organization as an organization described in

section 501(c)(3).   See Houston Lawyer Referral Serv., Inc. v.

Commissioner, 69 T.C. 570, 571 (1978).

     It is well established that the scope of our inquiry is

limited to the propriety of the reasons given by the Commissioner
                             - 20 -

for denying an organization's application for exemption.    See Aid

to Artisans, Inc. v. Commissioner, 71 T.C. 202, 208 (1978).

Thus, in making our declaration, we do not engage in a de novo

review of the administrative record.   See Am. Campaign Acad. v.

Commissioner, supra at 1063; Church in Boston v. Commissioner, 71

T.C. 102, 105-106 (1978); Houston Lawyer Referral Serv., Inc. v.

Commissioner, supra at 573-574, 577.     The burden of proof is on

the organization to overcome the grounds for denial of the

exemption set forth in the Commissioner’s determination.    See

Rule 217(c)(4)(A); Fla. Hosp. Trust Fund v. Commissioner, supra

at 146; Christian Manner Intl., Inc. v. Commissioner, 71 T.C.

661, 664-665 (1979); Hancock Acad. of Savannah, Inc. v.

Commissioner, 69 T.C. 488, 492 (1977).

     The parties do not dispute that petitioner was organized for

an exempt purpose within the meaning of section 501(c)(3).    The

dispute in this case centers on whether petitioner was operated

exclusively for an exempt purpose.

     Section 1.501(c)(3)-1(c)(1), Income Tax Regs., provides:

          (c) Operational test--(1) Primary activities. An
     organization will be regarded as "operated exclusively"
     for one or more exempt purposes only if it engages
     primarily in activities which accomplish one or more of
     such exempt purposes specified in section 501(c)(3).
     An organization will not be so regarded if more than an
     insubstantial part of its activities is not in
     furtherance of an exempt purpose.

The operational test focuses on the actual purposes the

organization advances by means of its activities, rather than on
                                - 21 -

the organization's statement of purpose or the nature of its

activities.   See Am. Campaign Acad. v. Commissioner, supra at

1064; Aid to Artisans, Inc. v. Commissioner, supra at 210-211.

Although an organization might be engaged in only a single

activity, that single activity might be directed toward multiple

purposes, both exempt and nonexempt.     See Redlands Surgical

Servs. v. Commissioner, 113 T.C. 47, 72 (1999), affd. per curiam

242 F.3d 904 (9th Cir. 2001).    "[T]he presence of a single

* * * [non-exempt] purpose, if substantial in nature, will

destroy the exemption regardless of the number or importance of

truly * * * [exempt] purposes."     Better Bus. Bureau, Inc. v.

United States, 326 U.S. 279, 283 (1945); see Manning Association

v. Commissioner, 93 T.C. 596, 603-605 (1989); Am. Campaign Acad.

v. Commissioner, supra at 1065.

     Whether an organization operates for a substantial nonexempt

purpose is a question of fact to be resolved on the basis of all

the evidence presented in the administrative record.    See Church

By Mail, Inc. v. Commissioner, 765 F.2d 1387, 1390 (9th Cir.

1985), affg. T.C. Memo. 1984-349.    For purposes of the instant

proceeding, we assume that the facts as represented in the

administrative record are true, although in the course of our

review we may draw our own ultimate conclusions and inferences

from the facts.   See Am. Campaign Acad. v. Commissioner, supra at

1063-1064; Houston Lawyer Referral Serv., Inc. v. Commissioner,
                              - 22 -

supra at 573-575 (1978).

     Section 501(c)(3) specifies various qualifying exempt

purposes, including "charitable" purposes.   The term "charitable"

is not defined in section 501(c)(3) but is used in its generally

accepted legal sense.   See Nationalist Movement v. Commissioner,

102 T.C. 558 (1994), affd. per curiam 37 F.3d 216 (5th Cir.

1994); sec. 1.501(c)(3)-1(d)(2), Income Tax Regs.

Charitable Purpose

     The Supreme Court has stated that “Charitable exemptions are

justified on the basis that the exempt entity confers a public

benefit-–a benefit which the society or the community may not

itself choose or be able to provide, or which supplements and

advances the work of public institutions already supported by tax

revenues.”   Bob Jones Univ. v. United States, supra at 591.

Although neither the furnishing of medical care nor the operation

of an HMO is listed as a qualifying exempt activity under section

501(c)(3), it is now well settled that the promotion of health

for the benefit of the community is a charitable purpose.    See

Redlands Surgical Servs. v. Commissioner, supra at 73; Sound

Health Association v. Commissioner, supra at 177-181.   As

discussed in detail below, a health-care provider seeking tax-
                                - 23 -

exempt status, such as an HMO, must demonstrate that it provides

a community benefit.

Community Benefit Test

     In Sound Health Association v. Commissioner, supra, we first

considered whether an HMO may qualify as an organization

described in section 501(c)(3).    The Commissioner determined that

Sound Health Association did not qualify for tax-exempt status

pursuant to section 501(c)(3) on the ground that the organization

served the private interests of its members as opposed to the

interests of the community.

     In Sound Health Association v. Commissioner, supra at 182-

183, we utilized the same factors deemed significant by the

Commissioner in granting tax-exempt status to one of two

hospitals under review in Rev. Rul. 69-545, 1969-2 C.B. 117, and

referred to the factors cited favorably in that ruling as the

community benefit test.   In Sound Health Association, we

concluded that the subject organization shared several

characteristics with the hospital deemed exempt in Rev. Rul. 69-

545, supra.   In particular, like the hospital in the revenue

ruling, Sound Health Association operated a medical clinic and

employed physicians and nurses to provide medical services, and

opened its emergency room to all persons requiring emergency care

whether they were members or not and regardless of whether they

were financially able to pay.    Sound Health Association also
                               - 24 -

established a research program to study health care delivery

systems, conducted a health education program open to the general

public, and was governed by a board of directors the majority of

whom were elected by Sound Health Association members from the

community at large.    Sound Health Association v. Commissioner,

supra at 184.

       We found that Sound Heath Association provided community

benefits beyond those offered by the hospital deemed exempt in

Rev. Rul. 69-545, supra.    Specifically, Sound Health Association

adopted a plan to accept contributions for the purpose of

subsidizing membership for those who could not otherwise afford

to pay the full amount of monthly dues.    Further, Sound Health

Association’s practice of offering membership to the public at

large demonstrated that the class of persons eligible to benefit

from the organization’s activities was practically unlimited.

Sound Health Association v. Commissioner, supra at 184-185.

       We rejected the Commissioner’s argument that Sound Health

Association provided an unwarranted private benefit to its

members.    We reasoned that, like the hospital deemed exempt in

Rev. Rul. 69-545, supra, which (except in emergency cases)

limited its treatment to paying patients, Sound Health

Association was permitted to restrict its services to paying

members.    Sound Health Association v. Commissioner, supra at 186-

187.
                               - 25 -

     The tax-exempt status of an HMO arose again in Geisinger

Health Plan v. Commissioner, T.C. Memo. 1991-649 (Geisinger I),

revd. and remanded 985 F.2d 1210 (3d Cir. 1993) (Geisinger II),

opinion on remand 100 T.C. 394 (1993) (Geisinger III), affd. 30

F.3d 494 (3d Cir. 1994) (Geisinger IV).   Geisinger HMO, like

petitioner in the instant case, was part of a group of related

organizations forming a large health care network (the Geisinger

system).

     Geisinger HMO arranged for its enrollees to receive hospital

services by contracting for such services with other Geisinger

entities (Geisinger hospitals and outpatient clinics that were

recognized as exempt organizations) and independent hospitals.

Geisinger HMO arranged for its enrollees to receive physician

services by contracting for such services with Clinic--a tax-

exempt Geisinger affiliate.   Clinic provided physician services

through a combination of 400 staff physicians and by contracting

with independent physicians for their services.   Geisinger HMO

was organized as a separate entity to avoid regulatory

difficulties and to simplify operations from an organizational

and managerial standpoint.

     Geisinger HMO offered enrollment to groups (with a minimum

of 100 eligible enrollees) and individuals (and certain

dependents) residing in 17 of the 27 counties in which the

Geisinger system operated.    Individual enrollees were required to
                               - 26 -

be at least 18 years of age.   Individual enrollees were required

to complete a medical questionnaire, whereas group enrollees were

not subject to this requirement.   All enrollees generally paid

the same premium based on a community rating system.   During the

period in question, Geisinger HMO had approximately 71,000

individual and group enrollees.

     Geisinger HMO also enrolled slightly more than 1,000

Medicare recipients under a “wraparound” plan that covered

medical expenses not reimbursed by Medicare.   Geisinger HMO also

enrolled a small number of Medicaid recipients.   Geisinger HMO

planned to initiate a subsidized dues program to assist enrollees

who might be unable to continue to pay their membership fees as

the result of some financial misfortune.

     At the conclusion of the administrative proceedings, the

Commissioner determined that Geisinger HMO did not qualify for

exemption as an organization described in section 501(c)(3) on

the grounds:   (1) Geisinger HMO did not satisfy the criteria for

exemption outlined in Sound Health Association v. Commissioner,

supra; and (2) Geisinger HMO was not an integral part of its tax-

exempt parent.

     In Geisinger I, we held that the Commissioner erred in

determining that Geisinger HMO did not qualify for exemption

pursuant to section 501(c)(3).    We based our holding largely on a

comparison of the Geisinger HMO with the organization in Sound
                             - 27 -

Health Association v. Commissioner, 71 T.C. 158 (1978).     In

particular, we found that, like Sound Health Association,

Geisinger HMO was operated for the charitable purpose of

promoting health insofar as its class of possible enrollees was

practically unlimited, it had adopted a subsidized dues program

for its enrollees, it offered health care services to Medicare

recipients at a reduced rate, and it was not operated for the

private benefit of its enrollees.    Geisinger Health Plan v.

Commissioner, T.C. Memo. 1991-649.

     In Geisinger II, the United States Court of Appeals for the

Third Circuit reversed and remanded our decision in Geisinger I.

Geisinger Health Plan v. Commissioner, 985 F.2d at 1218-1219.

Although the Court of Appeals agreed with the Court that an HMO

seeking tax-exempt status must provide a community benefit, see

id., the Court of Appeals concluded that Geisinger HMO did not

provide a primary benefit to the community but, rather, provided

benefits solely to its members.   The Court of Appeals, looking at

the totality of the circumstances, stated:

     GHP standing alone does not merit tax-exempt status
     under section 501(c)(3). GHP cannot say that it
     provides any health care services itself. Nor does it
     ensure that people who are not GHP subscribers have
     access to health care or information about health care.
     According to the record, it neither conducts research
     nor offers educational programs, much less educational
     programs open to the public. It benefits no one but
     its subscribers. [Id. at 1219.]

Further, the Court of Appeals attached little significance to
                             - 28 -

Geisinger HMO’s subsidized dues program, stating in pertinent

part:

          The mere fact that a person need not pay to belong
     does not necessarily mean that GHP, which provides
     services only to those who do belong, serves a public
     purpose which primarily benefits the community. The
     community benefited is, in fact, limited to those who
     belong to GHP since the requirement of subscribership
     remains a condition precedent to any service. Absent
     any additional indicia of a charitable purpose, this
     self-imposed precondition suggests that GHP is
     primarily benefiting itself (and, perhaps, secondarily
     benefiting the community) by promoting subscribership
     throughout the areas it serves. [Id. at 1219.]

Although concluding that Geisinger HMO did not qualify for tax-

exempt status on its own, the Court of Appeals remanded the case

to the Court for a determination whether the Geisinger HMO

qualified for exemption as an “integral part” of its tax-exempt

parent.   Id. at 1220.9

Integral Part Test

     In Geisinger III, we held that the administrative record did

not support Geisinger HMO’s claim that it was entitled to tax-

exempt status as an integral part of the Geisinger system.

Geisinger Health Plan v. Commissioner, 100 T.C. at 404-405.     As a

preliminary matter, we concluded that an HMO may qualify for tax-

exempt status as an integral part of a related tax-exempt entity



9
     The integral part doctrine is not codified, but its genesis
may be found in sec. 1.502-1(b), Income Tax Regs., which states
that a subsidiary may qualify for tax-exempt status “on the
ground that its activities are an integral part of the exempt
activities of the parent organization”.
                               - 29 -

if its activities are carried out under the supervision or

control of the tax-exempt affiliate and the HMO’s activities

would not constitute an unrelated trade or business if conducted

by the tax-exempt affiliate.   Id. at 402, 404-405.   We looked to

section 513(a) which defined an unrelated trade or business in

pertinent part as:

     "any trade or business the conduct of which is not
     substantially related (aside from the need of such
     organization for income or funds or the use it makes of
     the profits derived) to the exercise or performance by
     such organization of * * * [the] purpose or function
     constituting the basis for its exemption". * * * [Id.
     at 405.]

     Because Geisinger HMO enrollees received medical services

from hospitals outside of the Geisinger system, and because the

administrative record lacked evidence as to whether such services

were substantial, we were unable to conclude that Geisinger HMO’s

activities were substantially related to the activities of its

tax-exempt affiliates.   Id. at 405-406.

     In Geisinger IV, the Court of Appeals affirmed our holding

in Geisinger III, albeit on slightly different grounds.

Geisinger Health Plan v. Commissioner, 30 F.3d at 501.    The Court

of Appeals held that an organization may qualify for tax-exempt

status as an integral part of its tax-exempt parent if: (1) the

organization is not carrying on a trade or business which would

be an unrelated trade or business if regularly carried on by its

tax-exempt parent; and (2) the organization’s relationship with
                               - 30 -

its tax-exempt parent somehow enhances or “boosts” its own tax-

exempt character to the point that the organization would qualify

for tax-exempt status.   Id.   Focusing solely on the latter issue,

the Court of Appeals concluded that Geisinger HMO was not

entitled to tax-exempt status because it did not receive the

necessary boost from its relationship with exempt Geisinger

entities.   In particular, the Court of Appeals held:

          As our examination of the manner in which * * *
     [Geisinger HMO] interacts with other entities in the
     System makes clear, its association with those entities
     does nothing to increase the portion of the community
     for which * * * [Geisinger HMO] promotes health–-it
     serves no more people as a part of the System than it
     would serve otherwise. * * * [Id. at 502.]

Under the circumstances, the Court of Appeals concluded that it

was unnecessary to consider whether Geisinger HMO’s activities

would constitute an unrelated trade or business if regularly

carried on by a related tax-exempt entity.    Id. at 501.

Analysis

     Consistent with the preceding discussion, petitioner’s

qualification for exemption pursuant to section 501(a) as an

organization described in section 501(c)(3) initially depends

upon whether petitioner satisfies the community benefit test.    In

the event that petitioner cannot satisfy the community benefit

test, we must consider whether petitioner nevertheless qualifies

for exemption as an integral part of a related tax-exempt entity.
                              - 31 -

Whether Petitioner Satisfies The Community Benefit Test

     The community benefit test requires consideration of a

variety of factors that indicate whether an organization is

involved in the promotion of health on a community-wide basis.

See Sound Health Association v. Commissioner, 71 T.C. at 181-185

(comparing Sound Health Association’s operations with “hospital

A” in Rev. Rul. 69-545, 1969-2 C.B. 117.)    Considering all the

facts and circumstances surrounding petitioner’s operations, even

though petitioner is instrumental in arranging for the provision

of health care to a large number of individuals in the geographic

area that it serves, we are not persuaded that petitioner

provides a meaningful community benefit.    Accordingly, petitioner

does not qualify for tax-exempt status as an organization

described in section 501(c)(3) based upon the provision of a

community benefit.

     Significantly, unlike the HMOs in Geisinger Health Plans v.

Commissioner, supra, and Sound Health Association v.

Commissioner, supra, petitioner did not offer its health plans to

the general public.   Petitioner only offered its IHC Care health

plan to employees of large employers; i.e., employers with more

than 100 employees.   Moreover, petitioner no longer offers its

IHC Senior Care plan to Medicare patients.    In sum, petitioner
                              - 32 -

operates in a manner that substantially limits its universe of

potential enrollees.

     Against this backdrop, we further note that, unlike the HMO

in Sound Health Association v. Commissioner, supra, petitioner

did not own or operate its own medical facilities, nor did

petitioner employ its own physicians.   Consequently, petitioner

could not provide free medical care to those otherwise unable to

pay for medical services.   Additionally, petitioner did not

establish a subsidized premiums program, conduct research, or

offer free education programs to the public.    Petitioner’s Core

Wellness Program was offered exclusively to its enrollees.

     We recognize that petitioner’s operations, and particularly

petitioner’s practice of setting premiums based upon an adjusted

community rating system, likely allowed its enrollees to obtain

medical care at a lower cost than might otherwise have been

available.   However, the benefit associated with these cost

savings is more appropriately characterized as a benefit to

petitioner’s enrollees as opposed to the community at large.

     In sum, the record does not establish that petitioner

provides a community benefit that would qualify petitioner for

tax-exempt status pursuant to section 501(c)(3).   We next

consider whether petitioner qualifies for tax-exempt status as an

integral part of a related tax-exempt entity.
                                 - 33 -

2.   Whether Petitioner Satisfies The Integral Part Test

      In Geisinger III, we concluded that an organization may

qualify for exemption as an integral part of a tax-exempt

affiliate if:    (1) The organization’s activities are carried out

under the supervision or control of a tax-exempt affiliate, and

(2) such activities would not constitute an unrelated trade or

business if conducted by a related tax-exempt entity.      Geisinger

Health Plans v. Commissioner, 100 T.C. at 402-405.    There is no

dispute that petitioner’s activities were carried out under the

supervision and control of IHC-–a tax-exempt affiliate.     Thus, we

turn to the question whether petitioner’s activities would

constitute an unrelated trade or business if conducted by a

related tax-exempt entity.

      In Geisinger III, we held that, because Geisinger HMO

enrollees received some hospital services from independent

hospitals, Geisinger HMO had to show that its overall operations

were substantially related to the functions of its tax-exempt

affiliates.     Id. at 405.   We stated:

      If petitioner’s activities are “conducted on a scale
      larger than is ‘reasonably necessary’” to accomplish
      the purposes of the exempt entities, there is no
      substantial relationship within the meaning of the
      regulations. Hi-Plains Hospital v. United States, 670
      F.2d at 530-531; sec. 1.513-1(d)(3), Income Tax Regs.

Id. at 406.

      Although Geisinger HMO enrollees received all of their
                               - 34 -

physician services through Clinic, an exempt affiliate, Geisinger

HMO enrollees received approximately 20 percent of their hospital

services from independent hospitals.    Because the record did not

disclose why Geisinger HMO enrollees received hospital services

from hospitals outside of the Geisinger system, we were unable to

conclude that Geisinger HMO’s operations were substantially

related to the functions of its tax-exempt affiliates.    Id. at

404-406.

     Like Geisinger HMO, petitioner neither owned nor operated

any medical facilities and did not employ any physicians or

health care professionals.   Petitioner fulfilled its obligation

to provide medical services to its enrollees by contracting with

physicians (both physicians employed by Health Services and

independent physicians) and hospitals (both Health Services

hospitals and independent hospitals) to provide such services.

In contrast to Geisinger HMO, however, the administrative record

in this case indicates that the medical services that

petitioner’s enrollees received from independent hospitals were

largely attributable to admissions to either UMC or Davis

Hospital and Medical Center.   Further, these admissions were

undertaken to:   (1) Take advantage of specialized services (such

as burn treatment and pain management) provided at UMC; (2)

address occasional shortages of psychiatric beds in Health

Services hospitals; and (3) accommodate petitioner’s enrollees
                              - 35 -

living in Davis County, Utah, where Health Services lacked a

hospital.   Because the circumstances under which petitioner’s

enrollees received hospital services from independent hospitals

were limited to situations where Health Services was unable to

provide specialized hospital services or were due to geographical

expediency, or both, we are satisfied that petitioner’s method

for arranging for its enrollees to receive hospital services was

substantially related to Health Services’ tax-exempt function.

     However, we do not end our analysis here.   In particular,

the administrative record reveals that petitioner’s enrollees

received a substantial portion of their physician services from

independent physicians.

     In Geisinger III, we did not discuss the provision of

physician services to Geisinger enrollees inasmuch as Geisinger

HMO arranged for its enrollees to receive all their physician

services from Clinic–-a tax-exempt affiliate of Geisinger HMO.

Clinic in turn arranged to provide physician services to

Geisinger enrollees through its approximately 400

physician/employees (approximately 84 percent of services) and

through contracts with independent physicians (approximately 16

percent of services).   In contrast, in the instant case,

petitioner’s enrollees received only 21 percent of their

physician services from physicians employed by or contracting

with Health Services, while petitioner contracted for the
                               - 36 -

remaining 79 percent of such physician services directly with

independent physicians.   In other words, petitioner’s enrollees

received nearly 80 percent of their physician services from

physicians with no direct link to one of petitioner’s tax-exempt

affiliates.

     Petitioner contends that its contracts with independent

physicians are not relevant to the question of whether it

qualifies for tax-exempt status as an integral part of its tax-

exempt IHC affiliates because all such independent physicians

were required to maintain privileges at Health Services’

hospitals.    We disagree with the basic premise underlying

petitioner’s argument.

     Health Services was composed of the hospital division, which

operated a large number of hospitals and clinics, and the

physician division, which employed 245 primary care physicians

and 215 specialist physicians who generally practiced in Health

Services’ clinics and other community-based settings.    Health

Services’ status as an organization described in section

501(c)(3) is undoubtedly attributable to its willingness to

provide charity services and its participation in Medicare,

Medicaid, and other Government programs.    Considering that

petitioner does not provide free or low cost health services, and

given the termination of its IHC Senior Care plan for Medicare

patients, we fail to see how petitioner’s operations, including
                              - 37 -

its heavy reliance on independent physicians, would be essential

to or substantially related to Health Services’ exempt functions.

To the contrary, petitioner’s method of arranging for its

enrollees to receive physician services suggests that petitioner

conducted its operations on a scale “larger than is reasonably

necessary to accomplish the purposes of the exempt entities”.

Geisinger Health Plans v. Commissioner, 100 T.C. at 406.10

     In sum, petitioner does not provide the community benefit

required for petitioner to qualify as an organization described

in section 501(c)(3).   Further, petitioner’s operations are not

essential to or substantially related to Health Services’ exempt

functions.   Consequently, petitioner is not entitled to the

declaratory judgment it seeks.

     To reflect the foregoing,

                                      Decision will be entered

                                 for respondent.




10
     Under the circumstances, we need not consider whether we
would apply the “boost” test set forth in Geisinger Health Plan
v. Commissioner, 30 F.3d 494, 501 (3d Cir. 1994). In addition,
we need not consider respondent’s alternative contention that
petitioner is not entitled to tax-exempt status pursuant to sec.
501(m) which provides that an organization described sec.
501(c)(3) shall not be entitled to tax-exempt status if a
substantial part of its activities consists of providing
commercial-type insurance.
