                       T.C. Memo. 2001-246



                     UNITED STATES TAX COURT



              IHC HEALTH PLANS, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14600-99X.            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 Health Plans, Inc.

(petitioner) did not qualify as an organization described in

sections 501(c)(3) and 170(c)(2) and revoked petitioner’s
                                - 2 -

exemption from Federal income taxation pursuant to section

501(a).   The revocation was retroactive to January 1, 1987.

Unless otherwise 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.

     Respondent revoked petitioner’s tax-exempt status under

section 501(c)(3) on the grounds that:    (1) Petitioner was not

operated exclusively for a tax-exempt purpose; and (2)

petitioner’s activities were tantamount to providing commercial-

type insurance within the meaning of section 501(m)(1).

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 also filed a stipulation of facts with attached exhibits.

The parties agree that petitioner has satisfied all

jurisdictional requirements.    See sec. 7428(b); Rule 210(c).
                                - 3 -

                             Background

      By way of a brief introduction, petitioner and its

affiliates, IHC Care, Inc. (Care) and IHC Group, Inc. (Group),

operated health maintenance organizations and were part of a

number of companies composing the so-called Intermountain Health

System.    Petitioner offered health plans to individuals,

employees of large and small employers, and Medicaid recipients.

At the same time that respondent revoked petitioner’s tax-exempt

status, respondent denied Care’s and Group’s applications for

exemption from Federal income taxation pursuant to section

501(a).1   For completeness, we have provided a detailed

description of the various entities composing 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

Utah, Idaho, and Wyoming.    Prior to 1970, LDS Church hospitals

functioned autonomously with little coordination or centralized

management.




1
    Respondent’s determinations to deny IHC Care, Inc.’s and IHC
Group, Inc.’s applications for tax-exempt status are the subjects
of the Court’s opinions in IHC Care, Inc. v. Commissioner, T.C.
Memo. 2001-248, and IHC Group, Inc. v. Commissioner, T.C. Memo.
2001-247.
                               - 4 -

     During 1970, LDS Church organized Health Services

Corporation, later renamed 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 its hospitals and to oversee its worldwide health

program.   Respondent recognized IHC as an organization described

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

section 501(a).

     During 1975, LDS Church determined that its hospitals were

not central to its mission and subsequently transferred control

of IHC to an independent board of trustees.   Between 1975 and the

early 1980s, IHC continued to operate its existing hospitals

while it constructed or acquired additional hospitals.   At the

same time, IHC began the process of centralizing its management,

coordinating its services, restructuring its debt, and

undertaking other steps that its management deemed necessary for

IHC to become an integrated multihospital system capable of

expanding its services, achieving economies of scale, and

improving operational efficiency.

     During the early 1980s, in response to myriad changes in the

health care field, IHC decided to restructure its operations,

which restructuring included the formation of several affiliates.

In February 1983, the Internal Revenue Service issued a private

letter ruling to IHC approving its corporate reorganization plan.
                                  - 5 -

     B.   IHC Health Services, Inc.

     In 1983, IHC transferred its hospitals and substantially all

its remaining operating assets, together with substantially all

its outstanding tax-exempt debt and other liabilities, to IHC

Health Services, Inc. (Health Services), a newly formed nonprofit

affiliate.    As a result of this reorganization, IHC ceased to

operate hospitals and assumed the position of a parent company

overseeing the operations of several nonprofit and for profit

affiliates.   IHC was Health Services’ sole member.

     Health Services was IHC’s principal health care delivery

organization.    During 1994, Health Services began to conduct its

activities through two divisions, the hospital division and the

physician division, which are described in detail below.

     1.   The Hospital Division

     As of December 31, 1999, the hospital division comprised 22

hospitals (including 2,644 licensed beds) located in Utah and

Idaho.    All of 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.

     Primary Children’s specialized in pediatric care in the

Intermountain West (defined generally as the area covering
                               - 6 -

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.   LDS Hospital, Health Services’ largest hospital,

located in Salt Lake City, Utah, provided a number of specialized

medical services, including open heart surgery, pulmonary

medicine, and coronary care.

     In addition to traditional hospital services, the hospital

division conducted a wide range of special care programs,

including women’s services, InstaCare Centers, home health care

services, ambulatory surgery centers, cardiac services,

rehabilitation services, psychiatric services, and occupational

health and mission services.   Health Services used its mission

services as a means to serve the community’s charitable needs.

Health Services provided quality management services by tracking

measures for improvement in clinical care.

     All Health Services hospitals participated in 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.     In

1998, Health Services was not reimbursed for approximately $254

million in medical care provided to patients covered by Medicare,

Medicaid, and other governmental programs.   In 1997, 1998, and

1999, Health Services provided charity services to indigent
                                - 7 -

patients valued at $26,705,911, $31,287,743, and $33,449,669,

respectively.

     Health Services’ hospital division employed approximately

120 physicians separate and apart from Health Services’ physician

division described below.    Hospital division physicians provided

hospital-based services such as radiology, pathology, and in some

cases emergency services.

     2.    The Physician Division

     As of December 31, 1999, the physician division employed

approximately 300 primary care physicians (general internists,

family practitioners, and pediatricians) and 100 specialist

physicians (cardiologists, urologists, obstetricians-

gynecologists, radiologists, and surgeons).    These physicians

generally practiced in Health Services’ clinics and other

community-based settings.    The physician division also provided

various ancillary and support services such as diagnostic imaging

and laboratory services for patients treated in Health Services’

clinics.

     The physician division performed the physician credentialing

function for Health Services’ hospitals and IHC’s various health

maintenance organizations (described below).    All physicians who

were granted privileges to practice medicine at Health Services’

hospitals were also qualified to act as participating providers

for IHC’s health maintenance organizations.
                               - 8 -

      Respondent recognized Health Services as an organization

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

pursuant to section 501(a), and as a public charity described in

sections 509(a)(1) and 170(b)(1)(A)(iii).

C.   IHC Health Plans, Inc.

      As a further step in its reorganization plan, IHC initially

intended to organize an affiliate to provide professional,

general liability, and worker's compensation insurance.   However,

upon further reflection, IHC decided to create an affiliate to

operate as a State-licensed health maintenance organization

(HMO)2.

      IHC’s decision was based on its consideration of an HMO’s

potential for generating medical care cost savings and



2
     Utah Code Ann. sec. 31A-8-101(5) (1999 Repl.) defines the
term “Health maintenance organization” 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.
                               - 9 -

recognition that HMOs were gaining in popularity.    IHC also

decided to organize an affiliate to operate as an HMO in order to

gain practical experience, to attempt to realize its own cost

savings by enrolling IHC employees in the HMO, and to counter a

potential competitive threat posed by the combination of national

for-profit hospital chains and HMOs (and their perceived capacity

to direct large numbers of patients to Health Services’

competitor hospitals).

      During 1983, IHC organized petitioner as a nonprofit

affiliate.   IHC 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 to provide cost-effective and high
      quality care to participating employer groups and patients
      including elderly and disadvantaged persons, and conduct
      research and educational demonstration projects with various
      health care delivery systems.

The articles also stated that petitioner’s business and affairs

would be conducted by a board of trustees elected by IHC and

composed of physicians, hospital personnel, and “buyer-

employers”; i.e., employers offering petitioner’s health plans to

their employees.3   Petitioner was organized as a separate entity


3
    Petitioner’s By-Laws stated in pertinent part:

                                                     (continued...)
                             - 10 -

to comply with regulatory requirements and to simplify operations

from an organizational and managerial standpoint.

    Petitioner was licensed to operate an HMO in Utah and was

permitted to offer a variety of individual and group health plans

in the communities that it served.    In June 1985, respondent

recognized petitioner as an organization described in section

501(c)(3) that is exempt from taxation pursuant to section

501(a).

     1.   IHC Care, Inc.

     In January 1985, petitioner organized Care as a nonprofit

affiliate for the purpose of establishing a federally qualified




3
 (...continued)
     The number of Trustees of the Corporation shall be not
     less than four (4) or more than twenty-three (23)
     persons, as determined from time to time by the Member.
     The initial number of trustees shall be eighteen (18).
     A plurality of Board members shall represent the buyer-
     employer community and an approximately equal number of
     physicians and hospital representatives shall be
     appointed. Buyer-employer members shall be broadly
     representative of the major geographic areas and
     business interests (such as manufacturing, retailing,
     transportation, finance, utilities, education, etc.) to
     be served by the Corporation’s health care delivery
     plans, and physician members shall also reflect such
     geographic areas as well as major medical specialties
     and modes of practice. * * *
                              - 11 -

direct contract model HMO.4   Petitioner was Care’s sole corporate


4
     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...)
                               - 12 -

member.

     Care was licensed to operate an HMO in Utah.   In 1985, the

Health Care Financing Administration (HCFA) recognized Care as a

federally qualified HMO.

     In 1985, Care filed with respondent an application for

recognition as an organization that is exempt from taxation

pursuant to section 501(c)(3).   In June 1999, respondent denied

Care’s application for tax-exempt status.

     2.   IHC Group, Inc.

     In July 1991, petitioner organized Group as a nonprofit

affiliate for the purpose of establishing a federally qualified

medical group model HMO.    Petitioner was Group’s sole corporate

member.




4
 (...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.

     Petitioner organized IHC Care, Inc., and IHC Group, Inc.
(discussed below) as federally qualified HMOs to take advantage
of marketing opportunities presented under the so-called dual
choice mandate codified under 42 U.S.C. sec. 300e-9 (1976), which
required certain employers (generally those with more than 25
employees) to offer their employees the option of enrolling in a
federally qualified HMO.
                                - 13 -

     Group was licensed to operate an HMO in Utah and Wyoming.

In 1991, HCFA recognized Group as a federally qualified HMO.

     In 1991, Group filed with respondent an application for

recognition as an organization that is exempt from taxation

pursuant to section 501(c)(3).    In June 1999, respondent denied

Group’s application for tax-exempt status.

     3.   IHC Benefit Assurance Company

     In May 1992, petitioner organized IHC Benefit Assurance

Company (Benefit), a taxable business corporation, to underwrite

traditional indemnity health insurance risks, particularly

point-of-service options offered by petitioner, Care, and Group.

Petitioner was Benefit’s sole shareholder.

     4.   Management Services

     Health Services provided management services to petitioner

and its affiliates on a centralized basis, including legal

services, human resources, public relations, and treasury

functions.   Each affiliate was subject to an annual intercompany

overhead allocation charge for these services.

     Petitioner provided general management and administrative

services to Care 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.
                                 - 14 -

      Petitioner operated an office known as Network Services that

negotiated and managed contracts between Health Services and

insurance carriers, third-party administrators, and independent

HMOs.

      Petitioner employed between 600 and 700 employees during the

3-year period 1997 to 1999.

D.   IHC Foundation, Inc.

        IHC organized IHC Foundation, Inc. (Foundation) to support

IHC’s and its tax-exempt affiliates’ charitable, educational, and

scientific activities.      Foundation received funds from grants,

donations, and other sources.      Respondent recognized Foundation

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

from taxation pursuant to section 501(a), and as a public charity

pursuant to sections 509(a)(1) and 170(b)(1)(A)(vi).

E.   IHC Insurance Company, Inc.

        IHC organized IHC Insurance Company, Inc., (Insurance) as a

for-profit insurance company.      Insurance, which operated on Grand

Cayman Island, provided IHC, Health Services, and petitioner with

access to reinsurance coverage.

F.   Control

        IHC had effective control of its affiliates, including

Health Services, petitioner, Care, and Group, all of which were

subject to the ultimate governance and control of IHC’s board of

trustees and corporate managers.      Health Services, petitioner,
                                - 15 -

Care, and Group shared many of the same corporate officers and

trustees.    IHC and its affiliates conducted their strategic

planning, established their priorities, and attempted to

implement their business plans on an enterprise basis, even

though each entity had its own management team and budget.

II.   Petitioner’s Operations

      A. In General

      Petitioner operated as a State-licensed HMO offering health

plans known as SelectMed, SelectMed Plus, IHC Care, IHC Care

Plus, IHC Direct Care, IHC Direct Care Plus, Health Choice, and

IHC Access.     Petitioner collected premiums from its enrollees

and, as petitioner did not itself provide health care services

(as explained below), it arranged for its enrollees to receive

comprehensive health care services, including preventive care,

outpatient services, inpatient hospital services, emergency

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

as ambulance and pharmacy services.

      Petitioner, Care, and Group marketed several different

health plans encompassing a range of health services at varying

prices.     Petitioner offered its various health plans to:   (1)

Individuals and their families; (2) employees of both large

employers (more than 50 employees) and small employers (2 to 50

employees); and (3) individuals covered by Medicaid.
                              - 16 -

     Petitioner entered into some form of written agreement with

all enrollees specifying the premium charge and the medical

services to which the enrollee would be entitled.   Petitioner

entered into master group contracts with all employers offering

its health plans.   Thereafter, during annual open enrollment

periods, employees were permitted to enroll in the health plan

and select the benefit package of his or her choice.

     Although petitioner did not limit its enrollment based upon

pre-existing medical conditions, certain plans excluded some pre-

existing conditions from full coverage during the first 12 months

of membership.

     Petitioner applied an adjusted community rating methodology

to determine premiums for individual and small employer group

enrollees, adjusting its rates for risk factors such as age and

gender.5   Petitioner relied upon past claims experience to

determine premiums for large employer group enrollees.

     B. Physician Services

     Petitioner did not employ a significant number of

physicians.6   Petitioner fulfilled its obligation to arrange for

its enrollees to receive physician services by contracting with a


5
     See 42 C.F.R. sec. 417.104(b) (1995), which sets forth the
requirements for acceptable community rating systems for
federally qualified HMOs.
6
     Petitioner never employed more than five physicians at a
time, and these physicians were hired for the limited purpose of
conducting health fairs for enrollees.
                                 - 17 -

panel of some 2,800 physicians including: (1) the primary care

and specialist physicians employed by Health Services; and (2)

2,400 independent physicians.

       The following schedule, reflecting petitioner’s experience

for the years 1997, 1998, and 1999, presents the total amounts

(by percentage) that petitioner was billed for physician services

provided by: (1) Physicians employed by Health Services’

physician division (Employed); (2) independent physicians on

petitioner’s panel (Not Employed-Panel); and (3) all other

physicians (Not Employed-Non Panel).

Year        Employed    Not Employed-Panel    Not Employed-Non Panel

1997         21.6%            66.1%                   12.3%
1998         21.0%            67.0%                   12.0%
1999         20.3%            69.4%                   10.3%

       C.    Hospital Services

       Petitioner did not directly own or operate any health care

facilities.      Petitioner fulfilled its obligation to arrange for

its enrollees to receive hospital services by contracting with a

panel of hospitals including Health Services hospitals and a

limited number of independent 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,

petitioner arranged for its enrollees to obtain medical services

from UMC’s:      (1) Intermountain Burn Center (the only certified
                                  - 18 -

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 addition, petitioner, Group, and Care 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.

       The following schedule, reflecting petitioner’s experience

for the years 1997, 1998, and 1999, presents the total amounts

(by percentage) that petitioner was billed for inpatient hospital

services by: (1) Health Services hospitals (HS); (2) independent

hospitals on petitioner’s panel (Panel-Not Owned); (3)

independent Utah hospitals not on petitioner’s panel (Non Panel-

Utah); and (4) independent hospitals outside of Utah and not on

petitioner’s panel (Non Panel-Non Utah).

Year     HS     Panel-Not Owned   Non Panel-Utah   Non Panel-Non Utah

1997    93.5%        1.1%              3.9%               1.6%
1998    91.8%        1.7%              4.7%               1.8%
1999    91.7%        1.8%              4.2%               2.3%

Approximately 60 percent of the inpatient charges for enrollees
                                  - 19 -

admitted to Non Panel-Utah hospitals during 1997, 1998, and 1999

was attributable to emergency medical care.

       The following schedule, reflecting petitioner’s experience

for the years 1997, 1998, and 1999, presents the total amounts

(by percentage) that petitioner was billed for outpatient

hospital visits by: (1) Health Services’ hospitals (HS); (2)

independent hospitals on petitioner’s panel (Panel-Not Owned);

(3) independent Utah hospitals not on petitioner’s panel (Non

Panel-Utah); and (4) independent hospitals outside of Utah and

not on petitioner’s panel (Non Panel-Non Utah).

Year     HS     Panel-Not Owned   Non Panel-Utah   Non Panel-Non Utah

1997    92.1%        3.6%              3.1%               1.3%
1998    90.4%        4.8%              3.7%               1.2%
1999    89.7%        4.8%              4.2%               1.3%

       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.

       D. Point-of-Service Options

       Petitioner offered several plans (described below) that

included a “Plus” or a point-of-service option.       Enrollees in

such plans were permitted to use the services of physicians

and/or hospitals outside of petitioner’s network with the
                                - 20 -

understanding that enrollees were:       (1) responsible for obtaining

precertification for major services; (2) required to pay for the

services and to seek reimbursement from petitioner; and (3)

responsible for any charges exceeding petitioner’s fee schedule

for covered services.

       E.   Petitioner’s Health Plans

       Petitioner generally required its enrollees to agree to

coordinate all of their medical care through a primary care

physician or PCP (family practitioners, internists,

pediatricians, and some obstetricians/gynecologists).      In HMO

parlance, PCPs are commonly referred to as “gatekeepers” inasmuch

as PCPs generally oversee a patient’s medical care, particularly

a patient’s referrals to specialists known as specialty care

physicians or SCPs.

             1.   SelectMed

       Petitioner’s SelectMed plan offered enrollees access to

physician medical groups comprising more than 1,500 individual

PCPs and SCPs.     As previously mentioned, enrollees were required

to select a PCP for general medical care and for referral to a

SCP.

       Petitioner compensated PCPs in Salt Lake, Davis, and Weber

Counties in Utah on a discounted fee-for-service basis settled
                                - 21 -

against a capitation budget.7    In particular, petitioner

consulted a variety of sources to determine an estimate of market

rate charges or fees for specific physician services.    Petitioner

then applied a discount to the estimated market rate fee to

determine the amount of the fee to be paid to the physician

medical group providing services to SelectMed enrollees.     As of

1999, petitioner applied a 25-percent discount to estimated

market rate fees for PCPs.    Petitioner then reconciled the

discounted fees for services paid to each physician medical group

on a monthly basis against the group’s capitation budget.8      When

the total fees that petitioner paid to a physician medical group

were less than the group’s capitation budget, petitioner paid the

difference to the group.    However, when the total fees that

petitioner paid to a physician medical group were greater than

the group’s capitation budget, the group was required to pay the

difference to petitioner.

     Petitioner compensated SCPs on a discounted fee-for-service

basis settled against a capitation budget.    As of 1999,




7
     Eighty percent of SelectMed and SelectMed Plus enrollees
resided in Salt Lake, Davis, and Weber Counties, Utah. Although
the record is not clear on the point, we assume that PCPs from
other areas also were compensated on a discounted fee-for-service
basis.
8
     The term “capitation” refers to the practice of paying a
physician group a fixed fee for each enrollee under the group’s
care.
                                  - 22 -

petitioner applied a 37-percent discount to estimated market rate

fees for SCPs.

          2.     SelectMed Plus

     Petitioner’s SelectMed Plus plan offered enrollees access to

the SelectMed panel of physicians along with a point-of-service

option.   SelectMed Plus enrollees choosing SelectMed physicians

received higher “preferred” levels of service, whereas SelectMed

Plus enrollees choosing a non-SelectMed physician received lower

“standard” benefits.

     Consistent with its policy under the SelectMed plan,

petitioner compensated PCPs and SCPs on a discounted fee-for-

service basis settled against a capitation budget.

           3.    IHC Care

     Petitioner’s IHC Care plan offered enrollees access to a

panel of approximately 2,600 PCPs and SCPs.      Like the SelectMed

plan, enrollees in the IHC Care plan were required to select a

PCP for their general medical care and for referral to a SCP.

     Petitioner compensated IHC Care PCPs and SCPs on a

discounted fee-for-service basis.      During 1999, petitioner

applied discounts of 26 percent and 38 percent to estimated

market rate fees for PCPs and SCPs, respectively.

           4.    IHC Care Plus

     Petitioner’s IHC Care Plus plan offered enrollees access to

the IHC Care panel of physicians along with a point-of-service
                                  - 23 -

option.   IHC Care Plus enrollees choosing IHC Care physicians

received higher “preferred” levels of service, whereas IHC Care

enrollees choosing a non-IHC Care physician received lower

“standard” benefits.

     Petitioner compensated IHC Care Plus PCPs and SCPs on a

discounted fee-for-service basis.      During 1999, petitioner

applied discounts of 26 percent and 38 percent to estimated

market rate fees for PCPs and SCPs, respectively.

           5.   IHC Direct Care

     Petitioner’s IHC Direct Care plan offered enrollees access

to the IHC Care panel of physicians.       However, enrollees in the

IHC Direct Care plan were not required to select a PCP or rely on

a PCP for a referral to a SCP.

     Petitioner compensated IHC Direct Care PCPs and SCPs on a

discounted fee-for-service basis.      During 1999, petitioner

applied discounts of 26 percent and 38 percent to estimated

market rate fees for PCPs and SCPs, respectively.

           6.   IHC Direct Care Plus

     Petitioner’s IHC Direct Care Plus plan offered enrollees

access to the IHC Care panel of physicians along with a

point-of-service option.   IHC Direct Care Plus enrollees choosing

IHC Direct Care physicians received higher “preferred” levels of

service, whereas IHC Direct Care Plus enrollees choosing a non-

IHC Direct Care physician received lower “standard” benefits.
                               - 24 -

     Petitioner compensated IHC Direct Care Plus PCPs and SCPs on

a discounted fee-for-service basis.      During 1999, petitioner

applied discounts of 26 percent and 38 percent to estimated

market rate fees for PCPs and SCPs, respectively.

          7.   Health Choice

     Petitioner’s Health Choice plan offered enrollees access to

a panel of 2,600 PCPs and SCPs along with the option to use an

independent physician or facility.      Health Choice enrollees

choosing Health Choice physicians or facilities received higher

“preferred” levels of service, whereas Health Choice enrollees

choosing non-Health Choice physicians or facilities received

lower “standard” benefits.

     Petitioner compensated Health Choice PCPs and SCPs on a

discounted fee-for-service basis.    During 1999, petitioner

applied discounts of 23 percent and 28 percent to estimated

market rate fees for PCPs and SCPs, respectively.

          8.   IHC Access

     Petitioner entered into a so-called risk contract9 with the

Utah Department of Health (Department), effective January 1, 1995

through June 30, 1999, under which it agreed to arrange for the



9
   42 C.F.R. sec. 447.361 (2000) states: “Under a risk contract,
Medicaid payments to the contractor, for a defined scope of
services to be furnished to a defined number of recipients, may
not exceed the cost to the agency of providing those same
services on a fee-for-service basis, to an actuarially equivalent
nonenrolled population group.”
                               - 25 -

provision of health services to Utah residents eligible for

Medicaid benefits.10   Pursuant to the above-described contract,

the Department paid monthly premiums to petitioner based upon a

negotiated rate schedule under which premiums varied with the age

and sex of the enrollee.

     Petitioner offered Medicaid-eligible enrollees access to a

large panel of PCPs and SCPs through its IHC Access plan.    IHC

Access enrollees were required to select a PCP for general

medical care and for referral to a SCP.   As of January 1, 1999,

petitioner had nearly 36,000 Medicaid enrollees in its IHC Access

plan, almost half of the population of enrollees in managed

Medicaid plans in Utah.

     Petitioner compensated IHC Access PCPs and SCPs on a

discounted fee-for-service basis.   In addition, these physicians

were eligible for certain incentive payments, including an

additional payment based on the number of newborn deliveries and

one-third of any budget surplus.    Petitioner applied discounts of

49 percent and 61 percent to estimated market rate fees for PCPs

and SCPs, respectively.




10
   42 U.S.C. sec. 1396 et seq. (1994), authorizes the use of
Federal funds (in conjunction with State funds) to supplement
State-administered medical assistance plans for families with
dependent children, and aged, blind, and disabled individuals
whose income and resources are insufficient to meet the costs of
necessary medical services.
                                    - 26 -

     F.    Enrollment

     Petitioner was the sole source of health benefits for the

employees of IHC and its various affiliates.           In this regard,

approximately 70,000 of petitioner’s enrollees were Health

Services’ employees, their spouses, or dependents.

     The following schedule lists petitioner’s total enrollment

for 1997, 1998, and 1999, by enrollee class:

   Class                Jan. 1, 1997     Jan. 1, 1998      Jan. 1, 1999

Individuals                23,809             37,594           42,220
Small employers            44,575             63,892           64,822
Large employers           220,111            242,898          273,376
Medicaid                   29,723             33,263           35,902

  Total                   318,218            377,647          416,320

As of January 1, 1997, 1998, and 1999, petitioner’s enrollees

from large employer groups constituted 69 percent, 64 percent,

and 66 percent of petitioner’s total enrollees, respectively.

     The following schedule lists petitioner’s total enrollment

for 1997, 1998, and 1999, by plan type:

    Plan            Jan. 1, 1997         Jan. 1, 1998      Jan. 1, 1999

SelectMed            94,715                  134,555          165,240
SelectMed Plus       54,459                   53,614           52,143
IHC Care             14,628                   13,628           16,424
IHC Care Plus       102,492                  112,539          116,838
IHC Direct Care       1,900                    7,923           13,245
IHC Direct Care Plus 5,435                    15,299           13,381
Health Choice        14,866                    6,826            3,147
IHC Access           29,723                   33,263           35,902

  Total                 318,218              377,647          416,320
                               - 27 -

     During 1999, Utah’s total population was approximately 2.1

million.   During 1999, Utah’s total population of enrollees in

managed Medicaid programs was 73,503.

     G.    Petitioner’s Total Expenditures For Medical Costs

     The following schedule lists petitioner’s total expenditures

for medical costs by category for the years 1997, 1998, and 1999.

  Category                   1997           1998           1999

Physicians--Primary    $ 58,264,456     $ 72,942,723   $ 79,496,238
Physicians--Specialist   72,675,206       93,067,258    100,719,148
Hospital Services       113,138,915      156,678,959    182,015,023
Pharmacy                 41,683,824       57,193,724     63,886,920
Miscellaneous            10,028,410       13,565,913     15,817,140

     Total               $295,790,811   $393,448,577   $441,934,469

The foregoing amounts do not include petitioner’s selling,

general, and administrative costs.

     H.    Health Promotion Services

     Petitioner generally provided preventive health care

services to its enrollees at no additional charge, including

annual worksite health screenings, group health risk profiles, a

24-hour nurse hotline, ergonomics assessment and consulting,

worksite health seminars, and health newsletters.      During 1999,

petitioner conducted a number of free comprehensive health

screenings for local schools, municipalities, and nonprofit and

civic organizations.

     I.    Free/Low Cost Services

     Petitioner did not institute any program whereby individuals
                             - 28 -

were permitted to become members while paying reduced premiums.

Aside from the free health screenings mentioned above, petitioner

did not provide or arrange to provide free health care services.

                           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

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
                              - 29 -

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

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
                                - 30 -

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

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
                                - 31 -

* * * [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,

supra at 573-575.

     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,
                              - 32 -

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, 461 U.S. 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, 71 T.C. 158, 177-181 (1978).

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

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
                                - 33 -

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

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 Health Association provided community

benefits beyond those offered by the hospital deemed exempt in
                               - 34 -

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.

       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).
                               - 35 -

     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

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 at a reduced rate under a “wraparound” plan
                              - 36 -

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 that:   (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

Health Association v. Commissioner, supra.   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
                                - 37 -

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 1210, 1218-1219

(3d Cir. 1993).     Although the Court of Appeals agreed with the

Court that an HMO seeking tax-exempt status must provide a

community benefit, see id. at 1218-1219, 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

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
                             - 38 -

     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 1220.11

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

if its activities are carried out under the supervision or

control of a related tax-exempt entity and the HMO’s activities

would not constitute an unrelated trade or business if conducted

by the related tax-exempt entity.   Id. at 402, 404-405.   We

looked to section 513(a) which defined an unrelated trade or

business in pertinent part as:



11
     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”.
                              - 39 -

     "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

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. at 501.   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
                              - 40 -

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.

    Even assuming that petitioner qualifies as an organization

described in section 501(c)(3), respondent contends that

petitioner is not entitled to tax-exempt status under section

501(m) which provides that an organization described sec.

501(c)(3) shall not be entitled to tax-exempt status if a
                              - 41 -

substantial part of its activities consists of providing

commercial type insurance.

1.   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 charitable activity of promoting    health on a

communitywide basis.   Considering all the facts and circumstances

surrounding petitioner’s operations, we conclude that petitioner

did not provide a meaningful community benefit, and, therefore,

petitioner does not qualify for exemption pursuant to section

501(a) as an organization described in section 501(c)(3).

      Much like the HMOs under consideration in Sound Health

Association v. Commissioner, supra, and Geisinger Health Plan,

supra, petitioner offered its health plans to a broad cross-

section of the community including individuals, the employees of

both large and small employers, and individuals eligible for

Medicaid benefits.   Petitioner offered several different health

plans encompassing a range of health services at varying prices.

There is no indication in the record that petitioner rejected any

potential enrollees, although it was petitioner’s practice to

deny an enrollee coverage with respect to certain preexisting

conditions for the first 12 months of enrollment.
                             - 42 -

     During 1999, petitioner’s enrollees represented

approximately one-fifth of Utah’s total population and

petitioner’s IHC Access plan enrollees constituted nearly 50

percent of Utah residents that were eligible for managed Medicaid

benefits.

     Despite petitioner’s open enrollment policy and the wide

acceptance of its plans by individuals and groups alike,

petitioner’s operations differed materially from the operations

of Sound Health Association HMO and Geisinger HMO.

Significantly, petitioner did not own or operate its own medical

facilities, did not employ (to any significant extent) its own

physicians, and did not offer free medical care to the needy.

Additionally, petitioner did not institute any program whereby

individuals were permitted to become members while paying reduced

premiums, and, aside from the few free health screenings that

petitioner conducted in 1999, petitioner did not provide or

arrange to provide any free or low cost health care services.

The record does not reflect whether petitioner applied surplus

funds to improve facilities, equipment, patient care, or to

enhance medical training, education, and research.   See Rev. Rul.

83-157, 1983-2 C.B. 94.

     Importantly, the record does not reveal why petitioner

applied an adjusted community rating methodology to determine

premiums for individual and small employer group enrollees while
                               - 43 -

setting premiums for large employer group enrollees based upon

past claims experience.   If the difference in treatment of the

enrollees caused a disparity in premium costs between the classes

of enrollees, there could be an inference that petitioner was

benefiting larger employers.   However, the record contains no

explanation of the difference in treatment of enrollees.

     In conjunction with the premium disparity issue, we note

that, unlike the arrangement adopted by Sound Health Association,

petitioner’s bylaws stated that its board of trustees would be

composed of a plurality of representatives from the buyer-

employer community, with an approximately equal number of

physicians and hospital representatives.    The composition of

petitioner’s board of trustees, lacking in representation of the

community at large, furthers the inference that petitioner

predominantly served the private interests of the larger

employers participating in its plans.    In the absence of an

explanation in the record, the Court is left with doubt as to

petitioner’s provision of a community benefit.    Petitioner has

the burden of proof.   See Rule 217(c)(2)(A); Geisinger Health

Plan v. Commissioner, 100 T.C. at 406.

     In sum, we hold that petitioner has not established that it

provided a community benefit that qualifies it for tax-exempt

status pursuant to section 501(c)(3).    Put another way, it has

failed to show that it provides any community benefit that
                                 - 44 -

accomplishes a charitable purpose.        We next consider whether

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

a related tax-exempt entity.

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

need only consider 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.]
                              - 45 -

     Although Geisinger HMO enrollees received all of their

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 a significant number of

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 III, 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
                              - 46 -

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

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 approximately 20 percent of their

physician services from physicians employed by or contracting
                               - 47 -

with Health Services, while petitioner contracted for the

remaining 80 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 comprised the hospital division, which

operated a large number of hospitals and clinics, and the

physician division, which employed approximately 400 primary care

and specialist physicians who generally practiced in Health

Services’ clinics and other community-based settings.

Considering that petitioner does not provide free or low cost

health services, we fail to see how petitioner’s operations,

including 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
                               - 48 -

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.    Based on the record presented, we hold that petitioner does

not satisfy the integral part test.12

       In sum, petitioner did not provide the community benefit

required for petitioner to qualify as an organization described

in section 501(c)(3).    Further, petitioner’s operations were 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.




12
     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).
