                                                                                                                           Opinions of the United
1994 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


7-27-1994

Geisinger Health Plan v. Comm. IRS
Precedential or Non-Precedential:

Docket 93-7699




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                 UNITED STATES COURT OF APPEALS
                     FOR THE THIRD CIRCUIT

                             ___________

                             No. 93-7699
                             ___________


         GEISINGER HEALTH PLAN

                                  Appellant,

                           vs.

         COMMISSIONER OF INTERNAL REVENUE SERVICE

                                  Appellee.

                             ___________

                     APPEAL FROM THE DECISION OF
                     THE UNITED STATES TAX COURT

                           (No. 90-20793)
                            ___________


                         ARGUED MAY 19, 1994

           BEFORE:     BECKER and LEWIS, Circuit Judges,
                     and IRENAS, District Judge.0

                        (Filed July 27, 1994)

                             ___________


Lawrence J. Goode
Frederick J. Gerhart (ARGUED)
Melissa B. Rasman
Dechert Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, Pennsylvania 19103-2793

         Attorneys for Appellant

0
*   Honorable Joseph E. Irenas, United States District Judge for
        the District of New Jersey, sitting by designation.


                                  1
Gary R. Allen
Teresa E. McLaughlin (ARGUED)
United States Department of Justice
Tax Division
P. O. Box 502
Washington, D.C. 20044

          Attorneys for Appellee


                             ___________

                        OPINION OF THE COURT
                            ___________



LEWIS, Circuit Judge.

          In Geisinger Health Plan v. Commissioner of Internal

Revenue, 985 F.2d 1210 (3d Cir. 1993) ("Geisinger I"), we held

that the Geisinger Health Plan ("GHP"), a health maintenance

organization ("HMO"), was not entitled to exemption from federal

income taxation as a charitable organization under 26 U.S.C.

§ 501(c)(3).   We remanded the case for determination of whether

GHP was entitled to exemption from taxation by virtue of being an

integral part of the Geisinger System (the "System"), a
comprehensive health care system serving northeastern and

northcentral Pennsylvania.    We will affirm the Tax Court's

decision that it is not exempt as an integral part of the System.

                                 I.

          GHP is a prepaid health care plan which contracts with

health care providers to provide services to its subscribers. The

facts relevant to GHP's function are detailed in our opinion in

Geisinger I, and we need not repeat them here.   Instead, far more



                                  2
relevant to this appeal is GHP's relationship with the Geisinger

System and its other constituent entities, a relationship which

we must examine in some detail to decide the issue before us.

            The Geisinger System consists of GHP and eight other

nonprofit entities, all involved in some way in promoting health

care in 27 counties in northeastern and northcentral

Pennsylvania.    They are:   the Geisinger Foundation (the

"Foundation"), Geisinger Medical Center ("GMC"), Geisinger Clinic

(the "Clinic"), Geisinger Wyoming Valley Medical Center ("GWV"),

Marworth, Geisinger System Services ("GSS") and two professional

liability trusts.    All of these entities are recognized as exempt

from federal income taxation under one or more sections of the

Internal Revenue Code.

            The Foundation controls all these entities, as well as

three for-profit corporations.    It has the power to appoint the

corporate members of GHP, GMC, GWV, GSS, the Clinic and Marworth,

and those members elect the boards of directors of those

entities.   The Foundation also raises funds for the Geisinger

System.   Its board of directors is composed of civic and business

leaders in the area.

            GMC operates a 569-bed regional medical center.   As of

March 31, 1988, it had 3,512 employees, including 195 resident

physicians and fellows in approved postgraduate training

programs.   It accepts patients without regard to ability to pay,

including Medicare, Medicaid and charity patients.     It operates a

full-time emergency room open to all, regardless of ability to

pay.   It also serves as a teaching hospital.


                                  3
          GWV is a 230-bed hospital located in Wilkes-Barre,

Pennsylvania.    It accepts patients regardless of ability to pay,

and it operates a full-time emergency room open to all,

regardless of ability to pay.

          The Clinic provides medical services to patients at 43

locations throughout the System's service area.    It also conducts

extensive medical research in conjunction with GMC and physicians

who perform medical services for GMC, GWV and other entities in

the Geisinger System.   As of March 31, 1988, it employed 401

physicians.   It accepts patients without regard to their ability

to pay.

          Marworth operates two alcohol detoxification and

rehabilitation centers and offers educational programs to prevent

alcohol and substance abuse.

          GSS employs management and other personnel who provide

services to entities in the Geisinger System.

          As we noted in Geisinger I, the Geisinger System

apparently decided to create GHP after GMC experimented with a

pilot prepaid health plan between 1972 and 1985.    The experience

was positive, and the Geisinger System formed GHP to provide its

own prepaid health plan.

          It organized GHP as a separate entity within the System

(as opposed to operating it from within the Clinic, GMC or GWV)

for three reasons.    First, HMOs in Pennsylvania are subject to

extensive regulation by the Commonwealth's Departments of Health

and Insurance.   See generally 40 P.S. §§ 1551 et seq.   Operating

GHP separately enables other entities in the System to avoid


                                 4
having to comply with the burdensome requirements associated with

that regulation.    Second, those administering the System believe

it preferable for GHP's organization and management to remain

separate from those of the System's other entities because it

serves a wider geographic area than any of those other entities.

Finally, under Pennsylvania law at least one-third of GHP's

directors must be subscribers.   28 Pa. Code § 9.96(a).

Establishing GHP as a separate entity avoids disrupting the

governance of the other Geisinger System entities to comply with

this requirement.   For example, establishing an HMO within GMC

would have required GMC to canvass its board of directors to

ensure that one-third of them subscribed to the HMO.      If they did

not, GMC would have had to amend its by-laws or other governing

documents to add directorships so that one-third of the directors

were subscribers.   Incorporating GHP separately eliminates the

need for such reorganization.

          For the year which ended June 30, 1987, GHP generated

8.8 percent of the aggregate gross receipts of the five health

care providers0 in the Geisinger System.   At the time this case

was first submitted to the Tax Court, projections indicated that

by June 30, 1991, GHP would generate 14.35 percent of the

System's aggregate gross receipts.0

0
     These are GHP, GMC, GWV, the Clinic and Marworth. GHP is
     included among these five health care "providers" although,
     as noted in Geisinger I, GHP itself provides no health care
     but instead arranges that its subscribers will receive
     health care from others. Geisinger I, 985 F.2d at 1213.
0
     Because it is likely that many GHP subscribers would have
     used Geisinger facilities before purchasing GHP coverage (as
     insureds of Blue Cross or private insurers), this percentage


                                 5
            GHP's interaction with other Geisinger System entities

is varied.    Its most significant contact is with the Clinic, from

which it purchases the physician services its subscribers require

by paying a fixed amount per member per month, as set forth in a

Medical Services Agreement.    Eighty-four percent of physician

services are provided by doctors who are employees of the Clinic;

the remaining 16 percent are provided by doctors who are not

affiliated with the Clinic but who have contracted with the

Clinic to provide services to GHP subscribers.    GHP has similarly

entered into contracts with GMC and GWV, as well as 20

non-related hospitals.    When its subscribers require hospital

care, these hospitals provide it pursuant to the terms of their

contracts, for either a negotiated per diem charge or a

discounted percentage of billed charges.    GHP has also contracted

with GSS to purchase office space, supplies and administrative

services.

            Except in emergency situations, only physicians who

either work for the Clinic or have contracted with the Clinic may

order that a GHP subscriber be admitted to a hospital.    When such

admission is ordered, it generally must be to GMC, GWV or one of

the 20 other hospitals with which GHP has contracted.    The only

exceptions to this requirement are in a medical emergency outside

of GHP's service area or when approved in advance by GHP's

medical director; in those instances, a subscriber may be



     does not necessarily represent a net increase in utilization
     of Geisinger facilities by virtue of GHP's existence.


                                 6
admitted to a hospital with which GHP has no contractual

relationship.

          GHP has also entered into contracts with pharmacies,

durable medical equipment suppliers, ambulance services and

physical therapists.   Those entities' services are available to

subscribers only (1) in a medical emergency or (2) when

prescribed by a doctor who is employed by the Clinic or who is

under contract with the Clinic to provide care to GHP

subscribers.

          The Tax Court considered GHP's role in the Geisinger

System when, on remand from Geisinger I, it decided that GHP did

not qualify for exempt status under the integral part doctrine.

Geisinger Health Plan v. Commissioner of Internal Revenue, 100

T.C. 394 (1993) ("Geisinger II").       The court first distinguished

a series of "group practice cases," in which incorporated groups

of doctors on hospital or faculty medical staffs were held to be

exempt from taxation as integral parts of the tax-exempt

hospitals or medical schools with which they were associated. The

Tax Court found that those cases did not control its decision

because "[f]or [them] to apply here, the population of [GHP's]

subscribers would have to overlap substantially with the patients

of the related exempt entities [and t]he facts indicated that it

does not."   Geisinger II, 100 T.C. at 404.      Moreover, it held,

GHP was not entitled to tax-exempt status as an integral part of

the System because it would produce unrelated business income for

the Clinic, GMC or GWV if one of those entities were to absorb

its activities.   Id. at 404-06.       A timely appeal followed; as


                                   7
noted previously, we will affirm, although we will do so on

grounds which differ from those on which the Tax Court rested.

Specifically, because we deem it unnecessary to decide, we will

not reach the issue whether GHP would produce unrelated business

income if it were part of some entity created by merging its

operations with one of the other Geisinger System entities.

                               II.

          Generally, separately incorporated entities must

qualify for tax exemption on their own merits.   Mutual Aid

Association of the Church of the Brethren v. United States, 759

F.2d 792, 795 n.3 (10th Cir. 1985); cf. Moline Properties, Inc.

v. Commissioner of Internal Revenue, 319 U.S. 436 (1943).     In

Geisinger I, we decided that GHP cannot qualify for tax exemption

on its own merits.   The question before us now is whether it

comes within the "integral part doctrine," which may best be

described as an exception to the general rule that entitlement to

exemption is derived solely from an entity's own characteristics.

See Internal Revenue Service ("IRS") brief at 20 (regulation

providing basis for doctrine "implies that an organization whose

sole activity is an `integral part' of the exempt activities of a

related charity may derive its exemption from that of its

affiliate").   As it did with the issue of whether it was entitled

to exemption standing alone, see Geisinger I, 985 F.2d at 1214,
GHP bears the burden of proving entitlement to exemption under

the integral part doctrine.   Also as in Geisinger I, 985 F.2d at

1212, we will apply plenary review, both because of the

stipulated administrative nature of the record and because we

                                8
focus on a test which differs from that upon which the Tax Court

relied in rendering its decision.     Cf. Inwood Laboratories, Inc.

v. Ives Laboratories, Inc., 456 U.S. 844, 855 n.15 (1982) (citing

United States v. Singer Manufacturing Co., 374 U.S. 174, 194-95

n.9 (1963) (even when reviewing findings of fact subject to

clearly erroneous review, appellate court may decide case as a

matter of law if the factfinder applied an improper standard to

the facts)).

                                 A.

            In Geisinger I, we described the integral part doctrine

as follows:
          The integral part doctrine provides a means
          by which organizations may qualify for
          exemption vicariously through related
          organizations, as long as they are engaged in
          activities which would be exempt if the
          related organizations engaged in them, and as
          long as those activities are furthering the
          exempt purposes of the related organizations.

Geisinger I, 985 F.2d at 1220. The Tax Court on remand stated:
          The parties agree that an organization is
          entitled to exemption as an integral part of
          a tax-exempt affiliate if its activities are
          carried out under the supervision or control
          of an exempt organization and could be
          carried out by the exempt organization
          without constituting an unrelated trade or
          business.

Geisinger   II, 100 T.C. at 402; see 26 C.F.R. §1.502-1(b).

            GHP argues that these statements require us to examine

whether the Clinic or GMC could retain tax-exempt status if it

were to absorb GHP.   It thus compares the attributes of a

hypothetically merged Clinic/GHP or GMC/GHP entity to the

attributes of the HMO held to be exempt in Sound Health


                                 9
Association v. Commissioner, 71 T.C. 158 (1978), acq. 1981-2

C.B. 2.0   Concluding that the merged entity would display more

indicia of entitlement to exemption than the Sound Health HMO,

GHP urges that it is exempt because of the characteristics of the

hypothetical merged entity.    Despite its superficial appeal, we

reject this argument and hold that the integral part doctrine

does not mean that GHP would be exempt solely because either GMC

or the Clinic could absorb it while retaining its tax-exempt

status.    While this is a necessary condition to applying the

doctrine, it is not the only condition.    GHP is separately

incorporated for reasons it found administratively and

politically advantageous.    While it may certainly benefit from

that separate incorporation, it must also cope with the

consequences flowing from it.   Cf. Moline Properties, 319 U.S. at

438-39.

            We acknowledge that interpreting the integral part

doctrine in the manner GHP urges might enable entities to choose

their organizational structures based on efficiency concerns

rather than perverting those concerns by making tax

considerations relevant.    In our view, however, there are

countervailing policy concerns which justify determining each

entity's tax status based upon its own organizational structure.

0
     In Sound Health, the Tax Court ruled exempt an HMO which
     charged subscribers fees based upon a community rating
     system, subsidized the dues of subscribers who could not
     afford to pay, provided health care services (sometimes at
     no or a reduced charge) to both subscribers and members of
     the general public, treated emergency patients regardless of
     ability to pay and offered public educational programs
     regarding health.


                                 10
It is less complex and more certain for courts and administrators

to assess an entity's tax status in light of its unique

organizational composition and its association with another

entity, and only to have to take into account some hypothetical

combination of organizations as a second step in those relatively

rare instances when an organization meets the other precondition

of integral part status we set forth below.    See II.C. infra.      We

recognize that it may appear overly technical to tax GHP

differently from a GMC/GHP or a Clinic/GHP combination, for

instance, merely because it is incorporated separately.     On the

other hand, to tax GHP differently merely because it is related

to those entities, without searching for indicia that its

association with them enhances its own tax-exempt

characteristics, would be inconsistent with the narrow

construction generally accorded tax exemptions.    See Bingler v.

Johnson, 394 U.S. 741, 752 (1969); Commissioner of Internal

Revenue v. Jacobson, 336 U.S. 28, 48-49 (1949); Storall

Manufacturing Co., Inc. v. United States, 755 F.2d 664, 665 (8th

Cir. 1985).

          Accordingly, we will determine whether GHP is exempt

from taxation when examined not only in the context of its

relationship with the other entities in the System, but also

based upon its own organizational structure.   In doing so, we

bear in mind that we are not bound by the description of the

integral part doctrine set forth in dicta in Geisinger I.
                               B.



                               11
          As the Tax Court recognized, 100 T.C. at 401, the

integral part doctrine is not codified.    Its genesis may be found

in a phrase contained within a regulation which speaks of a

subsidiary being exempt "on the ground that its activities are an

integral part of the activities of the parent organization."      26

C.F.R. § 1.502-1(b); see generally General Counsel Memorandum

39,830 (August 30, 1990).0   This reference to the doctrine is

only fully understood, however, when one considers it in the

context of the regulation and the statute it implements.    Section

502 of the Internal Revenue Code (the "feeder organization rule")

provides that an organization engaged in a trade or business for

profit will be taxed even if it pays all of its profits over to

an exempt organization.   26 U.S.C. § 502(a).   See generally 9

Merten's Law of Federal Income Taxation § 34.01 at 5.    The

regulation interpreting this section of the Code makes clear that
          [i]n the case of an organization operated for
          the primary purpose of carrying on a trade or
          business for profit, exemption is not allowed
          . . . on the ground that all the profits of
          such organization are payable to one or more
          [exempt] organizations . . . .

26 C.F.R. § 502-1(b).

          The integral part doctrine arises from an exception to

this "feeder organization" rule.     Regulation 502-1(b) states that

despite the general rule of taxation of "feeder organizations,"


0
     We cite this General Counsel memorandum, which was issued in
     connection with GHP's application for exemption, Loren
     Callan Rosenzweig, Geisinger, HMOs and Health Care Reform,
     Taxes, January 1994, at 20, 23 n.27, as providing helpful
     background regarding the integral part doctrine. We do not
     adopt its legal conclusions.


                                12
            [i]f a subsidiary organization of a tax-
            exempt organization would itself be exempt on
            the ground that its activities are an
            integral part of the exempt activities of the
            parent organization, its exemption will not
            be lost because, as a matter of accounting
            between the two organizations, the subsidiary
            derives a profit from its dealings with the
            parent organization[.]

26 C.F.R. § 1.502-1(b) (emphasis added).    To illustrate how this

exemption might apply to an entity, the regulation describes "a

subsidiary organization which is operated for the sole purpose of

furnishing electric power used by its parent organization, a tax-

exempt organization, in carrying out its educational activities."

Id.0   See also Rev. Rul. 78-41, 1978-1 C.B. 148 (trust existing

solely as a repository of funds set aside by nonprofit hospital

for the payment of malpractice claims against the hospital, and

as the payor of those claims, was exempt as an integral part of

the hospital); Rev. Rul. 63-235, 1963-2 C.B. 210 (incidental

publication and sale of law journals did not prevent journal

corporation from being exempt as "adjunct to" an exempt law

school); Rev. Rul. 58-194, 1958-1 C.B. 240 (bookstore used almost
exclusively by university faculty and students was exempt as an

integral part of the university with which it was associated).

           GHP contends that as long as it would not generate

unrelated business income if it were merged into any one of the

other Geisinger System entities, it is exempt as an integral part

of the System.   The Tax Court, in fact, utilized unrelated

0
       Although the regulation speaks in terms of parent and
       subsidiary entities, the IRS does not contend that we should
       consider only GHP's relationship with its parent, the
       Foundation, in deciding this appeal.


                                 13
business income concepts in analyzing GHP's claim for exemption.

See Geisinger II, 100 T.C. at 404-07 (citing, inter alia, Hi-

Plains Hospital v. United States, 670 F.2d 528 (5th Cir. 1982);

Carle Foundation v. United States, 611 F.2d 1192 (7th Cir.

1979)).   We agree that an entity seeking exemption as an integral

part of another cannot primarily be engaged in activity which

would generate more than insubstantial unrelated business income

for the other entity.   That much is demonstrated by the remainder

of 26 C.F.R. § 1.502-1(b), which cautions that
          the subsidiary organization is not exempt
          from tax if it is operated for the primary
          purpose of carrying on a trade or business
          which would be an unrelated trade or business
          (that is, unrelated to exempt activities) if
          regularly carried on by the parent
          organization. For example, if a subsidiary
          organization is operated primarily for the
          purpose of furnishing electric power to
          consumers other than its parent organization
          (and the parent's tax-exempt subsidiary
          organizations), it is not exempt since such
          business would be an unrelated trade or
          business if regularly carried on by the
          parent organization. Similarly, if the
          organization is owned by several unrelated
          exempt organizations, and is operated for the
          purpose of furnishing electric power to each
          of them, it is not exempt since such business
          would be an unrelated trade or business if
          regularly carried on by any one of the
          tax-exempt organizations.

Id.

           Although 26 C.F.R. § 502-1(b) clearly makes the absence

of activity constituting an unrelated trade or business a

necessary qualification for the operation of the integral part

doctrine, because this regulation speaks in terms of

disqualification from exemption rather than qualifications for


                                14
exemption, it does not indicate or explain whether there are any

other necessary qualifications -- the issue we face in this case.

           Both the revenue rulings cited earlier and case law

similarly fail to state a comprehensive rule to assist in

determining when an entity is exempt as an integral part of

another.   In Squire v. Students Book Corp., 191 F.2d 1018 (9th

Cir. 1951), for example, the court ruled that a corporation

operating a bookstore and restaurant which sold college texts,

was wholly owned by a college, used college space free of charge,

served mostly faculty and students, and devoted its earnings to

educational purposes was exempt because it "obviously bears a

close and intimate relationship to the functioning of the

[c]ollege itself."    Squire, 191 F.2d at 1020.   It did not,

however, provide further explication for its rationale.    See also

University of Maryland Physicians, P.A. v. Commissioner of

Internal Revenue, 41 T.C.M. (CCH) 732 (1981); University of

Massachusetts Medical School Group Practice v. Commissioner of

Internal Revenue, 74 T.C. 1299 (1980), acq. 1980-2 C.B. 2; B.H.W.

Anesthesia Foundation, Inc. v. Commissioner of Internal Revenue,

72 T.C. 681 (1979), nonacq. 1980-2 C.B. 2; B.S.W. Group, Inc. v.
Commissioner of Internal Revenue, 70 T.C. 352 (1978); Brundage v.

Commissioner of Internal Revenue, 54 T.C. 1468 (1970), acq. in

result 1970-2 C.B. xix (addressing "integral part" issue in

deduction context).

                                 C.

           Distilling § 1.502-1(b) and these cases into a general

rule leads us to conclude that a subsidiary which is not entitled

                                 15
to exempt status on its own may only receive such status as an

integral part of its § 501(c)(3) qualified parent0 if (i) it is

not carrying on a trade or business which would be an unrelated

trade or business (that is, unrelated to exempt activities) if

regularly carried on by the parent, and (ii) its relationship to

its parent somehow enhances the subsidiary's own exempt character

to the point that, when the boost provided by the parent is added

to the contribution made by the subsidiary itself, the subsidiary

would be entitled to § 501(c)(3) status.

          Whether income received by an HMO operated by an entity

which also directly operates a health care facility would be

deemed unrelated business income was answered in the negative by

Sound Health.   Nevertheless, this is a complex issue which will

probably be further explored by the courts and Congress as the

entities which pay for health care, and those which provide it,

begin to intertwine.   Because we find that GHP does not meet the

second prong of the integral part test articulated above, we need

not probe the legal soundness of the Sound Health opinion.

          In considering whether the boost received by GHP from

its association with GMC or the Clinic might be sufficient, when

added to its own contribution, to merit § 501(c)(3) treatment, we

must first look at the nature of the boost which was sufficient

in those instances where the integral part doctrine has been

0
     Although we refer to the entity seeking application of the
     integral part doctrine as the "subsidiary" and the current
     holder of the § 501(c)(3) exemption as the "parent," we
     recognize that the relationship, as in this case, may be
     that of entities controlled by a common parent or some other
     form of affiliation.

                                16
applied.   The electric company discussed in 26 C.F.R. § 502-1(b),

for example, would not be entitled to an exemption standing

alone, because the provision of electric power to others is not a

charitable purpose.

           However, the fact that the electric company is a

subsidiary of an exempt university eliminates the characteristic

which prevented the company from being exempt on its own.     As a

subsidiary of the university, the electric company acquires the

purpose of the university -- it produces electricity solely for

the purpose of allowing education to occur.0   The "boost" it

receives from its association with the educational institution

transforms it from a company without to a company with a

charitable purpose and thus enables it to qualify for tax-exempt

status as an integral part of that institution.    Like the

electric company, the bookstores in Squire and Rev. Rul. 58-194,

and the law journal in Rev. Rul. 63-235 had insufficiently

charitable purposes to qualify for exempt status when considered

alone. Selling books or a journal to the general public is not

educational enough to qualify for exempt status as a charitable

institution.   But because these particular bookstores and this

particular law journal were subsidiaries of universities and

aided the universities' exempt missions of educating their

students, the purposes of the bookstores and journal became more




0
     The regulation presupposes that the entity seeking exemption
     derives a profit from serving its parent. 26 C.F.R.
     § 502-1(b).


                                17
charitable, and they were entitled to an exemption.0   Absent

receipt of such a "boost," we do not think that an institution is

entitled to a tax exemption as an integral part.   To hold

otherwise might enable an organization that is not entitled to an

exemption on its own to become tax-exempt merely because it

happens to be controlled by an organization that is itself

exempt.




0
     As noted previously, see infra page 14, Rev. Rul. 78-41,
     1978-1 C.B. 148 provides another example of a situation in
     which the IRS has ruled that an organization is exempt as an
     integral part of its parent's exempt functions. In Rev.
     Rul. 78-41, the IRS ruled that a trust existing solely as a
     repository of funds set aside by a nonprofit hospital for
     the payment of malpractice claims against the hospital, and
     as the payor of those claims, was exempt as an integral part
     of the hospital. To some extent, this revenue ruling is
     consistent with our understanding of the integral part
     doctrine based upon the statute and the case law: A trust
     established to pay claims may not be charitable standing
     alone, but by collecting funds for the payment of, and
     paying, solely the malpractice claims filed against a
     nonprofit hospital, this trust was serving the hospital's
     charitable purpose of promoting health by enhancing the
     hospital's ability to continue in business. Cf. Rev. Rul.
     73-313, 1973-2 C.B. 174 (organization created to build and
     offer medical office building and facilities at a reasonable
     rent to attract a doctor to an isolated area which
     previously lacked medical services was "a method of
     promoting health in the legal sense of the term in the law
     of charity and, therefore, a charitable purpose"). It is
     also true, however, that to some extent this revenue ruling
     conflicts with 26 U.S.C. § 502 and 26 C.F.R.
     § 1.513-1(d)(3), which, taken together, provide that the
     financing of exempt activities neither renders otherwise
     taxable entities exempt from taxation nor transforms
     unrelated business income into income which is substantially
     related to an exempt purpose and is thus exempt from
     taxation. Because of the tension we perceive between this
     revenue ruling and the statute and regulations, we will not
     rely on Rev. Rul. 78-41 in our analysis.


                               18
          Here, we do not think that GHP receives any "boost"

from its association with the Geisinger System.   In Geisinger I,

we determined that while GHP helps to promote health, it does not

do so for a significant enough portion of the community to

qualify for tax-exempt status on its own.   See Geisinger I, 985

F.2d at 1219-20.   Cf. Rev. Rul. 69-545, 1969-2 C.B. 117

(promotion of health is a charitable purpose "provided that the

class [served] is not so small that its relief is not of benefit

to the community").   And, unlike the electric company, university

bookstores or law journal in the regulations and case law, the

contribution that GHP makes to community health is not increased

at all by the fact that GHP is a subsidiary of the System rather

than being an independent organization which sends its

subscribers to a variety of hospitals and clinics.

          As our examination of the manner in which GHP 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 GHP promotes health -- it serves no more

people as a part of the System than it would serve otherwise.     It

may contribute to the System by providing more patients than the

System might otherwise have served, thus arguably allowing the

System to promote health among a broader segment of the community

than could be served without it, but its provision of patients to

the System does not enhance its own promotion of health; the

patients it provides -- its subscribers -- are the same patients

it serves without its association with the System.   To the extent

it promotes health among non-GHP-subscriber patients of the

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System, it does so only because GHP subscribers' payments to the

System help finance the provision of health care to others.     An

entity's mere financing of the exempt purposes of a related

organization does not constitute furtherance of that

organization's purpose so as to justify exemption.   Cf. 26 U.S.C.

§ 502 ("[a]n organization . . . shall not be exempt from taxation

under section 501 on the ground that all of its profits are

payable to one or more organizations exempt from taxation under

section 501").   Thus, it is apparent that GHP merely seeks to

"piggyback" off of the other entities in the System, taking on

their charitable characteristics in an effort to gain exemption

without demonstrating that it is rendered "more charitable" by

virtue of its association with them.

                                D.

          It has not escaped our attention, of course, that both

our decision today and our decision in Geisinger I may either set

the tone for, or be superseded by, legislative activity in the

near future.   The executive and the legislative branches are

currently debating the appropriate parameters of future

governmental involvement in the provision and financing of health

care in this country.   The legislation which may result could

significantly transform the structure and financing of health

care delivery systems in ways both anticipated and unanticipated.

Academic commentary on our decision in Geisinger I reinforces our
common-sense impression that questions regarding the tax-exempt

status of integrated delivery systems under 26 U.S.C. § 501(c)(3)

may be addressed during these debates.   See generally Loren

                                20
Callan Rosenzweig, Geisinger, HMOs and Health Care Reform, Taxes,

January 1994, at 20; Kenneth L. Levine, Geisinger Health Plan

Likely to Adversely Affect HMOs and Other Health Organizations,

J. Taxation, August 1993, at 90.

          Whatever changes are wrought by the legislature in the

future, however, today we are constrained to apply the law in its

current form and to construe tax exemptions narrowly.   Our

interpretation of the integral part route to exemption under

section 501(c)(3) reflects those constraints.   Obviously, we

express no opinion as to whether HMOs, whether structured like

GHP or like the Sound Health HMO, can or should be exempt from

federal income taxation after whatever transformation of the

health care industry may be forthcoming.




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                               III.

           In sum, GHP does not qualify for exemption as an

integral part of the Geisinger System because its charitable

character is not enhanced by virtue of its association with the

System.   We will affirm the decision of the Tax Court.




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