Accountable care organization denied Section 501(c)(4) status

Plain-English summary

An accountable care organization owned by a Section 501(c)(3) health system
asked to be recognized as a Section 501(c)(4) social-welfare organization. It
coordinated patient care under the federal Medicare Shared Savings Program
(MSSP), but it also had shared-savings contracts with commercial insurers and
planned to add more. The IRS found that the non-MSSP contracts were its primary
activity based on the contracts, patients, and revenue involved. Those
activities mainly benefited the insurers and participating health care
providers, and resembled a commercial intermediary or broker rather than an
organization primarily serving the community. The organization's relationship
with its exempt parent did not change the character of those activities, and
any broader public benefit was incidental. The IRS therefore denied exemption
under Section 501(c)(4).

Ruling snapshot

• Question: Did the accountable care organization operate primarily to promote social welfare and qualify for exemption under IRC § 501(c)(4)?
• Outcome: Denied
• Key authorities: IRC § 501(a) and § 501(c)(4); Treas. Reg. § 1.501(c)(4)-1; Treas. Reg. § 1.501(c)(3)-1(d)(2); Treas. Reg. § 1.502-1(b); Notice 2011-20

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Independent Office of Appeals

Date: DEC 14 2021

Person to contact:

Number: 202210023
Release Date: 3/11/2022

Employer ID number:

Uniform issue list (UIL):
501.04-00

Certified Mail

Dear

This is a final adverse determination that you do not qualify for exemption from federal income tax under
Internal Revenue Code (the "Code") Section 501(a) as an organization described in Section 501(c)(4)
of the Code.

We made the adverse determination for the following reasons:
You are not organized and operated for the purposes of promoting the social welfare and providing a
community benefit.

You're required to file federal income tax returns on Forms 1120. Mail your form to the appropriate Internal
Revenue Service Center per the form's instructions. You can get forms and instructions by visiting our website at
www.irs.gov/forms or by calling 800-TAX-FORM (800-829-3676).

We'll make this letter and the proposed adverse determination letter available for public inspection under
Section 6110 of the Code after deleting certain identifying information. We provided to you, in a separate
mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the documents attached
that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in
Notice 437.

If you decide to contest this determination, you can file an action for declaratory judgment under the provisions
of Section 7428 of the Code in either:

* The United States Tax Court
* The United States Court of Federal Claims, or
* The United States District Court for the District of Columbia

Letter 1371 (Rev. 10-2021)
Catalog Number 40533R

You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this
determination letter to you. Contact the clerk of the appropriate court for rules and the appropriate forms for
filing petitions for declaratory judgment. You can write to the courts at the following addresses:
United States Tax Court US Court of Federal Claims US District Court for the District of Columbia
400 Second Street, NW 717 Madison Place, NW 333 Constitution Avenue, NW
Washington, DC 20217 Washington, DC 20005 Washington, DC 20001

Note: We will not delay processing income tax returns and assessing any taxes due even if you file a petition for
declaratory judgment under Section 7428 of the Code.

You also have the right to contact the Taxpayer Advocate Service (TAS). TAS is an independent organization
within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing
a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS
assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov

or call 877-777-4778.

TAS assistance is not a substitute for established IRS procedures, such as the formal appeals process. TAS
cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a

petition in a United States Court.
If you have questions, contact the person at the top of this letter.

Sincerely,

Commissioner
By

Enclosures:
Publication 892
Appeals Survey
cc:

Letter 1371 (Rev. 10-2021)
Catalog Number 40683R

P.O. Box 2508
Cincinnati, OH 45201

Department of the Treasury
Internal Revenue Service

Date: JAN 16 2020

Employer ID number:
Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend:
B=
C=
D=
F=
G=
H=
J=
K=
L=
M=

UIL:
501.04-00

Dear

We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 501(a). We determined that you don’t qualify for exemption under IRC Section 501(c)(4).
This letter explains the reasons for our conclusion. Please keep it for your records.

Issues

Do you qualify for exemption from federal income tax under IRC Section 501(c)(4)? No, for the reasons stated
below.

Facts
Formation

You were formed as a nonprofit corporation on B in the State of C. On D you filed restated Articles of
Incorporation. Your restated Articles of Incorporation state that you were formed for the following purposes:

The Corporation is a non-profit corporation organized to promote social welfare within the
meaning of Section 501 (c)(4) of the Internal Revenue Code (the “Code”) including but not
limited to operating an accountable care organization (an “ACO”) that participates in the

Medicare Shared Savings Program (“MSSP”) and other similar accountable care programs.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

Your Restated Articles of Incorporation further provide that F shall be your sole member. F is a health system
recognized as exempt from federal income tax under IRC Section 501(c)(3).

Your dissolution clause provides as follows:

In the event of the dissolution of the Corporation, by lapse of time or otherwise, when it has, or is
entitled to, any interest in any funds or property of any kind, real, personal or mixed, such funds
or property or rights thereto shall not be transferred to private ownership, but upon such
dissolution, the Member shall, after paying or making provision for the payment of all liabilities
of the Corporation, transfer and set over such funds or property or rights thereto in such manner
and to such organization (or organizations) which shall at such time of dissolution qualify as an
organization (or organizations) exempt from federal income taxation under Section 501(a) of the
Code, or corresponding provisions hereafter in effect, as an organization (or organizations)
described in section 501(c)(3) of the Code, or corresponding provisions hereafter in effect, as the
Member in its sole discretion shall determine.

Governance
Your bylaws describe your purposes, in part as follows:

* To own, operate and manage an Accountable Care Organization (an “ACO”) in accordance
with, but not limited to, the requirements of the Medicare Shared Savings Program
(“MSSP”), as set forth in the Social Security Act and related regulations;

* To manage, coordinate, and promote accountability for the quality, patient safety, cost, and
overall care of patients, including without limitation, Medicare beneficiaries, of the following
(collectively, “Patients”): (a) F, (b) its affiliated entities and (c) patients of providers and
suppliers who participate in the MSSP and other similar programs through the Corporation’s
ACO and/or any related or similar programs established by the Corporation from time to
time:

* To receive and distribute shared savings from participation in the MSSP and other similar
programs and initiatives designed to manage, coordinate, and promote accountability for the
quality, patient safety, cost, and overall care of Patients;

* To repay, if any, shared losses or other monies determined to be owed to the U.S.
Department of Health and Human Services, Centers for Medicare and Medicaid Services

(“CMS”);

* To establish, report, and ensure provider compliance with health care quality criteria,
including quality performance standards, care protocols and efficiency measures;

* To invest in infrastructure and redesigned care processes for high quality and efficient care
delivery for Patients, including without limitation, evaluating the health needs of Patients
(including the Corporation’s ACO assigned patient population), and establishing,

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


3

implementing and communicating clinical knowledge and evidence-based medicine to
Patients;

* To fulfill other ACO functions as set forth in 42 C.F.R. Part 425 (the “MSSP Regulations”);
and

* To enter arrangements with third parties for the provision of care to Patients and to receive
and distribute compensation to providers and suppliers, or arrange for the repayment of
shared losses, arising from such arrangements.

Board

Paragraph 3.2 provides that your Board shall consist of not less than [redacted], but not more than [redacted] board members.
You have [redacted] board members. [redacted] of your board members are either officers or board members of your sole
Member, F, including one who is a physician. [redacted] board member is the chair of C, an entity related through F
and further described below. [redacted] board members are ex officio board members by virtue of their positions with
F, while the remaining [redacted] are elected directors.

Miscellaneous Provisions
Paragraph 2.5 enumerates transactions by you or your controlled corporations which require prior approval of F:
2.5.1 the merger or consolidation of the Corporation with or into any other entity;
2.5.2 the dissolution of the Corporation;
2.5.3 the creation of, or any investment in, any entity;
2.5.4 the purchase or acquisition of any property (real, personal, or mixed) by the Corporation, in any
transaction or series of related transactions, for an aggregate consideration in excess of
Dollars ($ [redacted]);
2.5.5 the sale, gift, or other disposition of any property (real, personal, or mixed) of the Corporation in any
transaction or series of related transactions, having an aggregate value in excess of

Dollars ($ [redacted]);

2.5.6 the mortgage or other encumbrance of any property (real, personal, or mixed) of the Corporation
having an aggregate value in excess of Dollars ($ [redacted]); and

2.5.7 the incurrence, on a secured or unsecured basis, or termination of any debt for borrowed money in
excess of Dollars ($ [redacted]), all interest rate swap and other hedge agreements, and
all reimbursement and indemnity obligations (whether primary or secondary, matured or contingent)
to any insurance company or bank providing credit enhancement or liquidity support for any such
debt or agreement or any bond secured by the same.

Paragraph 2.6 enumerates transactions requiring notice to (but not prior approval of) F:

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


4
2.6.1 any amendment to or restatement or repeal of the Certificate of Formation;
2.6.2 any amendment to or restatement or repeal of these Bylaws;
2.6.3 the adoption or modification of the annual operating and capital budgets of the Corporation;

2.6.4 voluntarily ceasing or substantially modifying its participation in the MSSP as an ACO for any
reason;

2.6.5 the adoption of a plan to distribute shared savings received from the Corporation’s participation in the
MSSP other than as set forth in the Corporation's application to CMS to participate in the MSSP as
an ACO;

2.6.6 participating in non-MSSP ACO activities;

2.6.7 the adoption of a plan to distribute shared savings received from the Corporation's participation in
non- MSSP ACO activities; and

2.6.8 the appointment and removal of the Directors of the Corporation by the
Board of Directors.

Paragraph 3.2.4 of your bylaws discusses non-participation in the MSSP and provides as follows:

Non-Participation in the MSSP. Notwithstanding any provision set forth in this Section 3.2, if the
Corporation ceases its participation in the MSSP as an ACO for any reason, the Member shall
automatically have the sole and exclusive right to (a) appoint, remove and replace the individuals
serving as Elected Directors, (b) change the number of Directors constituting the Board of Directors, and
(c) provide final approval for all matters set forth in Section 2.6 of these Bylaws following approval by
the Board of Directors.

Relationships with Others

You state that you are a fully-integrated subsidiary of F, an IRC 501(c)(3) health system. F provided financial
support to cover your startup costs. When you began making revenue from share services savings contracts
you repaid the start-up costs.

You also have a relationship with G. G is a C non-profit corporation that is taxable for federal income tax
purposes. G provides you with the physician network and case management personnel. You may share facilities
and have some common officers and/or directors.

As a part of your ACO activities, F engages G to administer a program to advance evidence-based medicine,
increase patient satisfaction and manage the cost of care for the hospitals,

services lines of F. You state that F operates a companion program similar to the MSSP, which is dependent on
your participation in the MSSP.

As a part of your ACO activities, F also engages H, , to provide . professional and
administrative services, related to the - line of services.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


As a part of your ACO activities, F engages J, an Internal Revenue Code Section 501(c)(3) healthcare

corporation in which F is the sole member to provide , professional and administrative services related
to the line of services.
Activities

You describe your exempt purpose as improving the health and social welfare of vulnerable patient populations
of your parent, IRC Section 501(c)(3) organization, F, and the community as a whole by developing,
implementing and communicating coordinated care models that improve patient outcomes. Your activities are
focused on patients with complex or chronic health conditions and who otherwise have challenges navigating
the healthcare system effectively.

Transactions with Insurance Companies

You have contracts with the MSSP program and [redacted] other agreements to manage care for [redacted] different
commercial insurance companies.

The MSSP contract you submitted with your application showed that before the time of your
application. However, you submitted a copy of showing that your application to
participate in the MSSP program is . You describe your financial transactions with them are as follows:

1. You and the MSSP or one of the other insurance company payors mutually identify a particular group of
patients.

2. For a given population, there are quality benchmarks that you must meet over a certain period of time.

3. If you meet these and the cost of providing care is below a specified level, then you receive a portion of

the savings from the insurer.

4. An example of the transaction is as follows:

a. You agree to a quality benchmark that no more than [redacted] percent of patients in Insurer A’s group are
readmitted to the hospital within [redacted] days of discharge during 20[redacted].
b. Insurer A expects to pay $ [redacted] in claims during a given year. If Insurer A pays less than $ [redacted]
in total claims in the given year and you meet the less than [redacted] percent readmission quality
benchmark, then Insurer A will pay you [redacted] percent of the savings.
c. You then use the funds you receive to pay healthcare providers who meet the standards for
participating in the care coordination program.

All your insurance contracts follow this formula, although the contracts may include multiple quality
benchmarks. The benchmarks vary by contract, but include both cost and quality factors.

You stated that the contracts that you have with non-MSSP insurance providers (for profit insurance providers)
are contractually confidential and you did not provide copies even though we requested them.

Your application states that you will add additional Non-MSSP insurance providers in the future.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


6

You state that you are continually seeking out ways to expand patient population covered by your programs.
Your new relationship discussions typically include many factors including how the network is structured, the
design of the insurer’s benefit plans and assurance of accurate and timely health data communications.

MSSP Activities

The MSSP was established under the Patient Protection and Affordable Care Act. Its purpose, as you describe
it, is to promote the accountability for care of Medicare beneficiaries, improve the coordination of Medicare fee
for service items and services and encourage investment in infrastructure and redesigned care processes for high
quality and efficient service delivery.

‘You further explained that:

Under [MSSP], certain groups of healthcare service providers are eligible to participate as ACOs. Eligible
ACOs are expected to manage and coordinate care for their assigned Medicare fee-for-service beneficiaries and
are eligible to receive MSSP payments to the extent the ACO meets quality performance standards established
by the Department of Health and Human Services and demonstrates that it has achieved appropriate benchmark
savings.

Non-MSSP Activities

You also state that, as part of the ACO activities, F engaged G to administer a companion program, similar to
the MSSP which is dependent on your and F’s participation in the MSSP. F approves the funding and you
approve the payments to the providers. You coordinate referrals to outside providers as part of this program.
You state that because you participate in the MSSP and because it approves the metrics, this enables F to
qualify for certain regulatory safe harbors available to quality initiatives that advance the purposes of MSSP.
You have continuing oversight over this program to ensure consistency with MSSP purposes. You state that all
payment agreements are negotiated at arm’s length and the amounts paid are set using objective criteria related
to the achievement of your quality metrics.

In your response to our information request letter you provided information regarding your patient attribution
under various ACO payor agreements. Slightly over [redacted] percent of your covered patients are attributed to your
MSSP agreement. Another [redacted] percent of your covered patients are covered under Medicare Advantage Plans
through commercial insurers. The remaining patients, approximately [redacted] percent, are attributed to agreements
under commercial insurance plans.

The information included in your application stated that you will continue to add Non-MSSP providers.
Transactions/Interactions with Healthcare Providers

To incentivize healthcare providers to participate in your activities you enter into participation agreements
whereby the providers agree to adhere to the care management protocols, documentation requirements and other
conditions and you agreed to make shared savings payments to those providers if the patients under their care
demonstrate improved health and lower dependence on the healthcare system through reduced costs. You state
the concept is analogous to the typical fee for service arrangements, but the healthcare providers are being paid
here for favorable outcomes not just the number or volume of procedures they perform.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


In paragraph 4.1 of your agreement with network participants (physicians and physician groups) you have
authority to act as an agent for the Physicians who are a part of your network. In your capacity as agent you are
authorized to contract for participating in the MSSP and other agreements.

In paragraph 4.2 of your agreement with network participants you require that the physician and physician give
you certain exclusive rights to negotiate with insurance providers and that they shall not become a member of
any other ACOs.

Your interactions with healthcare providers are summarized as follows:

1. Healthcare providers agree to comply with your standards and participate in care coordination programs.

2. If the provider meets the obligations under those programs, the provider will receive a portion of the
shared savings payments, as determined under the relevant agreement.

3. You share care management, network support and data regarding how to improve the quality with all
participating healthcare providers to encourage them to meet their obligations under the care
coordination program.

The care coordination activities are performed by you and by F’s personnel.

You state that your providers are required to be “clinically affiliated” with F in order to participate in your
MSSP and non-MSSP agreements. You state that this means they meet FTC and DOJ guidelines for joint
contracting activities and have committed in writing to clinical integration standards, care coordination and
sharing of information among network providers, and a commitment to the success of the overall mission of F.

You state that [redacted] percent of your members are patients “that have been seen in “an F facility or by an F
affiliated tax-exempt facility”. The balance is presumably being treated at unrelated facilities, which may or
may not be tax-exempt facilities. You project that this number will remain consistent.

F’s patients and others are identified as candidates for membership/participation in your health coordination
services based on recent hospitalizations, emergency center visits, physician referrals, payor referrals, hospital
referrals and member self-referrals. However, covered patients have the ability to see whomever they wish to
see and you do not have relationships with all the healthcare facilities that treat the patients.

The health management team acts as a liaison between the member’s primary care physician, their specialized
healthcare providers, and the member’s insurer.

You conduct seven specific programs as a part of your program services.

1. Advanced Illness Management
Advanced Illness Management (AIM) — Members are assisted in reducing usage of healthcare services,
while improving symptoms and quality of life. This program is focused on members with complex

disease management needs and end-stage diseases such as end-stage chronic obstructive pulmonary
disease (COPD), Heart Failure or Stage III/IV Chronic Kidney Disease.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


2. Comprehensive Care Program

Comprehensive Care Program (CCP) — Members are assisted in decreasing or eliminating psychosocial
barriers, learning self-advocacy skills and healthcare navigation skills, and communicating with their
healthcare providers. The program focuses on members who have [redacted] or more chronic conditions and
have had [redacted] or more acute inpatient hospitalizations within a [redacted] month period. Behavioral health
conditions and psychosocial barriers are also addressed (such as financial, housing, lack of support
systems, etc.).

Ambulatory Collaborative Care

Ambulatory Collaborative Care (ACC) — Members are assisted in managing their health conditions,
learning self-advocacy skills and healthcare navigation skills, and engaging in their own health. The
program focuses on supporting those members that have had at least emergency center visits
during a [redacted] day period, [redacted] inpatient visits in a [redacted] month period, have at least one chronic condition,
including but not limited to asthma, COPD, heart failure, chronic kidney disease and diabetes, open
quality gap in care, or a total cost of care greater than $ [redacted]

Complex Care

Complex Care (CC) — Members will be managed by a Registered Nurse. In some cases, the nurse will
collaborate with a condition-specific Care Navigator. Conditions managed include major trauma,
oncology/cancer, spinal injuries, and organ transplant. Programs for high-risk pregnancy and high-risk
pediatrics are currently under development.

Health Coaching

Health Coaching (HC) - Members are managed by certified health coaches and receive individualized
coaching focused on leading a healthy lifestyle and improving their ability to experience a full and
rewarding life. The focus is on new diagnoses and new chronic conditions, including but not limited to
diabetes management, smoking cessation and weight management.

Wellness

Wellness — Members are encouraged to engage in their own health by completing their annual wellness
visits and preventive health screenings.

Transitions

Transitions Members who are in the hospital are provided with services that ensure a safe and effective
transition from hospital to home. A member of the health management team visits the member in the
hospital prior to discharge and coordinates discharge plans with the hospital care team. The member
receives a “Welcome Home” phone call to provide the following:

* Reviews and provides education regarding the discharge instructions

* Provides comprehensive medication review

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


9

* Ensures equipment has arrived in the home and ensures that post-hospitalization services such as
Home Health have been initiated as ordered
* Ensures that the member has a follow-up appointment and transportation to the appointment

Community benefit

You state that patients of your participant providers who are not part of the Accountable Care Organization also
receive benefits from your activities since healthcare providers in a given community in which an ACO operates
tend to adopt the same sort of treatment plans, gap management and support services for a population that the
ACO promotes.

Revenue

Your revenue is from contract payments from MSSP and multiple contracts with different for-profit
insurance companies.

Your application was postmarked M. In your application and in response to our requests for further

information, you provided data showing that per GAAP your revenue from non-MSSP contracts was just over
[redacted] percent of your total revenue for the K fiscal year and approximately [redacted] percent of your revenue for the L

fiscal year. This continued a trend over the past several years of increasing revenue from non-MSSP contracts.

You provided an estimate showing that [redacted] percent of your revenue for the current year will come from your
MSSP contract. However, the estimate for the current year income includes income from only [redacted] of your
[redacted] contracts.

Expenses
Your expenses are for

* Professional Fees — payments to tax consultants for tax advice

* Contract Services Fees — payments to third party vendors for services including population health
consulting, analytics and surveys

* Medical Fees and Medical Fees- Professional Services -- payments to G for service line incentive
payments and MSSP and non-MSSP shared savings payments

* Program Service Expenses

* Miscellaneous Expenses

[redacted] percent of your expenses are for medical fees and medical fees-professional services. Your
expenses for program services are less than [redacted] percent of total expenses.

Law
IRC Section 501(c)(4) provides exemption for:
(A) Civic leagues or organizations not organized for profit but operated exclusively for the

promotion of social welfare, or local associations of employees, the membership of which is

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


10

limited to the employees of a designated person or persons in a particular municipality, and the
net earnings of which are devoted exclusively to charitable, educational, or recreational

purposes.

(B)  Subparagraph (A) shall not apply to an entity unless no part of the net earnings of such
entity inures to the benefit of any private shareholder or individual.

Treas. Reg. §1.501(c)(4)-1 provides:

(a) Civic organizations—
(1) In general. A civic league or organization may be exempt as an organization described in
section 501(c)(4) if-—

(i) It is not organized or operated for profit; and

(ii) It is operated exclusively for the promotion of social welfare.

(2) Promotion of social welfare—

(i) In general. An organization is operated exclusively for the promotion of social welfare
if it is primarily engaged in promoting in some way the common good and general welfare of the
people of the community. An organization embraced within this section is one which is operated
primarily for the purpose of bringing about civic betterments and social improvements. A social
welfare organization will qualify for exemption as a charitable organization if it falls within the
definition of charitable set forth in paragraph (d)(2) of Treas. Reg. § 1.501(c)(3)-1 and is not an
action organization as set forth in paragraph (c)(3) of Treas. Reg. § 1.501(c)(3)-1.

(ii) Political or social activities. The promotion of social welfare does not include direct
or indirect participation or intervention in political campaigns on behalf of or in opposition to
any candidate for public office. Nor is an organization operated primarily for the promotion of
social welfare if its primary¥ activity is operating a social club for the benefit, pleasure, or
recreation of its members, or is carrying on a business with the general public in a manner
similar to organizations which are operated for profit. See, however, section 501(c)(6) and §
1.501(c)(6)-1, relating to business leagues and similar organizations. A social welfare
organization that is not, at any time after October 4, 1976, exempt from taxation as an
organization described in section 501(c)(3) may qualify under section 501(c)(4) even though it is
an action organization described in § 1.501(c)(3)-1(c)(3)(ii) or (iv), if it otherwise qualifies
under this section. For rules relating to an organization that is, after October 4, 1976, exempt
from taxation as an organization described in section 501(c)(3), see section 534 and § 1.504-1.

Treas. Reg. § 1.501(c)(3)-1(d)(2) provides that the term “charitable” as used in IRC 501(c)(3) includes
its generally accepted legal sense and includes such purposes as relief of the poor and distressed or of
the underprivileged; advancement of religion; advancement of education or science; and lessening the
burdens of government. The promotion of health has long been recognized as a charitable purpose. See
Restatement (Third) Trusts § 28 (2012); 6 Austin W. Scott and William F. Fratcher, The Law of Trusts
§§ 38.1, 38.5 (5th ed. 2013); and Revenue Ruling 69-545, 1969-2 C.B. 117.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


11

However, not every activity that promotes health supports tax exemption under § 501(c)(3). For
example, selling prescription pharmaceuticals promotes health, but pharmacies cannot qualify for
recognition of exemption under § 501(c)(3) on that basis alone. Federation Pharmacy Services, Inc. v.
Commissioner, 72 T.C. 687 (1975), affd, 625 F.2d 804 (8th Cir. 1980); see also IHC Health Plans, Inc.
v. Commissioner, 325 F.3d 1188, 1197 (10th Cir. 2003) (noting that “engaging in an activity that
promotes health, standing alone, offers an insufficient indicium of an organization’s purpose,” as
“[n]umerous for-profit enterprises offer products or services that promote health”).

Treas. Reg. §1.502-1(b) provides

If 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 its parent organization, for example, a
subsidiary organization which is operated for the sole purpose of furnishing electric power used
by its parent organization, a tax-exempt educational organization, in carrying on its educational
activities. However, 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. For purposes of this paragraph,
organizations are related only if they consist of:

(1) A parent organization and one or more of its subsidiary organizations; or

(2) Subsidiary organizations having a common parent organization.
An exempt organization is not related to another exempt organization merely because they both
engage in the same type of exempt activities.

In Veterans Foundation v. U.S., 281 F.2d 912 (1960) the organization operated a thrift store and donated the
proceeds to an alleged exempt organization. The Court found that the thrift store was a business for profit which
does not further social welfare purposes.

In Contracting Plumbers Cooperative Restoration Corp. v. United States, 488 F.2d 584 (2nd Cir. 1973), cert.

denied, 419 U.S. 827, an organization whose purpose was to ensure the efficient repair of "cuts" in city streets
which resulted from its members’ plumbing activities did not qualify for exemption under IRC 501(c)(4). The
Court concluded that there were several factors which evidenced the existence of a substantial nonexempt
purpose. The factors included, but were not limited to, the members’ substantial business interest in the
organization’s formation and the fact that each member of the cooperative enjoyed economic benefits precisely
to the extent they used and paid for restoration services.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


12

Geisinger Health Plan v. Commissioner, 985 F.2d 1210, 1220 (3rd Circ. 1983) revg, T.C. Memo 1991-649 held
that the petitioner, an HMO, was not entitled to tax-exempt status, standing alone, because:

It does no more than arrange for its subscribers, many of whom are medically underserved, to receive
health care services from health care providers. This is so even though it has a program designed to
subsidize the subscribership of those who might not be able to afford the fees required of all other
subscribers. Arranging for the provision of medical services only to those who “belong” is not
necessarily charitable, particularly where, as here, the HMO has arranged to subsidize only a small
number of such persons. * * *

See also, IHC Health Plans v. Commissioner, 325 F. 3d 1188 (10th Cir. 2003) (Holding that an HMO which
arranged healthcare services for its subscribers in exchange for a fee was not described in section 501(c)(3). The
Court described the relevant test as follows, “In summary, under section 501(c)(3), a health-care provider must
make its services available to all in the community plus provide additional community or public benefits. The
benefit must either further the function of government-funded institutions or provide a service that would not
likely be provided within the community but for the subsidy. Further, the additional public benefit conferred
must be sufficient to give rise to a strong inference that the public benefit is the primary purpose for which the
organization operates. In conducting this inquiry, we consider the totality of the circumstances.”)

The HMO in Geisinger also argued that it was entitled to exemption under section 501(c)(3) as an integral part
of its exempt parent. The Appeals Court discussed the integral part doctrine, describing it as 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.
Texas Learning Technology Group v. Commissioner, 958 F.2d 122, 126 (5th Cir.1992). The integral
part doctrine has been applied in the context of several Code sections. See, e.g., Squire v. Students Book
Corp., 191 F.2d 1018 (9th Cir.1951); Brundage v. Commissioner, 54 T.C. 1468 (1970), acq. 1970-2
C.B. xix; Rev.Rul. 81-19, 1981-1 C.B. 353; Rev.Rul. 75-282, 1975-2 C.B. 201.

On remand, the Tax Court considered the HMO’s integral part arguments. In order to qualify for exemption
under the integral part theory, petitioner must perform an essential service either to its affiliates or to the class of
direct beneficiaries of the charitable activities of its affiliates (in petitioner's case, its patients), as required by
the entities in the legal precedents in this area. Geisinger Health Plan v. Comm'r, 100 T.C. 394, 394 (1993),
aff'd. 30 F.3d 494 (3d Cir. 1994) If the services are provided to unrelated organizations, however, the provider
does not qualify for exemption on this ground. Treas. Reg. § 1.502-1(b); Rev.Rul. 69-528, 1969-2 C.B. 127.
Alternatively, an organization can qualify under the integral part theory if it performs a service on behalf of its
parent directly to the class of beneficiaries of the charitable activities of its parent. For instance, in the case of
universities, an organization can qualify if it performs a service to the faculty or students of the university,
Squire v. Students Book Corporation, 191 F.2d 1018 (9th Cir.1951); See also Rev.Rul. 81-19; Rev.Rul. 78-41,
1978-1 C.B. 148; Rev.Rul. 75-282, 1975-2 C.B. 201; Rev.Rul. 68-26, 1968-1 C.B. 272; Rev.Rul. 67-217,
1967-2 C.B. 181; Rev.Rul. 58-194, 1958-1 C.B. 240

In the hospital context, the relevant class of beneficiaries is the patients of the related exempt health care
providers. The Tax Court held “faced with the conclusion of the Court of Appeals that its activities served the

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


13

private purposes of its members, we cannot conclude that petitioner's operations were so substantially and
closely related to the exempt purposes of its affiliates that those private interests may be disregarded.” Geisinger
100 T.C. at 406-407.

In the affirming opinion for 100 TC 394, the 3rd Circuit elaborated that “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. To the extent it promotes health
among non-GHP-subscriber patients of the 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...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. Geisinger Health Plan v Commissioner, 30 F.3d 494,
502-503 (1994).

In Rev. Rul. 68-14, 1968-1 C.B. 243 an organization that helped beautify a city was exempt under § 501(c)(3)
when it planted trees in public areas, cooperated with municipal authorities in tree plantings and programs to
keep the city clean, and educated the public in advantages of tree planting.

In Rev. Rul. 75-286, 1975-2 C.B. 210 A nonprofit organization with membership limited to the residents and
business operators within a city block and formed to preserve and beautify the public areas in the block, thereby
benefiting the community as a whole as well as enhancing the members’ property rights, will not qualify for
exemption under section 501(c)(3) of Code but may qualify under section 501(c)(4); Rev. Rul. 68-14
distinguished.

The organization was formed by the residents of a city block to preserve and beautify that block, to improve all
public facilities within the block, and to prevent physical deterioration of the block. its activities consist of
paying the city government to plant trees on public property within the block, organizing residents to pick up
litter and refuse in the public streets and on public sidewalks within the block, and encouraging residents to take
an active part in beautifying the block by placing shrubbery in public areas within the block. Much of the public
area improved by the organization is part of the public roadway lying between the sidewalk and the street in
front of private property owned by members of the organization. In the instant case the organization's activities
promote social welfare because they beautify and preserve public property in cooperation with the local
government. Although these activities are limited to a particular block, the community as a whole benefits from
them.

Rev. Rul. 81-276, 1981-2 C.B. 128, describes a professional standards review organization established pursuant
to a federal statute to review health care practitioners’ and institutions' provision of health care services and
items for which payment is made under Medicare and Medicaid, and determine whether the quality of services
met professionally recognized standards of care. The IRS ruled that by taking on the government's burden of
reviewing the quality of services under Medicare and Medicaid, the organization lessened the burdens of
government within the meaning of § 1.501(c)(3)-1(d)(2). Any benefit to members of the medical profession
from such activities was incidental to the benefit the organization provided in lessening the burdens of
government. Therefore, the organization qualified for exemption under § 501(c)(3).

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


14

Rev. Rul. 86-98, 1986-2 C.B. 74, holds that an individual practice association ("IPA") that provides health
services through written agreements with health maintenance organizations (HMOs) does not qualify for
exemption from federal income tax as a social welfare organization under § 501(c)(4). The IPA's stated purpose
is to arrange for the delivery of health services through written agreements negotiated with HMOs. Membership
in the IPA is limited to practicing licensed physicians who are members of a specified county medical society.
The IPA's members generally maintain a private medical practice in addition to performing services for the IPA.
The IPA's members are required to enter into written service contracts under which they provide services to the
HMO's patients in accordance with a negotiated compensation arrangement between the HMO and an IPA. The
IPA's primary activities are to serve as a "bargaining agent" for its members in dealing with HMOs and to
perform the administrative claims services required by the agreements. Members agree to reimbursement: by the
IPA according to a fee schedule established by the IPA's board of directors. The ruling finds that the IPA is
"akin to a billing and collection service, and a collective bargaining representative negotiating on behalf of its
member-physicians with HMOs." In addition, the IPA does not provide medical services that would not have
been available but for its establishment, or that are available at fees below what is customarily and reasonably
charged by the members in their private practices. The IPA is held to operate in a manner similar to a for-profit
entity, and its primary beneficiaries are its member-physicians, rather than the community as a whole.

Notice 2011-20, 2011-16 I.R.B 652 (April 18, 2011), summarizes how the IRS expects existing IRS guidance
may apply to § 501(c)(3) tax-exempt organizations (charitable organizations), such as charitable hospitals,
participating in the Medicare Shared Savings Program through ACOs. The Notice concluded that, due to CMS
regulation and oversight of the MSSP, participation in an MSSP contract by a tax-exempt organization through
an ACO was anticipated to be a charitable activity which lessened the burdens of government.

While Notice 2011-20 did not address under what circumstances a tax-exempt organization’s participation in
non-MSSP activities through an ACO may further or be substantially related to an exempt purpose, it
commented that “in contrast to activities conducted as part of the MSSP, many non-MSSP activities conducted
through or by an ACO are unlikely to lessen the burdens of government:...For example, negotiating with private
health insurers on behalf of unrelated parties generally is not a charitable activity, regardless of whether the
agreement negotiated involves a program aimed and achieving cost savings in health care delivery.

PLR 201615022 — Negotiating with private health insurers on behalf of unrelated healthcare providers is not a
charitable activity.

Rev. Proc. 2017-5, 2017-1 I.R.B. 230 in section 6.008(1) provides as follows regarding the effective date of
exemption.

1) In general. A determination letter recognizing exemption of an organization described in §
501(c), other than § 501(c)(29), is usually effective as of the date of formation of an organization
if: (1) its purposes and activities prior to the date of the determination letter have been consistent
with the requirements for exemption; (2) it has not failed to file required Form 990 series returns
or notices for three consecutive years; and (3) it has filed an application for recognition of
exemption within 27 months from the end of the month in which it was organized

Section 6.08(4) further provides as follows:

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


15

When an application is not submitted within 27 months of formation. An organization that
otherwise meets the requirements for tax-exempt status and the issuance of a determination letter
that does not meet the requirements for recognition from date of formation will generally be
recognized from the postmark date of its application or the submission date of its 1023-EZ, as
applicable.

Application of law
Social Welfare/Business Activity

Your application is before us to consider whether you qualify for exemption from federal income tax under IRC
Section 501(c)(4) as an organization operated exclusively for the promotion of social welfare. Treas. Reg.

§ 1.501(c)(4)-1 provides that an organization is operated exclusively for the promotion of social welfare if it is
primarily engaged in promoting in some way the common good and general welfare of the people of the
community.

Treas. Reg. § 1.501(c)(4)-1(2) provides that a social welfare organization will qualify for exemption as a
charitable organization if it falls within the definition of charitable set forth in paragraph (d)(2) of Treas. Reg.

§ 1.501(c)(3)-1 and is not an action organization as set forth in paragraph (c)(3) of Treas. Reg. § 1.501(c)(3)-1.
Thus, generally an activity that furthers a charitable purpose under IRC Section 501(c)(3) may also further
social welfare under IRC Section 501(c)(4). In Notice 2011-20 we have held that an organization serving as an
accountable care organization and participating in an MSSP could further the charitable purpose of lessening
the burdens of government.

Section 2.3.4 of your bylaws contemplates a situation in which you may not participate in the MSSP program.

At the time your application was reviewed, your MSSP contract had [redacted], but in response to our information

request, you submitted documentation of a [redacted]. At the time of our review, that application was
[redacted]. You stated that you plan to continue to add non-MSSP contracts in the future.

Your activities, as described above, is to coordinate the care of patient populations. You do not directly provide
health care. You serve as an intermediary between the insurance companies with whom you contract and the
physicians who you contract with to provide care and direct their efforts to meeting the cost and quality
benchmarks put in place by the insurance companies. Your revenue is derived from the contracts with the
insurance companies and then shared with the providers according to the terms of your provider agreements.

You have an agency relationship with the providers and negotiate as an agent on behalf of the providers, who
you state are “clinically affiliated” with you, with the insurance companies to enter into the share savings
arrangements.¹ You state that the concept is similar to the typical fee for service arrangements, but the
healthcare providers are being paid here for favorable outcomes not just the number or volume of procedures
they perform. The providers receive the typical fee or service revenue directly from the insurance providers.

Approximately [redacted] percent of the patients you serve are covered by MSSP contract. You attribute over
[redacted] percent of your covered patient population to non-MSSP contracts.

¹ Clinical affiliation represents the fulfillment of certain government standards for joint contracting with government agencies, but
does not appear to represent that the physicians or groups necessarily exclusively provide services to F patients.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


16

In both tax year K, the current tax year at the time of your application, and L, the most recent completed tax
year, revenue from non-MSSP contracts exceeded income from the MSSP contract. [redacted] of your

contracts are with for-profit insurance companies. You estimate that [redacted] percent of your revenue for the current
year will come from your MSSP contract. However, the estimate for the current year income includes income
from only [redacted] of your [redacted] contracts.

Considering the number of contracts, number of patients served under each contract and revenue streams from
each contract, we must conclude that your primary activities are those which you perform under your non-
MSSP contracts.

Treas. Reg. § 1.501(c)(4)-1 further provides that an organization is not operated primarily for the promotion of
social welfare if its primary activity is operating a social club for the benefit, pleasure, or recreation of its
members, or is carrying on a business with the general public in a manner similar to organizations which are

operated for profit.” (emphasis added).

While your activities may help to promote the health of participating patients not every activity for the
promotion of health serves an exempt purposes. As discussed in Notice 2011-20, negotiating with private health
insurers on behalf of unrelated parties generally is not a charitable health activity, regardless of whether the
agreement negotiated involves a program aimed at achieving cost savings in health care delivery, absent other
mitigating facts and circumstances. Your activity of providing coordinated care services in exchange for
contract fees illustrates you are conducting a business with the public, which does not further social welfare
under Treas. Reg. §1.501(c)(4)-1. The activities you conduct under the non-MSSP contracts primarily benefit
the insurance companies with whom you contract. Your activities of coordinating patient care results in a
savings to the insurance company and you perform these services under contractual obligation to them.

You are like the organization in Veterans Foundation v. U.S., which operated a business as an end in itself. You
have confidential contracts with for-profit insurance companies and are continuing to seek out new contracts.
The fact that you are controlled by an IRC Section 501(c)(3) organization does not change the character of the
activities and purposes you are accomplishing. If the activity furthers private interests when conducted by an
IRC Section 501(c)(3) organization, it does not suddenly become social welfare when the same activity is
conducted by a related organization.

Benefit to Insurance Companies and Healthcare Providers

Further, your activities benefit the health care providers you contract with. The providers receive additional fee
for service revenue from participating in your shared savings agreements. The providers are clinically affiliated
with F to the extent that they meet certain government joint contracting standards, The providers may not
participate in another ACO, but you have not represented that they provide services exclusively for F system
patients. Although not controlling authority, we find persuasive our prior ruling in PLR 201615022 in which we
held that the activity of negotiating with private health insurers on behalf of unrelated healthcare providers is
not a charitable activity. We find further that the activity benefits those for whom you negotiate and does not
further social welfare purposes.

You are similar to the organization described in Geisinger Health Plan v. Commissioner, 985 F.2d 1210, 1220
(3rd Circ. 1983) revg. T.C. Memo 1991-649 and Geisinger Health Plan v. Comm'r, 100 T.C. 394, 394 (1993),

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


17

aff'd, 30 F.3d 494 (3d Cir. 1994), above. Your services primarily benefit the insurance companies who pay you
fees only when you meet the agreed cost and quality benchmarks. The patients you serve are insured by these
companies may be referred to you by the insurance companies. Thus, you primarily benefit patient populations
who are subscribers to the insurance companies you serve. An organization that serves private interests also
does not further social welfare.

You are distinguished from the organization in Rev. Rul. 81-276, which qualified for exemption under the
rationale of lessening the burdens of government. You are distinguished in that your significant non-MSSP
activities are not operated pursuant to a federal statute to conduct reviews for federal programs. As discussed
above, participation in the MSSP program is not your primary activity.

You are similar to the organization described in Rev. Rul. 86-98, above. You negotiate contracts with insurance
companies and also serve as agent for the physicians who provide the services to meet the benchmark criteria
set by the insurance companies. Your primary function is to broker financial transactions between insurance
companies and participating physicians. Your activity is not distinguished from that of a commercial
organization. You are similar to the organization in Contracting Plumbers Cooperative Restoration Corp. v.
United States, above. While there may be some public benefit, the insurance companies you contract with have
substantial economic interest in your formation and pay you only when the physicians whose services you
coordinate meet their benchmarks.

You are distinguished from the organization in Rev. Rul. 68-14 above, in that your services do not benefit the
public as a whole. You are also distinguished from the organization in Rev. Rul. 75-286, because the benefits of
your organization do not primarily benefit the public. The organization in Rev. Rul. 75-286 worked together
with its local government and made improvements to public roadways. Although the scope of its improvement
was only one city block, the improvements it made was on public property. The services you provide are for
those with whom you have entered into contracts. While we acknowledge that you may conduct some
educational programs, your educational program expenses are only [redacted] percent of your expenses, far less than
primary. Further, it appears that you provide your services only to those who are a part of a population
identified under an insurance contract — not the public at large. Any benefit that flows to the public at large is
ancillary. Your alleged community benefit is that health care providers who participate in the accountable care
service programs may find best practices to use on their other patients. Any benefit flowing to other patients is
only incidental to your purposes of coordinating contracted services and does not rise to the level of your

primary activity.
Effective Date of Exemption:

You formed nearly five years before you filed your application for recognition of tax exempt status. You
requested a date of exemption effective one and a half years after your formation. Effective date of exemption is
governed by the IRS’ annual revenue procedure for its Exempt Organizations Rulings and Agreements
Program. At the time of your application, that annual revenue procedure was Rev. Proc. 2017-5. As discussed
in this letter, our position is that you do not qualify for exemption from federal income tax under IRC Section
501(c)(4). However, if you were recognized as exempt, as explained in Rev. Proc. 2017-5, 2017-1 I.R.B. 230,
the earliest date you could be recognized is the postmark date of your application since you filed your
application for recognition of exemption more than months from the end of the month in which you formed.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


18

Your position

You argue that your purpose is to improve the health and social welfare of your community including high risk
populations and to primarily serve the population of your IRC Section 501(c)(3) parent. You state that
coordinating care, conducting programs to promote health and creating incentives for providers are your
primary activities. You state that the flow of revenue between you, the insurance companies and the providers is
“necessary and incidental.”

The following is a summary of your arguments.

1.

Most of your activities are to promote social welfare because they further IRC Section 501(c)(3)
purposes of lessening the burdens of government, relieving poverty, or otherwise promoting health
in furtherance of your parent’s exempt purposes. You note that PLR 201615022 states that the triple
aim goals of the Patient Protection and Affordable Care Act are (i) reducing the cost of health care
for individuals, (ii) improving patient access to the quality of care, and (iii) improving population
health and patient experience. You cite Rev. Rul. 75-197, 1975-1 C.B. 154 which approved tax
exempt status under IRC Section 501(c)(3) and was formed for the purpose of operating an
information retrieval system to facilitate organ donation.

You also cite IHC Health Plans, Inc. v. Comm, 91 AFTR 2d 2003-1767 (325 F.3d 1188) noting that
the Court held that in addition to providing health services, an organization seeking tax exemption
under IRC Section 501(c)(3) must provide some additional “plus” or externality. You further stated
that “[t]his “positive externality” includes a benefit which the society of 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.”

You argue that your activities benefit all patients in the community not just those covered by
agreements with insurers and providers. You state that you share this data with providers and
providers generally use this data in treating patients, not just those covered by an agreement with
you.

You state that the patient care improvements and costs savings that result from your activities
constitute such a community benefit to the communities served by your parent, F, as well as to the
patients of participating providers who are not part of F, because the providers are incentivized to
adopt the population health philosophies and approaches generated through ACO participation and
apply them across their patient panels. You further state that you promote healthcare improvements
through physical meetings, conferences, and webinars.

2. You state that you operate as an integral part of your IRC Section 501(c)(3) parent and primarily
benefit the patients of your parent. You state that you are distinguished from the organization in
Geisinger Health Plan v. Comm, 74 AFTR 2d 94-5395 (90 Fed 494) in that you are subsidiary of F
rather than an independent organization. You argue that you also qualify for exemption because you
operate as an integral part of your IRC 501(c)(3) parent. Your parent maintains structural control
over you by appointing [redacted] of your [redacted] board members.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


19

You argue that your activities primarily benefit your parent by furthering the exempt purpose of the
parent in particular by facilitating greater quality, lower-cost services to F patients and other patients
across its community.” You state that [redacted] percent of the patients you serve “have been seen” in your
parent, F’s, facilities or by an F non-profit affiliate.

You state that F operates a companion program similar to the MSSP, which is dependent on your
participation in the MSSP. You state that by serving as an essential part of F’s quality initiatives,
you are furthering F’s exempt purposes.

3. You argue that any private benefit to physicians and insurance payors is necessary and incidental to
carrying out your exempt purposes. You cited Rev. Rul. 98-15, 1998-1 C.B. 718 and claim a key
distinction when reviewing whether a particular activity promotes health in a charitable (or social
welfare manner is whether the entity is privately owned and operated for the benefit of for-profit of
the owners. You argue that we have determined in Notice 2011-20 that an ACO participating in
MSSP will not result in inurement or impermissible private benefit to the private party ACO
participants where the terms of the exempt organization’s participating in the MSSP through the
ACO are set forth in advance in written agreement negotiated at arm’s length at fair market value.

You also cited Monterey Pub Parking Corp. v. United States, 481 F.2d 175 (9th Cir. 1973) for its
discussion of private versus public benefit and Rev. Rul. 97-21, 1997-1 C.B. 121 regarding
physician recruitment incentives.

Our response to your position
Our responses to your position are numbered to correspond to each of your arguments as numbered above.

1. You acknowledge that the organization in PLR 201615022 was held not to further purposes described in
IRC Section 501(c)(3), you contend that your services could further social welfare purposes under IRC
Section 501(c)(4).

For the reasons described in the application of law section above, we disagree. In addition, you are
distinguished from the organization in Rev. Rul. 75-197. That organization was funded by donations and
operated for the benefit of the public by providing legal forms for anyone would wanted to use them to
facilitate organ donation. Unlike you, it did not charge for its services and the services were not limited
to specific populations.

Your services provided under the non-MSSP contracts are provided under confidential contracts
regarding a specific population and do not benefit the public at large. Your primary activity is providing
contract services in exchange for a fee and serving as a broker between insurance companies and health
care providers. Only [redacted] percent of your expenses are spent on your programs. Even then, those
programs are directed at patients who are covered by the insurance companies with which you have
contracts. Your alleged community benefit is that health care providers who participate in the
accountable care service programs may find best practices to use on their other patients. Thus, any
benefit flowing to other patients is only incidental to your purposes of coordinating contracted services
and does not rise to the level of your primary activity. Thus, you fail the standard set forth in ICH Health
Plans Inc. v. Comm.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


20

2. Your arguments that you are an integral part of F are not persuasive. Your non-MSSP activities would
not be exempt if conducted by your parent and thus also not exempt when you conduct them. You
acknowledge that covered patients have the ability to see whichever providers they wish, in or outside of
the F parent system, and that you do not have relationships with all the healthcare facilities that treat the
patients. You acknowledge that many may not be tax-exempt facilities.

While your parent has control over your board, your interactions with your parent appear to be otherwise
limited. In response to our information you stated that the only financial transaction was a repaid loan
for start-up costs.

Treas. Reg. §1.502-1(b) provides that

If 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 its parent organization, for example, a
subsidiary organization which is operated for the sole purpose of furnishing electric power used
by its parent organization, a tax-exempt educational organization, in carrying on its educational
activities. However, 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.

Further, your argument that you should qualify for exemption under IRC Section 501(c)(4) as an integral
part of an IRC Section 501(c)(3) organization is not persuasive. While many of the patients covered by
your non-MSSP agreements with insurance companies may “be seen” in F facilities, implicit in your
response is that many are not.

You argue that F’s companion program to the MSSP furthers F’s exempt purposes, however, this is only
one of your activities, among others that do not further F’s exempt purposes other than in the most
general sense of facilitating healthcare activities. Because a primary activity you conduct, non-MSSP
contracts, does not further social welfare because it furthers the private interests of the for-profit
insurance companies and private providers, the fact that you are controlled by an IRC Section 501(c)(3)
organization does not change the character of the activities and purposes you are accomplishing. If the
activity further private interests when conducted by an IRC Section 501(c)(3) organization, it does not
suddenly become social welfare when the same activity is conducted by a related organization.

3. Our analysis, as discussed above, looks to not only who controls you but who benefits from your
transactions. Rev. Rul. 98-15 stands for the proposition that control over the activities of a joint venture
or subsidiary is generally required to ensure that the controlled entity does not operate in a manner
contrary to an exempt parent’s purposes; however, the activities themselves must still further exempt
purposes as defined under the relevant subsection of IRC section 501(c).

Notice 2011-20 concluded that participation in an MSSP program, under certain conditions, would
further charitable purposes, which would in turn further social welfare, because it lessens the burdens of
government. As discussed above, your primary activity is not participation in an MSSP. [redacted] percent of

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


21

your covered patient population is not attributable to the MSSP contract. Less than [redacted] of your revenues
for the most recent two tax years, K and L, were attributable to the MSSP

You have contractual duties to the insurance companies who stand to benefit in the form of substantial
savings due to the services you provide. You share those savings with providers similar to a fee for
service arrangement, but contingent on meeting benchmarks. We disagree that the financial benefits to
the insurance companies and providers are incidental. Rather, we conclude that any public benefit is
only incidental to your primary purpose of providing contract services in exchange for a fee.

Your activities with non-MSSP insurers do not lessen the burdens of government but are commercial
transactions. Your activities are not designed to incentivize physicians to locate at hospitals where there
is a physician shortage. Rather your activities are designed to provide cost savings to insurance
companies.

The case in Monterey Pub. Parking Corp. v. United States, 481 F.2d 175, 177 (9th Cir. 1973) discusses
how an organization under IRC Section 501(c)(4) does not engage in social welfare when its primary
activity is carrying on a business with the general public. As discussed above, seeking contracts with
for-profit insurance companies and serving as a contractual agent for providers is a commercial activity
and shows that you are carrying on a business with the general public.

Conclusion

For the foregoing reasons, we conclude that you do not qualify for exemption from federal income tax under
IRC Section 501(c)(4).

If you agree

If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from
you within 30 days, we'll issue a final adverse determination letter. That letter will provide information on
your income tax filing requirements.

If you don't agree

You have a right to protest if you don’t agree with our proposed adverse determination. To do so, send us a
protest within 30 days of the date of this letter. You must include:

* Your name, address, employer identification number (EIN), and a daytime phone number

* A statement of the facts, law, and arguments supporting your position

* A statement indicating whether you are requesting an Appeals Office conference

* The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization or your authorized representative

* The following declaration.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


22

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury. I declare that I have examined this request, or this modification to the
request, including accompanying documents, and to the best of my knowledge and belief, the request
or the modification contains all relevant facts relating to the request, and such facts are true, correct,
and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven’t
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We'll review your protest statement and decide if you gave us a basis to reconsider our determination. If so,
we'll continue to process your case considering the information you provided. If you haven’t given us a basis
for reconsideration, we’ll send your case to the Appeals Office and notify you. You can find more information
in Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status.

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court later because the
law requires that you use the IRC administrative process first (IRC Section 7428(b)(2)).

Where to send your protest
Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address:

U.S. mail: Street address for delivery service:
Internal Revenue Service Internal Revenue Service

EO Determinations Quality Assurance EO Determinations Quality Assurance
Mail Stop 6403 550 Main Street, Mail Stop 6423

P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you
fax your statement, please contact the person listed at the top of this letter to confirm that they received it.

You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-
pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at
the top of this letter.

Contacting the Taxpayer Advocate Service

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your
taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you’ve tried but haven’t
been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS
will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


23

We sent a copy of this letter to your representative as indicated in your power of attorney.

Sincerely,

Director, Exempt Organizations
Rulings and Agreements

cc:

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K