3ftt CTje ^§UpL'eiTTe CCOUrt of ®btD Case No. 2009-2310 DIALYSIS CLINIC, INC., Appellant, V. Oii Appeal i'om the WILLIAM W. WILKINS [RICHARD A. Ohio Board of Tax Appeals, LEVIN], TAX COMMISSIONER OF OHIO, Case No. 2006-V-23 89 Appellee. APPENDIX TO BRIEF VOL[JME II RICHARD CORDRAY (0038034) SEAN P. CALLAN* (0062266) Attorney General of Ohio *Counsel ofRecord SETH SCHWARTZ (0080961) SARAH SPARKS HERRON (0083803) RYAN P. O'ROURKE* (0082651) DINSMORE & SIIOHL LhP *Couns•el ofRecord LAWRENCE D. PRATT (0021870) 1900 Chemed Center ALAN P. SCHWEPE (0012676) 225 East Fifth Street Assistant Attorneys General Cincinnati, Ohio 45202 Telephone: (513) 977-8200 Taxation Section 30 East Broad Street, 25th Floor Facsimile: (513) 977-8141 [email protected] Columbus, Ohio 43215 Telephone: (614) 466-5967 Facsiniile: (614) 466-8226 [email protected] Counsel for Appellant Counsel for Appellee William W. Wilkins [Richard A. Levin], Tax Dialysis Clinic, Inc. Commissioner of Ohio Page 1 6 LEXSEE 37 BC L RBV I Copyright (c) 1995 Boston College Law School Boston College Law Review Deeember,1995 37B.C.L.Revl LENGTH: 27836 words ARTICL.E: EVOLUTIONARY FORCES: CHANGES IN FOR-PROFIT AND NOT-FOR-PROFIT HEALTH CARE DELIVERY STRUCTURES; A REGENF,RATION OF TAX EXEMPTION STANDARDS * * Copyright (c) 1995, Nina J. Crimm. NAME: Nina J. Crimm ** 1310: ** Professor of Law, Director, Project for Socially Responsive Taxation, Center for Law & Public Policy, St. John's tJnivcrsity School of Law; A.B., Washington University (1972); J.D. and M.B.A., Trilane University (1979); L.L.M. in Taxation, Georgetown University Law Center (1982); author of'1'AX COUR'C L1'1'1GATION: PRACTICE AND PROCEDURE (1992 & 1993 eds.). The author would like to acknowledge the support received frotn the Faculty Resew•ch Progrant at St. Jolm's University School of Law, the helpful library assistance of Arundhati A. Satkalmi, Reference Librarian, and the able research assista xe of Amy Bucci, Class of 1997, and Lisa Amt Spero, Class of 1995_ SUMMARY: _.. As far as the IRS and courts are concemed, the conuuunity benefit standard and concepts cnunciated in Revenue Rulings 56-185, 69-545, and 83-157 apply as a starting point to cotrsider whether any freestanding or affiliated health care organization pursuing initial tax-exempt status or seeking to retain tax exemption wider I.R.C. ... Focusing on the IRS's argrunent that qualification as a charitable health care organization under L.R.C. ... As part of its standards, the IRS has not articulated a requirenient that each component (e.g., the medical foundation and the hospital) of a founda- tion modellDS be considered per se a health care provider. A former IRS official and cun-ent tax practitio- ner/commentator has expressed the opirrion that a medical foundation in a foundation model IDS should be considered a health care provider. ... The IRS does not view an MSO as a health care provider, but rather as a health care arranger or facilitator.... Because the IRS does not consider an MSO to be a healtlt care provider, it wonld refuse I.R.C. .._ Yet, on a more micro-level, the IRS has tightened certain criteria for detennining whether a health care organization in ttie con- temporary health care enviromnent deserves tax-exempt treatntent. ... By cornparison, the IRS defines an IDS as a "healtlt care provider (or one component entity of an affiliated ttetwork of providers) created to integrate the provision of hospital services with professional medical (e.g., ptiysician) services. ... TEXT: [*541 Appx. 218 Page 2 37 B.C. L. Rev 1, * [EDITOR'S NOTE: PART 2 OF 2. THIS DOCUMENT FIAS BEEN SPLIT INTO MULTIPLE PARTS ON LEXIS TO ACCOMMODATE ITS LARGE SIZE.] h. Cominunity Benefit Standard Applied to L KC. § 501(c) (3) Health Care Organizations As far as the IRS and courts are concerned, the cotnmunity benefit standard and concepts cnunciated in Revenue Rulings 56-185, 69-545, and 83-157 apply as a starting point to consider whether any freestanding or affiliated health care organization pursuing ittitial tax-exempt status or seeking to retain tax exemption under I.R.C. § 501(c)(3) deserves such tax-exempt treatment. n205 However, as illustrated by GCM39,862, and as indicated in the following discussion of stand alone HMOs, as well as in the later discussion of IpSs, horizontal hospital networks, aud physician-hospital arrangements, the IRS has extended its inquiry beyond the four walls of these revenue rulings when determining whether a health care organization deserves 1. R. C. § 501(c)(3) tax exentpt status. The expanded hrquiry necessitated by an evolving health care envirannient reflects a revival or regeneration of certain concepts leading to a more refined definition of the conmiunity benefit standard. (1) Stand Alone HMOs andI.R.C §,¢ 501(c)(3) and (c)(4) For the most part, contemporary HMOs are for-profit enterprises. As of 1993, approxitnately 180 enjoyed tax- exetnpt status under either LR.C. § 501(c)(3) or (c)(4)_ n206 Of those 11MOs that have been granted [*551 tax-exempt stahts, 130 have been granted tax exemptions as "social welfare" organizations under I.R.C. § 501(c)(4), n207 while fifty IIMOs enjoy the more favorable treatment of tax-exempt "cltat'itable" organizations under LR.C § 501(c)(3). n208 HMOs seeking exemptiott either as I.R.C. ,ys' 501(c)(3) or (c)(4) organizations tnust demonstrate that they satisfy the cotmnunity benefit standard. Although satisfaction of the community benefit standard is a requisite for either type of tax-exetnpt IIMO, the standard appears to be stricter for IIMOs seeking to qualify htitially for or retain I.R. C. § 501(c)(3) tax-exempt status. Assuming that a not-for-profit HMO satisfies the community benefit standard for tax ex- emption under 1. R.C. § 501(a), it must also satisfy the requirement,s of I.R.C. ,ys 501(rn). To do so, no "substantial part" of the HMO's activities can be "commercial-type insuranee." 1. R.C. § 50I (nu) is untested to date with respect to 1. R.C. § 501(c)(3) HMOs. In 1978, in Sound ifealth Assra v. Comrnissioner, n209 a case of first impressiott, tlte Tax Court was confronted with the issue of whether a not-for-profit HMO qualified for tax exemption as an I.R.C. § 501(c)(3) "charitable" organi- zation. Sound Health Association ("SHA"), had as its primary, but not sole, purpose the provision of health care ser- vices to members on a prepaid basis. n210 It served only members wlro could afford to pay a set premium plus a $ 200 capital dues levy. n211 In order to become a member of the I-IMO, an individual was required to pass a physical ex- amination, even if the iudividual belonged to SHA through a group metnbership. n212 SIIA etnployed only two physi- cians [*56] and was considered a staff model HMO. However, SI-IA physicians were able to refer patients to an SHA "cottResy staff," initially consisting of sixteen physicians, who worked on a fee-for-setvice basis for SIIA but did not exclusively treat', SI-IA patients. n213 Membership on the "courtesy staff' was open to all physicians who applied, and no physicians had been refused privileges. n214 Consistent with a long line of cases and general counsel meinoranda, n215 the IRS argued that SHA provided preferential treatment to members and failed the organizational and exclusive operational requirements. To this ettd, the IRS suggested that SHA was not formed to provide medical services to the community-at-large. 'The IRS further alleged that the HMO failed the community benefit test because it failed to deliver medical services to the eomtntutity-at-large. 7'he Tax Court rejected the IRS's arguments. The coutt indicated that one need not conclude that because an IIMO is a membership organization it necessarily is organized and operated for private benefit rather than public benefit. n216 The court stated, "[The] requirentent that the connnunity tnust benefit from a charity's activities has, as its natural corollary, that private interests must not so benefit in any substantial degrec." n217 Relying on the community benefit standard of [*57] Rcroenue. Ruling 69-545, n2 18 the court concluded that the HMO satisfied the community bene6t test and did not violate the prohibition against excessive private benefit. n219 The court reviewed the factors listed in Revenue Ruling 69-545, assigning the most importance and the g-eatest weight to the comntunity benefited. n220 It considered the potential eligible membership class of the IIMO to be sufficiently broad. In its view, for all practical purposes HMO tnetnbership was open to the entire comtnuttity because the HMO had a subsidized dues program. n221 The court considered a number of other factors: (1) the HMO provided emergency and nonetnergency medical care to individttals unable to pay; n222 (2) the HMO had an open medical staff policy; n223 [*58] (3) the HMO's board of directors was coniposed of prominent citizens of the cotmnunity; n224 and (4) the I IMO offered a public educa- Appx. 219 Page 3 37 B.C. L. Rev 1, * tional program. n225 Tltus, for putposes of detertnining whether SHA was a"charitable" health care organization un- der IR.C. § 501(c)(3), the Tax Comt essentially adopted the factors that the IRS had established as its guidelines for the cotnmmnity benefit standard applicable to hospitals under Revenue Rzrling 69-545. n226 Approximately two years later, the IRS issued General Counsel Memorandum 38,735 ("GCM 38,735"), n227 which relied on Sound Aealth Ass'n and modified another general counsel memorandutn.