The country’s largest eye-care insurance program plans to ask the Supreme Court to decide whether the Internal Revenue Service properly revoked its tax exemption in 2003, company executives said Tuesday. The proposed filing, by VSP Vision Care of Rancho Cordova, Calif., highlights a major debate in the nonprofit arena over what activities deserve tax exemption when most nonprofit groups charge fees for services and products to supplement their income from charitable donations.

Vision Insurer to Ask Justices to Restore Its Tax Exemption, New York Times (July 16, 2008)

For some time now, tax exempt hospitals have been facing increasing scrutiny by tax authorities. :: Uncertain Future For Tax Exempt Status of Non-Profit Hospitals The NYT reports that the IRS has taken action in what may be an oblique attack on a broader range of traditional health care entities currently enjoying tax exempt status.

The NYT quotes VSP’s general counsel, Thomas Fessler, as stating that:

“We think this case calls into question the tax-exempt status of a number of tax-exempt organizations . . . It’s not just VSP at risk here. It’s other hospitals, other health-maintenance organizations, nursing homes, clinics — there’s a lot of confusion out there.”

Of course it would be to VSP’s advantage to sound the call to arms and hope for a mobilization of the powerful hospital lobby to its aid. In the health care business, however, the players typically react based on more primal instincts, i.e., who’s ox is getting gored.

Still, the case should be interesting to watch as potentially a harbinger for further developments. For example, the NYT piece notes that Kaiser Permanente and AARP are organizations “very much like VSP”.

Note: The Ninth Circuit recently affirmed a summary judgment motion in favor of the Commissioner. The unpublished opinion stated:

VSP is not operated exclusively for the promotion of social welfare because it is not primarily engaged in promoting the common good and general welfare of the community. 26 C.F.R. § 1.501(c)(4)-1(a)(2)(i) (”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.”).

The rationale:

While VSP offers some public benefits, they are not enough for us to conclude that VSP is primarily engaged in promoting the common good and general welfare of the community. See, e.g., Monterey Pub. Parking Corp. v. United States, 481 F.2d 175, 177 (9th Cir. 1973) (noting that the district court made a quantitative comparison between the private and public benefits); see also Comm’r v. Lake Forest, Inc., 305 F.2d 814, 818 (4th Cir. 1962) (noting that the public benefits of organization were too insubstantial to qualify the organization as exempt under Section 501(c)(4)); Police Benevolent Ass’n of Richmond v. United States, 661 F. Supp. 765, 772-73 (E.D. Va.), aff’d, 836 F.2d 547 (4th Cir. 1987) [**3] (per curiam) (unpublished opinion).

Furthermore, VSP’s own articles of incorporation state that the primary purpose of the corporation is to establish a fund from payments by subscribers to defray and assume the costs of vision care for those subscribers. This is a purpose that benefits VSP’s subscribers rather than the general welfare of the community. See Contracting Plumbers Co-op. Restoration Corp. v. United States, 488 F.2d 684, 686-87 (2d Cir. 1973) (setting forth several factors to examine in deciding whether an organization qualifies for a Section 501(c)(4) exemption, including the bylaws of the organization).


In light of the fact that VSP is not primarily engaged in promoting the general welfare under 26 C.F.R. § 1.501(c)(4)-1(a)(2)(i), we need not address whether VSP carries on its business with the public in a manner similar to those organizations operated for profit.

VSP Vision Care has reportedly engaged former United States Solicitor General Ken Starr as it pursues a writ of certiorari