IRS denies exemption to a fee-based health care cooperative serving its members

Plain-English summary

The IRS denied a nonprofit health care cooperative's application for exemption under IRC § 501(c)(3). The organization arranged discounted medical services, physician retainer plans, and insurance options for paying members, but the IRS found that its primary purpose was operating a commercial cooperative for members rather than promoting health or relieving the poor and distressed in a charitable way. The organization did not screen members for financial need and provided substantial private benefits to members, participating physicians, and a management company connected to an officer and director. Because the proposed adverse determination was not protested, it became final, and donors could no longer deduct contributions under IRC § 170.

Ruling snapshot

• Question: Did the health care cooperative qualify for exemption under IRC § 501(c)(3)?
• Outcome: Denied, the organization did not qualify for exemption
• Key authorities: IRC §§ 501(a), 501(c)(3), 170, 6110, and 7428; Treas. Reg. §§ 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(d)(1)(ii), 1.501(c)(3)-1(d)(2), and 1.501(c)(3)-1(e)

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

Release Number: 201409012 Contact Person:
Release Date: 2/28/2014

Date: December 5, 2013 Identification Number:

UIL Code: 501.33-00
Contact Number:

Employer Identification Number:
Form Required To Be Filed:

Tax Years:

Dear

This is our final determination that you do not qualify for exemption from Federal income tax as
an organization described in Internal Revenue Code section 501(c)(3). Recently, we sent you a
letter in response to your application that proposed an adverse determination. The letter
explained the facts, law and rationale, and gave you 30 days to file a protest. Since we did not
receive a protest within the requisite 30 days, the proposed adverse determination is now final.

Because you do not qualify for exemption as an organization described in Code section
501(c)(3), donors may not deduct contributions to you under Code section 170. You must file
Federal income tax returns on the form and for the years listed above within 30 days of this
letter, unless you request an extension of time to file. File the returns in accordance with their
instructions, and do not send them to this office. Failure to file the returns timely may result in a
penalty.

We will make this letter and our proposed adverse determination letter available for public
inspection under Code section 6110, after deleting certain identifying information. Please read
the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, follow the
instructions in Notice 437. If you agree with our deletions, you do not need to take any further
action.

If you have any questions about this letter, please contact the person whose name and
telephone number are shown in the heading of this letter. If you have any questions about your
Federal income tax status and responsibilities, please contact IRS Customer Service at

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1-800-829-1040 or the IRS Customer Service number for businesses, 1-800-829-4933. The
IRS Customer Service number for people with hearing impairments is 1-800-829-4059.

Sincerely,

Karen Schiller
Acting Director, Exempt Organizations
Rulings and Agreements

Enclosure
Notice 437
Redacted Proposed Adverse Determination Letter
Redacted Final Adverse Determination Letter

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

Date: October 30, 2013 Contact Person:
Identification Number:
UIL Code: 501.33-00
Contact Number:
FAX Number:

Employer Identification Number:

We have considered your application for recognition of exemption from Federal income tax
under Internal Revenue Code § 501(a). Based on the information provided, we have concluded
that you do not qualify for exemption under § 501(c)(3). The basis for our conclusion is set forth
below.

Facts

You were incorporated in Year 1 as a nonprofit corporation under state law. You amended and
restated your Articles of Incorporation in Year 2 to state that you are formed “...for charitable
purposes to assure the availability and quality of medical care for senior members of the
community and the making of distributions to organizations that qualify as exempt organizations
under Sections 501(c)(3) and 170(c)(2) of the...Code....” Your Bylaws also state that you
intend to enter into contracts on behalf of your members with health care providers to assure the
quality and availability of services to your membership.

Your Articles state that you will have members, a group defined in your bylaws as consisting
“...solely of persons who are age forty years or older.”

You currently have five board members, three of whom are a father and his two sons.

You state you were initially formed to operate free medical clinics in donated office space and
health care providers, where you “sought to determine the basic structure and costs of the non-
profit association or cooperative.” The clinics were operated in donated space with donated
supplies. Doctors and nurse practitioners donated their time and the School sent student nurses
to assist with patients. You state that this activity generates no income or expenses. You further
state that you still conduct this activity in two clinics, which comprises approximately 30% of
your resources, “even though almost all of the medical care by physicians and nurses is donated.”
You state that because of this activity:

We realized that people who were below the poverty line could still afford primary health
care so we asked other physicians to see patients in the cooperative on a monthly
payment plan and so far 99 offices have agreed. That expansion and cooperation made
it possible [sic] attach more people to the coop model.

Beginning in Year 2, you began signing up members for a “cooperative health care system,”
which you describe as:

Through the concept of cooperative purchasing, the members function as a group to
obtain access to health care at affordable prices. Primary or basic medical care services
are provided to members with no copayments or with a [$x1] office visit copayment and
no health qualifications. Currently, members may select from [x1] primary care
physicians in the greater City area. Each member signs a monthly payment plan
agreement with a primary care provider through which the availability of the physician
and his or her services are paid in full.

You state that you select your cooperative physician providers through a contract with Group1,
a physician and credentialing company that lists your cooperative health care system as a
program choice for Group1 members. Your contract with Group 1 describes you as a “state
licensed health maintenance organization.” Your obligations under the contract are performing
or arranging for claims processing, marketing, quality improvement, utilization review and other
functions appropriate for administering benefit plans. The contract also provides that Group 1’s
physicians will provide medical services to your members at Medicare rates.

In your agreement for primary care physician services between your members and participating
physicians, you state that the purposes of the agreement are as follows:

WHEREAS Patient wishes to be billed a preferred rate for the Physician’s services;
WHEREAS Physician wishes to have a predictable source of monthly income;
WHEREAS Physician currently pays overhead for the submission of claims for payment
and for efforts to collect payments not received at the time of services; WHEREAS
physicians have traditionally accepted fees for parties who pay under preferred terms
such as insurance and managed care companies...

You charge a one-time household enrollment fee to join your cooperative. Members then pay
mandatory monthly membership dues, which allow them access to “discounted fees for medical,
dental, and vision” services. Members may also elect to purchase a monthly “retainer plan for
primary care.” The primary care retainer fees vary based on the amount of services included
(“Primary Care Physician Services” or an additional “Diagnostic Facility Physician Services”)
and age of each individual member.

In Year 2, you negotiated an agreement with an insurer to provide a group health plan option for
your members. The group plan options offer additional coverage beyond what is offered at the
clinics within your “cooperative health care system.” As part of the agreement, the insurer will
pay a performance bonus to physicians “able to manage the patient’s health so that the group
policy has a surplus...”

Your monthly physician health care access plan does not cover conditions that require
hospitalization or surgery. To cover such costs, you also offer four separate insurance options
(Group Hospital, Critical Illness, Supplemental Accident, and Catastrophic Health) with rates
based on each individual member's age and tobacco use.

You project that virtually all of your revenue will come from membership fees, and your largest
expenses will be made for the benefit of your members in the form of “payments to medical
providers” and payments for members’ health insurance premiums.

Your Bylaws set forth the terms of payment for your membership dues, and provide in pertinent
part as follows:

[You] contract with Group 2 and participating member physicians of Group1 which have
certain availability and service obligations. Each member head of household is a limited
guarantor of those obligations up to $x2. If the member resigns his or her membership
or defaults on payment of his or her dues, then the guarantee amount of $x2 becomes
due and is payable monthly at a rate of $x3 per month over a period of 12 months.

You state that your membership dues cover your administrative costs, such as data entry,
bookkeeping and telephone support for members who need medical care.

Your Bylaws also include the following language regarding payments for the “Agreement for
Primary Care Physician Services Payment Plan” and “Diagnostic Facility Physician Services
Payment Plan:”

The term of this Agreement is one (1) year and it will automatically renew each year
unless either party gives written notice by U.S. certified mail return receipt requested,
before the end of the current term. Either party may terminate this Agreement at will
with proper written notice at any time. If this Agreement is terminated by Physician, the
outstanding balance of the yearly fee for the current term will be waived unless the
Physician is terminating for failure of Patient to pay fees or charges owing under this
agreement. If this Agreement is terminated by Patient, the outstanding balance of the
yearly fee for the current term will continue to be owed.

Your website provides physician-specific information promoting Group1, stating that it has the
staff expertise and resources in the following areas:

Your website also indicates that your group health plan is exclusive for Group1 physicians and
should result in about x2 new patients for Group1 providers. The website also states that:

From the information submitted, it appears that substantially all of the physicians that your
members contract with are part of Group1. Your Manager and board member is President of
the company that manages Group1. He also owns an interest in the company as does his son,
who is also one of your board members. The management company handles your payroll,
billing, collections and accounting although you stated that you have no agreements with the
management company.

You have expanded services beyond your initial City. A medical practice in another State also
requested to join your system, and you in turn filed an application with that State’s insurance
department and were approved for a group health policy issued to you. The policy enables the
practice’s patients “who were uninsured to have a policy that would pay for their health care
when they [have] to go to a specialist or a hospital.”

Law

Section 501(c)(3) provides that for an organization to be described in § 501(c)(3) it must be
organized and operated exclusively for exempt purposes, including charitable, scientific and
educational purposes.

Section 1.501(c)(3)-1(c)(1) of the Income Tax Regulations states that an organization will be
regarded as operated exclusively for one or more exempt purposes only if it engages primarily
in activities which accomplish one or more of such exempt purposes specified in § 501(c)(3).
An organization will not be so regarded if more than an insubstantial part of its activities is not
in furtherance of an exempt purpose.

Section 1.501(c)(3)-1(d)(1)(ii) states that an organization is not organized or operated
exclusively for one or more tax-exempt purposes unless it serves a public rather than a private
interest. To meet this requirement, an organization must establish that it is not organized or
operated for the benefit of private interests, such as designated individuals, the creator or his
family, shareholders of the organization, or persons controlled, directly or indirectly, by such
private interests.

Section 1.501(c)(3)-1(d)(2) provides that the term “charitable” is used in § 501(c)(3) in 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 of the burdens of Government. In addition, the promotion of health has long been
recognized as a charitable purpose. See Restatement (Third) of Trusts, § 28 (2012); 4A Austin
W. Scott and William F. Fratcher, The Law of Trusts §§ 368, 372 (4th ed. 1989).

Section 1.501(c)(3)-1(e) provides that an organization may meet the requirements of §501(c)(3)
although it operates a trade or business as a substantial part of its activities, if the operation of
such trade or business is in furtherance of the organization’s exempt purpose or purposes and if
the organization is not organized or operated for the primary purpose of carrying on an
unrelated trade or business, as defined in § 513.

Rev. Rul. 69-545, 1969-2 C.B. 117, holds that a non-profit hospital that benefits a broad cross
section of its community by having an open medical staff and a board of trustees broadly
representative of the community, operating a full-time emergency room open to all regardless of
ability to pay, and otherwise admitting all patients able to pay (either themselves, or through
third party payers such as private health insurance or government programs such as Medicare)
may qualify as an organization described in § 501(c)(3).

Rev. Rul. 69-175, 1969-1 C.B. 149, states that when a group of individuals associate to provide
a cooperative service for themselves, they are serving a private interest. By providing bus
transportation for school children the organization is enabling the participating parents to fulfill
their individual responsibility of transporting their children to school. Thus, the organization
serves a private rather than a public interest. Accordingly, it was not exempt from federal
income tax under § 501(c)(3).

Rev. Rul. 72-124, 1972-1 C.B. 145, provides that an organization, otherwise qualified for
charitable status under § 501(c)(3), which devotes its resources to the operation of a home for
the aged will qualify for charitable status for purposes of Federal tax law if it operates in a
manner designed to satisfy the three primary needs of aged persons. These are the need for
housing, the need for health care, and the need for financial security.

Rev. Rul. 76-244, 1976-1 C.B. 155, provides that an organization that provides home delivery of
meals to elderly and handicapped people by volunteers, for a fee insufficient to cover the cost of
operations but approximating the cost of the meals provided, or for a reduced fee or no fee
depending on the recipient's ability to pay, is operated for charitable purposes and qualifies for
exemption under § 501(c)(3).

Rev. Rul. 79-18, 1979-1 C.B. 194, provides that an organization that provides specially
designed housing to elderly persons at the lowest feasible cost and maintains in residence
those tenants who subsequently become unable to pay its monthly fees is an organization
operating for charitable purposes within the meaning of § 501(c)(3).

Rev. Rul. 80-287, 1980-2 C.B. 185, provides that a nonprofit lawyer referral service does not
qualify for exemption under § 501(c)(3). The organization aided persons who did not have an
attorney by helping them select one, in exchange for a nominal service charge. Any attorney
who was a member of a local bar association could apply for placement on the referral list, in
exchange for an application fee. Because a substantial purpose of the organization was aiding
the legal profession, the organization was not organized or operated exclusively for charitable
purposes, even though its lawyer referral service did provide some public benefit.

In Better Business Bureau of Washington D.C., Inc. v. U.S., 326 U.S. 279 (1945), the Supreme
Court held that the presence of a single non-exempt purpose, if substantial in nature, will
destroy the exemption regardless of the number or importance of truly exempt purposes. The
Court found that a trade association had an “underlying commercial motive” that distinguished
its educational program from that carried out by a university, and therefore, the association did
not qualify for exemption.

In Harding Hospital, Inc. v. United States, 505 F.2d 1068 (6th Cir. 1974), a non-profit hospital
with an independent board of directors executed a contract with a medical partnership
composed of seven physicians. The contract gave the physicians control over care of the
hospital's patients and the stream of income generated by the patients while also guaranteeing
the physicians thousands of dollars in payment for various supervisory activities. The court held
that the benefits derived from the contract constituted sufficient private benefit to preclude
exemption.

In B.S.W. Group, Incorporated v. Commissioner, 70 T.C. 352 (1978), the Tax Court considered
the qualification for exemption under § 501(c)(3) of an organization formed to provide consulting
services for a fee to nonprofit and tax exempt organizations in the areas of health and health
delivery systems, housing, vocational skills, and cooperative management. In concluding that
the organization did not qualify for exemption, the court noted that:

[T]he critical inquiry is whether petitioner's primary purpose for engaging in its
sole activity is an exempt purpose, or whether its primary purpose is the
nonexempt one of operating a commercial business producing net profits for
petitioner. ... Factors such as the particular manner in which an organization’s
activities are conducted, the commercial hue of those activities, and the
existence and amount of annual or accumulated profits are relevant evidence of
a forbidden predominant purpose.

In Federation Pharmacy Services, Inc. v. Commissioner, 72 T.C. 687 (1979), aff'd, 625 F.2d 804
(8th Cir. 1980), the court held that, while selling prescription pharmaceuticals to elderly persons
at a discount promotes health, the pharmacy did not qualify for recognition of exemption under
§ 501(c)(3) on that basis alone. Because the pharmacy operated for a substantial commercial
purpose, it did not qualify for exemption under § 501(c)(3).

In Columbia Park & Recreation Association v. Commissioner, 88 T.C. 1 (1987), aff'd. without
published opinion, 838 F.2d 465 (4th Cir. 1988), the court held that an association formed in a
private real estate development to operate parks, swimming pools, boat docks and other
recreational facilities did not qualify as a § 501(c)(3) organization. Although the organization
provided some benefit to the general public, the primary intended beneficiaries were the
residents and property owners of the private development. The organization did not solicit or
receive voluntary contributions from the public.

Living Faith, Inc. v. Commissioner, 950 F.2d 365 (7th Cir. 1991), involved an organization
established by the Seventh Day Adventist Church to carry out its “health ministry” through
operation of two vegetarian restaurants and health food stores. The court sustained the IRS's
denial of tax exemption under § 501(c)(3) because the organization was operated for a
substantial non-exempt commercial purpose. The court found that the organization’s activities
were “presumptively commercial” because the organization was in competition with other
restaurants, engaged in marketing, and generally operated in a manner similar to commercial
businesses.

In Geisinger Health Plan v. Commissioner, 985 F.2d 1210 (3d Cir. 1993), the court held that a
pre-paid health care organization that arranges for the provision of health care services only for
its members benefits its members, not the community as a whole. Under the community
benefit standard, the organization must benefit the community as a whole to be recognized as
promoting health in the charitable sense of § 501(c)(3).

IHC Health Plans, Inc. v. Commissioner, 325 F.3d 1188 (10th Cir. 2003), involved an operator of
health maintenance organizations that served approximately one-quarter of Utah’s residents
and approximately one-half of its Medicaid population. The court held that the organization
failed to meet the community benefit standard to qualify for exemption under

§ 501(c)(3) because its sole activity was arranging for health care services for its members, in
exchange for a fee. The court said that providing health-care products or services to all in the
community is necessary but not sufficient to meet the community benefit standard. Rather, the
organization must provide some additional benefit that likely would not be provided in the
community but for the tax exemption, and this public benefit must be the primary purpose for
which the organization operates.

Analysis

We have concluded that you are not operated exclusively to promote health under § 501(c)(3),
or to further any other tax-exempt purpose within the meaning of § 501(c)(3) and § 1.501(c)(3)-
1(d). Rather, you are operated primarily for a non-exempt purpose, i.e., to operate a
commercial business and a cooperative enterprise primarily for the benefit of your members.
Any public purposes for which you may operate are only incidental to this primary non-exempt
purpose. In addition, you are operated primarily to provide substantial private benefit to your
members, which is prohibited by § 1.501(c)(3)-1(d)(1)(ii). Therefore, we cannot recognize you
as an exempt organization under § 501(c)(3).

Tax-Exempt Purpose

Promotion of Health

The promotion of health has long been recognized as a charitable purpose under common law.
However, not every activity that generally promotes health furthers exclusively charitable
purposes 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., supra. Nor does a hospital primarily further a
charitable purpose solely by offering health care services to the public in exchange for a fee.
See Rev. Rul. 69-545, supra. Rather, a hospital must be organized and operated primarily for
the benefit of the community, as evidenced by such factors as a board that represents the
community, operation of an emergency room, provision of charity care, medical training, or
medical research. For example, a health maintenance organization that is operated primarily for
the purpose of benefiting its paying subscribers does not qualify for exemption solely because
the community also derives health benefits from its activities. See Geisinger Health Plan, supra;
and IHC Health Plans, Inc., supra.

Although you state approximately 30% of your resources are dedicated to operate free medical
clinics in donated office space and health care providers, the balance of your activities consist
of arranging health care provider and insurance group purchasing options for your members.

Such activities do not provide healthcare services directly to patients, unlike the hospital in Rev.
Rul. 69-545. In essence, you are merely providing purchasing options to your members so that
they can reduce their health-care related costs.

Furthermore, your primary activities directly and substantially benefit your members. To the
extent the community may realize benefits from this activity, in the form of reduced healthcare
costs, this would be similar to the benefits a community derives when healthcare providers use
more effective and efficient medical supplies, equipment, and current health information to
diagnose illnesses and diseases and treat their patients. The provision of such tools to
healthcare providers generally does not serve exclusively tax-exempt purposes. As the court
noted in IHC Health Plans, Inc., supra at 1197:

In giving form to the community-benefit standard, we stress that ‘not every
activity that promotes health supports tax exemption under § 501(c)(3). For
example, selling prescription pharmaceuticals certainly promotes health, but
pharmacies cannot qualify for... exemption under § 501(c)(3) on that basis
alone.’ Rev. Rul. 98-15. In other words, engaging in an activity that promotes
health, standing alone, offers an insufficient indicium of an organization's purpose.
Numerous for-profit enterprises offer products or services that promote health.

Therefore, although some of your activities may promote health in a general sense, your
primary activities do not promote health in a charitable manner within the meaning of § 501(c)(3)
and § 1.501(c)(3)-1(d)(2).

Relief of the Poor and Distressed

Section 1.501(c)(3)-1(d)(2) states that the term “charitable” includes relief to the poor and
distressed. Providing for the special needs of the elderly has long been recognized as a
charitable activity for federal tax purposes. See Rev. Rul. 72-124, supra. The elderly, as a class,
are highly susceptible to distress other than financial, in that they have special needs because of
their advanced years. The three primary needs of aged persons are the need for housing, the
need for health care, and the need for financial security. See id.

Your amended governing documents state that you are formed “...to assure the availability and
quality of medical care for senior members of the community...,” and that your members are
defined in your bylaws as consisting “...solely of persons who are age forty years or older.”
While different federal statutes define elderly at different ages, none set the threshold as low as

40. Your members are not limited to elderly persons. In addition, you have not shown that you
    screen or limit your members to those 40 or older, and in fact advertise to doctors your ability to
    provide “non-geriatric” patients.

While you do facilitate some free health care through your free clinics, you have not provided
information regarding whether such services are provided to a charitable class. Actually, you
indicate that such activity was conducted to “determine the basic structure and costs of the non-
profit association or cooperative,” so that you could develop your current fee-based cooperative
health care structure. Additionally, if any member cancels his or her membership or defaults on
dues, the member is nevertheless liable for the entire annual dues amount of $x2.

You do not have a financial assistance policy to assist persons who cannot afford your
membership dues. In fact, you state that through your free clinics, you realized that “people
who were below the poverty line could still afford primary health care,” hence your current
cooperative structure.

You have not provided any information indicating that you screen your members for financial
need to offer medical services for free or reduced rates. Thus, you are not providing for the
needs of the elderly and are not relieving the poor and distressed within the meaning of

§ 1.501(c)(3)-1(d)(2).

Substantial Non-Exempt Purpose

An organization is operated exclusively for one or more exempt purposes only if it engages
primarily in activities which accomplish one or more of such exempt purposes specified in
§ 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its
activities is not in furtherance of an exempt purpose. See § 1.501(c)(3)-1(c)(1).

Providing services of an ordinary commercial nature, regardless of whether the undertaking is
conducted on a nonprofit basis and is beneficial to the community, does not further a charitable
purpose, unless the service directly accomplishes a tax-exempt purpose. See § 1.501(c)(3)-
1(e)(1), Rev. Rul. 80-287, supra. The sale of health-related goods and services (e.g., laboratory
services, pharmaceuticals, HMO services, consulting services) does not exclusively further
charitable purposes because such activities serve a substantial non-exempt, commercial
purpose. See, e.g., Federation Pharmacy Services, supra (sale of pharmaceuticals to senior
citizens was presumptively commercial, because such activity was normally pursued by
commercial enterprises); Geisinger Health Plan, supra.

As stated above, you do not serve the elderly, nor do you screen your members for financial
need to serve the poor.

Thus, your activities are neither inherently charitable, nor in furtherance of a charitable purpose,
but resemble activities carried on by for-profit businesses, a factor that supports the commercial
nature of your activities. See, e.g., Living Faith, Inc., supra (organization’s health food stores

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and restaurants were in competition with for-profit organizations); and IHC Health Plans, supra
(health plans resembled and competed with commercial insurance providers).

Your relationship with members is conducted as an ordinary business. You advertise to the
community as a whole, charge market-rate enrollment and monthly fees in addition to the
payments to doctors, and require an entire year’s payments even if a person terminates
membership. Your relationship with the doctors and insurance companies is also on a
commercial basis. You executed an agreement with Group 1, as a “state licensed health
maintenance organization” to acquire the services of Group 1’s physicians in the provider
network to treat your members. Your obligations under the agreement are to “perform or
arrange for the provision of claims processing, marketing, Quality Improvement, Utilization
Review and other functions as are necessary or appropriate for administration of [your] Benefit
Agreements.” You have not established any distinction between your operations and those of a
commercial health plan operator.

Any charitable or educational benefits the public may derive from your services are merely
incidental to your principal purpose of benefiting your members. Thus, your activities do not
primarily further an exempt purpose. Therefore, you are not “operated exclusively” for one more
exempt purpose under § 501(c)(3). See § 1.501(c)(3)-1(c)(1) (an organization will not be
regarded as “operated exclusively” for one or more exempt purposes under § 501(c)(3) if more
than an insubstantial part of its activities is not in furtherance of an exempt purpose). Better
Business Bureau of Washington D.C., Inc., supra.

Substantial Private Benefit

An exempt organization must be organized and operated exclusively for exempt purposes
pursuant to § 1.501(c)(3)-1(a). An entity that is organized or operated to serve private rather
than public interests cannot be recognized as operating exclusively for exempt purposes. See

§ 1.501(c)(3)-1(d)(1)(ii)

Your activities confer impermissible private benefit to at least three parties: your members, the
members of Group1, and your officer. Like the organization in Rev. Rul. 69-175, you serve the
private interests of your members by providing access to a fee-based health care cooperative.

In addition, your activities provide substantial private benefit to the members of Group1 through
attracting a new population of patients (the uninsured) and providing a guaranteed stream of
income to its members. Also, your website touts that your contracts with insurers consistently
result in bonuses for participating physicians, and provide a younger (non-geriatric) patient
population with “exclusivity and bonus agreements.”

Your officer and director is also the President, and part owner, of a medical Management
Company. It manages Group1, and appears to provide the administrative services to you and
through you for the administration of the benefits provided to your members. By attracting
significant additional patients for the doctors in Group1, and thus increasing business for
Management Company, you provide a private financial benefit to your officer and director.

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Therefore, because you are operated primarily to serve private interests contrary to the
prohibition in § 1.501(c)(3)-1(d)(1)(ii), you are not operated exclusively for exempt purposes
under § 501(c)(3).

Conclusion

You are not operated exclusively for one or more exempt purposes within the meaning of

§ 501(c)(3) and § 1.501(c)(3)-1(d). Rather, you are operated primarily for a non-exempt
purpose, i.e., to operate a commercial business and a cooperative enterprise primarily for the
benefit of private interests. Any public purposes for which you may operate are only incidental
to this primary non-exempt purpose. In addition, you are operated primarily to provide
substantial private benefit of private interests, which is prohibited by § 1.501(c)(3)-1(d)(1)(ii).
Therefore, you do not qualify for recognition of exemption under § 501(a) as an organization
described in § 501(c)(3).

You have the right to file a protest if you believe this determination is incorrect. To protest, you
must submit a statement of your views and fully explain your reasoning. You must submit the
statement, signed by one of your officers, within 30 days from the date of this letter. We will
consider your statement and decide if the information affects our determination.

Your protest statement should be accompanied by the following declaration:

Under penalties of perjury, I declare that I have examined this protest statement, including
accompanying documents, and, to the best of my knowledge and belief, the statement
contains all the relevant facts, and such facts are true, correct, and complete.

You also have a right to request a conference to discuss your protest. This request should be
made when you file your protest statement. An attorney, certified public accountant, or an
individual enrolled to practice before the Internal Revenue Service may represent you. If you
want representation during the conference procedures, you must file a proper power of attorney,
Form 2848, Power of Attorney and Declaration of Representative, if you have not already done
so. For more information about representation, see Publication 947, Practice before the IRS
and Power of Attorney. All forms and publications mentioned in this letter can be found at
www.irs.gov, Forms and Publications.

If you do not file a protest within 30 days, you will not be able to file a suit for declaratory
judgment in court because the Internal Revenue Service (IRS) will consider the failure to protest
as a failure to exhaust available administrative remedies. Code § 7428(b)(2) provides, in part,
that a declaratory judgment or decree shall not be issued in any proceeding unless the Tax
Court, the United States Court of Federal Claims, or the District Court of the United States for
the District of Columbia determines that the organization involved has exhausted all of the
administrative remedies available to it within the IRS.

If you do not intend to protest this determination, you do not need to take any further action. If
we do not hear from you within 30 days, we will issue a final adverse determination letter. That
letter will provide information about filing tax returns and other matters.

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Please send your protest statement, Form 2848 and any supporting documents to this address:

Internal Revenue Service

1111 Constitution Ave., NW
Washington, DC 20224-0002

You may also fax your statement using the fax number shown in the heading of this letter. If
you fax your statement, please call the person identified in the heading of this letter to confirm
that he or she received your fax.

If you have any questions, please contact the person whose name and telephone number are
shown in the heading of this letter.

Sincerely,

Karen Schiller
Acting Director, Rulings and Agreements