Exempt Organizations Advisory - Ninth Circuit Rules That Vision Services Plan Does Not Qualify For Exemption As Social Welfare Organization

Catherine W. Wilkinson (cwilkinson@steptoe.com)
Suzanne Ross McDowell (smcdowell@steptoe.com)
Randal T. Evans (revans@steptoe.com)

In an unpublished memorandum decision issued January 30, 2008, the Ninth Circuit Court of Appeals upheld a lower court’s ruling that Vision Services Plan (“VSP”), a membership-based vision care plan that also provides charity vision care and conducts community education programs, does not qualify for tax-exemption as a “social welfare” organization under IRC § 501(c)(4).  Vision Service Plan, Inc. v. U.S., 2008 WL 268075, *1 (9th Cir. 2008).

VSP provides eyecare health coverage and related benefits to its members (enrollees) through participating employers (subscribers).  See Vision Service Plan v. U.S., 96 A.F.T.R.2d 2005-7440, *2005-7443 (E.D. Cal. 2005).  Enrollees obtain vision care services from participating doctors. Id.  VSP also provides services to non-enrollees through charity programs, although the lower court found these services not substantial when compared to VSP's services to its members.  Id.  VSP was initially recognized by the IRS as tax-exempt under IRC § 501(c)(4) in 1960.  (Neither the lower court nor the appellate court discuss the basis of the IRS' 1960 ruling.)  In 1999, on audit, the IRS concluded that VSP was not entitled tax-exempt status and issued a final adverse determination letter revoking the organization’s IRC § 501(c)(4) status, effective prospectively from January 1, 2003. 96 A.F.T.R.2d at *2005-7441.

The Ninth Circuit Court of Appeals concluded that “[w]hile 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,” noting that VSP’s own corporate documents state that the primary purpose of the organization is to establish a fund from payments by subscribers to defray and assume the costs of vision care for those subscribers  Id.

The lower court had also concluded that VSP carried on business “in a manner similar to organizations which are operated for profit,” referring to language in the IRS regulations that an organization is not operated primarily for the promotion of social welfare if its primary activity is “carrying on a business with the general public in a manner similar to organizations which are operated for profit.”  See 96 A.F.T.R. 2d at *2005-7447 - 2005-7448, referencing Treas. Reg. § 1.501(c)(4)- 1(a)(2)(ii).  The appellate court stated that it need not decide this issue in light of its finding that VSP was not primarily engaged in promoting the common good and general welfare of the community.  2008 WL 268075 at *1.