Federal Appeals Court Rules Vision Service Plan (VSP) Not Entitled to Federal Tax Exemption; the Not-for-Profit Company to Appeal Decision

RANCHO CORDOVA, Calif.—A federal appeals court, the U.S. Court of Appeals for the Ninth Circuit, ruled late last month that Vision Service Plan (VSP), a not-for-profit corporation, does not qualify for exemption under Internal Revenue Code Section 501 (c) (4) noting that the organization, formed to provide vision care services to subscribers with whom it contracts “is not primarily engaged in promoting social welfare and does not, therefore, qualify for a federal tax exemption.” The appeals court sided with the Internal Revenue Service (IRS) and affirmed a December 2006 federal trial court decision.

Rob Lynch, president and CEO of VSP Vision Care, said in statement, "The court's determination calls into question the tax-exempt status of all not-for-profit organizations with a membership structure, including other healthcare delivery systems and educational institutions. VSP provides vision care benefits to its members under the same delivery model as other tax-exempt health plans such as Kaiser and Delta Dental. We are taking the appropriate steps to appeal this ruling and look forward to an opportunity to communicate our position."

A VSP spokesperson also told VMail, “VSP will continue to operate as a not-for-profit organization with or without the tax exemption. Any excess revenues will continue to be used to further the health of the community through charity care, patient education, peer review, quality assurance, and patient satisfaction programs. There will be no service disruptions or gap in care since we are a financially sound company and VSP providers will not be affected by our tax-exempt status.”

Although the trial court had also cited concerns that VSP did not qualify for tax-exempt status because it operated in ways characteristic of for-profit organizations, the Ninth Circuit declined to consider this basis of the trial court's decision. "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," it concluded.

The ruling came following oral arguments held in December 2007, at which time attorneys representing VSP argued that it was entitled to recover taxes it paid in 2003 because it served substantial numbers of individuals eligible for Medicare and Medicaid and provided vision care services that for-profit insurers did not even offer.

VSP was originally granted status as a tax-exempt organization in 1960.

Providing more background to VMail in this case, VSP noted that in a decision in 2002, effective Jan. 1, 2003, the IRS revoked VSP's tax exempt status after reviewing VSP's finances and operations for the years 1996-98. The company has been filing tax returns since that time.

In March 2004, VSP filed a claim for a refund with the IRS and after six months of not receiving a response, commenced the action in U.S. District Court to obtain a refund of taxes paid. In December 2005, both VSP and the U.S. brought cross-motions for summary judgment and by an order dated Dec.12 that year, Judge Karlton denied VSP’s motion for summary judgment, granted the U.S. government's motion and dismissed the complaint. VSP appealed that decision in May 2006 to the U.S. Court of Appeals for the 9th Circuit. Oral argument was heard on Dec. 5, 2007. On Jan. 30, 2008, the Ninth Circuit affirmed the U.S. district court’s decision.

The VSP spokesperson said, “We have 2 weeks to submit request for reconsideration to the Ninth Circuit. There is no specific timeline for them to say yes or no. A special panel can look at the case again, the decision could stand, or we could choose to pursue the case further.”