U.S. Tax Court: Accountable care organization not entitled to tax exemption under section 501(c)(4)

The U.S. Tax Court today released a memorandum opinion holding that the taxpayer, an accountable care organization (ACO), did not meet its burden of showing that it is an organization described under section 501(c)(4) qualifying for exemption from federal income tax under section 501(a).

The case is: Memorial Hermann Accountable Care Organization v. Commissioner, T.C. Memo 2023-62 (May 16, 2023). Read the Tax Court’s opinion [PDF 113 KB] (8 pages)

The taxpayer was organized and controlled by an organization described under section 501(c)(3) and operated as an ACO, which the taxpayer defined as “a group of doctors, hospitals, and other health care providers, who come together voluntarily to give coordinated high-quality care to Medicare and other patients.” As an ACO the taxpayer coordinated care for participating patients. Some of these patients were enrolled in Medicare, while others were covered by health insurance plans offered by commercial payors.

The taxpayer contracted with a related corporation to provide it with a physician network that participated in care coordination activities and case management personnel. Individual physicians entered into network participation agreements with the taxpayer or its related corporation. These medical providers contracted with the taxpayer to coordinate and provide care for patients in exchange for a share of the payments that the taxpayer received both under the Medicare Shared Savings Program (MSSP) and under non-MSSP shared savings plans that the taxpayer negotiated with commercial payors.

The IRS denied the taxpayer exemption from federal income tax under section 501(a) in a final adverse determination letter dated December 14, 2021. The taxpayer subsequently exhausted its administrative remedies as required by section 7428(b)(2) and Rule 210(c)(4) and, on March 10, 2022, timely filed a petition with the Tax Court seeking a declaratory judgment that it was entitled to exempt status as an organization described under section 501(c)(4).

The Tax Court held that the taxpayer was not entitled to exempt status as an organization described in section 501(c)(4) because the taxpayer’s activities related to non-MSSP shared savings plans “primarily benefit commercial payors and healthcare providers and thereby constitute a substantial nonexempt purpose precluding petitioner from qualifying as an organization described by section 501(c)(4).”

For more information, contact a tax professional with KPMG’s Washington National Tax practice:

Ruth Madrigal | ruthmadrigal@kpmg.com

Preston Quesenberry | pquesenberry@kpmg.com