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Wednesday, July 16, 2008

Vision Insurer to Ask Justices to Restore Its Tax Exemption

The New York Times reports that the country's largest eye-care insurance program plans to ask the Supreme Court to reconsider its tax exemption.  Stephanie Strom writes,

Vision_insurerThe 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.

Nonprofit health care providers in particular have struggled to distinguish themselves from their for-profit counterparts in recent years as federal lawmakers have questioned why they deserve tax exemptions. State courts have also stripped exemptions from nonprofits, like substance abuse centers and nursing homes, saying they were no different from tax-paying companies providing similar services.

“We think this case calls into question the tax-exempt status of a number of tax-exempt organizations,” VSP’s general counsel, Thomas Fessler, said Tuesday. “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.”

Lawyers specializing in nonprofit legal matters agreed, but said they still doubted that the Supreme Court would hear the challenge.

Perhaps the best-known case among nonprofits was Bob Jones University v. United States, in which the Supreme Court upheld the I.R.S.’s refusal to grant tax exemption to the private university because it banned interracial dating and marriage.

Nonetheless, VSP’s challenge is regarded as important in the nonprofit world, and the company has retained Kenneth W. Starr, the former solicitor general and Whitewater independent counsel, to prepare for a hearing.

“It’s a big deal,” said Bruce R. Hopkins, a lawyer who has written several books on nonprofit law. “There are lots of very similar organizations out there, so the implications of the I.R.S. move shook things up a bit.”

Kaiser Permanente, Delta Dental and AARP are among organizations very much like VSP, which was established in 1955 and granted tax exemption in 1960. Five years ago, after an examination of VSP’s finances and operations from 1996 to 1998, the I.R.S. revoked its tax exemption.

In a 2002 letter to the company, the I.R.S. said that VSP’s “social welfare activities, in relation to its total activities, are minor, incidental and insignificant.”

VSP’s president and chief executive, Rob Lynch, said the only difference between the company today and at its founding was that it is now a national organization rather than a regional one.

“We provide access to vision care for all segments of our society,” Mr. Lynch said. “We do provide coverage to employers, but to all types, public or private, ranging in size from the federal government to employers with two people, and we offer coverage to those who can afford it and those who participate in Medicare, Medicaid and Schip,” the State Children’s Health Insurance Program. Some employees of The New York Times are covered by a VSP program.

VSP also runs several charitable programs, like Sight for Students, which provides vision care and glasses to low-income, uninsured children — services the company valued at $92 million since 1997; and Mobile Eyes, which sends two mobile clinics around the country to provide vision care after disasters and in community outreach programs.

“We don’t offer our programs through commercial outlets like LensCrafters and Wal-Mart,” Mr. Lynch said, “and over one-third of the providers in our network are in medically underserved areas.”

VSP has paid some $47 million in taxes while the case has moved through the courts. A federal district judge in California ruled in favor of the I.R.S. in 2005, and that decision was upheld this year by the United States Court of Appeals for the Ninth Circuit.

The district judge’s decision was issued on a motion for summary judgment rather than after a trial. So, said Mr. Fessler, the general counsel, “VSP has never had its day in court.”

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