Tuesday, November 17, 2009
The IRS recently released Private Letter Ruling 200942068, which denied recognition of exemption under Code section 501(c)(3) for an organization dedicated to improving the quality of health care by gathering and distributing information about health care services. Such organizations are commonly known as health information exchanges (HIEs) or regional health information organizations (RHIOs). The ruling provides a road map of how such an organization, which Congress has indicated it believes should generally qualify for tax exemption, can still fail to pass IRS muster. The organization at issue's fatal flaw was that it limited distribution of the information it gathered and the results of its analysis of that information to its members, which were both employers and health plans (those members also provided all of its revenues). The IRS found that limited distribution demonstrated the organization functioned primarily to benefit its members and not the general public, and so the organization was both operating for a non-exempt purpose and providing a substantial private benefit. The fact that the organization was arguably promoting health and providing education through its activities was not compelling in the IRS' view, again because of the limited distribution of the information gathered and the results of analysis performed.