Should VSP Retain Non-Profit…Tax Free…Status?

The following post on another blog is typical of the PR effort that VSP appears to be making.  I suggest that it's a PR effort because, of the dozen or so that I've read like this, they all seem to be saying the same thing and using the same words. 

It appears to me that this is a simple question.  Does the structure of VSP, given its foray into for-profit businesses, warrant tax-free status.  The vast majority of their revenue comes from for-profit businesses (employers) and the vast majority of their expenses go to for-profit businesses (providers).  So why shouldn't they contribute to the tax needs of the country.  While I'm all for tax-free status to legitimate charities…I fail to see the societal benefit of such status in this case, unless its to fund the 15% 401-K grant and other significant benefits and salaries of VSP employees and officers.  There's no doubt that VSP is a good corporate citizen…but at who's expense? 

What do you think?  If you think VSP should retain tax-free status, post your comments below. 


The Supreme Court will soon have the opportunity to decide whether to hear a case that could have tremendous impact on the ability of private, nonprofit charities to provide health care and other services to the poor. The case involves the Internal Revenue Service's decision to strip Vision Service Plan (VSP) – a California-based nonprofit which provides vision-care insurance to 55 million Americans – of its tax-exempt status. VSP is fighting the IRS' decision five years ago to revoke its (501(c)(4) status as a tax-exempt social-welfare organization – one it had held since 1960.

The high court will decide by Jan. 9 whether to hear the lawsuit VSP filed to overturn the IRS decision. If VSP loses, the result could be very damaging to a wide array of private, nonprofit organizations.

The VSP case illustrates how bureaucrats in the executive branch quietly expand their power to rewrite federal laws enacted by Congress with the acquiescence of the federal judiciary. In 1960, VSP became a 501(c)(4) tax-exempt organization. In 1986, Congress amended the law to take tax-exempt status away from providers of "commercial-type" insurance – a change that was aimed at Blue Cross insurers, who were tax-exempt even though they operated in much the same way as for-profit companies. But the 1986 amendment contained "safe harbor" language that was understood at the time to preserve the tax-exempt status of most nonprofit health maintenance organizations, and VSP's exemption was not challenged by the IRS until 1999, when the firm expanded from regional to national operations. The IRS opened an inquiry into VSP's tax-exempt status that year, and in 2002 it announced that effective Jan. 1, 2003, the company would lose its tax exemption.

VSP began paying taxes in 2003, but filed suit in an effort to overturn the IRS ruling and get the tax money back. In December 2005, a U.S. District Court judge in Sacramento ruled in favor of the IRS, holding that the company was ineligible for 501(c)(4) status because it was operated in a manner similar to for-profit organizations. But the ruling did not address the 1986 amendment. It was appealed to the U.S. Court of Appeals for the Ninth Circuit, which in January affirmed it in a short (three-paragraph-long) ruling that also did not address the 1986 measure. Congress – which could clarify the situation – has failed to act, abdicating the issue, at least for now, to the federal courts.

These misinterpretations of federal law could have devastating results for people served by VSP and other HMOs. VSP General Counsel Thomas Fessler told The Washington Times that since 1997 his organization has donated more than $90 million worth of free health care to poor children through a program called "Sight for Students." Three national charities that are partners in the program with VSP – Prevent Blindness America, the National Council of La Raza and the National Association of School Nurses – signed an amicus brief warning that the IRS decision threatens to "divert to the federal treasury funds from the Sight for Students program" – thereby jeopardizing health care for poor children.

The Supreme Court should hear the Vision Service Plan case.

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