Defining Non-Profit

The public is used to hearing about the Supreme Court's rulings on things like the rights of the accused or the First Amendment, and they assume other subjects get similarly regular attention. But we lawyers know it's a big deal when the court rules on an issue in our practice areas. I daresay every legal specialist can identify at least one issue important to his or her practice that has been hanging around for years waiting for dispositive treatment by the high court.

Because the stakes can be high on which way the court rules, much energy is put into getting the right set of facts for your side in the certiorari chain. Both defendants and plaintiffs alike know they will probably get only one bite of the apple so they want the case the court hears to be "just right."

But the court does not always oblige us in its choice of cases. They must pick from real cases and controversies, not from idealized test cases with perfect facts. Thus it is that the non-profit, tax-exempt world awaits whether the court will decide to hear Vision Service Plan v. U.S.

The case could answer the fundamental question: "What is a charity?" In 2003, the IRS revoked Vision Service Plan's 40-year-old tax-exempt status as a social welfare organization because the nation's largest provider of insurance for eyeglasses and contacts provided benefits only to its members and subscribers. The IRS and the 9th Circuit called that an impermissible "private" benefit rather than a permissible "community" benefit. The difference between the two means a lot to the $1 trillion non-profit health care industry, especially the non-profit HMOs.

The crux of the case is that the IRS got two federal judges to agree that VSP was run more like a for-profit business than a non-profit business and that it did not provide charity aid to a larger community. The courts pointed to several aspects of VSP's operations as being too uncharitable, including, unfortunately, the high salaries and bonuses of its executives.

And this is the problem with this case as a test case on the fundamental meaning of "charity." It is possible the non-profit sector could be punished for the same reason the big three auto executives got so much heat for flying into Washington, D.C., on their private jets to ask Congress for a taxpayer bailout. Regardless of the merits of the auto industry's argument, the public and politicians focused their ire on the private jets to the near exclusion of everything else. It is no wonder the car guys went back to Detroit empty-handed after their first visit to Capitol Hill.

Similarly, the district court judge zeroed in on the "luxury company cars" VSP provided its chief officers and executives as evidence VSP acted more like a for-profit company than not. He noted the company offered its executives "high salaries and other forms of compensation" more akin to for-profits. The top executive, for example, received $1.3 million in 2004. One of those other forms of compensation included "bonuses that are taken directly from ... net earnings."

The judge thought they looked too much like stock dividends that for-profit executives would enjoy. He wrote that one year VSP paid $19 million in broker commissions, which was more than it spent on charity work that year. Tsk. Tsk. Finally, the judge said VSP's 2003 surplus of "more than $300 million" sounded more like ordinary commercial activity than it did aiding the poor.

You see the problem. VSP's lawyer, Kenneth Starr (of Monicagate fame), has argued that the IRS acted rashly in revoking VSP's tax exemption. But the frou frou of luxury cars and huge salaries and bonuses could well tip the balance against that argument no matter how well it is articulated. With that in mind, if this case goes to the Supreme Court, the VSP executives should consider driving to D.C. in a plain American-made sedan.

Join the Conversation

Advertisement. Closing in 15 seconds.