Insurer Asks Supreme Court to Restore Its Exemption

A California eye-insurance provider plans to ask the U.S. Supreme Court to reverse a 2003 decision by the Internal Revenue Service that revoked its tax-exempt status.

VSP Vision Care, in Rancho Cordova, Calif., said it believes the IRS overstepped its bounds when it ruled in 2003 that the organization does not provide enough services to the needy to justify its tax-exempt status.

The organization, which is the nation’s largest eye-insurance provider, has continued to do business as a tax-exempt group, but is paying federal income taxes as it attempts to get the decision reversed.

VSP Vision Care is classified as a “social welfare” organization under Section 501(c)(4) of the federal tax code.

The U.S. Court of Appeals for the Ninth Circuit upheld the IRS’s decision in January, prompting the insurance company’s decision to ask the Supreme Court to review the case.

Previous IRS and court decisions had determined that the organization “is not operated exclusively for the promotion of social welfare.” But the insurance company is continuing to fight those rulings and has hired Kenneth Starr, the former U.S. Solicitor General and the independent counsel in the Whitewater investigation into former President Bill Clinton, to help prepare its case.

“This case is really about determining what guidelines the IRS uses to define what constitutes a tax-exempt, not-for-profit organization,” Mr. Starr said in a written statement. “VSP had a tax exemption for more than 40 years, has not changed their business philosophy or focus on the community, yet lost their tax-exempt status.”

VSP, which received its tax-exempt status in 1960, says the IRS’s 2003 decision — and the subsequent court decisions in its favor — jeopardizes the nonprofit status of other nonprofit health-care institutions.

“The district court’s decision, affirmed by the panel, ignores the health-care context of this case and fashions a test for exemption that calls into question the exempt status of numerous nonprofit health plans across the country,” the eye-insurance company said in filings with the appeals court.

To read a copy of VSP’s most recent petition to the Ninth Circuit Court, go to http://philanthropy.com/extras.