IRS concluded that the ACO was not operated exclusively for exempt purposes and did not engage primarily in activities that accomplish one or more exempt purposes. It found that an insubstantial part of its activities were in furtherance of a nonexempt purpose. The IRS further concluded that the ACO was not operating primarily for a public purpose, but rather was operated for the benefit of private interests. As a result, an adverse determination was issued.
In determining that the organization did not qualify for charitable tax‐exempt status, the IRS relied upon the well‐established principle that not every activity that promotes health supports charitable tax‐exempt status. In addition, it noted that an organization is not a charitable institution if it is privately owned and run for the profit of the owners. The IRS cited the principle that the presence of a single nonexempt purpose that is substantial in nature will destroy the basis for exemption of an organization without regard to the number or importance of its other exempt purposes.115
In the ruling, the IRS distinguished between organizations that lessen the burdens of government (which was a key factor in recognizing exempt status for ACOs that participate in the MSSP) and those that do not. It noted that whether an organization is actually lessening the burdens of government is a facts and circumstances determination and that “an activity is a burden of the government if there is an objective manifestation by the governmental unit that it considers the activities of the organization to be its burden.”116 In the case of ACOs that participate in the MSSP, the IRS stated that the Affordable Care Act established the MSSP to promote quality improvements and healthcare cost savings. Accordingly, in the IRS's view, participation in the MSSP by an ACO furthers the charitable purpose of lessening the burdens of government within the meaning of its applicable regulations. The IRS concluded that, in contrast, the law does not provide an objective manifestation that the government considers ACO activities outside of the MSSP to be its burden, even if they further the overall Triple Aim goals of the Affordable Care Act.
The IRS also found it relevant that the organization was not created pursuant to a statute, managed by government officials, or funded by government grants, and there was no government oversight of its activities. In addition, the ACO was not engaged primarily in assisting Medicare and Medicaid beneficiaries, which could further the charitable purpose of relieving the poor and distressed.117
Much of recent healthcare activity has been focused on addressing population health and achieving the Triple Aim goals set forth in the Affordable Care Act and advocated for by thought leaders in this area.118 Nevertheless, the IRS found that while these goals generally promote health, they are not coextensive with charitable purposes, and not all activities that advance the Triple Aim goals are necessarily in furtherance of charitable purposes.
The IRS also cited its prior guidance that an individual practice association that provides health services through written agreements with a health maintenance organization does not qualify for federal income tax exemption as a social welfare organization when its primary activities are to serve as a bargaining agent for its members in dealing with a health maintenance organization and the performance of administrative claim services. In the IRS's view, such facts demonstrate that the organization operates in a manner similar to a for‐profit entity and that it benefits primarily its member‐physicians rather than the community as a whole.119
The IRS found that negotiating with private health insurers on behalf of independent healthcare providers is not a charitable activity. It also found that negotiation of payer agreements on behalf of nonaffiliated physicians only indirectly benefits the community as a whole. It determined that the negotiation of payer agreements by the ACO comprised a substantial part of its activities and conferred impermissible private benefit to participants who were not affiliated with the health system.
With regard to the ACO's request for recognition of public charity status as a supporting organization, the IRS concluded that even if it were a charitable tax‐exempt organization, the ACO would not be classified as a supporting organization because its networking and contracting activities on behalf of unaffiliated providers do not exclusively provide a benefit to the health system.
This is the first guidance published by the IRS that directly addresses the consequences of ACO operation outside of the MSSP. It is consistent with the analysis in its prior notice and fact sheet,120 as well as its established position on the unavailability of tax exemption for most healthcare contracting entities such as PHOs and IPAs, and it answers the open question as to the consequences of non‐MSSP activity by the ACO.
The IRS analysis in this ruling suggests that where an ACO is able to qualify as a charitable organization because it primarily operates within the MSSP, but also has some insubstantial non‐MSSP activity such as contracting with private payers, the IRS would be likely to treat any income from the non‐MSSP activity as unrelated business taxable income. This could also raise private business use concerns if ACO operations take place in facilities financed by tax‐exempt bonds.
*§ 13.6 CANNABIS‐RELATED SERVICES ORGANIZATIONS
There has been rapid growth in the development of medicinal cannabis products and services, catalyzed by the substantial increase in legalization of such use (including in many cases for recreational use) at the state level. As of late 2019, thirty‐three states and the District of Columbia had passed laws broadly legalizing marijuana in some form.121 In 2018, investors put $10 billion into the North American marijuana market, expected to grow to $16 billion by the end of 2019.
Notwithstanding this sea change in regulation of cannabis use at the state level, current federal law prohibits the use of cannabis except in limited circumstances, which do not include the medicinal use of cannabis. Federal law does not currently recognize any health benefits of cannabis and classifies it as a controlled substance.122
This conflict in legislative and regulatory approaches has come to a head in the case of nonprofit organizations, doing business in states in which medicinal cannabis use has been approved, seeking recognition of federal tax‐exempt status as charitable organizations. In two instances, the IRS has determined that organizations involved in various aspects of providing cannabis‐related services do not qualify for tax exemption as charitable organizations because they have illegal purposes that violate federal law.
In one case, an organization described its purposes and goals as aiding financially disadvantaged patients and their families affected by the costs of THC and CBD123 medical treatment by providing financial support to cover their cost of living and other expenses; to educate healthcare providers in the general public about THC and CBD medical treatments; and to support and engage in research of THC and CBD medical treatments.124 The organization planned to provide funds to patients who demonstrated financial need to help them offset the costs of these medications. All patients eligible for such financial assistance must be certified as meeting applicable state requirements to legally obtain CBD‐ and THC‐based medications for medical reasons. Financial assistance would not include reimbursement for medical marijuana medicines. The organization would also engage in educational initiatives such as developing CBD and THC educational literature to help patients; conducting seminars and classes for healthcare professionals; organizing support groups; and accumulating and publishing empirical data reports related to