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June 23, 2022

Accountable care organization petitions Tax Court to challenge IRS denial of 501(c)(4) status

According to an article in the EO Tax Journal,1 an accountable care organization (ACO) owned and operated by an IRC Section 501(c)(3) hospital system has filed a Tax Court petition urging the court to hold that the IRS erred in denying the ACO IRC Section 501(c)(4) status, and that the ACO is entitled to be recognized as a tax-exempt social welfare organization under IRC Section 501(c)(4).


In a final adverse determination letter (202210023) to Memorial Hermann ACO, the IRS declined to grant IRC Section 501(c)(4) status to the ACO (see Tax Alert 2022-0452). The IRS analogized the ACO's facts to those at issue in PLR 201615022 (see Tax Alert 2016-0740) and Geisinger Health Plan v. Commissioner, 30 F.3d 494 (3d Cir. 1994) aff'g 100 T.C. 394 (1993), both of which concluded that the taxpayer did not qualify for tax-exempt status as a charity under IRC Section 501(c)(3). (The entity involved in PLR 201615022 negotiated with private insurers for an unrelated health-care provider. The health maintenance organization in Geisinger sought IRC Section 501(c)(3) status as an integral part of an exempt parent.)

In the final determination letter, the IRS stated that the ACO primarily benefited insurance companies to which paid it fees only when agreed cost and quality benchmarks were met. The IRS concluded that the ACO "primarily benefit[ed] patient populations who are subscribers to the insurance companies" the ACO served, adding that serving private health insurers does not further social welfare.

Tax Court petition

In its Tax Court petition, the ACO asserts that it is organized and operated as an organization described in IRC Section 501(c)(4) and the Service's determination is erroneous. The petition explains that an "ACO is a group of doctors, hospitals, and other health-care providers, who come together voluntarily to give coordinated high-quality care to Medicare and other patients." The petition provides a litany of facts to support the ACO's position, including the following:

  • The ACO promotes social welfare by participating in the Medicare Shared Savings Program (MSSP) and similar accountable care programs
  • Memorial Hermann Health System, a public charity that promotes health for the benefit of its community, organized and controls the ACO as its sole member
  • The ACO's bylaws describe its purposes and activities as including:
    • Owning, operating and managing an ACO in accordance with the requirements of the MSSP
    • Managing, coordinating and promoting accountability for patient care
    • Establishing, reporting and ensuring health-care providers' compliance with quality criteria
    • Investing in infrastructure and redesigned care processes for high-quality and efficient care delivery for patients
    • Entering into arrangements for providing health care to patients
    • Receiving and distributing compensation to health-care providers and suppliers
  • The ACO's bylaws and organizing documents generally:
    • Require most of the seats on the ACO's board to be filled by Memorial Hermann officers and board members
    • Prohibit any part of the ACO's earnings from inuring to private benefit, beyond paying reasonable compensation for services rendered
    • Prohibit the ACO from being operated for the primary purpose of carrying on a trade or business for profit
    • Prohibit the ACO from carrying on activities that are not permitted to be carried on by an organization described in IRC Section 501(c)(4)
    • Require, when the ACO dissolves, any proceeds remaining after liabilities are paid to be transferred to an IRC Section 501(c)(3) organization
  • Operating in a manner consistent with its governing documents, the ACO has participated in the MSSP since 2012
  • The ACO is open to entering into an accountable care arrangement with any payor that is willing to provide data, interact with the ACO's team, agree to quality metrics that align with those in use for the MSSP, work constructively with Memorial Hermann and participating physicians, and share savings with the ACO
  • The ACO is not a service provider or vendor for Medicare or private insurance companies
  • Through MSSP and non-MSSP agreements, the ACO manages, coordinates and promotes accountability for the overall care of more than 450,000 patients
  • Approximately 20% of the ACO's patients are elderly Medicare beneficiaries
  • The ACO pursues its mission to improve health and quality of care while reducing health-care expenses through services that include:
    • Counseling patients with complex disease management needs
    • Advising at-risk patients on how to navigate the health-care system
    • Providing access to a registered nurse for patients with complex medical needs
    • Providing transitional services for its patients moving from hospital to home
  • Therefore, the ACO promotes the social welfare of its community, as described in IRC Section 501(c)(4)


In the Memorial Hermann ACO IRC Section 501(c)(4) denial letter, the IRS relied on denials of applications for recognition of the IRC Section 501(c)(3) status of health plans and ACOs, presumably due to the lack of guidance on whether and how an ACO can qualify for exemption under IRC Section 501(c)(4). This litigation, if not settled, could lead to a Tax Court opinion establishing more specific standards for whether and how an ACO can qualify for IRC Section 501(c)(4) exemption.

Please contact your Ernst & Young LLP tax professional with any questions.


Contact Information
For additional information concerning this Alert, please contact:
Tax-Exempt Organization Services
   • Steve Clarke (
   • Melanie McPeak (
   • Morgan Moran (
   • Tiyesha Johnson (
   • Cal Hoke (


1 EO Tax Journal 2022-108 (Monday, June 6, 2022)