Most nonprofit health care providers are able to qualify as tax-exempt organizations. Home health agencies are typically among them. Since 1972, the Internal Revenue Service has expressly recognized that nonprofit home health agencies that are properly organized and operated can achieve recognition of 501(c)(3) status. However, in two recent rulings, the IRS denied or revoked tax-exempt status for home health agencies. It did so because they ran afoul of two well-settled positions of the IRS: the provision of management services to unrelated providers and the operation of a registry of health care providers are commercial activities and do not warrant recognition of tax-exempt status.

In the first ruling, an organization was incorporated as a nonprofit organization to coordinate the delivery of home health services. It conducted three major activities: home health management, hospital liaison, and physician home call. It provided services to two for-profit home health agencies, two nonprofit home health agencies, and a tax-exempt hospital. Its management services consisted of traditional management and consulting services to unrelated home health organizations. These management services provided the majority of the organization's income. The liaison services, which were the second largest source of income for the organization, involved finding home health agencies or home health providers to care for patients after their discharge from the hospital. The organization also provided physician house call services to homebound patients; however, this was an insubstantial part of its overall activities.

The IRS concluded that by operating as a manager or facilitator for the provision of home health services in return for a fee, the organization was operating in a commercial manner and its activities were not charitable. The IRS noted, as it has in several other contexts, that activities promoting health, without more, do not further a charitable purpose. Accordingly, the IRS ruled that the organization did not qualify as a charitable tax-exempt organization. Priv. Ltr. Rul. 200539027.

In the second ruling, the IRS considered an application for recognition of exemption from federal income tax of an organization seeking to qualify as a tax-exempt social welfare organization. The organization was incorporated as a nonstock corporation for the purpose of establishing an agency for home health care services to be provided exclusively in particular residential communities. It served approximately 1000 residents in five facilities in four locations. The organization described its activities in its exemption application as a liaison that arranges for independent contractors, through a registry, to be hired by independent and assisted living residents. When the organization received phone calls asking for assistance, it would collect relevant information, assess the need for care, and would then match service providers from its registry to the client. The organization's revenue was derived entirely from fees that it charged for it services.

The IRS found that the organization did not qualify as a tax-exempt social welfare organization. In its ruling, it stated that a crucial element for qualifying for tax exemption as a social welfare organization is the promotion of social welfare for the people of the community. In the IRS's view, the fact that the organization was serving only residents of a small number of facilities in a small number of residential locations was insufficient.

The IRS also found that the organization's primary activity was to act as a liaison by maintaining a registry. The IRS, relying on well-settled court decisions and guidance, concluded that this was a traditional business activity carried on by for-profit organizations and not charitable in nature. Applying a position commonly taken by the IRS in guidance regarding the tax-exempt status of health maintenance organizations, the IRS determined that the organization's activities were not charitable because it was an arranger of services and not a provider of charitable services. The IRS further pointed out that even if the organization's services were offered only to exempt organizations, they would still be regarded as a business. Thus, because its primary purpose was operating a business, rather than promoting the general welfare of the people of the community, the IRS ruled that the organization did not qualify for exemption as a social welfare organization. Priv. Ltr. Rul. 200544020.

The moral of these rulings is this: Simply characterizing a nonprofit organization as a home health agency is insufficient to warrant recognition of its status as a tax-exempt organization. If an organization purporting to be a home health agency is in reality simply a conduit for the provision of services by others or is primarily a provider of management and liaison services between unrelated parties, it will be unable to qualify for tax-exempt status as a charitable organization or as a social welfare organization.