Alyeska International, Inc., d/b/a Alaska Sleep Clinic v. State of Alaska, Department of Revenue, S18949

Notice: This opinion is subject to correction before publication in the PACIFIC REPORTER. Readers are requested to bring errors to the attention of the Clerk of the Appellate Courts, 303 K Street, Anchorage, Alaska 99501, phone (907) 264-0608, fax (907) 264-0878, email corrections@akcourts.gov.

O P I N I O N

Appeal from the Superior Court of the State of Alaska, Third Judicial District, Anchorage, Kevin M. Saxby, Judge.

Appearances: Colleen Knix and F. Steven Mahoney, Manley Brautigam Bankston P.C., Anchorage, for Appellant. J. Paige Smothers, Assistant Attorney General, Anchorage, and Treg Taylor, Attorney General, Juneau, for Appellee.

Before: Borghesan, Henderson, Pate, and Oravec, Justices. [Carney, Chief Justice, not participating.]

BORGHESAN, Justice.

I. INTRODUCTION

Alaska law offers a favorable tax status to corporations that meet certain standards described in federal law. This favorable treatment does not apply to businesses that perform services “in the field of health.”

A corporation that performs sleep studies ordered by physicians claimed the favorable tax status, asserting that it did not provide services in the field of health. The State denied this status, and the superior court affirmed. The corporation appeals, raising three principal arguments: (1) the denial was untimely; (2) the State erred in ruling that the corporation provided services in the field of health; and (3) the outcome of this case should be controlled by a private letter ruling (PLR) later obtained from the Internal Revenue Service (IRS) stating, upon facts described by the corporation, that it did not perform services in the field of health.

We are not persuaded by these arguments. First, the State‘s denial of the corporation‘s tax exemption was not untimely. The corporation argues that the State must determine whether taxpayers qualify for a particular exemption on the first day of the tax year at issue and notify them shortly after. But interpreting the applicable statute to require the State to make a fact-intensive determination regarding a taxpayer‘s status before taxes are even due would lead to absurdity. Second, the State correctly determined that the corporation performed services in the field of health based on findings that were supported by substantial evidence, including evidence about the role of the corporation‘s highly trained medical director, its staff‘s interaction with patients, and its expertise-and-skill-focused marketing. Third, the corporation‘s PLR, which did not mention certain facts that were central to the State‘s analysis and was issued long after the State‘s decision, does not convince us that the State erred. We therefore affirm the decision.

II. FACTS AND PROCEEDINGS

A. Facts

1. Legal framework

Alaska‘s net income tax does not apply to “an Alaska corporation that is a qualified small business and that meets the active business requirement in 26 U.S.C. 1202(e) as that subsection read on January 1, 2012.”¹ On that day, section 1202(e)‘s active business requirement was met by a corporation when “at least 80 percent (by value) of the assets of such corporation [were] used . . . in the active conduct of 1 or more qualified trades or businesses” and “such corporation [was] an eligible corporation.”² Section 1202(e) defined qualified trades or businesses in the negative, excluding

any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees.³

The U.S. Department of Treasury‘s (Treasury‘s) regulations expounding on section 1202 do not define “field[] of health.”⁴ But another section of the Internal Revenue Code (IRC), enacted prior to section 1202(e)(3)(A), uses the same phrase: Section 448 excludes some corporations “in the field[] of health” from calculating

personal income taxes using a particular method of accounting.⁵ In 2019 the Treasury and the IRS indicated that to interpret section 1202, “it is appropriate to look to the definitions provided for in the regulations under section 448 because guidance under section 1202 is limited.”⁶ A Treasury regulation defines performance of services in the field of health, for the purposes of section 448, as follows:

the provision of medical services by physicians, nurses, dentists, and other similar healthcare professionals. The performance of services in the field of health does not include the provision of services not directly related to a medical field, even though the services may purportedly relate to the health of the service recipient. For example, the performance of services in the field of health does not include the operation of health clubs or health spas that provide physical exercise or conditioning to their customers.⁷

Federal cases have discussed the meaning of “field of health” in the context of section 448 rather than section 1202(e).⁸ But some PLRs by the IRS have discussed whether businesses perform services in the “field of health” under

section 1202.⁹ These PLRs are written statements issued to a taxpayer that “interpret[] and appl[y] tax laws to the taxpayer‘s specific set of facts,” but “may not be relied on as precedent by other taxpayers or IRS personnel.”¹⁰

2. Alaska Sleep Clinic

The Alaska Sleep Clinic (Clinic) incorporated in February 2015 to take advantage of the small business exemption. Since 2015 it has identified itself as a qualified small business on each of its tax returns to claim the small business exemption.

The Clinic produces reports of sleep diagnostic studies for physicians and sells medical equipment. These sleep tests monitor the test subject during sleep to collect data and look for abnormalities related to brain waves, respiration, oxygenation, heart function, and movements. These studies require six or more hours of recording time, which typically occurs in the Clinic. The Clinic‘s website indicates that it collects, analyzes, and interprets large amounts of data in order to produce a final report which is sent to the patient‘s referring physician.

The Clinic is also an “independent diagnostic testing facility,” which allows it to bill Medicare and Medicaid.¹¹ Such facilities perform diagnostic procedures. Patients need a doctor‘s referral for a sleep test at the Clinic. If a patient does not have a referral, the Clinic will connect the patient to one of its affiliated, board-certified, sleep medicine doctors for a consultation. The doctor typically refers the patient back to the Clinic.

The Clinic is accredited by the American Academy of Sleep Medicine (Academy). The Academy advertises that accredited sleep centers demonstrate

commitment to the highest care in the diagnosis and treatment of sleep disorders. To maintain Academy accreditation and to be considered an independent diagnostic testing facility, the Clinic must have a medical director who is a board-certified physician. The Clinic‘s medical director, Dr. Mauricio Reinoso, is a pulmonary and board-certified sleep specialist.

The Clinic employs polysomnographic technologists, who have completed an educational program in that field; some of the technologists obtain the hands-on training for this program while working at the Clinic. There are no state licensing requirements for the technologists, but the Clinic requires technologists to be certified by a national credentialing body.

B. Proceedings

The Clinic claimed the small business exemption for the 2016, 2017, and 2018 tax years. In 2020 the State notified the Clinic that it was denying the exemption and increasing the Clinic‘s tax liability for the three years at issue. The Clinic objected and requested an informal conference.¹²

1. Informal conference decision

An informal conference was held, and the appeals officer issued a decision in June 2020. The appeals officer determined that the Clinic performed services in the field of health and therefore did not qualify for the small business exemption because the Clinic (1) has a doctor certified by a national credentialing body on staff; (2) is Academy-certified; (3) interacts extensively with patients when testing for sleep disorders; (4) employs only technologists certified by an appropriate national credentialing body; and (5) is unlike businesses that the IRS has determined do not

perform services in the “field of health,” such as a diagnostic laboratory and a drug manufacturer.

2. Office of Administrative Hearings decision

In July 2020 the Clinic appealed the decision to the Office of Administrative Hearings (OAH). First, the Clinic argued that the State‘s denial of its tax exemption was untimely. Second, the Clinic argued that it was eligible for the small business exemption in 2016, 2017, and 2018 because it met the “active business requirement” of Internal Revenue Code section 1202(e).

The OAH held a hearing, at which the Clinic‘s CEO and its medical director testified. During the hearing, the OAH‘s Administrative Law Judge (ALJ) explained that he had previously undergone a sleep study at a different clinic and asked the CEO whether the Clinic‘s operations differed from the ALJ‘s personal experience.

Following the hearing, the OAH issued a decision upholding the State‘s decision and determining that the Clinic performed services in the “field of health.” As a preliminary matter, the OAH rejected the Clinic‘s argument that the State‘s denial of the small business exemption for tax years 2016, 2017, and 2018 was untimely.

The OAH then assessed whether the Clinic was eligible for the tax exemption for the years in question. The OAH relied on IRS PLRs applying the phrase “field of health” from section 1202 and federal case law interpreting the same phrase in section 448. The OAH reasoned that “the ‘field of health’ language was in a provision intended to keep entities trading primarily on professional skill from getting a special tax break aimed at entities that needed to accumulate capital for reinvestment.”

The OAH deemed the question a close one. It reasoned that federal authorities have analyzed whether a business performs services in the field of health “primarily by focusing on the professional status of those who do the core of the taxpayer‘s work.” And it found that the Clinic‘s polysomnographic technologists fell “at the break point between what the prior cases have considered health professionals as opposed to non-professional workers in the health industry.” But it ruled that the Clinic performed services in the field of health because of three “[u]nusual factors.” First, the Clinic‘s medical director provided a professional screening service for every patient that went “well beyond what one would expect of the medical director of . . . a lab doing blood tests.” Second, the Clinic marketed its skill and judgment in helping diagnose sleep disorders. Third, the Clinic had “long-term, multidimensional, interpersonal” interactions with its patients. Accordingly, the OAH affirmed the State‘s denial of the small business exemption.

3. Superior court proceedings

The Clinic appealed the OAH decision to the superior court. The Clinic argued, among other things, that the ALJ, who mentioned his experience with a different sleep clinic during the administrative hearing, had conflated his personal experience with the evidence presented by the Clinic. The Clinic also argued that the ALJ improperly considered the Clinic‘s website and advertising in making its decision. The superior court rejected these arguments and affirmed the OAH decision.

A few months later, the IRS issued a PLR at the Clinic‘s request. The statement of facts in the PLR did not mention some of the particular findings relied on by the OAH. The PLR concluded that the Clinic “was not engaged in a trade or business involving the performance of services in the fields of health.” It included this caveat: “The ruling is based upon information and representations submitted by Taxpayer and accompanied by a penalty of perjury statement executed by appropriate parties. This office has not verified any of the material submitted in support of the request for a ruling.”

The Clinic notified the superior court of the PLR and filed a motion for reconsideration. The superior court noted that the PLR‘s description of the Clinic‘s practice was different than the findings made by the OAH. The court reasoned that “not all information provided to or considered by this court was provided to or considered by” the IRS official that wrote the letter. For that reason, the court ruled that the PLR did not change its decision and denied reconsideration.

The Clinic appeals.

III. STANDARD OF REVIEW

“When a superior court acts as an intermediate court of appeals, we independently review the administrative decision.”¹³ There are two standards of review for administrative agency decisions based on the agency‘s interpretation of statute.¹⁴

The reasonable basis standard applies to questions of law “when the interpretation at issue implicates agency expertise or the determination of fundamental policies within the scope of the agency‘s statutory functions.”¹⁵ Under the reasonable basis standard, we “seek to determine whether the agency‘s decision is supported by the facts and has a reasonable basis in law.”¹⁶

When agency expertise is unnecessary to resolve questions of law, we apply the substitution of judgment standard.¹⁷ Under this test, we “substitute [our] own judgment for that of the agency even if the agency‘s decision had a reasonable basis in

law.”¹⁸ We adopt “the rule of law that is most persuasive in light of precedent, reason, and policy.”¹⁹

In reviewing an administrative agency‘s factual determinations, we apply “the ‘substantial evidence’ test.”²⁰ For this test, we examine whether a reasonable mind could find the evidence adequate to support the finding.²¹

IV. DISCUSSION

A. The State‘s Denial Of The Claimed Exemption Was Timely.

As a threshold issue, we assess the Clinic‘s argument that the State‘s denial of the exemption was untimely and therefore invalid. Using the substitution of judgment standard, we agree with the OAH that this argument is unavailing.

According to AS 43.20.012(c), “whether a corporation qualifies [for the small business exemption] shall be determined on the first day of the tax year for which the corporation claims it qualifies.” The Clinic interprets this to mean that the State must decide whether taxpayers qualify for the exemption and then notify taxpayers on or shortly after the first day of the tax year for which the exemption is claimed. The Clinic claims to have detrimentally relied on the implied acceptance of its tax status in 2016, 2017, and 2018 because the State did not deny its exemption until 2020.

The OAH rejected the Clinic‘s interpretation under “the principle that a reading of a statute, even if consistent with its literal language, may be excluded if it

would lead to an absurd result.”²² The OAH reasoned it “cannot be that AS 43.20.012(c) required the Department of Revenue to rule on a factually complex matter relating to a corporation‘s structure on a New Year‘s Day that fell before that corporation had yet filed a single return,” noting “that the prior year‘s return was not yet due.”

We interpret statutes “according to reason, practicality, and common sense, taking into account the plain meaning and purpose of the law as well as the intent of the drafters.”²³ Interpreting AS 43.20.012(c) to require the Department of Revenue to determine, on the first day of the tax year, whether a taxpayer qualifies for a particular exemption in that tax year is a technically plausible reading of the statute‘s plain text. But, as the OAH explained, this reading leads to an absurd result the legislature almost certainly did not intend.

The statutory text can support a more plausible reading. That is, it does not require the determination of the corporation‘s status to be made on the first day of the tax year. It requires the determination to be based on whether the corporation qualified for the tax exemption on the first day of the tax year.

This interpretation is also more plausible because there is already a statutory limitation on the timing of tax assessments. The Department can review a tax return and assess additional taxes until three years after the date the return was filed.²⁴

This clear deadline for determining tax liability further supports the conclusion that AS 43.20.012(c) was not intended to function as a deadline.²⁵

Therefore, we reject the Clinic‘s interpretation of AS 43.20.012(c) and its argument that the denial of its claimed exemption was untimely.

B. The OAH Did Not Err In Determining That The Clinic Performed Services In The Field Of Health.

The Clinic argues that the OAH erred in determining that the Clinic performed services in the “field of health” such that it did not qualify for the small business exemption under AS 43.20.012(a)(3). We discern three distinct elements to the Clinic‘s challenge: (1) that the OAH did not correctly interpret the phrase “field of health” because it relied on improper or irrelevant considerations; (2) that some of the OAH‘s factual findings are not supported by the record; and (3) that the OAH‘s overall determination that the Clinic performed services in the “field of health” is out of step with other legal authorities.

1. The OAH did not err in interpreting the term “field of health.”

We first review whether the OAH accurately interpreted the meaning of the phrase “field of health.” Before delving into this question, we address two threshold disputes.

a. Term of art

The first dispute is whether the phrase “field of health” is a term of art. “[W]e construe terms according to their common usage, unless a term has acquired a peculiar meaning due to statutory definition or judicial construction.”²⁶ The State

argues that the phrase “field of health” should be interpreted broadly and according to its plain meaning. The Clinic counters that this phrase is a term of art that covers a narrower range of businesses.

We agree with the Clinic‘s position. Alaska law expressly references 26 U.S.C. § 1202 as it existed on a particular date.²⁷ While the phrase has not been explicitly defined in the context of section 1202(e), the same language is used in section 448, and both the IRS and the Treasury have determined that authorities interpreting section 448 are helpful guidance on the meaning of section 1202(e).²⁸ The IRS has defined “the performance of services in the field of health” for purposes of section 448 as “the provision of medical services by physicians, nurses, dentists, and other similar healthcare professionals,” but not businesses like “health clubs or health spas.”²⁹ And a handful of federal cases have relied on this definition to determine whether a business performed services in the “field of health.”³⁰ The State points out that the United States

Tax Court has reasoned that the normal meaning of the term “health” is one of the “relevant indicia” to be considered when interpreting this federal law.³¹ But since the common usage of the term “health” is just one factor among many used by federal authorities to determine whether a business operates in the “field of health,” it is clear that this phrase has acquired a “peculiar meaning due to . . . judicial construction.”³² We therefore rely primarily on authorities construing the phrase, rather than ordinary usage.

b. Deference

The second threshold issue is whether to use our independent judgment or to defer to the State‘s interpretation of the phrase. The State argues that if “field of health” is a term of art with a specialized meaning in the tax code, as the Clinic asserts, then the State‘s expertise is implicated.

But we are skeptical that interpreting “field of health” as a term of art requires tax expertise. Interpreting the phrase “field of health” requires analysis of federal statutes, case law, IRS rulings, and regulations. This kind of analysis “resides within the traditional province of judicial review and involves no technical expertise.”³³

Nor is it clear that the deference should apply based on a legislative delegation of fundamental policy decisions to the Department. The legislature tethered the Department to federal law as it existed on a particular date.³⁴ And since the final agency decision in this matter was made by the OAH, not the Department itself, it is unclear whether the statutory interpretation reflects policy determinations of any sort.

Finally, the canon of strict construction for tax exemptions does not support the State‘s argument for deference. The canon is merely an “aid to, not a substitute for, statutory interpretation“;³⁵ it does not determine the level of deference we apply.

Ultimately, we need not decide the appropriate level of deference to apply because, in our independent judgment, we agree with the OAH‘s interpretation of the phrase “field of health.”

c. Interpretation

Because the phrase “field of health” has acquired, for purposes of section 1202(e)‘s active business requirement, a “peculiar meaning due to . . . judicial construction,” our interpretation focuses heavily on judicial decisions and PLRs applying this phrase.³⁶ Yet we begin with the text of the statute because it illuminates a guiding interpretive principle.

Section 1202(e) excludes certain types of businesses from qualifying for favorable tax treatment. It excludes businesses providing services in the “field[] of health” as well as those providing services in fields of “law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees.”³⁷ The specific categories of business mentioned in the statute all share the characteristic of the catchall phrase: businesses whose value derives primarily from “the reputation or skill” of the business‘s personnel. Whether a business in the healthcare industry derives its value from the reputation or skill of its personnel is therefore key to whether it performs services in the “field of health” for purposes of section 1202(e).

This principle finds further support in authorities interpreting the same phrase under section 448,³⁸ which according to the IRS and the Treasury are “appropriate” guidance for understanding section 1202(e).³⁹ A Treasury regulation defines “field of health” under section 448 by reference to trained healthcare professionals: “the performance of services in the field of health means the provision of medical services by physicians, nurses, dentists, and other similar healthcare professionals.”⁴⁰ A federal district court, examining commentary on section 448, reasoned that the carve-out for professional services corporations reflects two related purposes: first, “Congress wanted to stop professional individuals from . . . using their corporate status[] in order to obtain lower graduated corporate tax rates“; and second, “Congress did not see any reason why qualified personal services corporations, who were being paid largely for their mental or intellectual skill, needed to accumulate capital for future corporate investment.”⁴¹

Accordingly, whether a business provides services in the field of health depends heavily on the degree to which it is compensated for the professional reputation or skill of those performing the service. At the same time, courts have emphasized that whether a business performs services in the “field of health” turns on “all relevant

indicia,” including “the normal meaning of the term ‘health’ . . . and examination of services historically regarded as within the qualifying field.”⁴²

The OAH correctly described and applied these principles in its decision. Examining federal court decisions and PLRs interpreting “field of health” in both section 448 and section 1202, the OAH determined that the Clinic‘s polysomnographic technologists fell “at the break point between what the prior cases have considered health professionals as opposed to non-professional workers in the health industry.” What tipped the scales toward the “field of health” side was the screening service provided by the medical director, the way the Clinic marketed the skill and judgment of its staff, and the interaction between staff and patients. These are “relevant indicia” in determining whether the Clinic‘s value derives primarily from the skill and reputation of its personnel.⁴³

The Clinic argues that a business‘s interaction with patients is not a relevant factor in determining whether it provides services in the field of health. We disagree. Some PLRs, although not precedential, indicate that the degree of interaction between a business and its patients is relevant to whether a business provides services in the field of health.⁴⁴ In a 2017 PLR the IRS determined that a diagnostic lab did not perform services in the field of health partly because the lab had extremely limited interactions with patients or the patients’ providers.⁴⁵ In a 2021 PLR, the IRS determined that the developer of medical treatment-optimizing software did not perform services in the field of health after considering the business‘s lack of interaction

with patients and providers.⁴⁶ It is logical to infer that when a business‘s services involve a high degree of interaction between staff and customers, the staff‘s professional skill and reputation contribute substantially to the business‘s value. Therefore, we see no error in the OAH‘s reliance on this factor.

Because whether a business operates in the field of health is determined by reference to “all relevant indicia,”⁴⁷ and because there is authority supporting the relevance of the particular indicia the OAH relied on, we see no legal error in the OAH‘s interpretation of the phrase “field of health.”

2. There was substantial evidence to support the OAH‘s factual findings.

The Clinic challenges particular factual findings made by the OAH. Of particular importance to the OAH‘s decision that the Clinic was “an operation that is being compensated in large part for the ‘mental and intellectual skill’ of its employees” were (1) the role performed by the Clinic‘s medical director; (2) the way the Clinic marketed the expertise and training of its staff; and (3) the nature of the interaction between the clinic and its patients.

We apply the substantial evidence test to administrative decisions involving questions of fact.⁴⁸ Under this test, we “do not choose between competing inferences.”⁴⁹ A finding of fact will be affirmed if enough relevant evidence exists such that a reasonable mind could find the evidence adequate to support the finding.⁵⁰

First, the Clinic argues that the OAH “misapprehend[ed]” the role of its medical director and asserts that the medical director “does not consult with patients or their providers on Taxpayer‘s behalf.” But the OAH did not find that the medical director consulted with patients or their providers. Rather, it found that the director‘s role went “well beyond what one would expect of the medical director of . . . a lab doing blood tests.”

This finding is supported by substantial evidence. The Clinic‘s medical director, Dr. Mauricio Reinoso, is a pulmonary and board-certified sleep medicine specialist. He testified that as the Clinic‘s medical director, he does not see, diagnose, or treat patients. But he testified that he reviews every referral and assesses which particular test is best for each patient referred to the Clinic. If he disagrees with the study requested in a referral, he will contact the referring physician to say that the study is not recommended and may recommend a better test.

A reasonable mind reviewing the director‘s testimony could accept the OAH‘s conclusions that the medical director‘s role in the Clinic‘s services is extensive and goes beyond what one would expect of a medical director for a lab conducting blood tests. His testimony suggests that he applies his independent judgment and expertise to each patient, such that his professional skill is part of the service the Clinic provides. In arguing otherwise, the Clinic emphasizes an exchange in which the medical director described how he would review the patient‘s file and contact the referring physician to suggest a “better test.” When the Clinic‘s counsel summarized the director‘s testimony as “expressing the ability of the Sleep Center to provide a specific type of test” and asked, “Is that fair?” the director said “Yes.” But the OAH was not required to accept the inference counsel suggested in characterizing the testimony. The testimony plausibly supported the somewhat different inference that the OAH drew, which was that the director reviewed each patient‘s file to “ensure that the patient is appropriate for the study selected.” Therefore, the OAH‘s findings regarding the director‘s role in the Clinic is supported by substantial evidence.

Second, the Clinic appears to dispute the OAH‘s overall finding that it “is being compensated in large part for the ‘mental and intellectual skill’ of its employees” because of the way it markets their skill and judgment. The Clinic asserts there is no evidence that its patients are drawn by its expertise other than its advertising materials, which the Clinic argues are mere promotional puffery that should not be taken into account.

Substantial evidence supports the OAH‘s finding. The OAH found that “[p]art of the overall package that [the Clinic] provides to every patient is . . . screening by a physician with an extremely high level of specialized training.” Although true that there was no direct evidence of why patients were drawn to the clinic, it cannot be disputed that the Clinic‘s website marketed its staff‘s training:

At Alaska Sleep Clinic, our staff has the training, skill and expertise necessary to diagnose and treat your sleep disorder. With training and seasoned know-how, our staff can handle the subtle science of diagnosis and treatment of these complex, and sometimes elusive problems. Our compassion and dedication facilitate the continuity and quality of care that you deserve and the restful, restorative sleep you need.

The website encouraged viewers to “[t]rust your sleep problems to a sleep expert” and “[g]et a consultation.” It also advertised that the Clinic was Academy-accredited. The Clinic‘s website and promotional materials are substantial evidence that the Clinic traded on the expertise and skill of its personnel.⁵¹ And they are also

substantial evidence that the Clinic was, as the OAH found, “compensated in large part for the ‘mental and intellectual skill’ of its employees.”

Third, the Clinic disputes the OAH‘s conclusion that the Clinic‘s interactions with patients are “long-term, multidimensional, [and] interpersonal [in] nature.” The Clinic argues that its interactions with patients are limited because its staff “only interact with patients long enough to set up the sleep test,” and “do not advise, treat, or diagnose patients.”

But here too substantial evidence supports the OAH‘s finding. The Clinic‘s staff spend a fair amount of time with patients — the Clinic‘s sleep tests typically last at least six hours, and the Clinic‘s staff are required to monitor patients during that time. And the OAH‘s finding went beyond the interaction between the sleep technologists and the patient. It also relied on evidence that the Clinic facilitates patients’ movement through a continuum of care. The Clinic‘s CEO testified that the Clinic is a “facilitator” in the “integrated delivery system” of treatment for sleep disorders. He testified that if a patient does not have a referral for a sleep test, the Clinic will connect the patient for a consultation with one of its affiliated, board-certified, sleep medicine doctors, who typically refers the patient back to the Clinic. In addition, the Clinic‘s website states that the Clinic‘s staff can “schedule you for a thorough consultation” and are “always available to consult with your physician about your needs and your care.” Because a reasonable mind reviewing this evidence could accept the conclusion that the Clinic‘s interactions with patients are “long-term, multidimensional, [and] interpersonal [in] nature,” the OAH‘s finding about the nature of the Clinic‘s relationship with patients rested on substantial evidence.⁵²

3. The OAH did not err by determining that the clinic provides services in the field of health.

The Clinic challenges the OAH‘s ultimate legal conclusion that the Clinic performs services in the field of health. We recognize, as the OAH did, that the Clinic‘s case is a “particularly close” one. But we see no error in the OAH‘s ruling that the Clinic performs services in the field of health and therefore is not eligible for the small business exemption.

The OAH recognized that legal authorities have determined whether a business provides services in the “field of health” primarily by “focusing on the professional status of those who do the taxpayer‘s work.” It reasoned that the polysomnographic technologists who administer the Clinic‘s sleep tests fall right on the line between “what the prior cases have considered health professionals” and “non-professional workers in the health industry.” The OAH concluded that the Clinic is more like those businesses providing services in the field of health for three related reasons: the screening function performed by the Clinic‘s medical director; the way the Clinic traded on the skill and professionalism of its staff; and the degree of interaction between the Clinic and its patients. Finally, the OAH also relied on the rule that tax exemptions are to be construed narrowly in favor of taxation.

The Clinic challenges this analysis on several fronts. It disputes the OAH‘s reasoning with regard to (1) its employees’ level of training, (2) the significance of their interactions with patients, and (3) the role of the medical director. In our view, the first two factors are not decisive. But given the OAH‘s factual findings about the medical director‘s role, we conclude that the Clinic is the kind of business that performs services in the field of health. Our conclusion is reinforced by the rule of narrow construction for tax exemptions.

The Clinic argues that it does not perform services in the field of health because the training and education requirements for its employees fall short of the level required of other healthcare professionals. The Clinic asserts that its workers’ training and education requirements are more akin to those of lab techs and EMTs — employees of businesses that were deemed not to be providing services in the field of health — than to those of sonographers providing ultrasound services — employees of a business deemed to be providing services in the field of health.⁵³

To evaluate this comparison we briefly describe the relevant legal authorities. In Chickasaw Ambulance Service, Inc. v. United States, a federal court determined that an ambulance business was not performing services in the field of health because the EMTs who performed the work had minimal education and training.⁵⁴ The court noted that the EMTs did not need a high school diploma or any other formal education, although some of the EMTs had received several hundred hours of required training.⁵⁵ And in a PLR assessing whether a diagnostic laboratory performed services in the field of health, the IRS determined that the company‘s lab techs were not healthcare professionals because they were “not subject to state licensing requirements or classified as healthcare professionals by any applicable state or federal law or regulatory authority,” and the lab techs’ skills “[were] unique to the work they perform[ed] for [the lab] and [were] not useful to other employers.”⁵⁶

By contrast, in Zia-Ahmadi v. Commissioner of Internal Revenue, the U.S. Tax Court ruled that a business providing ultrasound services to medical offices and clinics performed services in the “field of health” based largely on the employee‘s training.⁵⁷ The court noted that the business‘s employee had completed a two-year

ultrasound associate program and that this degree was preferred by employers and radiologists.⁵⁸ The court observed that the treasury regulation‘s example of healthcare professionals included but was “not limited to physicians, nurses, dentists” and reasoned that sonographers are “more similar to physicians and nurses than to health club or health spa employees.”⁵⁹

The Clinic‘s somnographic technologists fall somewhere between the EMTs and the ultrasound technician in the cases described above. The OAH relied on the Clinic‘s job description for the somnographic technologists it employs, which required completion of “a polysomnography program, of no less than one year duration, associated with a state licensed and/or a nationally accredited educational facility” or “[a] minimum of 6 months of experience as a Polysomnographic Trainee.” The Clinic‘s technologists must also be certified by a national credentialing body. The Clinic‘s technologists seemingly have more training and education requirements than the EMTs in Chickasaw and the lab techs in PLR 201717010 (not healthcare professionals).⁶⁰ But the Clinic‘s sleep technologists seem to have less training than the ultrasound technician in Zia-Ahmadi (healthcare professional), who was required to have an associate degree.⁶¹ Because the Clinic‘s polysomnographic technologists straddle the line between the kinds of “healthcare professionals” employed by businesses that provide services in the field of health and the kinds of health workers employed by businesses that do not, their own skill and training is not a decisive factor in our analysis.

The Clinic also argues that the EMTs in Chickasaw Ambulance had more significant interactions with patients than the Clinic‘s own employees do, so this factor

does not support the conclusion that the Clinic performs services in the field of health. On the one hand, we agree that EMTs’ interactions with patients are typically much more intense and critical than interactions between the Clinic‘s staff and its patients. On the other hand, patients ordinarily spend far longer in the care of the Clinic‘s staff than with EMTs in an ambulance: The sleep tests conducted by the Clinic‘s technologists typically last at least six hours. And even though patients are mostly asleep during the tests, the technologists will wake up a patient, provide oxygen, or take other necessary action to get a patient to breathe if the patient‘s oxygen levels fall below a certain threshold. Also relevant is that patients are in a position to choose their sleep clinic in a way that they usually cannot choose their ambulance company. This difference means that the skill or reputation of sleep clinic staff may contribute more to the value of the business. But this point goes only so far. Attentive service and long-lasting interactions with customers are not unique to businesses providing professional services. They do not establish that professional skill or judgment is the Clinic‘s primary asset. Ultimately, this factor is not decisive in our analysis either.

What is more decisive is the role of the Clinic‘s medical director, whose substantial professional training and skill are important aspects of the services the Clinic provides. The Clinic argues that “the presence of a director who is highly trained, full-time, and involved in daily supervision, does not place [a] taxpayer in the field of health.” This may be so. But the Clinic minimizes the precise finding the OAH made about its medical director‘s role. The OAH found that “[p]art of the overall package that [the Clinic] provides to every patient is . . . screening by a physician with an extremely high level of specialized training.” The medical director applies his expertise to each patient‘s case to ensure the patient receives an “appropriate” test. This suggests that the value of the Clinic lies not primarily in the equipment or testing processes it employs, but in the “reputation or skill of 1 or more of its employees”⁶² — its medical director.

Indeed, professional skill and judgment is precisely what the Clinic‘s promotional materials emphasize: “With training and seasoned know-how, our staff can handle the subtle science of diagnosis and treatment of these complex, and sometimes elusive problems.” In a similar vein, the Clinic emphasizes its role as a “facilitator” in an “integrated delivery system” for the treatment of sleep problems. The Clinic advertises its role as a “facilitator” directly to potential patients and will connect them to physicians who then refer the patients back to the Clinic. Within this framework, the screening function performed for each patient by the medical director heightens the degree to which the Clinic‘s value is based on professional skill and judgment. The medical director‘s role supports the conclusion that the Clinic provides services in the field of health.

Finally, a basic rule of statutory construction tips the balance further toward the conclusion that the Clinic performs services in the field of health. “Taxpayer exemptions are strictly construed against the taxpayer and in favor of the taxing authority.”⁶³ The small business exemption serves as an exclusion from taxable income, and must be construed narrowly.⁶⁴ The burden of proof thus falls on the

taxpayer to unambiguously prove that it qualifies for an exemption.⁶⁵ In our view, the Clinic did not meet this burden. Accordingly, we affirm the OAH‘s determination that the Clinic did not qualify for the small business tax exemption.

C. The Clinic‘s Private Letter Ruling Does Not Persuade Us That The State‘s Decision Was Wrong.

Several months after the superior court distributed its opinion affirming the OAH‘s ruling, the Clinic moved for reconsideration. The Clinic attached a copy of a PLR it had obtained from the IRS, which determined that the Clinic was not engaged in a trade or business performing services in the “field of health” for federal tax purposes for tax year 2024. The Clinic argued that the superior court should reconsider its opinion and rule, consistent with the PLR, that the Clinic was eligible for the small business exemption. The superior court denied reconsideration. The Clinic challenges that decision on appeal, arguing that its PLR establishes its entitlement to the tax exemption and requires reversing the decisions below.

The PLR does not convince us that the decisions of the OAH and superior court were wrong. The Clinic argues that the PLR was based on “the same facts as those presented in this appeal.” It also asserts that because the information it provided to the IRS in connection with the PLR was submitted under penalty of perjury, the PLR‘s determination is especially credible. But it is important to note that the PLR determination was issued in 2024, whereas this appeal concerns tax years 2016-2018. So the relevant facts may have changed.

We also note, as the superior court did, that the PLR‘s statement of facts does not mention certain facts that were decisive in the OAH‘s ruling and in our review. For example, the letter states that the Clinic “has no education or experience

requirements for new hires.” The OAH found that the polysomnographic technologists performing the sleep studies generally must obtain “up to a year of training, with practicioners commonly obtaining a national certification.” The PLR states that the medical directors “provide no diagnoses, medical advice, or treatment” and that their role is to “review incoming orders to ensure that [the Clinic] can accommodate requested [tests].” It did not describe precisely what the OAH found, which was that “[f]or every patient, [the medical director] reviews the referral form and accompanying medical records to ensure that the patient is appropriate for the study selected” and sometimes contacts the referring physician to explain that a particular test would be inappropriate. And the PLR did not discuss the way the Clinic emphasized the skill and training of its personnel when marketing itself to patients.⁶⁶

Because the PLR is not binding and does not describe all the facts that were found by the OAH for purposes of the tax years at issue, it does not alter our independent analysis of whether the Clinic qualifies for Alaska‘s small business exemption based on the record before us.

V. CONCLUSION

For the foregoing reasons we AFFIRM the superior court‘s opinion upholding the administrative decision.

BORGHESAN, Justice.

Notes

1

Former AS 43.20.012(a)(3) (2013). This exemption was in effect during the tax years at issue (2016-2018) and is referred to throughout as the “small business exemption.”
Some of the statutes referenced in this opinion have been amended. The version of section 1202(e) referenced throughout this opinion is the statute as it read on January 1, 2012. Otherwise, the references to the statutes throughout are to those versions applicable during the tax years at issue in this case.

2

26 U.S.C. § 1202(e)(1) (2010).

3

Id. § 1202(e)(3)(A).

4

See, e.g., Treas. Reg. § 1.1202-2 (1997) (expounding on section 1202 exclusions for qualified small business stock but making no mention of meaning of fields of health).

5

26 U.S.C. § 448(a), (b)(2), (d)(2)(A) (2002). Section 1202 and section 448 use the phrase “field[] of health” to determine tax status in different ways. Section 448 asks whether “substantially all . . . activities” of the business are provided in the field of health, while section 1202 asks whether 80% of the taxpayer‘s assets are used in the field of health. No party has suggested that this distinction is material in this case.

6

T.D. 9847, 2019-09 I.R.B., https://www.irs.gov/irb/2019-09_IRB#TD 9847 [https://perma.cc/WC3P-JYMD].

7

Treas. Reg. § 1.448-1T(a), (e)(4)(ii) (2005).

8

See Hosp. Corp. of Am. & Subsidiaries v. Comm‘r, 107 T.C. 116, 142 n.17 (1996), aff‘d, 348 F.3d 136 (6th Cir. 2003); Chickasaw Ambulance Serv., Inc. v. United States, No. C97-2094 MJM, 1999 WL 33656862, at *4-5 (N.D. Iowa May 21, 1999); W.W. Eure, M.D., Inc. v. Comm‘r, 93 T.C.M. (CCH) 1237, 2007 WL 1451975, at *2-3 (May 17, 2007); Zia-Ahmadi v. Comm‘r, Nos. 23635-13S & 23636-13S, 2017 WL 2570937, at *8-9 (T.C. Summ. Op. June 14, 2017).

9

See, e.g., I.R.S. Priv. Ltr. Rul. 202418001 (May 3, 2024); I.R.S. Priv. Ltr. Rul. 201717010 (Apr. 28, 2017); I.R.S. Priv. Ltr. Rul. 201436001 (Sept. 5, 2014).

10

Understanding IRS Guidance – A brief primer, INTERNAL REVENUE SERVICE, https://www.irs.gov/newsroom/understanding-irs-guidance-a-brief-primer (last visited July 10, 2026).

11

42 C.F.R. § 410.33 (2012).

12

See AS 43.05.240 (providing that taxpayers aggrieved by action of department may request informal conference, where taxpayers can present relevant evidence to department and request correction).

13

Stirling v. N. Slope Borough Sch. Dist., 565 P.3d 181, 188 (Alaska 2025) (quoting Titus v. State, Dep‘t of Admin., Div. of Motor Vehicles, 305 P.3d 1271, 1276 (Alaska 2013)).

14

Pacifica Marine, Inc. v. Solomon Gold, Inc., 356 P.3d 780, 788 (Alaska 2015) (citing Gottstein v. State, Dep‘t of Nat. Res., 223 P.3d 609, 620 (Alaska 2010)).

15

West v. Alaska Mental Health Tr. Auth., 467 P.3d 1064, 1069 (Alaska 2020) (quoting Haar v. State, Dep‘t of Admin., Div. of Motor Vehicles, 349 P.3d 173, 180 (Alaska 2015)).

16

Id. (quoting Haar, 349 P.3d at 180-81).

17

City of Valdez v. State, 372 P.3d 240, 246 (Alaska 2016) (citing Marathon Oil Co. v. State, Dep‘t of Nat. Res., 254 P.3d 1078, 1082 (Alaska 2011)).

18

Nicolos v. Borough, 424 P.3d 318, 325 (Alaska 2018) (alteration in original) (quoting Davis Wright Tremaine LLP v. State, Dep‘t of Admin., 324 P.3d 293, 299 (Alaska 2014)).

19

City of Valdez, 372 P.3d at 246 (quoting Heller v. State, Dep‘t of Revenue, 314 P.3d 69, 73 (Alaska 2013)).

20

Stirling v. N. Slope Borough Sch. Dist., 565 P.3d 181, 188 (Alaska 2025) (quoting Grimmett v. Univ. of Alaska, 303 P.3d 482, 487 (Alaska 2013)).

21

Id.

22

See Martinez v. Cape Fox Corp., 113 P.3d 1226, 1230 (Alaska 2005).

23

Marathon Oil Co. v. State, Dep‘t of Nat. Res., 254 P.3d 1078, 1082 (Alaska 2011) (quoting Native Vill. of Elim v. State, 990 P.2d 1, 5 (Alaska 1999)).

24

AS 43.20.200(b) (adopting limitation period from 26 U.S.C. §§ 6501-03 on assessment and collection of taxes imposed under AS 43.20); 26 U.S.C. § 6501(a) (requiring, in general, that taxes be assessed within three years of relevant tax return‘s filing or within three years of date on which any part of tax payable by stamp was paid).

25

Goodwin v. Mat-Su Midwifery, Inc., 562 P.3d 26, 38 (Alaska 2024), reh‘g denied (Jan. 14, 2025) (“When we engage in statutory construction, we must, whenever possible, interpret[] each part or section of a statute with every other part or section, so as to create a harmonious whole.” (alteration in original) (quoting Kodiak Island Borough v. Exxon Corp., 991 P.2d 757, 761 (Alaska 1999) (internal quotation marks omitted))).

26

N. Alaska Env‘t. Ctr. v. State, Dep‘t of. Nat. Res., 2 P.3d 629, 634 (Alaska 2000).

27

See former AS 43.20.012(a)(3) (2013).

28

T.D. 9847, 2019-09 I.R.B., https://www.irs.gov/irb/2019-09_IRB#TD 9847 (“The Treasury Department and the IRS believe it is appropriate to look to the definitions provided for in the regulations under section 448 because guidance under section 1202 is limited.“) [https://perma.cc/WC3P-JYMD].

29

Treas. Reg. § 1.448-1T(e)(4)(ii) (2005).

30

See Hosp. Corp. of Am. & Subsidiaries v. Comm‘r, 107 T.C. 116, 142 n.17 (1996), aff‘d, 348 F.3d 136 (6th Cir. 2003) (“For purposes of sec. 448(d)(2), the performance of services in the field of health means the provision of medical services by physicians, nurses, dentists, and other similar healthcare professionals.“); Chickasaw Ambulance Serv., Inc. v. United States, No. C97-2094 MJM, 1999 WL 33656862, at *5 (N.D. Iowa May 21, 1999) (using Treasury Regulation § 1.448-1T(e)(4)(ii) to define “performance of services in the field of health“); W.W. Eure, M.D., Inc. v. Comm‘r, 93 T.C.M. (CCH) 1237, 2007 WL 1451975, at *3-4 (May 17, 2007) (concluding that radiation treatment facility performs services in “the field of health” under 1.448-1T(e)(4)(ii)); Zia-Ahmadi v. Comm‘r, Nos. 23635-13S & 23636-13S, 2017 WL 2570937, at *8-9 (T.C. Summ. Op. June 14, 2017) (determining whether ultrasound company operated in “the field of health” under section 1.448-1T(e)(4)(ii)).

31

Kraatz & Craig Surveying Inc. v. Comm‘r, 134 T.C. 167, 181 (2010).

32

See id.; N. Alaska Env‘t Ctr. v. State, Dep‘t of Nat. Res., 2 P.3d 629, 634 (Alaska 2000).

33

State, Dep‘t of Health & Soc. Servs., Div. of Pub. Assistance v. Gross, 347 P.3d 116, 122 (Alaska 2015) (quoting Lakosh v. Dep‘t of Env‘t Conservation, 49 P.3d 1111, 1117 (Alaska 2002)) (applying substitution of judgment standard).

34

See AS 43.20.012(a)(3) (2013).

35

McKee v. Evans, 490 P.2d 1226, 1230 n.18 (Alaska 1971).

36

N. Alaska Env‘t Ctr., 2 P.3d at 634.

37

26 U.S.C. § 1202(e)(3)(A) (2010) (emphasis added).

38

26 U.S.C. § 448(d)(2) (2002) (defining “qualified personal service corporation” to mean “any corporation” where “substantially all of the activities . . . involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting“).

39

T.D. 9847, 2019-09 I.R.B., https://www.irs.gov/irb/2019-09_IRB#TD 9847 (“The Treasury Department and the IRS believe it is appropriate to look to the definitions provided for in the regulations under section 448 because guidance under section 1202 is limited.“) [https://perma.cc/WC3P-JYMD].

40

Treas. Reg. § 1.448-1T(e)(4)(ii) (2005).

41

Chickasaw Ambulance Serv., Inc. v. United States, No. C97-2094 MJM, 1999 WL 33656862, at *7 (N.D. Iowa May 21, 1999).

42

Zia-Ahmadi v. Comm‘r, Nos. 23635-13S & 23636-13S, 2017 WL 2570937, at *8-9 (T.C. Summ. Op. June 14, 2017) (quoting Kraatz & Craig Surveying Inc. v. Comm‘r, 134 T.C. 167, 181 (2010)).

43

See Id. at *8.

44

I.R.S. Priv. Ltr. Rul. 201717010 (Apr. 28, 2017); I.R.S. Priv. Ltr. Rul. 202144026 (Nov. 5, 2021).

45

I.R.S. Priv. Ltr. Rul. 201717010 (Apr. 28, 2017).

46

I.R.S. Priv. Ltr. Rul. 202144026 (Nov. 5, 2021).

47

Zia-Ahmadi, 2017 WL 2570937, at *8-9.

48

Stirling v. N. Slope Borough Sch. Dist., 565 P.3d 181, 188 (Alaska 2025) (citing Grimmett v. Univ. of Alaska, 303 P.3d 482, 487 (Alaska 2013)).

49

Id.

50

Id.

51

The Clinic also asserts that the superior court erred in affirming the OAH‘s reliance on the website because the site was hearsay. When a “statement is offered against a party and is . . . the party‘s own statement, in either an individual or a representative capacity,” the statement is not hearsay. Alaska R. Evid. 801(d)(2). A statement offered against a party is also not hearsay when “the party has manifested an adoption or belief in its truth” or the statement is “by a person authorized by the party to make a statement concerning the subject.” Id. The Clinic‘s website is not hearsay. The statements appeared on the Clinic‘s website, and the Clinic‘s CEO testified that he approved the website content.

52

The Clinic argues that the ALJ conflated the services he received at a different sleep clinic with the services provided by the Clinic. Having reviewed the record, we see no indication that the ALJ reached any conclusions based on his personal experience.

53

Chickasaw Ambulance Serv., Inc. v. United States, No. C97-2094 MJM, 1999 WL 33656862, at *4-5 (N.D. Iowa May 21, 1999); I.R.S. Priv. Ltr. Rul. 201717010 (Apr. 28, 2017); Zia-Ahmadi v. Comm‘r, Nos. 23635-13S & 23636-13S, 2017 WL 2570937, at *9 (T.C. Summ. Op. June 14, 2017).

54

1999 WL 33656862, at *5, *7.

55

Id. at *2, *5.

56

I.R.S. Priv. Ltr. Rul. 201717010 (Apr. 28, 2017).

57

2017 WL 2570937, at *9.

58

Id. at *8.

59

Id. at *9.

60

Chickasaw Ambulance Serv., 1999 WL 33656862, at *5; I.R.S. Priv. Ltr. Rul. 201717010 (Apr. 28, 2017).

61

Zia-Ahmadi, 2017 WL 2570937, at *8-9.

62

26 U.S.C. § 1202(e)(3)(A) (2010).

63

Fairbanks N. Star Borough v. Dená Nená Henash, 88 P.3d 124, 129 (Alaska 2004).

64

See Fairbanks Gold Mining, Inc. v. Fairbanks N. Star Borough Assessor, 488 P.3d 959, 967 (Alaska 2021) (“We construe tax exemptions narrowly.“); Comm‘r v. Schleier, 515 U.S. 323, 328 (1995) (emphasizing narrow construction of exclusions from income as corollary of Internal Revenue Code‘s broad definition of “gross income“).

65

Dená Nená Henash, 88 P.3d at 129 (“The burden of proving eligibility for an exemption is on the taxpayer.“); see also United States v. Wells Fargo Bank, 485 U.S. 351, 354, 359 (1988) (noting “the settled principle that exemptions from taxation are not to be implied; they must be unambiguously proved” by taxpayer).

66

We in no way mean to suggest that the Clinic was untruthful or omitted information in its submission to the IRS. Given the passage of time between the tax years at issue and the application for PLR, aspects of the Clinic‘s business may well have changed.

Case Details

Case Name: Alyeska International, Inc., d/b/a Alaska Sleep Clinic v. State of Alaska, Department of Revenue

Court Name: Alaska Supreme Court

Date Published: Jul 17, 2026

Citation: S18949

Docket Number: S18949

Court Abbreviation: Alaska