Source: https://law.justia.com/cases/federal/appellate-courts/F2/670/528/118103/
Timestamp: 2019-11-11 20:39:45
Document Index: 795192116

Matched Legal Cases: ['§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 501', '§ 1', '§ 1', '§ 513']

Hi-plains Hospital, Plaintiff-appellant, v. United States of America, Defendant-appellee, 670 F.2d 528 (5th Cir. 1982) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Fifth Circuit › 1982 › Hi-plains Hospital, Plaintiff-appellant, v. United States of America, Defendant-appellee
Hi-plains Hospital, Plaintiff-appellant, v. United States of America, Defendant-appellee, 670 F.2d 528 (5th Cir. 1982)
US Court of Appeals for the Fifth Circuit - 670 F.2d 528 (5th Cir. 1982) March 15, 1982
Section 1.513-1(d) provides guidelines for determining whether an activity is substantially related to the exempt function of a charitable organization. See Treas.Reg. § 1.513-1(d). The activity must be causally related to the exempt function of the organization. See Treas.Reg. § 1.513-1(d) (2). Moreover, the causal connection must be one which "contributes importantly" to the accomplishment of that function. The regulations provide that this determination "depends in each case upon the facts and circumstances involved." Id. Finally, the regulations note that even if an activity is "related in part" it is not substantially related if it is conducted on a scale larger than is "reasonably necessary" to accomplish the organization's purpose. See Treas.Reg. § 1.513-1(d) (3). The regulations thus require a case-by-case identification of the exempt purpose, an analysis of how the activity contributes to that purpose and an examination of the scale on which the activity is conducted.
Finally, there is no indication that these sales are conducted on a larger scale than is reasonably necessary to accomplish Hi-Plains' exempt purpose. See Treas.Reg. § 1.513-1(d) (3). The pharmacy primarily sells prescription drugs to the patients of the hospital and to the private patients of the staff doctors. It has not sought to expand its market or the type of products it sells. It does not advertise nor does it use display areas to attract customers. In short, it lacks the indicia of a modern commercial drug store and appears to have directed its efforts solely at meeting the needs of the hospital and its staff doctors.
The government also notes that section 1.513-1(b) of the Treasury Regulations expressly refers to sales by a hospital pharmacy to the general public. However, the context of this reference indicates that it is inapposite to the issue before us. In a subsection explaining what constitutes the first of the three required elements, "a trade or business," the regulations state that an activity does not lose its identity as a trade or business merely because it is incorporated in a larger aggregate of similar activities and give, as an example, sales by a hospital pharmacy to nonhospital patients. See Treas.Reg. § 1.513-1(b). The regulations essentially incorporate the amendment to section 513 enacted in the Tax Reform Act of 1969. This reference to sales by a hospital pharmacy, like the reference in the Senate Report, does no more than establish that sales by Hi-Plains' pharmacy constitute an identifiable trade or business. The fact that such sales satisfy the first element of a three part test does not answer the question of whether they satisfy the last part-are they substantially related to Hi-Plains' exempt purpose?The government finally relies on Carle Foundation v. United States, 611 F.2d 1192 (7th Cir. 1979), cert. denied, 449 U.S. 824, 101 S. Ct. 85, 66 L. Ed. 2d 27 (1980). In Carle, a pharmacy in a tax exempt hospital sold drugs to both hospital patients and to the private patients of doctors who operated an independent clinic association on a for-profit basis in offices located in the hospital complex. The Seventh Circuit rejected a claim that sales to these private patients were exempt. It found that the "stated purpose of (Carle) Foundation is to conduct 'a hospital for the treatment of sick and disabled persons.' ... There is no evidence that the sale of pharmaceuticals to the (independent) Clinic and its private patients substantially furthers that purpose." 611 F.2d at 1199.
The majority's scholarly and pragmatic opinion makes a persuasive presentation for its holding that, under the highly individualized facts presented to us, the profits from the sales by the tax-exempt hospital's pharmacy to private patients of the staff doctors should likewise be regarded as tax-exempt, because "substantially related" to the tax-exempt purpose of the charitable institution. I.R.C. §§ 501(a), 511, 513(a). The majority concludes that the activity meets this test essentially because it "contributes importantly" to the accomplishment of the tax-exempt function, see Treas.Reg. § 1.513-1(d) (2), under the narrow facts before us-that, to accomplish the tax-exempt purposes of affording hospital facilities in this small (pop. 2,250) community, it was necessary to provide substantial inducements to physicians to practice at the hospital center.
The determinative issue is whether this activity "contributes importantly" to the accomplishment of the tax-exempt purpose, Treas.Reg. § 1.513(d) (2), so as to be considered as "substantially related ... to the exercise or performance ... of its charitable ... function constituting the basis for its exemption under section 501." I.R.C. § 513(a). I would not disturb the administrative determination to the negative, nor the district court's findings to the negative (which, insofar as factual, are not clearly erroneous). The majority concedes that the sale of drugs to the general public, at least if on a non-occasional basis, would not be substantially related (i.e., contribute importantly) to the tax-exempt purpose. No more, in my opinion, should be the sale at profit of drugs by prescription to the private patients of doctors (themselves in this regard engaged in a medical practice for their own profit)-prescriptions that could as well be filled by pharmacies elsewhere (although, admittedly, more conveniently at the hospital's own pharmacy).