Opinion ID: 163334
Heading Depth: 4
Heading Rank: 1

Heading: Evolution of the community benefit standard

Text: 29 The IRS has long recognized that nonprofit hospitals may be exempt as charitable entities under section 501(c)(3). See generally John D. Colombo, Health Care Reform and Federal Tax Exemption: Rethinking the Issues, 29 WAKE FOREST L.REV. 215, 218 (1994). Exemption for hospitals, in fact, is so ingrained in the lore of taxation that today about half the states specifically enumerate hospitals as exempt entities, alongside such traditional exemption bulwarks as churches and educational institutions. Id. at 215. Early on, the touchstone for exemption was the provision of free or below-cost care. Id. at 217. In 1956, the IRS published Rev. Rul. 56-185, 1956 WL 11273, which provided that a hospital must be operated to the extent of its financial ability for those not able to pay for the services rendered and not exclusively for those who are able and expected to pay. 30 By the last part of the twentieth century, however, with the advent of Medicare and Medicaid and the increased prevalence of private insurance, nonprofit hospitals moved away from this relief of poverty function. Colombo, supra, at 218. The financing of their services evolved in parallel, from primary dependence on the generosity of religious orders and charitable donors, to almost exclusive reliance on payments for services rendered. M. Gregg Bloche, Health Policy Below the Waterline: Medical Care and the Charitable Exemption, 80 MINN. L.REV. 299, 300 (1995). 31 In 1969, in response to the nonprofit hospital's changing function, the IRS modified its position regarding charity care. In Rev. Rul. 69-545, 1969 WL 19168, which modified 56-185, the IRS removed the requirement[ ] relating to caring for patients without charge or at rates below cost. In its discussion, the IRS stated: 32 The promotion of health, like the relief of poverty and the advancement of education and religion, is one of the purposes in the general law of charity that is deemed beneficial to the community as a whole even though the class of beneficiaries eligible to receive a direct benefit from its activities does not include all members of the community, such as indigent members of the community, provided that the class is not so small that its relief is not of benefit to the community. 33 Rev. Rul. 69-545. The hospital in question provided hospital care for all persons in the community able to pay either directly or through third-party insurers. The IRS also noted, however, that the hospital operated an emergency room open to all persons regardless of ability to pay. 13 In addition, the hospital used surplus funds to improve patient care and finance medical training, education, and research. Based on these factors, 14 the IRS concluded that the hospital was promoting the health of a class of persons ... broad enough to benefit the community. Id. 34 Finally, in Revenue Ruling 83-157, 1983 WL 190185, the IRS amplified its prior ruling in 69-545. The hospital in 83-157 was identical to the hospital in 69-545, 15 except that it did not operate an emergency room open to all regardless of ability to pay. In eschewing any rigid test under section 501(c)(3), the IRS made clear that although [g]enerally, operation of a full time emergency room providing emergency medical services to all members of the public regardless of their ability to pay for such services is strong evidence that a hospital is operating to benefit the community ... other significant factors ... may be considered. Rev. Rul. 83-157. The IRS went on to conclude that the hospital did in fact operate for the benefit of the community, noting that the hospital treated patients participating in Medicare and Medicaid and applied any surplus funds to improve facilities, equipment, and patient care, and advance its medical training, education, and research. 35 Thus, under the IRS's interpretation of section 501(c)(3), in the context of health-care providers, we must determine whether the taxpayer operates primarily for the benefit of the community. 16 And while the concept of community benefit is somewhat amorphous, we agree with the IRS, the Tax Court, and the Third Circuit that it provides a workable standard for determining tax exemption under section 501(c)(3). 36