Tax-Exempt Status

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Legal/Regulatory OverviewCommunity Benefit
Judith Kindell, Senior Technical Advisor, Exempt
Organizations, Internal Revenue Service (202)
283-8964 December 10, 2007115 145 p.m.
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Tax Exemption for Hospitals

• Neither Code nor Regulations explicitly provide
  for exemption of hospitals
• Original IRS interpretation of charitable relief
  of the poor
• Rev. Rul. 56-185 exemption for hospitals that
  accepted patients without ability to pay to the
  extent of their financial ability

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Factors Leading to Change

• In 1959, new IRS regulation provided charitable
  interpreted in generally accepted legal sense
  not limited to relief of poor
• In 1965, Medicare and Medicaid established many
  believed would eliminate need for indigent care
• Financial Ability standard of Rev. Rul. 56-185
  criticized
• IRS study of hospital industry

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Promotion of Health

• Recognized as charitable purpose under general
  law of charity
• Beneficial to community even though not all
  directly benefit provided class is not so small
  that there is no benefit to the community
• Hospital must benefit class broad enough to
  benefit community and be operated for public
  rather than private interests to be exempt

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Revenue Ruling 69-545

• Community Board
• Open medical staff
• Emergency room open to all regardless of ability
  to pay
• Hospital otherwise admits patients able to pay,
  either themselves or through insurance, Medicare
  or Medicaid
• Excess funds applied to facilities, patient care,
  medical training, education research

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Community Benefit Standard

• Rev. Rul. 69-545 modified, but did not revoke,
  Rev. Rul. 56-185 charity care can still be used
  to show community benefit
• Rev. Rul. 83-157 modified Rev. Rul. 69-545 to
  illustrate situations where no emergency room
  required
• Research and innovation, medical education, care
  for low-income patients, community services and
  quality of care

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Community Benefit Standard

• Community benefit standard allows flexibility in
  determining charitable status
• Changes in industry made specific factors in Rev.
  Rul. 69-545 less relevant
• Anecdotal evidence only of community benefit
  activities

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Hospital Compliance Project Objective

• To determine both whether and how nonprofit
  hospitals demonstrate their qualification for
  exemption as organizations described in section
  501(c)(3) under the community benefit standard
  articulated in Revenue Ruling 69-545

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Hospital Questionnaire

• Addresses both community benefit and compensation
  practices
• Sent to approximately 500 hospitals
• Gather data to determine how hospitals benefit
  the community
• Opportunity for hospitals to tell their story
• Response Rate 98

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Hospital Questionnaire

• Patients
• Emergency Room
• Board of Directors
• Medical Staff Privileges
• Medical Research

• Professional Medical Education and Training
• Uncompensated Care
• Billing Practices
• Community Programs

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Interim Report

• Released July 2007
• Summarizes responses to Community Benefit
  questions
• In aggregate, uncompensated care accounted for
  56 of community benefit
• Significant variations found in how hospitals
  report uncompensated care
• Other community benefit medical education and
  training (23), research (15) and community
  programs (6)

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Next Steps

• Analyze data to determine whether differences in
  reporting may be isolated and adjusted to allow
  more meaningful comparisons
• Obtain additional research and analyze
  differences in community benefit expenditures and
  types to take into account varying demographics
• Test community benefit amount and types

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Form 990 Redesign

• Interim Hospital Compliance Project Report
  recommended separate schedule for community
  benefit reporting
• Redesign of Form 990 released June 2007
• Proposed Schedule H for hospitals includes
  section on community benefit
• Numerous comments received from hospital community

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For More Information

• IRS Charities Nonprofits Website
  www.irs.gov/eo
• TE/GE Customer Account Services
• [phone] (toll-free)
• P.O. Box 2508
• Cincinnati, OH 45201
• Subscribe to EO Update
• eo-update-subscribe_at_lists.qai.irs.gov