## Facts

- B.H.W. Anesthesia Foundation, Inc. (Foundation) was a nonprofit Massachusetts corporation based in Boston.
- The Foundation functioned as the incorporated anesthesiology department of Boston Hospital for Women (a § 501(c)(3) hospital) and was affiliated with Harvard Medical School (also § 501(c)(3)).
- Its members were anesthesiologists who served on the hospital staff and Harvard faculty and performed clinical care, teaching, research, and administrative duties.
- The anesthesiologists provided care to hospital patients without regard to ability to pay; more than 10% of patients were treated without compensation.
- The Foundation directly billed patients and insurers for anesthesiology services performed by member physicians.
- Receipts were used primarily to pay physician salaries and to fund department operating costs (e.g., equipment, staffing, administration).
- Member physicians also received compensation from the hospital and Harvard; although well compensated, they could have earned more in private practice.
- The Commissioner conceded the Foundation’s activities were charitable and educational but argued it was operated for the private benefit of physician-members, disqualifying it from § 501(c)(3).

## Issues

1. Whether the Foundation was “operated exclusively” for charitable and educational purposes under I.R.C. § 501(c)(3).
2. Whether the Foundation’s direct billing arrangement and substantial physician compensation constituted prohibited private inurement or more-than-incidental private benefit.

## Decision

- The Tax Court held the Foundation qualified as an organization described in I.R.C. § 501(c)(3).
- The court found the Foundation’s primary operations furthered charitable and educational purposes through hospital-based patient care, teaching, and research.
- The court rejected the Commissioner’s private benefit theory, concluding physician compensation was reasonable and did not reflect diversion of net earnings to insiders.
- The court treated direct billing as an administrative arrangement that did not convert the entity into a private practice.
- Declaratory relief was granted recognizing the Foundation’s § 501(c)(3) status.

## Legal Principles

- An organization fails § 501(c)(3)’s operational test if more than an insubstantial part of its activities does not further exempt purposes or if it serves private interests more than incidentally.
- No part of an exempt organization’s net earnings may inure to the benefit of private shareholders or individuals; excessive or profit-diverting insider compensation is a key indicator.
- Payment of reasonable compensation for services, including professional services by insiders, is not itself private inurement.
- Private benefits to insiders may exist if they are incidental and necessary to accomplishing an organization’s exempt charitable or educational purposes.
- Hospital-affiliated physician organizations may qualify under § 501(c)(3) when integrated with charitable institutions and operated to advance community health and medical education rather than member economic interests.

## Conclusion

The Tax Court concluded the Foundation operated primarily to further charitable and educational functions as an integral hospital department, and that physician salaries and direct billing did not create disqualifying private inurement or more-than-incidental private benefit.


B.H.W. Anesthesia Found., Inc. v. Comm’r, 72 T.C. 681 (1979)