## Facts

- The Internal Revenue Service issued an administrative ruling interpreting I.R.C. §§ 501(a) and 501(c)(3) (1954) as applied to nonprofit hospitals seeking federal income tax exemption.
- The ruling addressed the criteria for determining whether a hospital qualifies as a “public charitable organization” under § 501(c)(3).
- The IRS identified two general requirements for exemption: the hospital must be properly organized as a nonprofit for hospital purposes and must be operated in a manner consistent with public charitable purposes.
- The operational focus was whether the hospital, consistent with its finances, provided care to patients unable to pay and did not function as an institution limited to paying patients.
- The ruling was later modified by Rev. Rul. 69-545, which reframed the analysis toward a broader “community benefit” approach.

## Issues

1. What organizational and operational criteria must a nonprofit hospital satisfy to qualify for federal income tax exemption as a charitable organization under I.R.C. § 501(c)(3) (1954)?
2. Whether a hospital that charges patients can still qualify as charitable, and what obligation it has to serve patients unable to pay.
3. How the non-inurement requirement and the concept of public benefit apply to hospital operations.

## Decision

- The IRS concluded that a hospital may qualify under § 501(c)(3) only if it is both organized and operated for public charitable purposes.
- Organizationally, the hospital must be a nonprofit entity formed for operating a hospital for the care of the sick; a charter in general charitable terms may suffice.
- Operationally, the hospital must, to the extent of its financial ability, provide hospital services to persons unable to pay and must not operate exclusively for those able and expected to pay.
- Charging those able to pay was treated as consistent with exemption when used to meet operating expenses, so long as care is not denied to others unable to pay.
- The ruling linked exemption to dedication of resources to public benefit and to the absence of private inurement.

## Legal Principles

- A hospital’s § 501(c)(3) exemption depends on satisfying both an organizational test (nonprofit, charitable hospital purpose) and an operational test (actual operations reflect public charitable purposes).
- In the hospital context, “charitable” contemplates a public benefit akin to an implied public trust; the institution’s resources may not be directed to private benefit.
- A hospital may charge for services, but it must not exclude those unable to pay; it must provide care to the extent of its financial capacity.
- Operating essentially as a full-pay hospital (serving exclusively those expected to pay) is inconsistent with charitable status under the ruling’s standard.
- No part of net earnings may inure to the benefit of private shareholders or individuals.

## Conclusion

Rev. Rul. 56-185 established that a nonprofit hospital qualifies as charitable under § 501(c)(3) only if it is organized for hospital care and operated, consistent with its financial ability, to serve patients unable to pay rather than functioning as a pay-only institution, while also avoiding private inurement and operating for public benefit.


Rev. Rul. 56-185, 1956-1 C.B. 202 (1956)