## Facts

- The IRS considered whether two nonprofit hospitals qualified for federal income tax exemption under I.R.C. § 501(c)(3); both met the organizational requirements, leaving the operational test as the focus.
- The ruling modified earlier IRS guidance that had emphasized providing care to those unable to pay as a central indicator of charitable hospital operation.
- **Hospital A**
  - Operated as a 250-bed community hospital governed by a board composed of prominent community members.
  - Granted medical staff privileges to all qualified physicians in the area, subject to facility limits; the active and courtesy staffs included hundreds of physicians.
  - Owned a medical office building and leased space to active staff physicians at rates comparable to commercial rates in the area.
  - Operated a full-time emergency room and did not deny emergency treatment to anyone requiring it.
  - Generally limited non-emergency admissions to patients able to pay through personal funds, private insurance, or public programs (including Medicare), and typically referred patients unable to meet financial requirements to another local hospital serving indigent patients.
  - Generated annual operating surpluses and applied them to facility replacement/expansion, debt amortization, improved patient care, and medical training, education, and research.
- **Hospital B**
  - Operated as a 60-bed general hospital previously owned by five physicians who sold the hospital to a nonprofit at fair market value.
  - Was governed by a board dominated by the same physicians (plus their accountant and lawyer), and the physicians controlled the medical committee responsible for staff selection.
  - Restricted staff privileges, rejecting applications from qualified community physicians; admissions were restricted to patients of physicians holding staff privileges.
  - Maintained an emergency room but frequently redirected ambulances and did not operate emergency services as a meaningful community resource.
  - Functioned primarily to serve the patient base and professional interests of the controlling physicians.

## Issues

1. Whether a nonprofit hospital can qualify as “charitable” under § 501(c)(3) without providing substantial uncompensated care, when it operates to promote health for a sufficiently broad community class.
2. Whether a nonprofit hospital fails the § 501(c)(3) operational test when its governance and operations primarily serve the private interests of a controlling group of physicians.

## Decision

- The IRS concluded Hospital A qualified for exemption under § 501(c)(3).
- The IRS concluded Hospital B did not qualify for exemption because it was operated primarily to serve private interests rather than the community.
- The IRS recognized “promotion of health” as a charitable purpose and evaluated hospital charity status under a community benefit approach rather than a strict indigent-care metric.

## Legal Principles

- A hospital may qualify under § 501(c)(3) if it is operated to promote health for a class of persons broad enough to benefit the community, considering all relevant facts and circumstances.
- Community benefit indicators include:
  - Governance by an independent, community-representative board rather than financially interested insiders.
  - Medical staff privileges that are meaningfully available to all qualified physicians in the area, consistent with capacity and facility needs.
  - Operation of an emergency room providing emergency care without denial based on inability to pay.
  - Application of operating surpluses to exempt purposes (e.g., improving facilities and patient care, education, training, and research) rather than conferring benefits on private persons.
- A hospital does not qualify under § 501(c)(3) when restrictions on staff privileges, admissions, and emergency services, combined with insider control, show operation primarily for the private benefit of a limited group, contrary to the operational test and the prohibition on private benefit/inurement.

## Conclusion

Revenue Ruling 69-545 adopted a community benefit framework for § 501(c)(3) hospitals, approving exemption for a community-governed hospital that provided open emergency access and reinvested surpluses in exempt functions, while denying exemption to a physician-controlled hospital operated principally for insiders’ benefit.


Rev. Rul. 69-545, 1969-2 C.B. 117 (1969)