Internal Revenue Service
Rev. Rul. 69-545
1969-2 C.B. 117
Amplified by Rev. Rul. 83-157
Examples illustrate whether a nonprofit hospital claiming exemption under
section 501(c)(3) of the Code is operated to serve a public rather than a
private interest; Revenue Ruling 56-185 modified.
Rev. Rul. 69-545 /1/
Advice has been requested whether the two nonprofit hospitals described
below qualify for exemption from Federal income tax under section 501(c)(3)
of the Internal Revenue Code of 1954. The articles of organization of both
hospitals meet the organizational requirements of section 1.501(c)(3)-1(b)
of the Income Tax Regulations, including the limitation of the
organizations' purposes to those described in section 501(c)(3) of the Code
and the dedication of their assets to such purposes.
Situation 1. Hospital A is a 250-bed community hospital. Its board of
trustees is composed of prominent citizens in the community. Medical staff
privileges in the hospital are available to all qualified physicians in the
area, consistent with the size and nature of its facilities. The hospital
has 150 doctors on its active staff and 200 doctors on its courtesy staff.
It also owns a medical office building on its premises with space for 60
doctors. Any member of its active medical staff has the privilege of
leasing available office space. Rents are set at rates comparable to those
of other commercial buildings in the area.
The hospital operates a full time emergency room and no one requiring
emergency care is denied treatment. The hospital otherwise ordinarily
limits admissions to those who can pay the cost of their hospitalization,
either themselves, or through private health insurance, or with the aid of
public programs such as Medicare. Patients who cannot meet the financial
requirements for admission are ordinarily referred to another hospital in
the community that does serve indigent patients.
The hospital usually ends each year with an excess of operating receipts
over operating disbursements from its hospital operations. Excess funds are
generally applied to expansion and replacement of existing facilities and
equipment, amortization of indebtedness, improvement in patient care, and
medical training, education, and research.
Situation 2. Hospital B is a 60-bed general hospital which was originally
owned by five doctors. The owners formed a nonprofit organization and sold
their interests in the hospital to the organization at fair market value.
The board of trustees of the organization consists of the five doctors,
their accountant, and their lawyer. The five doctors also comprise the
hospital's medical committee and thereby control the selection and the
admission of other doctors to the medical staff. During its first five
years of operations, only four other doctors have been granted staff
privileges at the hospital. The applications of a number of qualified
doctors in the community have been rejected.
Hospital admission is restricted to patients of doctors holding staff
privileges. Patients of the five original physicians have accounted for a
large majority of all hospital admissions over the years. The hospital
maintains an emergency room, but on a relatively inactive basis, and
primarily for the convenience of the patients of the staff doctors. The
local ambulance services have been instructed by the hospital to take
emergency cases to other hospitals in the area. The hospital follows the
policy of ordinarily limiting admissions to those who can pay the cost of
the services rendered. The five doctors comprising the original medical
staff have continued to maintain their offices in the hospital since its
sale to the nonprofit organization. The rental paid is less than that of
comparable office space in the vicinity. No office space is available for
any of the other staff members.
Section 501(c)(3) of the Code provides for exemption from Federal income
tax of organizations organized and operated exclusively for charitable,
scientific, or educational purposes, no part of the net earnings of which
inures to the benefit of any private shareholder or individual.
Section 1.501(c)(3)-1(d)(1)(ii) of the regulations provides that an
organization is not organized or operated exclusively for any purpose set
forth in section 501(c)(3) of the Code unless it serves a public rather
than a private interest.
Section 1.501(c)(3)-1(d)(2) of the regulations states that the term
"charitable" is used in section 501(c)(3) of the Code in its generally
accepted legal sense.
To qualify for exemption from Federal income tax under section 501(c)(3) of
the Code, a nonprofit hospital must be organized and operated exclusively
in furtherance of some purpose considered "charitable" in the generally
accepted legal sense of that term, and the hospital may not be operated,
directly or indirectly, for the benefit of private interests.
In the general law of charity, the promotion of health is considered to be
a charitable purpose. Restatement (Second), Trusts, sec. 368 and sec. 372;
IV Scott on Trusts (3rd ed. 1967), sec. 368 and sec. 372. A nonprofit
organization whose purpose and activity are providing hospital care is
promoting health and may, therefore, qualify as organized and operated in
furtherance of a charitable purpose. If it meets the other requirements of
section 501(c)(3) of the Code, it will qualify for exemption from Federal
income tax under section 501(a).
Since the purpose and activity of Hospital A, apart from its related
educational and research activities and purposes, are providing hospital
care on a nonprofit basis for members of its community, it is organized and
operated in furtherance of a purpose considered "charitable" in the
generally accepted legal sense of that term. 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. Restatement (Second), Trusts, sec. 368, comment (b) and sec.
372, comments (b) and (c); IV Scott on Trusts (3rd ed. 1967), sec. 368 and
sec. 372.2. By operating an emergency room open to all persons and by
providing hospital care for all those persons in the community able to pay
the cost thereof either directly or through third party reimbursement,
Hospital A is promoting the health of a class of persons that is broad
enough to benefit the community.
The fact that Hospital A operates at an annual surplus of receipts over
disbursements does not preclude its exemption. By using its surplus funds
to improve the quality of patient care, expand its facilities, and advance
its medical training, education, and research programs, the hospital is
operating in furtherance of its exempt purposes.
Furthermore, Hospital A is operated to serve a public rather than a private
interest. Control of the hospital rests with its board of trustees, which
is composed of independent civic leaders. The hospital maintains an open
medical staff, with privileges available to all qualified physicians.
Members of its active medical staff have the privilege of leasing available
space in its medical building. (See Rev. Rul. 69-464, page 132, this
Bulletin.) It operates an active and generally accessible emergency room.
These factors indicate that the use and control of Hospital A are for the
benefit of the public and that no part of the income of the organization is
inuring to the benefit of any private individual nor is any private
interest being served.
Accordingly, it is held that Hospital A is exempt from Federal income tax
under section 501(c)(3) of the Code.
Hospital B is also providing hospital care. However, in order to qualify
under section 501(c)(3) of the Code, an organization must be organized and
operated exclusively for one or more of the purposes set forth in that
section. Hospital B was initially established as a proprietary institution
operated for the benefit of its owners. Although its ownership has been
transferred to a nonprofit organization, the hospital has continued to
operate for the private benefit of its original owners who exercise control
over the hospital through the board of trustees and the medical committee.
They have used their control to restrict the number of doctors admitted to
the medical staff, to enter into favorable rental agreements with the
hospital, and to limit emergency room care and hospital admission
substantially to their own patients. These facts indicate that the hospital
is operated for the private benefit of its original owners, rather than for
the exclusive benefit of the public. See Sonora Community Hospital v.
Commissioner, 46 T.C. 519 (1966), aff'd. 397 F. 2d 814 (1968).
Accordingly, it is held that Hospital B does not qualify for exemption from
Federal income tax under section 501(c)(3) of the Code. In considering
whether a nonprofit hospital claiming such exemption is operated to serve a
private benefit, the Service will weigh all of the relevant facts and
circumstances in each case. The absence of particular factors set forth
above or the presence of other factors will not necessarily be
Even though an organization considers itself within the scope of Situation
1 of this Revenue Ruling, it must file an application on Form 1023,
Exemption Application, in order to be recognized by the Service as exempt
under section 501(c)(3) of the Code. The application should be filed with
the District Director of Internal Revenue for the district in which is
located the principal place of business or principal office of the
organization. See section 1.501(a)-1 of the regulations.
Revenue Ruling 56-185, C.B. 1956-1, 202, sets forth requirements for
exemption of hospitals under section 501(c)(3) more restrictive than those
contained in this Revenue Ruling with respect to caring for patients
without charge or at rates below cost. In addition, the fourth requirement
of Revenue Ruling 56-185 is ambiguous in that it can be read as implying
that the possibility of "shareholders" or "members" sharing in the assets
of a hospital upon its dissolution will not preclude exemption of the
hospital as a charity described in section 501(c)(3) of the Code. Section
1.501(c)(3)-1(b)(4) of the regulations promulgated subsequent to Revenue
Ruling 56-185 makes it clear, however, that an absolute dedication of
assets to charity is a precondition to exemption under section 501(c)(3) of
Revenue Ruling 56-185 is hereby modified to remove therefrom the
requirements relating to caring for patients without charge or at rates
below cost. Furthermore, requirement four has been modified by section
1.501(c)(3)-1(b)(4) of the regulations.
/1/ Also released as Technical Information Release 1022, dated Oct. 8,