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The exemption from the communications tax under $ 4253(h) of the Code is limited to 'nonprofit hospitals'. For purposes of such exemption, an organization must be organized and operated as a charitable organization for purposes of providing a hospital for the sick and its primary function is providing hospital care. The exemption does not extend to an organization

established and operated primarily as an out-patient clinic. The entire ruling of the Internal Revenue Service is attached to this submission for the information of the Committee on Ways and Means.

D. DISCUSSION OF FEDERAL TAX TREATMENT OF HOSPITALS

Section 4253(h) of the Internal Revenue Code, relating to exemptions from tax under communication services, provides that no tax shall be imposed under $ 4251 on any amount paid by a nonprofit hospital for communication services furnished to such organization. Prior to its amendment to the Tax Reform Act of 1969, $ 42.33(h) provided that the term "nonprofit hospital" meant a "hospital referred to in $ 503(b) (5) which is exempt from tax under $ 501 (a)." Section 303(b) (5) of the Cove did not use the term "nonprofit hospital” but referred to an organization, the principal purpose of which was to provide medical or hospital care. Section 503(b) (5) was repealed under the Tax Reform Act of 1969 and the hospital exemption under $4253(h) now provides :

(h) Nonprofit Hospitals. No tax shall be imposed under section 4251 on any amount paid by a nonprofit hospital for services furnished to such organization. For purposes of this subsection, the term 'nonprofit hospital' means a hospital referred to in section 170(b) (1) (A) (iii) which is exempt

from tax under section 501(a). The Internal Revenue Service has never promulgated any regulations under $ 503(b) to elaborate on the term used in the exemption provision, notwithstanding that $ 503(b) dates back to 1950. Nor has the Internal Revenue Service ever promulgated any regulations under $ 1253(h), although that provision was enacted in 1966. However, regulations were published in 1958 to deal with and define the term "hospital" contained in $ 170(b) (1) (A) (iii).” That section deals with percentage limitations on the amount of deductions for contributions made to hospitals allowed individual donors.

Under $ 170(b) (1) (A) (iii), prior to its amendment by the Tax Reform Act of 1969, an organization rendering hospital (are was regarded as an “extra 10% organization" in the computation of the limitations on an individual's adjusted gross income. Section 170(b) (1) (A) (iii) defined "hospital" as a “hospital referred to in section 503(b)." Thus in 1969, the operative provision describing the term "hospital" under $ 42.73(h) and the term “hospital" under $ 170(b) (1) (A) (iii) were identical. The identical language provided described the exempted organization as "a hospital referred to in $ 503(b) (5)."

The Tax Reform Act of 1969 amended $ 170(b) (1) (A) (iii) and $ 4253 (h). effective January 1, 1970 with respect to the definition of "hospital” contained therein." Section 1253(h) now provides that the term "nonprofit hospital” means a nonprofit hospital described in $ 170(b) (1) (A) (iii). Section 170(b) (1) (A) (iii) now provides with respect to the definition of "hospital":

An organization the principal purpose or functions of which are the providing of medical or hospital (are or medical education or medical research, if the organization is a hospital, or if the organization is a medical research organization directly engaged in the continuous active conduct of medical research in conjunction with a hospital, and during the calendar year in which the contribution is made such organization is committed to expend such contribution for such research before January 1 of the fifth calendar

year which begins after the date such contribution is made. The redefinition contained in $ 170(b) (1) (A) (iii) can be traced directly to the definition of the term hospital contained under the Income Tax Regulations under $ 170, which were in effect at the time of enactment of the Tax Reform Act. Under Regulations $ 1.170–2(b) (4) (i), the term hospital means an organization the principal purposes or functions of which are the providing of hospital or medical care. The regulations further provide :

A rehabilitation institution or an out-patient clinic may qualify as a hospital if its principal purposes or functions are the providing of hospital or medical

care. (Emphasis supplied) 2 T. D. 6285, C. B. 1958–1, 127, 135. 3 Tax Reform Act, sec. 101 (j) (27) amending IRC & 4253(h) and sec. 201 (a) (1) (B) amending IRC $ 170 (b) (1) (A)(111).

These regulations were promulgated to define "hospital" where $ 170 referred, in the same fashion as $ 4253 (h), to a "hospital referred to in section 503 (b)." The principle of the regulation, as contained in $ 170(b) (1) (A) (iii), is that an organization which is an out-patient clinic providing medical or hospital care is a “nonprofit hospital" for purposes of $ 170 (b) (1) (A) (dealing with charitable contribution deductions). The operative provision under prior la'w for the income tax deduction for charitable contributions to a hospital used the identical language contained in the telephone tax exemption. Under this identical language, the regulations clearly allow the qualifications of an out-patient clinic as a nonprofit hospital. Under the current law, with $ 4253 (h) referring directly to $ 170 (b) (1) (A) (iii), the matter is even clearer since the exemption from telephone tax now directly refers to a hospital described in $ 170 (rather than one described in 8 503). Since the $ 170 regulations allow an out-patient clinic to be a hospital, the disallowance of hospital classification to an out-patient clinic under $ 4253 (h) seems absurd. But, that is the official position of the Internal Revenue Service. For classification as an "extra 30% organization" under $ 170(b)(1)(A) (iii) an organization rendering hospital or medical care to the sick or injured need only utilize out-patient facilities. For classification under $ 4253(h), an organization rendering hospital or medical care to the sick or injured must utilize in-patient facilities.

The Internal Revenue Service in prior years has issued revenue rulings dealing with the relevant considerations which govern classification of an organization as a hospital for purposes of income tax exemption and charitable contribution deductions. The basic ruling governing qualifications of an organization as a nonprofit hospital is Revenue Ruling 56–18.5 (C. B. 1936–1, 202). The conditions stated in this revenue ruling for classification as a hospital were the following:

1. It must be organized and operated as a nonprofit charitable organization for purposes of operating a hospital for the care of the sick.

2. It must be operated to the extent of its financial ability for those not able to pay for services rendered and not exclusively for those who are able and expected to pay.

3. It must not restrict the use of its facilities to a particular group of physicians and surgeons such as a medical partnership or association to the exclusion of other qualified doctors.

4. Its net earnings must not inure directly or indirectly for the benefit of any private shareholder or individual.

This revenue ruling did not require that a facility have “in-patient" facilities to have the appropriate classification, nor did it exclude from qualification as a hospital an organization which had exclusively out-patient or emergency facilities.

Revenue Ruling 56–18.5 was superseded late last year by Revenue Ruling 69–545 (IRB 1969-44, 10). Through the use of examples, the Internal Revenue Service described the type of organization which would be classified as a "nonprofit hospital" and exempt from tax as a charitable organization and the type of organization which would not qualify for such benefits. While the basic thrust of the ruling was to set forth a test which did not require the rendition of free care to patients to obtain tax exempt status as a charitable organization, there was no inference or suggestion that an organization which provided out-patient facilities only could not be classified as a hospital. In addition, the consideration of the distinction between an out-patient clinic as a hospital and a facility whose primary purpose is to maintain in-patient facilities (and out-patient and emergency facilities) has never been construed by ruling or in any case under the income tax exemption or charitable contribution provisions. Prior to the Internal Revenue Service's ruling of July 31, 1970 to the Community-Group Health Foundation, there has never been any suggestion that a “nonprofit hospital" for any federal tax purpose had to be one which provided in-patient facilities in the care and treatment of sick or injured persons.

We are at a loss to suggest any valid administrative or legislative purpose served by such distinction. The Congress has encouraged medical care for the needy by charitable organizations by providing a multitude of benefits. If there was any difference in the operative language there might be some justification for the distinction. But with identical language, and a clear statement in the pertinent regulations, there can be no justification for this discriminatory treatment.

E. CONCLUSION

The federal excise tax on communication services does not apply in the case of a nonprofit hospital described in $ 170 (b) (1) (A) (iii). We do not believe that the Congress distinguishes between a hospital providing an out-patient facility and a hospital providing an in-patient facility for federal tax purposes. It is therefore requested that the Ways and Means Committee clarify the treatment of nonprofit hospitals by making more explicit the exemption from the communication services tax granted to organizations providing hospital and medical care, regardless of the use of in-patient or out-patient facilities utilized to provide such (are.

EXHIBIT (A)

DEPARTMENT OF THE TREASURY,

INTERNAL REVENUE SERVICE,

Washington, D.C., July 31, 1970. COMMUNITY GROUP HEALTH FOUNDATION, INC., Washington, D.C.

GENTLEMEN: We have a letter from Mr. William J. Lehrfeld requesting a ruling whether the Community-Group Health Foundation, Inc., qualifies as a nonprofit hospital exempt from communications tax under section 4253(h) of the Internal Revenue Code, with respect to proposed payments for communication services.

As a result of a conference held in this office on June 6, 1969, Mr. Lehrfeld submitted additional information in a letter dated July 15, 1969, as well as related documents on the issue involved.

The evidence shows that the Foundation was granted exemption from Federal income tax under section 501(a) of the Internal Revenue Code with reference to organizations described in section 501 (c)(3) thereof. This exemption relates only to income tax and does not automatically assure an exemption from other Federal taxes.

The information available indicates that the purposes of the Community-Group Health Foundation, Inc. is to provide an out-patient medical, dental, and general health care service center for low-income residents of the Upper Cardozo area of Washington, D.C. This health care center will be operated in the nature of an out-patient clinic. The Foundation does not plan to have any in-patient facilities to house and maintain patients, nor will there be any type of nonambulatory care. It will be staffed in the normal fashion of doctors, dentists, nurses, technicians, and other health care specialists. The general aim of the Foundation and its staff will be to provide a family oriented comprehensive medical and dental care which will include treatment for episodes of illnesses as well as preventive medicine, and diagnostic studies of persons, both as patients and as members of the family who are not then patients but who will be the objects of study by various members of the medical team. The hours of operation of the clinic will be from 9 a.m. to 7 p.m., Mondays, Wednesdays, and Friday; from 9 a.m. to 5 p.m. on Tuesdays and Thursdays; and 9 a.m. to 1 p.m. on Saturdays. The information shows no scheduled operating hours for Sunday.

The proposed temporary facilities of the Foundation will consist of examination rooms, diagnostic rooms, treatment rooms, dental operatories, as well as conference rooms, administration offices, and a pharmacy. It is contemplated that the facilities will include two emergency rooms where emergency medical or dental care will be available to persons who come in off the street. These temporary facilities will be in use for approximately two years while construction is in process for a permanent health care service center.

The permanent health center is expected to be ready for occupancy in 1971. The facilities of the new center are designed to serve the 110,000 residents of the Cardozo a rea. Such facilities will include two emergency rooms, sixteen consultation rooms, thirty-two examining rooms, a pharmacy, a physical therapy room, and various administration offices. This center will also have facilities to be used for training medical and paramedical personnel who will act as part of medical care teams. It is stated that neither the temporary health center nor the permanent health center will have facilities to provide for in-patient care.

Section 4233 (h) of the Code, relating to exemptions from tax on communications, provides that no tax shall be imposed under section 4251 on any amount paid by a nonprofit hospital for services furnished to such organization. For purposes of this exemption the term “nonprofit hospital" means a hospital referred to in section 170(b) (1) (A) (iii) which is exempt from income tax under section 501 (a). Prior to the amendment to section 4253(h) of the Code by section 101 (j) (27) of Public Law 91–172, effective January 1, 1970, that term meant a hospital referred to in section 503(b) (5). In either instance, the organization must be a hospital.

The legislative history of section 4253(h) suggests that Congress was using the term "hospital" in what we believe to be its commonly understood meaning. That is an institution providing in-patient care. Section 4253(h) was section 202 (b) of P.L. 89-368, The Tax Adjustment Act of 1966, Seth ('ong. 2d Sess. The Committee Reports are published in C.B. 1966–1, at 436. References to this provision are at pages 461 and 472. It is stated at page 461 that the purpose of the amendment was to accord to nonprofit hospitals the same treatment accorded Government hospitals under present law. These references are specifically to nonprofit hospitals and Government hospitals. The language is also specitic on page 472 where it is stated that, “Under this amendment, prirate nonprofit hospitals will receive the same tax-exempt treatment on their payments for communication services as is applicable under section 1292 to hospitals operated by a State or local government.” (Underlining added.)

The exemption from the communications tax under section 4233(h) of the Code is limited to "nonprofit hospitals." For purposes of such exemption, an organization must be organized and operated as a charitable organization for the purpose of operating a hospital for the sick, and its primary function is providing hospital care. The exemption does not extend to an organization established and operated primarily as an out-patient clinic.

In view of the above, and based on the information furnished, it is our conclusion that the Community-Group Health Foundation, Inc., in operating as an out-patient clinic would not be considered a hospital within the intendment of section 4253(h) of the Code. Therefore, the exemption provided by that section would not apply to amounts paid for communication services furnished to the Foundation.

In accordance with the request contained in a power of attorney on file in this office, a copy of this ruling is being mailed to Mr. William J. Lehrfeld, 1815 H. Street, N.W., Washington, D.C. 20006. Very truly yours,

Bernard H. FISCHGRUND,

Chief, Ercise Tar Branch.

EXHIBIT (B)

EXCERPTS FROM H. REP. 89-128.5

(TAX ADJUSTMENT ACT OF 19664

Page 31 Exemptions for hospitals.-Your committee's bill provides an exemption from the excise tax for telephone services furnished to nonprofit hospitals exempt from income tax. This is to accord such hospitals the same treatment accorded Government hospitals under present law.

Page 48 (6) Nonprofit hospitals.-Subsection (b) of section 202 of the bill adds a new subsection (h) to section 4253. The new subsection (h) provides that no tax shall be imposed under section 4251 on any amount paid by a nonprofit hospital for communication services furnished to such hospital. A “nonprofit hospital" is defined in the new subsection (h) to mean a hospital referred to in section 503 (b) (5) which is exempt from income tax under section 501 (a). Under this amendment, private nonprofit hospitals will receive the same tax-exempt treatment on their payments for communication services as is applicable under section 4292 to hospitals operated by a State or local government.

EXHIBIT (C) NEWSPAPER CLIPPINGS
(Washington Evening Star, June 27, 1969)

$1.4 MILLION GRANTED FOR CARDOZO CENTER The first federal grant for rebuilding in the District's riot-damaged Upper Cardozo area was announced yesterday by the Commerce Department: $1.4 million toward a health center that will serve 20,000 residents.

The grant was called “really good news" by Mayor Walter Washington, who was on hand when the Economic Development Administration announced it. It will be matched by a $1.4 million loan from the Equitable Life Assurance Association.

At present, the Cardozo area, with a population of more than 111,000, has no medical facilities whatsoever. The new medical center, a glass-front building to be erected near 14th and Irving Streets NW, will have two emergency rooms, 16 consultation rooms, 32 examining rooms, a pharmacy, and a physical therapy room. Feets will be based on the patent's ability to pay.

Development of such a center was originally proposed by the Cardozo Heights Association for Neighborhood Growth and Enrichment (CHANGE), and the center's board of directors will include four members from CHANGE as well as four from the Howard University Medical School and four from the Group Health Association.

The federal grant--and the insurance company's matching loan-are being made to the Community Group Health Foundation, Inc., of 3308 14th St. NW.

The center will also serve as a training ground for 75 medical and paramedical personnel a year. It will provide for teams of physicians acting as personal doctors to neighborhood residents.

Commerce officials said yesterday the center will not be ready for operation for about two years. Interim medical services will be offered in a temporary health office at the Riggs National Bank Building, 14th and Park Road NW, beginning August 1.

[Washington Post, June 30, 1969)

CARDOZO HEALTH CENTER

Much more than physical rebuilding is involved in the decision to go ahead with construction of the Cardozo Health Center near 14th and Irving Streets, NW. astride the 14th Street riot corridor. There has been a pooling of resources to fund it—$1.94 million in construction money from the Commerce Department, matched by a loan of the same amount from Equitable Life and $1.5 million from the Office of Economic Opportunity to operate it. The center itself is a joint venture of CHANGE, Inc., a Cardozo neighborhood action group; Howard University Medical School and the Group Health Association. Medical service will be provided residents on an ability-to-pay basis and 75 persons a year will be trained in medical and para-medical jobs. Construction will take two years, but meanwhile, medical service will start Aug 1 in the Riggs Bank building at 14th and Park Road. It is an imaginative effort to meet the needs of the 111,000 Cardozo residents, particularly the 20,000 in Upper Cardozo who, according to Mayor Washington, now lack any medical facilities.

The CHAIRMAN. Thank you, sir, for bringing this matter to our attention.

Are there any questions? Mr. Conable.

Mr. CONABLE. Are there any other institutions similarly situated that have this problem? Is this a general interpretation that the IRS has made, or is it one that applies only to your organization?

Dr. Suth. I would assume that it applies to all of the neighborhood health centers. There are 49 such centers presently funded throughout the country and another 26 on the drawing boards. So, in all probability, this would be the ruling which would affect all of these centers.

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