Hospital Definition Under IRC Sections 509(a)(1) and 170(b)(1)(A)(iii) versus IRC Section 501(r)

This Snapshot addresses the distinction between the definition of a hospital under Section 170(b)(1)(A)(iii) and a hospital for the purposes of Section 501(r).

IRC Section and Treas. Regulation

IRC Section 170(b)(1)(A)(iii): Public charity designation as a hospital.

IRC Section 501(r): Additional requirements for tax-exempt hospitals.

IRC Section 509(a)(1): Exceptions to private foundation classification.

Treas. Reg. Section 1.170A-9(d)(1): Hospital definition under IRC Section 170(b)(1)(A)(iii).

Treas. Reg. Section 1.501(r)-1(b)(17): Definition of a hospital facility under IRC Section 501(r).

Treas. Reg. Section 1.501(r)-1(b)(18): Definition of hospital organization under IRC Section 501(r).

Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources)

Rev. Rul. 76-9: Residential center for the aged or indigent.

Rev. Rul. 74-619: Mobile medical clinics for patients unable to travel.

Rev. Rul. 76-452: Organization primarily providing health services to sick persons in their own homes and providing only incidental patient treatment at the organization's office, which is not equipped to serve as an outpatient facility on a continuing basis, does not qualify as a hospital under Section 170(b)(1)(A)(iii).

Rev. Rul. 74-572: An exempt organization that maintains a free clinic for animals does not qualify as a hospital or an organization that provides medical or hospital care within the meaning of Section 170(b)(1)(A)(iii) of the Code and is a private foundation.

Rev. Rul. 73-131: Outpatient clinic qualifying under IRC Section 170(b)(1)(A)(iii).

Analysis

Comparing IRC Section 170(b)(1)(A)(iii) & IRC Section 501(r)

This snapshot compares the definitions under Sections 170(b) and 501(r). In general, Section 170(b)(1)(A)(iii) identifies hospitals by their principal purpose, whereas Section 501(r) identifies hospitals with reference to state law. Organizations themselves may also use the term “hospital” for other purposes.

Section 509(a) distinguishes a public charity from a private foundation. Under Section 509(a)(1), an organization described in Section 170(b)(1)(A) (other than subsections (vii) and (viii)) is not a private foundation. Section 170(b)(1)(A)(iii) describes organizations whose principal purpose or function is to provide medical or hospital care, medical education, or medical research. In contrast, the definition of hospital organization under Section 501(r)(2) triggers the additional requirements of Section 501(r), which must be satisfied for a hospital organization to obtain exempt status under Section 501(c)(3). Section 501(r)(2) defines hospital organization as an organization that operates a facility that is required by a state to be licensed, registered or similarly recognized as a hospital.

Accordingly, for example, we may encounter an acute care hospital that is subject to Section 501(r) (because it is licensed as a hospital under state law) and that also qualifies as a public charity under Section 170(b)(1)(A)(iii). Or we may encounter a rehabilitation center that is subject to Section 501(r) requirements (because it is licensed as a hospital under state law) but that chooses instead to be classified as a public charity under Section 509(a)(2). Or we may encounter an outpatient clinic that qualifies as a public charity under Section 170(b)(1)(A)(iii) but that is not subject to Section 501(r) (because state law does not require it to be licensed as a hospital). It is therefore important to understand which legal regime applies to these various definitions of hospital.

Definition of a hospital under IRC Section 170(b)(1)(A)(iii)

Treas. Reg. Section 1.170A-9(d)(1)(ii) defines the term ‘hospital’ by reference to examples of organizations that are hospitals and those that are not. For example, hospitals do not include convalescent homes or homes for children or the aged, nor do they include institutions whose principal purpose is to train handicapped individuals to pursue a vocation.

An organization whose principal purpose or function is the provision of medical education or medical research will generally not be considered a “hospital” unless it is also actively engaged in providing medical or hospital care to patients on its premises or in its facilities, on an inpatient or outpatient basis, as an integral part of its medical education or medical research functions. Take note, however, that a medical research organization that is not itself a hospital may nonetheless qualify under Section170(b)(1)(A)(iii) if the principal purpose or functions of such organization are medical research and if it is directly engaged in the continuous active conduct of medical research in conjunction with a hospital.

A rehabilitation institution may qualify as a hospital under Treas. Reg. Section 1.170A-9(d)(1)(ii)(A) as long as its principal purpose or function is the provision of medical or hospital care. See Rev. Rul. 55-268. Outpatient clinics providing medical, dental, or general health care may also qualify. See Rev. Rul. 73-131. In addition, mobile health clinics in foreign countries may qualify under Section170(b)(1)(A)(iii). See Rev. Rul. 74-619.

An organization, all the accommodations of which qualify as being part of a ”skilled nursing facility” within the meaning of 42 U.S.C. 1395x(j), commonly referred to as a nursing home, may qualify as a hospital under Section 170(b)(1)(A)(iii) if its principal purpose or function is the providing of hospital or medical care. See also Rev. Rul. 76-9.

An organization that primarily provides health care services to patients in their own homes under the direction of their private physicians (and only incidentally provides patient treatment at the organization’s offices) is not described in Section 170(b)(1)(A)(iii). See Rev. Rul. 76-452. Even though the principal purpose of the organization in this ruling was to provide medical care, it was not equipped to serve as an outpatient facility on a continuing basis.

For purposes of Treas. Reg. Section 1.170A-9(d)(1)(ii), the term “medical care” includes the treatment of any physical or mental disability or condition, whether on an inpatient or outpatient basis, provided the cost of such treatment is deductible under Section 213 by the person being treated. See Treas. Reg. Section 1.170A-9(d)(1)(ii)(A)(2); see also IRS Publication 502 (containing a more comprehensive list of deductible medical and dental expenses). Legal abortions and vasectomies are considered medical care under Section 213. See Rev. Rul. 73-201. Cosmetic surgery is not. See Rev. Rul. 2003-57.

Definition of a hospital under IRC Section 501(r):

Section 501(r) imposes additional requirements on Section 501(c)(3) organizations that operate one or more hospital facilities. Section 501(r)(2)(A) defines a hospital organization as:

An organization that operates a facility which is required by a state to be licensed, registered, or similarly recognized as a hospital; and

Any other organization that the Secretary determines has the provision of hospital care as its principal function or purpose constituting the basis for its exemption under Section 501(c)(3).

With respect to the second bullet point above, the Secretary has not identified any additional categories of organizations (other than hospital facilities and organizations operating them) that provide hospital care as their principal function. If any such categories of organizations are identified in the future, proposed regulations will be published and the expanded definition will apply propspectively only if, and when, the proposed regulations are finalized, after an opportunity for notice and comment. Thus, Section 501(r) currently applies only to organizations operating a facility that is required by state law to be licensed, registered, or similarly recognized as a hospital.

Different states have different ways of classifying hospitals. Some states may require nursing homes, rehab facilities, hospice in-patient units, psychiatric hospitals, and diagnostic treatment centers to obtain hospital licenses. Other states may not require those facilities to obtain hospital licenses, but may provide alternative registration procedures (e.g. allowing them to register as health facilities or health clinics). Likewise, while some states offer only one type of hospital license, other states provide different types of hospital licenses to correspond with different categories of hospitals (e.g. acute care hospital licenses, psychiatric hospital licenses, rural hospital licenses, etc.). The Code clearly requires the Service to respect the categories that states create for hospitals and other types of health facilities, even if the categories differ from state to state.

Issue Indicators or Audit Tips

Determinations:

  • Check to see if state law requires the facility to be licensed or registered as a hospital. If state law does not require the facility to have a hospital license or similar registration, then Section 501(r) does not apply to the organization.
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  • Some organizations provide information with their applications for exemption to demonstrate they are licensed as hospitals by their states. However, if the application does not reveal whether an organization is licensed as a hospital, sometimes specialists can find out through internet research. Many state health departments maintain a list of licensed hospitals on their websites. If you find the hospital on the state website, print a screenshot of the list (including the URL) for the case file and note the date you visited the site. Specialists may also request a written statement from the organization attesting that the facility is licensed or registered as a hospital under state law and including the license number. If the organization maintains that state law does not require the facility to be licensed or registered as a hospital, research the relevant state law to confirm.
     
  • Examine the organization’s narrative statement provided in response to Part IV of Form 1023 to determine if the organization’s principal purpose or function is to provide medical or hospital care, medical education, or medical research.
     
  • Review the organization’s responses to Part VIII, line 20 and Part X, line 5c of Form 1023.

Examinations:

  • Review Schedule H to Form 990 as it is used to document all aspects of Section 501(r) compliance.
  • Refer to IRM 4.75.9.3 (Affordable Care Act Hospital Review) for more information regarding Section501(r) compliance.