As discussed in other posts, a nonprofit organization that is organized and operated for charitable purposes may be deemed a public charity — and not a private foundation — if it is specifically defined in the Internal Revenue Code as a qualifying charity by the nature of its activities.
The IRS considers hospitals and medical research organizations described in Internal Revenue Code (IRC) section 170(b)(1)(A)(iii) to be public charities by the nature of their activities. In prior posts we reviewed 501(c)(3) churches and 501(c)(3) schools, which also qualify by the nature of their activities. Such organizations need not satisfy a public support test: they will qualify by virtue of their defined status.
Organizations that qualify under IRC section 170(b)(1)(A)(iii) and the correlating regulations are
- Hospitals whose "principal purpose or function is the providing of medical care or hospital care or medical education or medical research"
- Medical research organizations "whose principal purpose or function is the providing of medical research" and which are "directly engaged in the continuous active conduct of medical research in conjunction with a hospital"
A hospital must provide medical or hospital care as its primary function and must additionally meet the community benefit standard.
Medical or Hospital Care
The treasury regulations provide that the term hospital includes federal hospitals, as well as state, county, and municipal hospitals that are instrumentalities of governmental units. The term also includes rehabilitation institutions, outpatient clinics, community mental health or drug treatment centers, and skilled nursing facilities, if their principal purpose or function is to provide medical or hospital care.
The term hospital does not include "convalescent homes or homes for children or the aged, nor does the term include institutions whose principal purpose or function is to train handicapped individuals to pursue some vocation." Treas. Reg. § 1.170A-9(d)(1)(B).
The Community Benefit Standard
The community benefit standard requires a hospital to promote "the health of a class of persons that is broad enough to benefit the community," even if its primary purpose is not "charity care." See Rev. Rul. 69-545 (PDF). Several factors help qualify a hospital under this standard, including (among others): whether an organization has a community board and an open medical staff; whether it admits all types of patients, including those able to pay for care either themselves or through third-party payors; and whether it applies excess funds towards such things as expansion and replacement of existing facilities and equipment, medical training, education, and research.
While the IRS considers the operation of an emergency room accessible to anyone in need to be a potential factor in the community benefit analysis, an emergency room is not required for an organization to qualify. For example, "specialized hospitals, such as eye hospitals and cancer hospitals, offer medical care limited to special conditions unlikely to necessitate emergency care and do not, as a practical matter, maintain emergency rooms." See Rev. Rul. 83-157 (PDF).
An organization need not meet every element of the community benefit standard in order to qualify. The IRS weighs these factors to determine whether a hospital substantially serves the public benefit, and does not benefit private interests more than incidentally.
Changes Under the Patient Protection and Affordable Care Act (“Affordable Care Act”)
The Affordable Care Act introduced new requirements (outlined in IRC section 501(r)) for hospitals seeking to qualify, or maintain their status, as charities under IRC section 501(c)(3). However, the IRS recently clarified, in Revenue Procedure 2017-53 (PDF), that these requirements do not extend to foreign hospitals for purposes of equivalency determination (ED).
Medical Research Organizations
A medical research organization (MRO) is an organization "whose principal purpose or function is the providing of medical research and which is directly engaged in the continuous active conduct of medical research in conjunction with a hospital." IRC § 170(b)(1)(A)(iii); See also Treas. Reg. § 1.170A–9(c)(1).
Medical Research as Principal Purpose or Function
The treasury regulations provide that medical research is
"… the conduct of investigations, experiments, and studies to discover, develop, or verify knowledge relating to the causes, diagnosis, treatment, prevention, or control of physical or mental diseases and impairments of man. To qualify as a medical research organization, the organization must have or must have continuously available for its regular use the appropriate equipment and professional personnel necessary to carry out its principal function. Medical research encompasses the associated disciplines spanning the biological, social and behavioral sciences." — Treas. Reg. § 1.170A-9(d)(2)(iii)
An MRO is considered to have medical research as its principal purpose or function if "it is expressly organized for the purpose of conducting medical research and is actually engaged primarily in the conduct of medical research." Treas. Reg. § 1.170A-9(d)(2)(iv).
Continuous Active Conduct of Medical Research
To ensure that an MRO is primarily engaged in the continuous active conduct of medical research, MROs must also satisfy a mathematical asset or endowment test. Under these tests, either (1) the organization must devote more than half of its assets to the continuous active conduct of medical research; or (2) it must expend at least 3.5 percent of the fair market value of its endowment for the same purpose. Treas. Reg. § 1.170A-9(d)(2)(v)(B).
In Conjunction with a Hospital
Medical research "in conjunction with a hospital" requires that there be "a joint effort on the part of the research organization and the hospital pursuant to an understanding that the two organizations will maintain continuing close cooperation in the active conduct of medical research." Treas. Reg. § 1.170A-9(d)(2)(vii). Continuing close cooperation may involve the sharing of facilities and staff, and it usually involves a contractual understanding between the MRO and one or more hospitals.
Other Medical and Health-Related Charities
"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." Rev. Rul. 69-545 (PDF).
Therefore, a health care organization that does not meet the requirements of IRC section 170(b)(1)(A)(iii) may still qualify as a 501(c)(3) public charity (or a foreign public charity equivalent). To do so, it must be organized and operated for charitable purposes and satisfy a public support test. Common examples of such organizations include health advocacy groups, nursing homes, hospices, and blood banks, to name a few.