Revokes dual-status hospital's section 501(c)(3) exemption

View official IRS release (PDF)

Plain-English summary

A county-owned hospital also held section 501(c)(3) status, making it a dual-status governmental hospital. The hospital was not required to file Form 990 because of its governmental status, but it still had to comply with section 501(r). The IRS found no community health needs assessment or implementation strategy, financial assistance or emergency-care policy, or compliant billing and collection procedures. Hospital officials said they had not known about the section 501(c)(3) status, were not using its benefits, and agreed to give it up. The IRS revoked the charitable exemption while confirming that the hospital would remain a governmental hospital. The final letter uses October 1 of a redacted year as the effective date, while the examination report proposes January 1 of a redacted year.

Ruling snapshot

• Question: Could a dual-status governmental hospital retain section 501(c)(3) status without complying with section 501(r)'s hospital requirements?
• Outcome: Revocation of section 501(c)(3) status, with governmental-hospital status retained.
• Key authorities: IRC §§ 501(c)(3), 501(r), and 512; Treas. Reg. §§ 1.501(r)-1 and 1.501(r)-2

Full text (IRS public release)

[Redaction note: the IRS release blanks the hospital's identity, taxpayer identification number, contact information, location, dates, bed and staff counts, and other identifying details.]

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TEGE EO Examinations Mail Stop 4920 DAL
1100 Commerce St.
Dallas, Texas 75242

TAX EXEMPT AND

GOVERNMENT ENTITIES

DIVISION

Date: May 8, 2018

Number: 201833021
Release Date: 8/17/2018 Tax Year Ending:

Taxpayer Identification Number:
Person to Contact:
Employee Identification Number:

Employee Telephone Number:
(Phone)
(Fax)

UIL Code: 501.03-00

CERTIFIED MAIL — RETURN RECEIPT
Dear

This is a final determination that you do not qualify for exemption from Federal income tax under
Internal Revenue Code (the “Code”) section 501(a) as an organization described in Code section
501(c)(3) effective October 1, 20XX. Your determination letter dated March 26, 19XX is revoked.

The revocation of your exempt status was made for the following reason(s):

Organizations described in section 501(c)(3) of the Internal Revenue Code and exempt from tax
under section 501(a) must be both organized and operated exclusively for exempt purposes. A
hospital organization must also comply with IRC 501(r) in order to be treated as described in IRC
501(c)(3). You are not in compliance with any of the provisions imposed under IRC 501(r). You
are a “dual status” hospital which is a governmental hospital that is also exempt under IRC
501(c)(3). You will retain your status as a governmental hospital upon the loss of your status as
exempt under IRC 501(c)(3).

If you decide to contest this determination, you may file an action for declaratory judgment under
the provisions of section 7428 of the Code in one of the following three venues: 1) United States
Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for
the District of Columbia. A petition or complaint in one of these three courts must be filed within
90 days from the date this determination letter was mailed to you. Please contact the clerk of the
appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment

by referring to the enclosed Publication 892. You may write to the courts at the following
addresses:

United States Tax Court
400 Second Street, N.W.
Washington, D.C. 20217

U.S. Court of Federal Claims
717 Madison Place, N.W.
Washington, D.C. 20439

U.S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, D.C. 20001

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help
protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or
you've tried but haven’t been able to resolve your problem with the IRS. If you qualify for TAS
assistance, which is always free, TAS will do everything possible to help you. Visit
www.taxpayeradvocate.irs.gov or call 1-877-777-4778.

If you have any questions about this letter, please contact the person whose name and telephone
number are shown in the heading of this letter.

Sincerely,

Maria Hooke
Director, EO Examinations

Enclosure:
Publication 892

Department of the Treasury Date: September 18, 2017

Internal Revenue Service
Tax Exempt and Government Entities
IRS Exempt Organizations Examinations

Taxpayer Identification Number:
Form:

Tax Year(s) Ended:

Person to Contact / ID Number:

Employee ID:
Contact numbers:
Telephone:
Fax:
Manager's Name / ID Number:

Employee ID:
Manager’s Contact Number:

Response Due Date:

United Parcel Service — Proof of Delivery
Dear

Why you are receiving this letter

We propose to revoke your status as an organization described in section 501(c)(3) of the
Internal Revenue Code (Code). Enclosed is our report of examination explaining the proposed
action.

What you need to do if you agree

If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed
Action — Section 7428, and return it to the contact person at the address listed above (unless
you have already provided us a signed Form 6018). We'll issue a final revocation letter
determining that you aren’t an organization described in section 501(c)(3).

After we issue the final revocation letter, we'll announce that your organization is no longer
eligible for contributions deductible under section 170 of the Code.

If we don't hear from you

If you don’t respond to this proposal within 30 calendar days from the date of this letter, we'll
issue a final revocation letter. Failing to respond to this proposal will adversely impact your legal
standing to seek a declaratory judgment because you failed to exhaust your administrative
remedies.

Effect of revocation status
If you receive a final revocation letter, you'll be required to file federal income tax returns for the
tax year(s) shown above as well as for subsequent tax years.

Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

What you need to do if you disagree with the proposed revocation

If you disagree with our proposed revocation, you may request a meeting or telephone
conference with the supervisor of the IRS contact identified in the heading of this letter. You also
may file a protest with the IRS Appeals office by submitting a written request to the contact
person at the address listed above within 30 calendar days from the date of this letter.

The Appeals office is independent of the Exempt Organizations division and resolves most
disputes informally.

For your protest to be valid, it must contain certain specific information including a statement of
the facts, the applicable law, and arguments in support of your position. For specific information
needed for a valid protest, please refer to page one of the enclosed Publication 892, How to
Appeal an IRS Decision on Tax-Exempt Status, and page six of the enclosed Publication 3498,
The Examination Process. Publication 3498 also includes information on your rights as a
taxpayer and the IRS collection process. Please note that Fast Track Mediation referred to in
Publication 3498 generally doesn’t apply after we issue this letter.

You also may request that we refer this matter for technical advice as explained in Publication

892. Please contact the individual identified on the first page of this letter if you are considering
     requesting technical advice. If we issue a determination letter to you based on a technical
     advice memorandum issued by the Exempt Organizations Rulings and Agreements office, no
     further IRS administrative appeal will be available to you.

Contacting the Taxpayer Advocate Office is a taxpayer right

You have the right to contact the office of the Taxpayer Advocate. Their assistance isn’t a
substitute for established IRS procedures, such as the formal appeals process. The Taxpayer
Advocate can't reverse a legally correct tax determination or extend the time you have (fixed by
law) to file a petition in a United States court. They can, however, see that a tax matter that
hasn't been resolved through normal channels gets prompt and proper handling. You may call
toll-free 1-877-777-4778 and ask for Taxpayer Advocate assistance. If you prefer, you may
contact your local Taxpayer Advocate at:

Internal Revenue Service
Office of the Taxpayer Advocate

2 Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

For additional information

If you have any questions, please call the contact person at the telephone number shown in the
heading of this letter. If you write, please provide a telephone number and the most convenient
time to call if we need to contact you.

Thank you for your cooperation.

Sincerely,

Maria Hooke
Director, EO Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

3 Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS
Name of taxpayer Tax Identification Number Year/Period ended
20XX
Issue:
Whether the tax-exempt status of should be revoked for its failure to comply

with provisions of Internal Revenue Code § 501(r).

Facts:

or , a 0 bed facility was founded in 19XX as a county
government owned hospital. The initial construction was financed through a local bond issue.
is governed by the Board of Trustees. The zero member board includes zero member from
each of the County supervisor districts, member at large, and the current Chief of

Staff at the hospital. The board members’ duties for the hospital are to: establish administrative
policy; review finances; and approve patient charges and employees’ salaries.

IRS records show they submitted Form 1023 seeking tax-exempt status under IRC § 501(c)(3)
during November of 19XX. The administrative file does not contain the organizing document that
created - however, it does contain the by-laws. Article I of the by-laws state the governing
body for the entity is the Board of Trustees for . The hospital administrator and medical staff
are hired by the board of trustees per the by-laws.

The entity's initial determination letter was issued March 26, 19XX granting exemption under IRC
§ 501(c)(3). Upon expiration of the advance ruling period a final determination letter was issued
during October, 19XX stating they were not a private foundation because they are described in
IRC § 170(b)(1)(A)(iii) as a hospital.

During 19XX the hospital expanded its services to include a clinic, inpatient care, surgery, laundry,
dietary, and laboratory accommodations. In 20XX was designated a Critical Access
Hospital per Medicare and Medicaid regulations. emergency room is open 24 hours a
day, seven days a week. The emergency room is staffed with Nurse Practitioners who have

access to services.
. The

with zero beds. They are patronized by
residents in County and the counties surrounding the area.

employs over 0 full-time and part-time employees. The medical staff is comprised of zero
registered nurses, zero respiratory therapists, zero nursing assistants, and zero nurse practitioner
24 hours daily. They also have a physician who makes rounds daily, seven days per week.
Physical Therapy, Occupational Therapy, Speech Therapy, Respiratory Therapy, IV Therapy, and
Wound Care are provided five to seven days per week depending on the need. operates
primary care clinics in ; and ;

Form 886-A (1-1994) Catalog Number 20810W Page 1 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
20XX
The medical specialists affiliated with include zero medical doctors, one of whom serves

as the Chief of Staff, an oral surgeon, and zero nurse practitioners. The medical specialist provide
care in the hospital and clinics operated by

The services provided by the hospital include:

Acute Care Unit

Swing Bed Unit

Emergency Room

Clinical Laboratory

Radiology/CT Scan

Therapy: Respiratory, Physical, Occupational, Speech, Wound, and IV
Wound Care

Ultrasound

Sonograms
Vascular/Echocardiography
Pulmonary/Function evaluations
Pharmacy

PICC Line Services

Ventilator and Trach Weaning Program
Oral Surgery

The services provided by the clinics include:

Annual check-ups/wellness visits/physicals
General medical care

Diabetic screening

Diagnostic Lab

Comprehensive exams

Immunizations

Nutrition education

Preventive health screenings

Weight loss

is amember of ( ), an IRC § 501(c)(6) not-
for-profit corporation. operations began in 19XX as the vision of 0 administrators from
small (less than 0 beds), located in the . They
envisioned a network that would support and strengthen and provide a
voice with rural health advocacy on the local and national level.

The mission of the is to assist member hospitals in being successful health

Form 886-A (1-1994) Catalog Number 20810W Page 2 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

20XX

care providers in their unique rural setting by helping them to achieve collectively what they could
not achieve individually.

was selected for examination for possible deficiencies relative to IRC § 501(r) which
imposes additional requirements on hospitals identified as tax-exempt under IRC § 501(c)(3) per
provisions of the Affordable Care Act (ACA). does not have a Form 990 filing requirement
by virtue of its status as a governmental entity; however, that does not preclude its adherence to
statutes enacted in response to the ACA for IRC § 501(c)(3) hospitals.

Since the entity is not required to file Form 990, information reported on Schedule H of that return
was sought from other sources. A review of the entity's website did not provide the data, nor was
there a link or indication of where the data was located. Other searches were performed which
also resulted in subsection 501(r) data not being located; therefore, the searches performed
identified deficiencies relevant to the ACA requirements and IRC § 501(r). Specifically,
preliminary review of the entity did not locate its:

• Community Health Needs Assessment, CHNA, on website, nor was there a link or
instructions identifying where the CHNA was located.

Implementation Strategy (IS) addressing the CHNA

Financial Assistance Policy (FAP)

Emergency Medical Care Policy (EMCP)

Billing and Collection Procedures

A letter was mailed to on June 22, 20XX, along with several Information Document
Requests, IDRs, to obtain information relative to the items noted above. Attempts were made to
contact administrative personnel to discuss the correspondence mailed to them since there had

not been any communication with . Messages were left for the CEO, , and
subsequently a phone call was received from one of his staff personnel, . There were
conversations with the CEO and regarding the correspondence they received from the
IRS and concerns associated therewith. did state had not completed a

CHNA, did not complete an Implementation Strategy, nor have they complied with the other
provisions of IRC § 501(r).

IRC § 501(r) states a hospital must comply with the items noted above and addressed in the IDRs
to retain tax-exempt status under IRC § 501(c)(3). During discussions with and
they were advised that IRS records indicate is both a government hospital and an IRC §
501(c)(3) tax exempt hospital. It was explained that governmental hospitals are described as
“dual status” entities when they have received a determination letter from the IRS stating they are
exempt under IRC § 501(c)(3) as a hospital.

stated he was not aware was exempt under IRC § 501(c)(3). There was
discussion regarding why some governmental hospitals prefer to be dual status hospitals.
stated none of the reasons discussed are applicable to . They do not offer 403(b) plans

Form 886-A (1-1994) Catalog Number 20810W Page 3 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

20XX

as their employees are covered by the retirement plan offered by the state of , they do
not need the sales and/or property tax exemption, nor do they receive a discounted rate from the
post office.

Discussions were held to determine resolution for a lack of compliance with IRC § 501(r),
revocation of the tax exempt status or termination, and the CEO advised revocation was the
direction for the hospital. He states they are not using the public charity status and want to
relinquish it and not face any penalties for noncompliance with the statutes discussed.

Law:
IRC § 501(r):
(r) Additional requirements for certain hospitals.--
(1) In general.--A hospital organization to which this subsection applies shall not be treated as described in
subsection (c)(3) unless the organization--
(A) meets the community health needs assessment requirements described in paragraph (3),
(B) meets the financial assistance policy requirements described in paragraph (4),
(C) meets the requirements on charges described in paragraph (5), and
(D) meets the billing and collection requirement described in paragraph (6).
(2) Hospital organizations to which subsection applies.--
(A) In general.--This subsection shall apply to--
(i) an organization which operates a facility which is required by a State to be licensed, registered, or
similarly recognized as a hospital, and
(ii) any other organization which the Secretary determines has the provision of hospital care as its
principal function or purpose constituting the basis for its exemption under subsection (c)(3) (determined
without regard to this subsection).
(B) Organizations with more than 1 hospital facility.--If a hospital organization operates more than 1
hospital facility--
(i) the organization shall meet the requirements of this subsection separately with respect to each such
facility, and
(ii) the organization shall not be treated as described in subsection (c)(3) with respect to any such
facility for which such requirements are not separately met.
(3) Community health needs assessments.--
(A) In general.--An organization meets the requirements of this paragraph with respect to any taxable
year only if the organization--

Form 886-A (1-1994) Catalog Number 20810W Page 4 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit
Form 886-A EXPLANATIONS OF ITEMS
(Rev. January 1994)
Name of taxpayer Tax Identification Number Year/Period ended

20XX

(i) has conducted a community health needs assessment which meets the requirements of
subparagraph (B) in such taxable year or in either of the 2 taxable years immediately preceding such
taxable year, and

(ii) has adopted an implementation strategy to meet the community health needs identified through
such assessment.

(B) Community health needs assessment.--A community health needs assessment meets the
requirements of this paragraph if such community health needs assessment--

(i) takes into account input from persons who represent the broad interests of the community served by
the hospital facility, including those with special knowledge of or expertise in public health, and

(ii) is made widely available to the public.

(4) Financial assistance policy.--An organization meets the requirements of this paragraph if the
organization establishes the following policies:

(A) Financial assistance policy.--A written financial assistance policy which includes--

(i) eligibility criteria for financial assistance, and whether such assistance includes free or discounted
care,

(ii) the basis for calculating amounts charged to patients,

(iii) the method for applying for financial assistance,

(iv) in the case of an organization which does not have a separate billing and collections policy, the
actions the organization may take in the event of non-payment, including collections action and reporting to
credit agencies, and

(v) measures to widely publicize the policy within the community to be served by the organization.

(B) Policy relating to emergency medical care.--A written policy requiring the organization to provide,
without discrimination, care for emergency medical conditions (within the meaning of section 1867 of the
Social Security Act (42 U.S.C. 1395dd)) to individuals regardless of their eligibility under the financial
assistance policy described in subparagraph (A).

(5) Limitation on charges.--An organization meets the requirements of this paragraph if the organization--

(A) limits amounts charged for emergency or other medically necessary care provided to individuals
eligible for assistance under the financial assistance policy described in paragraph (4)(A) to not more than
the amounts generally billed to individuals who have insurance covering such care, and

(B) prohibits the use of gross charges.

(6) Billing and collection requirements.--An organization meets the requirement of this paragraph only if
the organization does not engage in extraordinary collection actions before the organization has made

Form 886-A (1-1994) Catalog Number 20810W Page 5 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

20XX

reasonable efforts to determine whether the individual is eligible for assistance under the financial
assistance policy described in paragraph (4)(A).

(7) Regulatory authority.--The Secretary shall issue such regulations and guidance as may be necessary
to carry out the provisions of this subsection, including guidance relating to what constitutes reasonable
efforts to determine the eligibility of a patient under a financial assistance policy for purposes of paragraph

(6).

26 C.F.R. § 1.501(r)-1, Treas. Reg. § 1.501(r)-1

§ 1.501(r)-1 Definitions.

Currentness

(a) Application. The definitions set forth in this section apply to §§ 1.501(r)-2 through 1.501(r)-7.

(b) Definitions—(1) Amounts generally billed (AGB) means the amounts generally billed for emergency or
other medically necessary care to individuals who have insurance covering such care, determined in
accordance with § 1.501(r)-5(b).

(2) AGB percentage means a percentage of gross charges that a hospital facility uses under § 1.501(r)-
5(b)(3) to determine the AGB for any emergency or other medically necessary care it provides to an
individual who is eligible for assistance under its financial assistance policy (FAP).

(3) Application period means the period during which a hospital facility must accept and process an
application for financial assistance under its FAP submitted by an individual in order to have made
reasonable efforts to determine whether the individual is FAP-eligible under § 1.501(r)-6(c).

(4) Authorized body of a hospital facility means—

(i) The governing body (that is, the board of directors, board of trustees, or equivalent controlling body) of
the hospital organization that operates the hospital facility or a committee of, or other party authorized by,
that governing body to the extent such committee or other party is permitted under state law to act on
behalf of the governing body;

(5) Billing and collections policy means a written policy that includes all of the elements described in §
1.501(r)-4(b)(4)(i).

(6) Date provided means, in the case of any billing statement, written notice, or other written
communication that is mailed, the date of mailing. The date that a billing statement, written notice, or other
written communication is provided can also be the date such communication is sent electronically or
delivered by hand.

(9) Emergency medical care means care provided by a hospital facility for emergency medical conditions.
(10) Emergency medical conditions means emergency medical conditions as defined in section 1867 of the
Social Security Act (42 U.S.C. 1395dd).

(11) Extraordinary collection action (ECA) means an action described in § 1.501(r)-6(b)(1).

(12) Financial assistance policy (FAP) means a written policy that meets the requirements described in §
1.501(r)-4(b).

(17) Hospital facility means a facility that is required by a state to be licensed, registered, or similarly
recognized as a hospital. Multiple buildings operated under a single state license are considered to be a
single hospital facility.

(24) Plain language summary of the FAP means a written statement that notifies an individual that the
hospital facility offers financial assistance under a FAP and provides the following additional information in
language that is clear, concise, and easy to understand:

Form 886-A (1-1994) Catalog Number 20810W Page 6 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
20XX

(vi) A statement of the availability of translations of the FAP, FAP application form, and plain language
summary of the FAP in other languages, if applicable.

(29) Widely available on a Web site means—

(i) The hospital facility conspicuously posts a complete and current version of the document on—

(A) The hospital facility's Web site;

(B) If the hospital facility does not have its own Web site separate from the hospital organization that
operates it, the hospital organization's Web site; or

(C) A Web site established and maintained by another entity, but only if the Web site of the hospital facility
or hospital organization (if the facility or organization has a Web site) provides a conspicuously-displayed
link to the Web page where the document is posted, along with clear instructions for accessing the
document on that Web site;

(ii) Individuals with access to the Internet can access, download, view, and print a hard copy of the
document from the Web site—

(A) Without requiring special computer hardware or software (other than software that is readily available to
members of the public without payment of any fee);

(B) Without paying a fee to the hospitality facility, hospital organization, or other entity maintaining the Web
site; and

(C) Without creating an account or being otherwise required to provide personally identifiable information;
and

(iii) The hospital facility provides individuals who ask how to access a copy of the document online with the
direct Web site address, or URL, of the Web page where the document is posted.

26 C.F.R. § 1.501(r)-2, Treas. Reg. § 1.501(r)-2
§ 1.501(r)-2 Failures to satisfy section 501(r).
Currentness
(a) Revocation of section 501(c)(3) status. Except as otherwise provided in paragraphs (b) and (c) of this
section, a hospital organization failing to meet one or more of the requirements of section 501(r) separately
with respect to one or more hospital facilities it operates may have its section 501(c)(3) status revoked as
of the first day of the taxable year in which the failure occurs. In determining whether to continue to
recognize the section 501(c)(3) status of a hospital organization that fails to meet one or more of the
requirements of section 501(r) with respect to one or more hospital facilities, the Commissioner will
consider all relevant facts and circumstances including, but not limited to, the following:
(1) Whether the organization has previously failed to meet the requirements of section 501(r), and, if so,
whether the same type of failure previously occurred.
(2) The size, scope, nature, and significance of the organization's failure(s).
(3) In the case of an organization that operates more than one hospital facility, the number, size, and
significance of the facilities that have failed to meet the section 501(r) requirements relative to those that
have complied with these requirements.

Form 886-A (1-1994) Catalog Number 20810W Page 7 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
20XX

(4) The reason for the failure(s).

(5) Whether the organization had, prior to the failure(s), established practices or procedures (formal or
informal) reasonably designed to promote and facilitate overall compliance with the section 501(r)
requirements.

(6) Whether the practices or procedures had been routinely followed and the failure(s) occurred through an
oversight or mistake in applying them.

(7) Whether the organization has implemented safeguards that are reasonably calculated to prevent similar
failures from occurring in the future.

(8) Whether the organization corrected the failure(s) as promptly after discovery as is reasonable given the
nature of the failure(s).

(9) Whether the organization took the measures described in paragraphs (a)(7) and (a)(8) of this section
before the Commissioner discovered the failure(s).

(b) Minor omissions and errors—(1) In general. A hospital facility's omission of required information from
a policy or report described in § 1.501(r)-3 or § 1.501(r)-4, or error with respect to the implementation or
operational requirements described in §§ 1.501(r)-3 through 1.501(r)-6, will not be considered a failure to
meet a requirement of section 501(r) if the following conditions are satisfied:

(i) Such omission or error was minor and either inadvertent or due to reasonable cause.

(ii) The hospital facility corrects such omission or error as promptly after discovery as is reasonable given
the nature of the omission or error. Such correction must include establishment (or review and, if
necessary, revision) of practices or procedures (formal or informal) that are reasonably designed to

promote and facilitate overall compliance with the requirements of section 501(r).

(4) Reasonable cause. For purposes of this paragraph (b), the fact that a hospital facility has established
practices or procedures (formal or informal) reasonably designed to promote and facilitate overall
compliance with the section 501(r) requirements prior to the occurrence of an omission or error is a factor
tending to show that the omission or error is due to reasonable cause.

(c) Excusing certain failures if hospital facility corrects and discloses. A hospital facility's failure to
meet one or more of the requirements described in §§ 1.501(r)-3 through 1.501(r)-6 that is neither willful
nor egregious shall be excused for purposes of this section if the hospital facility corrects and makes
disclosure in accordance with rules set forth by revenue procedure, notice, or other guidance published in
the Internal Revenue Bulletin. For purposes of this paragraph (c), a “willful” failure includes a failure due to
gross negligence, reckless disregard, or willful neglect, and an “egregious” failure includes only a very
serious failure, taking into account the severity of the impact and the number of affected persons. Whether
a failure is willful or egregious will be determined based on all of the facts and circumstances. A hospital

Form 886-A (1-1994) Catalog Number 20810W Page 8 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit
Form 886-A EXPLANATIONS OF ITEMS
(Rev. January 1994)
Name of taxpayer Tax Identification Number Year/Period ended

20XX

facility's correction and disclosure of a failure in accordance with the relevant guidance is a factor tending to
show that the failure was not willful.

(d) Taxation of noncompliant hospital facilities—(1) In general. Except as otherwise provided in
paragraphs (b) and (c) of this section, if a hospital organization that operates more than one hospital facility
fails to meet one or more of the requirements of section 501(r) separately with respect to a hospital facility
during a taxable year, the income derived from the noncompliant hospital facility (“noncompliant facility
income”) during that taxable year will be subject to tax

(2) Noncompliant facility income—(i) In general. For purposes of this paragraph (d), the noncompliant
facility income derived from a hospital facility during a taxable year will be the gross income derived from
that hospital facility during the taxable year, less the deductions allowed by chapter 1 that are directly
connected to the operation of that hospital facility during the taxable year, excluding any gross income and
deductions taken into account in computing any unrelated business taxable income described in section

512 that is derived from the facility during the taxable year.

Analysis and Government Position:

The ACA, enacted March 23, 20XX added new, mandatory requirements on hospital organizations to retain
their exemption under IRC § 501(c)(3). Most of the provisions were effective upon passage of the ACA.
The CHNA requirements became effective for tax years beginning after March 23, 20XX and stated the
hospital must conduct a CHNA and implementation strategy at least once every three years for tax years
beginning after March 23, 20XX. operates on a calendar year ending December 31st annually.
The CHNA would have be conducted no later than its year ended December 31, 20XX for them to be
compliant.

The final regulations were issued on December 31, 20XX effective for tax years beginning after December
29, 20XX and states the documents required must be made widely available on website. This
policy was not enforceable for the period examined, but was a requirement when the exam was initiated.
Therefore, the data requested should have been on website for the current periods and that would
have made some of the documents sought for the year under audit automatically available.

IRC § 501(r) states hospitals required to follow its provisions will not be recognized as an entity described
in subsection 501(c)(3) unless it meets the criteria enumerated in subsections 501(r)(1)(A), (B), (C), and
(D). Those sections state the entity must have a CHNA, FAP, limit the amounts charged for emergency or
other medically necessary care provided to patients eligible for assistance under its FAP, prohibit the use of
gross charges, and states the hospital cannot engage in extraordinary collection actions before reasonable
efforts have been made to determine whether the patient is eligible for assistance under the hospital’s FAP.

IRC § 501(r) further states this law is applicable to organization's that operate a facility required to be
licensed, registered, or recognized as a hospital and any other organization determined to have the
provision of hospital care as its principal function or purpose constituting the basis for its exemption under
subsection 501(c)(3).

Form 886-A (1-1994) Catalog Number 20810W Page 9 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax identification Number Year/Period ended
20XX

Treasury Regulations § 1.501(r)-1 provides definitions of terms pertinent to IRC § 501(r). It provides clarity
regarding: amounts that can be charged patients; billing policies; FAP applications; governing body of the
hospital; and other pertinent items.

Treasury Regulations § 1.501(r)-2 states hospitals failing to meet one or more of the requirements of this
section could have its 501(c)(3) status revoked effective the first day of the taxable year in which the failure
occurs.

The entity does have a website which was reviewed during the pre-audit phase of the examination and as
the exam progressed. The website did not meet the final regulations; nor was there any indication the
temporary and/or proposed regulations had been followed or met. In fact, the CEO stated they were not
aware of their responsibility to comply with IRC § 501(r).

During conversations with the entity and review of their operations, it was established they were not in
compliance with the provisions of IRC § 501(r); furthermore, they were not aware of their statutory
obligation to do so as was not aware of its exemption under IRC § 501(c)(3).

The entity's CEO stated they were agreeable to termination of the 501(c)(3) status since they were not
aware for its existence, nor was a tangible benefit being derived from the status. The entity was
established as governmental hospital and has been operating as such. They were concerned about the
assessment of penalties due to their lack of compliance.

Upon review of the procedures to terminate, which results in a prospective action and a subsequent
request for retroactive termination of the exempt status, along with discussions with counsel, it was
determined revocation of their exempt status was applicable and appropriate based upon the facts.
The entity will retain its status as a governmental hospital upon loss of its status as a public charity.

Taxpayer’s Position:

The taxpayer has stated they will agree to revocation of their status as an IRC § 501(c)(3) hospital since
they would remain a governmental hospital.

Conclusion:

is a hospital that was selected for an examination to determine its compliance with the ACA
provisions under IRC § 501(r). The entity is a governmental hospital that is also exempt under IRC §
501(c)(3) of the code. This type entity is referred to as a “dual status” hospital. It was determined the entity
is not in compliance with any of the provisions imposed under § 501(r) of the code. The entity stated they
were not aware of the § 501(c)(3) exemption and were not availing themselves of benefits afforded under
that subsection; therefore, revocation of their exempt status is proposed effective for the year beginning
January 1, 20XX as this is the first taxable year failure to comply with § 501(r) was noted.

Form 886-A (1-1994) Catalog Number 20810W Page 10 publish.no.irs.gov Department of the Treasury-Internal Revenue Service