Hospital moves from supporting-organization status to section 509(a)(2)

Plain-English summary

The IRS changed a hospital's public-charity classification from a section 509(a)(3) supporting organization to a section 509(a)(2) organization, while leaving its section 501(c)(3) exemption intact. The hospital no longer supported another public charity, so it no longer met the requirements for supporting-organization status. Its gross receipts from hospital services and its limited investment and unrelated-business income satisfied the support tests in section 509(a)(2). The hospital had reported itself as a hospital described in section 170(b)(1)(A)(iii), but the examination division explained that formal reclassification on that basis requires a separate Form 8940 request and review by the IRS rulings function. The organization consented to the section 509(a)(2) modification, effective January 1 of a redacted year.

Ruling snapshot

• Question: What public-charity classification applied after the hospital stopped supporting another public charity?
• Outcome: Classification changed from section 509(a)(3) to section 509(a)(2), with section 501(c)(3) exemption preserved.
• Key authorities: IRC §§ 170(b)(1)(A)(iii), 501(c)(3), and 509(a)(2)-(3); Treas. Reg. § 1.501(c)(3)-1

Full text (IRS public release)

Scanned document; transcription proofread from IRS OCR. Obvious scan misreads were corrected. Wording is otherwise verbatim.

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TE/GE: EO Examination

1100 Commerce, MS 4920 DAL

Dallas, Texas 75242-1100
TAX EXEMPT AND

GOVERNMENT ENTITIES
DIVISION

Date: NOV 30 2017

Release Number: 201922031
Release Date: 5/31/2019 Employer Identification Number:

UIL Code: 501.03-00
Person to Contact/ID Number:

Contact Numbers:

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT: — FEB 28 2018

CERTIFIED MAIL - RETURN RECEIPT REQUESTED

Dear

This is a final determination regarding your foundation classification. This modifies our
letter dated October 19xx, in which we determined that you were an organization described
in section 509(a)(3) of the Internal Revenue Code (Code). We have modified your
foundation status to that of a public charity described in section 509(a)(2) of the Code,
effective for tax years beginning January 1, 20xx.

Your tax exempt status under section 501(c)(3) of the Internal Revenue Code is not
affected. Granters and contributors may rely on this determination, unless the Internal
Revenue Service publishes a notice to the contrary. Because this letter could help resolve
any questions about your private foundation status, please keep it with your permanent
records.

We previously provided you a report of examination explaining the proposed modification
of your tax-exempt status. At that time, we informed you of your right to contact the
Taxpayer Advocate, as well as your appeal rights. On September 18, 20xx, you signed
Form 6018, Consent to Proposed Action - Section 7428, in which you agreed to the
modification of your foundation classification to 509(a)(2) of the Code. This is a final
determination letter with regards to your Federal tax-exempt status under section 501(a) of
the Code.

You are required to file Form 990, Return of Organization Exempt from Income Tax. Form
990 must be filed by the 15th day of the fifth month after the end of your annual accounting
periods. A penalty of $20 a day is charged when a return is filed late, unless there is a
reasonable cause for the delay; however, the maximum penalty charged cannot exceed
$10,000 or 5 percent of your gross receipts for the year whichever is less. In addition

organizations with gross receipts exceeding $1,000,000 for any year will be charged a
penalty of $100 a day when a return is filed late; however, the maximum penalty charged
cannot exceed $50,000. These penalties may also be charged if a return is not complete,
so be sure your return is complete before you file it.

If you are subject to the tax on unrelated business income under section 511 of the Code,
you must also file an income tax return on Form 990-T, Exempt Organization Business
Income Tax Return.

If you decide to contest this determination in court, you must initiate a suit for a declaratory
judgment in the United States Tax Court, the United States Claims Court, or the District
Court of the United States for the District of Columbia before the 91st day after the date this
final determination letter was mailed to you. Contact the clerk of the appropriate court for
rules for initiating suits for declaratory judgment. You may write to the Tax Court at the
following address:

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

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS
that can help protect your rights. We 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 our assistance, which is always free, we will do everything possible to

help you. Visit [email protected]_ or call 1-877-777-4778.

If you have any questions, please call the contact person at the telephone number
shown in the heading of this letter.

Thank you for your cooperation.

Sincerely,

Maria Hooke
Director, Exempt Organizations Examinations
Publication 892

Department of the Treasury Date:
Internal Revenue Service August 10, 2017
IRS Tax Exempt and Government Entities Taxpayer Identification Number:

Exempt Organizations Examinations
Form:

990 Return
Tax Year(s) Ended:
December 31, 20xx
Person to Contact / ID Number:

Contact numbers:
Telephone:
Fax:

Certified Mail — Return Receipt Requested
Dear

We have enclosed a copy of our report of examination explaining why we propose modifying
your foundation status under section 509(a) of the Internal Revenue Code (Code).

Your exempt status under section 501(c)(3) of the Code is still in effect.

If you accept our findings, take no further action. We will issue a final letter modifying your
foundation status.

If you do not agree with our proposed modification of your foundation status, you may provide
additional information that you would like to have considered, or you may submit a written
appeal. The enclosed Publication 3498, The Examination Process, and Publication 892,
Exempt Organization Appeal Procedures for Unagreed Issues, explain how to appeal an
Internal Revenue Service (IRS) decision. Publication 3498 also includes information on your
rights as a taxpayer and the IRS collection process.

If you request a conference with Appeals, you must submit a written protest within 30 days from
the date of this letter. An Appeals officer will review your case. The Appeals Office is
independent of the Director, EO Examinations. The Appeals Office resolves most disputes
informally and promptly. You may also request that we refer this matter for technical advice as
explained in Publication 892. If we issue a determination letter to you based on technical
advice, no further administrative appeal is available to you within the IRS regarding the issue
that was the subject of the technical advice.

If we do not hear from you within 30 days from the date of this letter, we will process your case
based on the recommendations shown in the report of examination. If you do not protest this
proposed determination within 30 days from the date of this letter, the IRS will consider it to be a
failure to exhaust your available administrative remedies. Section 7428(b)(2) of the Code
provides, in part: “A declaratory judgment or decree under this section shall not be issued in any
proceeding unless the Tax Court, the Claims Court, or the District Court of the United States for

Letter 3620 (Rev 11-2003)
Catalog Number 34811R

the District of Columbia determines that the organization involved has exhausted its
administrative remedies within the Internal Revenue Service.” We will then issue a final letter.

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate
assistance is not a substitute for established IRS procedures, such as the formal appeals
process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or extend
the time fixed by law that you have to file a petition in a United States court. The Taxpayer
Advocate can, however, see that a tax matter that may not have 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

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:
Publication 3498
Publication 892
Report of Examination

2 Letter 3620 (Rev 11-2003)
Catalog Number 34811R

Form 886-A Schedule Number or exhibit
(Rev. January 1994) EXPLANATION OF ITEMS

Name of taxpayer Taxpayer Identification Number Year/Period ended

December 31, 20XX

ISSUE:

Whether ( ) qualifies for a private
foundation status modification to section 509(a)(2) of the Internal Revenue Code (Code).

FACTS:

is an organization exempt from federal income tax under section 501(a) of the Code. is
currently described as a supporting organization under section 509(a)(3) of the Code and is therefore not a
private foundation.

no longer supports any public charity within the meaning of section 509(a)(3).

has reported on its Form 990, Schedule A, for the past several years that it is not a private
foundation because it classifies itself as a hospital under section 170(b)(1)(A)(iii) of the Code.

The primary activities of is the operation of a hospital. provides free and discounted care to
patients needing financial assistance and complies with the requirements of section 501(r) of the Code with
respect to the Patient Protection and Affordable Care Act.

On average, received 0% of its revenues from gross receipts related to its exempt function as a
hospital over the past 0 years.

LAW:

Exemption:

Section 501(a) of the Code generally provides that an organization described in subsection (c) shall be
exempt from taxation.

Section 501(c)(3) of the Code generally includes corporations, organized and operated exclusively for
charitable and educational purposes.

Section 1.501(c)(3)-1(a)(1) of the Treasury Regulations states that in order to be exempt under section
501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes
specified in such section.

Private Foundation Status:

Section 170(b)(1)(A)(iii) of the Code generally describes a hospital as an organization the principal purpose
or functions of which are the providing of medical or hospital care or medical education or medical research.

Section 509(a) of the Code generally provides that the term “private foundation” means a domestic or
foreign organization described in section 501(c)(3) other than those described under sections 509(a)(1), (2), (3)
or (4).

Section 509(a)(2) of the Code includes an organization which —
(A) Normally receives more than one-third of its support in each taxable year from any combination of —

(i) gifts, grants, contributions, or membership fees, and

(ii) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of
facilities, in an activity which is not an unrelated trade or business (within the meaning of section
513), not including such receipts from any person or from any bureau or similar agency of a
governmental unit (as described in section 170(c)(1)), in any taxable year to the extent such

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

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

Name of taxpayer Taxpayer Identification Number Year/Period ended

December 31, 20XX

receipts exceed the greater of $5,000 or 1 percent of the organization's support in such taxable
year,
from persons other than disqualified persons (as defined in section 4946) with respect to the
organization, from governmental units described in section 170(c)(1), or from organizations
described in section 170(b)(1)(A) (other than clauses (vii) and (viii)), and

(B) Normally receives not more than one-third of its support in each taxable year from the sum of —

(i) gross investment income (as defined in subsection (e)) and
(ii) the excess (if any) of the amount of the unrelated business taxable income (as defined in
section 512) over the amount of the tax imposed by section 511

Section 509(a)(3) of the Code generally includes an organization which is organized and operated,
exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified
organizations described in sections 509(a)(1) or (2).

TAXPAYERS POSITION:

has not provided its position at this time.

GOVERNMENTS POSITION:

qualifies as an organization described under section 509(a)(2) of the Code therefore its private
foundation status will be modified accordingly.

The Internal Revenue Service (IRS) agrees that satisfies the operational and organizational test
within the meaning of section 501(c)(3) of the Code.

During the audit of , it was observed that operates a hospital within the meaning of section
170(b)(1)(A)(iii) of the Code. However, is currently described as a supporting organization under
section 509(a)(3) of the Code. From its creation, believed that it was in fact described under section

170(b)(1)(A)(iii).

A modification or reclassification from a supporting organization described under section 509(a)(3) to a
hospital described under section 170(b)(1)(A)(iii) requires an in-depth review by the Rulings and Agreements
Division of the IRS and the issuance of a formal Determination Letter granting the modification. Organizations
such as churches, schools and hospitals are granted public charity status under section 501(c)(3) based on
their specific operations and activities they conduct and require additional review and documentation. The
Exempt Organizations, Examinations Division is not authorized to grant a Determination Letter. Therefore
is required to submit Form 8940, Request for Miscellaneous Determination, along with the necessary
supporting information and User Fee to the IRS Service Center in order to request reclassification to a hospital
under section 170(b)(1)(A)(iii).

Section 509(a)(3) of the Code generally describes organizations that are organized and operated
exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified
organizations described as public charities under sections 509(a)(1) or (2).

During the review of private foundation status, it was stated by , CFO for
, that no longer supports any public charity described under sections 509(a)(1) or (2). Therefore
no longer satisfies the requirements of section 509(a)(3).

Section 509(a)(2) of the Code generally includes an organization which normally receives more that one-
third of its support from contributions, gross receipts from activities related to its exempt functions, and no more
than one-third of its support from gross investment income and unrelated business taxable income.

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

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

Name of taxpayer Taxpayer Identification Number Year/Period ended
December 31, 20XX

In the 0 preceding tax years, has received 0% of its revenues from gross receipts related to its

exempt functions as a hospital. has not received more than one-third support from investment income
or unrelated business activities. Therefore qualifies as an organization described under section
509(a)(2).

CONCLUSION:

qualifies for a private foundation status
modification to section 509(a)(2) of the Code effective January 1, 20XX.

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