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I. INTRODUCTION

At significant cost to the federal budget, [1] the U.S. Treasury Department has historically granted section 501(c)(3) tax-exempt status to nonprofit hospitals. [2] For several decades prior to 1969, however, the Internal Revenue Service refused to grant tax-exempt status to nonprofit hospitals unless they provided free or below-cost care to indigent persons. [3] With Revenue Ruling 69-545, [4] the Service dramatically reversed course, replacing the old charity standard with a new, nebulous [5] “community benefit” standard. [6] Some consider this ruling, which effectively created a per se exemption for all nonprofit hospitals, [7] to be the most important exempt organizations ruling *410 ever. [8] As a result of Revenue Ruling 69-545, taxpayers are providing billions of dollars in subsidies each year to tax-exempt hospitals that are in most respects indistinguishable from their for-profit peers. [9] This Article questions the wisdom of such a policy.

More than 45 years after its adoption, the community benefit standard remains a controversial issue, with many questioning whether the limited benefits nonprofit hospitals provide their communities justify tax exemption. [10] For example, the New York Times recently reported that the tax-exempt University of Pittsburgh Medical Center and Johns Hopkins Hospital each dedicate only about two percent of their revenues to providing charity care. [11] Labeling the community benefit standard a complete failure, [12] some argue for its repeal. [13] Others advocate repealing the nonprofit hospital charitable exemption altogether. [14] Indeed, some in Congress question the wisdom and value of exempting nonprofit hospitals, particularly given an estimated budget cost of $12.6 billion per year. [15]

In this Article, I argue that the community benefit standard is flawed for three reasons. First, it is an indefinite criterion for exemption that has *411 caused confusion in the courts. [16] More specifically, although not required by Revenue Ruling 69-545, whether a nonprofit hospital must nonetheless provide a significant amount of charity care is unclear. [17] Second, because empirical studies [18] show little difference in the behavior of for-profit and nonprofit hospitals, including the provision of charity care, the community benefit standard is inequitable. That is, if there are no behavioral distinctions between for-profit and nonprofit hospitals to justify the exemption, then horizontal equity, the tenet that taxpayers in the same circumstances should have equal tax burdens, dictates that the exemption is unfair. [19] Third, the community benefit standard fails to comport with any compelling theory [20] for the charitable exemption. Therefore, I conclude that the community benefit standard should be “terminat[ed] with extreme prejudice.” [21]

However, I do not argue for the repeal of the charitable exemption for nonprofit hospitals altogether. [22] Rather, this Article calls for the adoption of an access theory proposed by Professor John Colombo in a 2004 article. [23] Under the access theory, nonprofit hospitals would qualify for exemption by expanding access to care for previously underserved populations, or by providing access to medical services not otherwise available in the market. [24] While it would perhaps be preferable to return to a strengthened requirement *412 of charity care, this may not be politically feasible. [25] In the alternative, the access theory presents an opportunity to promote sound tax policy while complementing ongoing federal health reform efforts.

The timely adoption of the access theory will address two critical public health concerns. First, although the Affordable Care Act [26] (ACA) is enrolling millions of previously uninsured Americans into health plans, a central component of the ACA is the expansion of Medicaid. Many providers refuse to accept Medicaid patients due to the program's historically low reimbursement rates. As such, access will continue to be a problem even after the ACA's implementation. [27] Basing a nonprofit hospital's exemption on a theory of access, including access to primary care for Medicaid patients, will complement efforts already underway to make health care more accessible and affordable. Second, while most empirical studies have shown little behavioral difference between for-profit and nonprofit hospitals, recent evidence suggests that nonprofits do distinguish themselves by providing traditionally unprofitable but necessary services, for instance, obstetric and trauma care. [28] Nonprofit hospitals that provide such services not otherwise available in the community arguably should qualify for exemption. Hence, the access theory will enhance ongoing health care reform efforts by encouraging nonprofit hospitals to provide such services as a condition of exemption.

Part II of this Article examines the historical underpinnings of the charitable exemption, explains the modern exemption scheme under section 501(c)(3) of the Code, and explicates the special case of hospitals. Part III analyzes the community benefit standard as a matter of tax policy and demonstrates its shortcomings. Part IV argues for the adoption of a new standard for exemption based on a theory of access.

II. THE CHARITABLE EXEMPTION: ITS HISTORY, MODERN SCHEME & THE SPECIAL CASE OF HOSPITALS

A. Historical Foundations of the Charitable Exemption

The preferential tax treatment of charitable organizations is a concept with roots in antiquity. [29] This treatment began as a reflection of society's belief that the gods who owned early religious institutions were outside the revenue agents' jurisdiction. [30] Similarly, the view of charity as the promotion of social good, namely caring for the poor, also has an ancient provenance. [31] Indeed, there is evidence that early Egyptians “were buried with records of the ‘blessed giving[s]’ they had shared with the poor during their lifetimes.” [32]

Following the fall of the Roman Empire and throughout the Middle Ages, the Church of Rome was the nexus of charitable work in Europe. [33] The church also grew in wealth and power during this time. [34] This growth led to the Mortmain statutes, designed to thwart gifts to the church. [35] Charitable trusts, or uses, developed in response as a device to avoid the Mortmain statutes and make charitable gifts to the church. [36] These trusts allowed landowners to convey property to individuals who would in turn hold it for the use of the church. [37] The laws that governed these charitable uses laid the foundations for modern charity law. [38]

These foundations are firmly grounded in the 1601 Elizabethan Statute of Charitable Uses. [39] The Statute is significant for providing “the first authoritative definition of charitable purposes,” [40] enumerating myriad purposes, including the “relief of aged, impotent and poor people,” [41] that the state considered at the time to be charitable. [42] While the enumerated purposes were not meant to be exclusive, common themes are clear: “public benefit” and “the relief of poverty.” [43] These themes and this approach to defining charitable purposes continue to inform modern charity law.

B. The Modern Charitable Exemption Scheme

1. Exemption Under Section 501 (c)(3)

Like the 1601 Elizabethan Statute of Charitable Uses, the modern U.S. Tax Code defines “charitable” purposes not through a strict statutory definition, but rather with a non-exclusive list. [44] Organizations seeking exemption from federal income tax under section 501(c)(3) [45] must be “organized and operated exclusively for religious, charitable, scientific ... or *415 educational purposes.” [46] Although the list includes such specific, diverse purposes as “testing for public safety” and “foster[ing] national or international amateur sports competition,” section 501(c)(3) does not include “promotion of health.” Given that nonprofit hospitals are not explicitly listed, the critical statutory interpretation question is whether they are exempt under the more generic section 501(c)(3) language referring to organizations organized and operated for “charitable” purposes.

According to the Joint Committee on Taxation (JCT), the term charitable “is best understood as including activities that are intended to benefit the general welfare or public interest ... which itself can be construed broadly or narrowly and which will expand and contract over time to reflect changing notions of the public interest.” [47] While the JCT's definition is among the clearest, even this definition has a vague, existential flavor. The remainder of this section more fully develops the concept of charity for purposes of section 501(c)(3) tax-exempt status.

2. Public Purpose Test: Bob Jones University v. United States

In Bob Jones University v. United States, [48] the Supreme Court held that the English law of charitable trusts undergirds the modern charitable exemption scheme of section 501(c)(3). The Court noted that drafters of the Tariff Act of 1894, [49] which included the first federal income tax charitable exemption, “relied heavily on English concepts of taxation.” [50] The Act exempted “corporations, companies, or associations organized and conducted solely for charitable, religious, or educational purposes ....” [51] While this Act was later ruled unconstitutional on unrelated grounds, a similar charitable *416 exemption has been included in every subsequent income tax act since the Revenue Act of 1913. [52]

After surveying the legal history at the time the Tariff Act was passed, the Court concluded: “charities were to be given preferential treatment because they provide a benefit to society.” [53] The Court quoted Senator Henry F. Hollis in congressional floor debate: “For every dollar that a man contributes to these public charities, educational, scientific, or otherwise, the public gets 100 percent.” [54] Therefore, the Court stated that there was “no doubt Congress deemed the specified organizations entitled to tax benefits because they served desirable public purposes.” [55] Moreover, the Court held that in accordance with the common law standards of charity, every organization exempt under section 501(c)(3) “must serve a public purpose and not be contrary to established public policy.” [56] Hence, the Code imports from the common law a charitable requirement for every organization exempt under section 501(c)(3). Put differently, every organization exempt under section 501(c)(3), regardless of whether its stated purposes are religious, charitable, scientific, educational, or something else, must also be charitable. That is, it must serve a public benefit. [57]

3. Regulatory Interpretation

a. Organizational Test

The Treasury Regulations supplement the section 501(c)(3) statutory requirements by setting out an organizational test and an operational test for exemption. [58] The organizational test establishes two broad requirements. First, the organization's articles of incorporation must “[l]imit the purposes of such organization to one or more exempt purposes.” [59] Second, the organization's articles must not “expressly empower the organization to engage, otherwise than as an insubstantial part of its activities,” in nonexempt purposes. [60] In defining exempt purposes, the Treasury Regulations essentially reiterate the purposes enumerated in the statute. [61] Thus, the organizational test is primarily *417 concerned with limiting the focus of the institution's organizing documents to exempt purposes. [62]

b. Operational Test

Although section 501(c)(3) requires that a tax-exempt organization be organized and operated “exclusively” for exempt purposes, the Treasury Regulations more liberally allow tax-exempt status for organizations that engage primarily in tax-exempt activities. [63] Unfortunately, the statute and regulations provide no clear guidance distinguishing substantial from insubstantial activities. Moreover, the case law is of limited value because the courts have applied a facts and circumstances test. However, factors used to separate substantial from insubstantial activities may include how the activities are conducted; whether they have a commercial hue; and whether they are generating sizable profits. [64]

c. “Charitable” Definition

Along with setting out the organizational and operational tests, the Treasury Regulations define the term “charitable,” [65] stating that the term “is used in section 501(c)(3) in its generally accepted legal sense” and is not “limited by the separate enumeration in section 501(c)(3) of other tax-exempt purposes.” [66] The structure and content of the regulatory definition of charitable is similar to that contained in the Elizabethan Statute of Charitable Uses. [67] The Treasury Regulations, like the Statute of Charitable Uses, define charity not through a strict statutory definition, but instead by listing purposes considered to be charitable. [68] Moreover, when comparing the enumerated charitable purposes of the Statute of Charitable Uses and the Treasury Regulations, *418 scholars have noted that “[f]rom 1601 to 1982, few changes can be observed in the concept or the language of charity.” [69]

C. The Special Case of Hospitals

1. Nonprofit Hospitals: A Historical Context

The earliest records of hospitals in England follow the Norman Conquest in 1066. [70] These early ecclesiastical “hospitals,” financed by the clergy and donations from royalty, nobility, and wealthy landowners, were essentially quasi-retirement villages for clergy and almshouses for society's unwanted. [71] They were also charitable institutions, serving the poor and subsisting on donative support. [72]

As England was beset by leprosy during the 12th century, approximately one-half of the hospitals were leper houses. [73] Once leprosy abated in the 14th century, some medieval hospitals became almshouses for the infirm or aged, [74] but others became “places of dreaded impurity and exiled human wreckage.” [75] Clientele included sufferers of small pox and syphilis, and “lascivious” unmarried pregnant women. [76] Indeed, St. Mary without Bishopsgate and St. Bartholomew's in 1341 negotiated their exemption from royal taxation as consideration for caring for unmarried pregnant girls who were migrating to London to work as servants and prostitutes. [77]

Even hospitals that survived King Henry VIII's dissolution of the monasteries in the sixteenth century were dumping grounds for society's unwanted. [78] For example, when petitioning King Henry VIII to spare London hospitals in 1538, the Lord Mayor argued that this action would “clear away the offensive sight and smell of the poor sick who offended the senses of the *419 clean.” [79] And in 1551, the City of London convinced King Edward IV to sell the city St. Thomas's by pointing out “the sick and infirm lying begging in the streets and places of London and its suburbs to the infection and annoyance of the King's subjects.” [80]

This brief history of Britain's hospitals illustrates that, at least when the Elizabethan Statute of Charitable Uses was enacted in 1601, [81] hospitals were charities, serving exclusively the feeble and sick poor. The Preamble to the Statute of Charitable Uses provides that “relief of aged, impotent and poor people” [82] is a charitable purpose. Further, “impotent” has been construed by the courts to mean that a “gift for the purpose of a hospital is prima facie a good charitable gift.” [83] But at the time the Statute was enacted, a gift to a hospital, to serve a sick or “impotent” person, would have surely benefited a poor sick person.

The history of hospitals in the United States generally reflects that of England. [84] In the seventeenth century, almshouses served exclusively the poor, including the aged, ill, and debilitated. These charitable institutions initially provided custodial care and little medical treatment. However, as their medical focus grew, their charitable focus remained. Assuredly, they served the sick, but the scope of their patients was limited to the poor. [85] As with early English hospitals, patients in early U.S. hospitals were generally “exiled human wreckage” [86] and included “accident casualties, victims of contagious epidemics ... [and] homeless paupers.” [87]

Only in the late nineteenth century did hospitals begin serving all classes of society. Until then, hospitals had largely been viewed as a necessity for unfortunate persons without families able to care for them at home. [88] In fact, prior to the Civil War, American doctors might never see the inside of a hospital. From approximately 1870 to 1910, however, scientific advances and the industrial revolution spurred a movement establishing the modern hospital as the center of medical education and practice. Where once the hospital served only the poor and subsisted entirely on charitable donations, it now became a community center that served all classes of society and financed itself increasingly on a fee-for service basis. [89] Yet, as with the enactment of the Elizabethan Statute of Charitable Uses, at the time the first federal income tax *420 was enacted in 1894, [90] charitable hospitals still primarily treated the poor. [91] Moreover, while there is limited evidence of the rationale for the charitable exemption in the early legislative record, there is no evidence to suggest that the drafters of the 1894 exemption believed hospitals, or any type of nonprofit organization for that matter, would develop into the commercialized corporate behemoths many nonprofits are today. [92]

2. Tax Exemptions for Hospitals Under Section 501(c)(3)

When the first corporate income tax was enacted in 1894, nonprofit hospitals treated the sick poor and were staffed with volunteer labor. [93] Given this traditional charitable role, nonprofit hospital exemptions were never questioned. [94] But as hospitals evolved into fee-for-service providers during the first part of the twentieth century, clarification regarding the required criteria to establish hospital tax-exemption became necessary. The Service thus turned to revenue rulings to provide these standards. [95] While the “promotion of health” is not explicitly listed as an exempt purpose in section 501(c)(3), [96] the Service, citing the general law of charity, has held that it is a charitable purpose. [97] Therefore, a nonprofit hospital may qualify for exemption under the “charitable” category of section 501(c)(3).

a. Revenue Ruling 56-185: The “Charity Care” Standard

The historic role of nonprofit hospitals as providers of charity care is reflected in Revenue Ruling 56-185. [98] This 1956 ruling required a hospital to provide charity care as a condition of exemption and to “be operated to the *421 extent of its financial ability for those not able to pay for the services rendered and not exclusively for those who are able and expected to pay.” At the same time, however, the ruling neither established a strict charity care threshold, nor prohibited a hospital from charging patients for services. Yet, it did provide that a hospital could not “refuse to accept patients in need of hospital care who cannot pay for such services.” Further, Revenue Ruling 56-185 held that if a hospital “operates with the expectation of full payment from all those to whom it renders services, it does not dispense charity merely because some of its patients fail to pay for the services rendered.” On the other hand, the ruling added that “[t]he fact that [a hospital's] charity record is relatively low is not conclusive that a hospital is not operated for charitable purposes to the full extent of its financial ability.” [99]

b. Revenue Ruling 69-545: The “Community Benefit” Standard

Less than 14 years after the 1956 “charity care” ruling, the Service published Revenue Ruling 69-545 [100] This ruling effectively abolished the charity care standard and replaced it with the vague “community benefit” standard. Given such a shift in policy, one might be surprised to discover that this important ruling was drafted with shockingly little debate. [101]

In 1968, three years after the enactment of Medicare and Medicaid, Robert Bromberg, the Service attorney who was the primary drafter of Revenue Ruling 69-545, was assigned to draft a report regarding the charitable exemption of nonprofit hospitals. [102] Bromberg met with hospital administrators, “read a lot of history and considerable case law,” and was subsequently convinced that the existing charity care standard was obsolete. [103] Because patients were now covered by private insurance, Medicare, and Medicaid, hospital administrators told Bromberg that “they couldn't find patients to whom to give free care.” [104] Accepting the hospital industry's claims that “there were no more uninsured persons,” Bromberg presented his findings to his superiors, who also accepted them as fact. Indeed, one of Bromberg's superiors said, “when you get a good study like that, you accept it.” [105]

As a result, Revenue Ruling 69-545 held that “[t]he promotion of health ... is one of the purposes in the general law of charity that is deemed beneficial to the community as a whole even though the class of beneficiaries *422 ... does not include ... indigent members of the community.” [106] Factors other than the general provision of health that seem to have influenced the Service's ruling include that the hospital (1) maintained an emergency room open to persons regardless of ability to pay; (2) was run by a community board; (3) had an open medical staff policy; and (4) used its surplus funds to “improve the quality of patient care, expand its facilities, and advance its medical training, education, and research programs.” [107] In effect, the ruling's opaque standard and elimination of the charity care requirement created a per se exemption for all nonprofit hospitals. [108]

This new community benefit standard was soon challenged in court. In Eastern Kentucky Welfare Rights Organization v. Schultz, [109] a class of indigent patients who had been turned away by tax-exempt hospitals brought suit, challenging the validity of Service policy as implemented by Revenue Ruling. 69-545. [110] Although the district court held that the Service's ruling was invalid and granted the plaintiffs summary judgment, [111] the D.C. Court of Appeals reversed. [112] Upholding the validity of Revenue Ruling 69-545, the D.C. Circuit held that requiring charity care was “an inflexible construction [that] fails to recognize the changing economic, social and technological precepts and values of contemporary society.” [113] Indeed, echoing the arguments of the hospital industry, the D.C. Circuit wrote that “[t]he institution of Medicare and Medicaid in the last decade combined with the rapid growth of medical and hospital insurance has greatly reduced the number of poor people requiring free or below cost hospital services,” and therefore, “it appears that the rationale upon which the limited definition of ‘charitable’ was predicated has largely disappeared.” [114] The Supreme Court later vacated the judgment on the grounds that the plaintiffs lacked standing because they could not show: (1) that the hospitals' decision to deny them service was a result of the revenue ruling; and (2) that the district court's judgment would result in *423 them receiving the services they sought. [115] Consequently, the Court's ruling effectively precluded future plaintiff challenges to Revenue Ruling 69-545.

III. A FLAWED STANDARD

This Part argues that the community benefit standard is flawed for three reasons. First, the community benefit standard is an indefinite criterion for exemption that has caused confusion in the courts. Second, because empirical studies show little difference in the behavior of for-profit and nonprofit hospitals, including the provision of charity care, the community benefit standard is inequitable. Finally, the community benefit standard fails to comport with any compelling theory for the charitable exemption.

A. The Community Benefit Standard Has Caused Confusion in the Courts

Because the community benefit standard lacks a clear set of indicia for exemption, it has caused confusion in the courts. In fact, several commentators have noted curious efforts by the Service and the courts to reintroduce a charity care requirement to Revenue Ruling 69-545. [116] While the Service has not revoked or revised Revenue Ruling 69-545 and has publicly stated that it is still good law, [117] case law suggests that the “promotion of health” alone may no longer be enough for exemption, and that a “plus” [118] factor may be required. At the very least, the state of the community benefit doctrine is unsettled. [119]

The Service's efforts at adding a “plus” factor began in the late 1970s, [120] but were largely unsuccessful until the early 1990s with Geisinger Health Plan v. Commissioner. [121] In Geisinger, the Service denied exemption to an HMO that failed to provide direct health services, lacked a charity care *424 program, and at the time had a limited subsidized dues program, [122] as well as no Medicaid provider. [123] While the Tax Court ruled against the Service, upholding the broad reading of the community benefit standard, the Third Circuit reversed. [124] The Third Circuit rejected the Tax Court's “promotion of health” concept (as articulated in Revenue Ruling 69-545) and ruled that to receive exemption an organization must do more than simply provide medical services to paying patients. [125] Specifically, the court stated that, “a nonprofit hospital will qualify for tax-exempt status if it primarily benefits the community.” [126] The court gave three examples of benefiting the community, all involving the provision of charity care: providing emergency room care regardless of ability to pay; providing charity care; and providing care to those on Medicaid or Medicare. [127]

The idea that nonprofit hospitals must do something beyond the general promotion of health to qualify for tax exemption has developed into a “health care plus” standard. [128] In IHC Health Plans v. Commissioner, [129] Judge Tacha provided the clearest articulation of this standard, holding that “an organization cannot satisfy the community-benefit requirement based solely on the fact that it offers health-care services to all in the community for a fee,” but instead “must provide some additional ‘plus.”’ [130] Citing Bob Jones University, Judge Tacha described the “plus” as “best characterized as ‘a benefit which the society or the community may not itself choose to provide, or which supplements and advances the work of public institutions already supported by tax revenues.” [131] Finally, Judge Tacha characterized this additional public benefit as something “sufficient to give rise to a strong inference that the public benefit is the primary purpose for which the organization operates.” [132]

This is a higher standard than the test set out in Revenue Ruling 69-545. Therefore, these Third and Tenth Circuit rulings create uncertainty as to what exactly a nonprofit hospital must do to merit tax-exempt status. While *425 neither explicitly says so, both rulings suggest that a hospital must provide some amount of charity care to qualify for exemption. However, the Service claims that Revenue Ruling 69-545, which has no charity requirement, is still good law. This quandary is a result of Revenue Ruling 69-545's ambiguous test.

B. The Community Benefit Standard Causes Horizontal Inequities

Empirical studies suggest that there are very few areas in which for-profit and nonprofit hospitals differ, including the provision of charity care. [133] Thus, the studies also suggest that the community benefit standard is inequitable, because it grants a tax benefit to nonprofit hospitals that are behaving no differently than their for-profit counterparts. Horizontal equity dictates that entities in similar circumstances should share similar tax burdens.

Professor Gregg Bloche has written that “[s]tudies of comparable nonprofit and for-profit hospitals, matched on the basis of community demographics and patient characteristics, have not shown a significant difference in rates of uncompensated care.” [134] Bloche also has pointed out that a small number of urban teaching and research hospitals are shouldering the burden of conducting research and providing charity care, and “many community hospitals, nonprofit and for-profit alike, provide minimal amounts of free and below-cost care.” [135] Moreover, Bloche has observed that the “nonprofit hospitals that benefit the most from the tax exemption, those with the highest percentage levels of operating income, tend to provide the lowest rates of uncompensated care.” [136] This follows logically. The greater a hospital's profits are, the more income is exempt from taxation. Thus, the hospital will enjoy a greater tax benefit. Conversely, if a hospital is providing predominantly charity care in lieu of focusing on large profits, it will have less income. As a result, less income will be exempt from taxation. Therefore, the hospital will enjoy a smaller tax benefit.

Professor John Colombo has also noted behavioral similarities between the for-profit and nonprofit hospital sectors. [137] Surveying the *426 literature, Colombo has reported three key similarities with respect to quality and costs of care, and treatment of charity patients. First, empirical studies suggest that for-profit and nonprofit hospitals are similar in the quality of the care they provide. Second, Columbo has found no evidence of significant pricing differences between for-profit and nonprofit hospitals. Third and perhaps most importantly, there is “little difference in the provision of ‘uncompensated care’ by for-profit and nonprofit entities and little difference between pre- and post-conversion levels of charity in nonprofit to for-profit conversion transactions.” [138] As a matter of fact, “some nonprofits provide no charity care at all.” [139]

These empirical studies are troubling. If there are few behavioral differences between for-profit and nonprofit hospitals, then there are serious equitable concerns occurring in the market. Horizontal equity, a fundamental doctrine of tax policy, argues that it is unfair to place “different burdens on taxpayers in similar economic circumstances.” [140] Put differently, horizontal equity argues that those who are in like circumstances with similar incomes “should ordinarily pay roughly the same amount of income tax.” [141] It follows that if for-profit and nonprofit hospitals are competing with each other in the same markets and providing the same services, yet the nonprofits are not providing a greater community benefit, then the nonprofits have an unfair market advantage. It also follows that the community benefit standard, which allows for these outcomes with a toothless test for exemption that requires no charity care or other measurable public benefits, is inequitable.

C. The Community Benefit Standard Is Theoretically Unsound

There are several theories for the charitable exemption. Here, I present five and analyze each as a rationale for the community benefit standard. None provides a compelling case.

1. The Public Benefit Theory & Tax Expenditures

a. Nonprofit Organizations, Public Benefit & Pluralism

The most widely accepted justification for the charitable exemption is the public benefit theory, which views tax exemption as a subsidy to nonprofit organizations “to encourage activities that [are] recognized as inherently *427 meritorious and conducive to the general welfare.” [142] Often this includes organizations that relieve the government of some burden by performing a useful public benefit that society is otherwise unable or unwilling to provide. [143] Indeed, the Supreme Court has endorsed this theory, stating in Bob Jones University that “[c]haritable exemptions are justified on the basis that the exempt entity confers a public benefit--a benefit which the society or the community may not itself choose or be able to provide, or which supplements and advances the work of public institutions already supported by tax revenues.” [144] In addition, the JCT has noted that this theory is reflected in the list of charitable activities in the Treasury Regulations, which include the “erection or maintenance of public buildings, monuments, or works” and the “lessening of the burdens of Government.” [145] Finally, Congress has stated that the “Government is compensated for the loss of revenue by its relief from financial burdens which would otherwise have to be met by appropriations from other public funds, and by the benefits resulting from the promotion of the general welfare.” [146]

A second, related aspect of the public benefit theory focuses on the positive benefits that nonprofit organizations create by contributing to American pluralism. [147] Chauncey Belknap posits that the theoretical foundations of the charitable exemption may be fixed in the writings of Montesquieu, Locke, and Bentham, whose classical liberalism inspired and influenced the views of the founding fathers and promoted the “free and open competition of ideas.” [148] That is, tax-exempt organizations were reflective of the political philosophies of Franklin, Jefferson, Madison, and others who had “distrust in government and faith that the progress and well-being of mankind could best be achieved by natural forces harmonizing the individual actions of men who were left untrammeled.” [149] Thus, citizens who shared similar beliefs *428 and interests could create organizations that would be free from government interference (i.e., taxation) and would contribute to the marketplace of ideas (i.e., a pluralistic society). Similarly, Professor Saul Levmore argues that the charitable deduction under section 170 [150] acts as a sort of “ballot” through which taxpayers may “vote” for the charitable organizations they wish the government to support. [151] Because taxpayers may receive a deduction of up to 50 percent of their income for donations to charitable organizations, Levmore argues that the government acts as a partner who matches the gift by reimbursing part of it to the taxpayer. Accordingly, Levmore concludes, the charitable deduction may arguably be viewed as a “social choice mechanism” that empowers taxpayers to have input on federal funding decisions. [152]

b. Public Benefit & Tax Expenditures

In a case decided during the same term as Bob Jones University, Justice Rehnquist reaffirmed the Court's support of the public benefit theory, writing that “tax exemptions and tax-deductibility are a form of subsidy that is administered through the tax system.” [153] This concept effectively treats tax-exempt status as a “tax expenditure,” a term coined in the late 1960s by former Assistant Secretary of the Treasury for Tax Policy, Stanley Surrey. Surrey's tax expenditure theory considers departures from the normal tax base to be government subsidies analogous to direct government spending programs. [154] Surrey's theoretic contribution was ultimately formalized by the Congressional Budget and Impoundment Control Act of 1974, [155] which requires the Congressional Budget Office (CBO) and Treasury to publish annual estimates of federal tax expenditures. The JCT prepares these reports for both the CBO and Treasury. Like Surrey, Justice Rehquist's opinion described exemptions as a “cash grant to the organization of the amount of tax it would have to pay on its income,” and deductible contributions as “similar *429 to cash grants of the amount of a portion of the individual's contributions.” [156] At the same time, Justice Rehnquist was careful to point out that “we of course do not mean to assert that [exemptions, deductions, and subsidies] are in all respects identical.” [157] Perhaps reflecting this equivocation, the JCT does not include the charitable exemption of nonprofit organizations in its tax expenditure methodology, reasoning that “the nonbusiness activities of such organizations generally must predominate and their unrelated business activities are subject to tax.” [158] This appears to be a policy decision to view the exempt activities of a section 501(c)(3) organization as inherently un-taxable, and thus not a departure from the normal tax base.

The public benefit theory does not explain exemption under the community benefit standard. The theory is conditioned on the idea of a quid pro quo. But the community benefit standard as articulated in Revenue Ruling 69-545 is vague regarding what beyond promotion of health is required of a nonprofit hospital for exemption. So, while Revenue Ruling 69-545 does not require it, in determining whether a nonprofit hospital is deserving of exemption, courts have most commonly looked to whether the hospital offers some amount of charity care. [159] Yet, empirical studies have shown little difference in the amount of charity care provided by nonprofit and for-profit hospitals. [160] Accordingly, because there is a for-profit sector providing a comparable amount of charity care, some other benefit is necessary. [161]

Still, apart from providing health care to the broad community, which for-profit hospitals also do, it is unclear what this benefit might be. Some nonprofit hospitals tout their economic impact to the community, but this is no different than the impact of for-profit hospitals. [162] Similarly, some nonprofit hospitals point to their community outreach programs. But these programs surely also have marketing benefits for the hospitals, even if there is some community benefit. [163] Again, this begs the question of what measurable benefit a nonprofit hospital is required to provide that is deserving of a subsidy under the public benefit theory.

It may be the case that some nonprofit hospitals, such as those that maintain a religious affiliation, contribute positively to the pluralism and cultural diversity of our society. But this is a very difficult benefit to measure. Further, not all nonprofit hospitals have such an affiliation. Thus, this argument is ultimately inadequate.

2. The Income Measurement Theory

Finding the traditional public benefit theory to be unsatisfying, Professor Boris Bittker and George Rahdert in the mid-1970s pioneered the income measurement theory. [164] The theory argues that the attempt to tax charitable organizations presents deep, practical problems with respect to the proper measurement of income. [165] Bittker and Rahdert reason that because the nonprofit sector does not generally produce profits in the same way a for-profit corporation does, it is difficult to determine a nonprofit organization's net income. For example, if nonprofit organizations were subject to tax, Bittker and Rahdert question whether membership dues would qualify as gifts under section 102 or as income. [166] Moreover, they question whether charitable contributions themselves would be properly treated as gifts under section 102 or as income.

Likewise, the treatment of expenses presents similar problems. Bittker and Rahdert question whether staff salaries for employees of charities are “ordinary and necessary business expenses” deductible under section 162. [167] At first, this seems an odd question. Such expenses would naturally be assumed to be deductible. However, Bittker and Rahdert note that private individuals who bestow charity upon those in need are not allowed to take deductions for their expenses.

Bittker and Rahdert also argue that determining the proper income tax rate for nonprofit organizations would be problematic. [168] First, they note that the most widely accepted contemporary method for determining tax rates is “ability to pay.” [169] They then illustrate that because nonprofits generally act as conduits, [170] which dispense economic benefits to their charitable beneficiaries, the income should be taxed at the recipient's tax rate. [171] However, Bittker and Rahdert explain that this would be difficult. Even if the beneficiaries could be determined, they would likely be too numerous and diverse to allow for this *431 type of computation. [172] Thus, the alternatives would be taxing the entity as a surrogate, or forgoing tax altogether.

While the income measurement theory might justify exempting donative organizations that subsist almost entirely on charitable contributions, it makes little sense for modern nonprofit hospitals, which function as quasi-businesslike entities. In fact, as Professor Henry Hansmann pointed out in 1981, many modern nonprofit organizations, particularly hospitals, produce their incomes through the sales of goods or services, not charitable contributions. [173] For such entities, which he labeled “commercial nonprofits,” [174] Hansmann argues that tax accounting principles could be imported from for-profit business practices, such as using receipts from sales as gross income and allowing deductions for business expenses incurred in the cost of producing such goods and services.

One key difference between for-profit hospitals and nonprofit hospitals is the nondistribution constraint, which prohibits the distribution of net earnings. Therefore, Hansmann posits that a tax could be imposed on “retained earnings,” which would be the sum of “(1) earnings saved for expenditure in future years, and (2) net capital investment (i.e., the excess of expenditures on capital equipment over depreciation allowances).” [175] Accordingly, any earnings retained for future use would be taxed, and any capital expenditures, less any allowable depreciation, would be taxed annually. Consequently, aside from the nondistribution constraint, which Hansmann argues could be taxed as retained earnings, taxing nonprofit hospitals is not a Herculean task. Therefore, the income measurement theory does not justify the exemption of nonprofit hospitals under the community benefit standard.

3. “Contract Failure” & the Capital Subsidy Theory

Professor Henry Hansmann draws on law and economics theory both to (1) explain the role of the charitable sector and (2) provide a rationale for the charitable exemption. [176] Hansmann first argues that nonprofit organizations might well be the most efficient providers of goods and services in cases where consumers are unable to adequately evaluate the goods and *432 services a producer delivers, and the producer thus has no market incentive to charge fair prices or deliver quality services, a situation he labels “contract failure.” [177] Consider someone making a donation to a charity that claims it will feed hungry children in an impoverished nation on another continent. The donor has no way of knowing whether the charity will actually use the funds to feed hungry children, or instead, to purchase a new Bentley for the charity's CEO. Hansmann argues that consumers in these situations might be better off dealing with nonprofit organizations because they are subject to the “nondistribution constraint.” [178] The nondistribution constraint bars a nonprofit organization from distributing its profits or net earnings to the persons who control it. [179] Section 501(c)(3) includes this prohibition as a condition of exemption; it is commonly referred to as the private inurement doctrine. [180] Hansmann argues that because nonprofit providers lack the profit motive of their for-profit counterparts, consumers are better protected where there is contract failure. [181] Thus, he argues that the broader reason for the existence of the nonprofit sector in general is to provide goods and services where contract failure exists.

The rationale for the exemption, Hansmann next argues, is to compensate nonprofit organizations for the challenges they face in capital markets. [182] Specifically, he notes that the nondistribution constraint prohibits nonprofit organizations from issuing shares like a for-profit corporation, thereby creating capital constraints. Hence, Hansmann argues that the tax exemption acts like a capital subsidy, providing nonprofit organizations better access to capital through retained earnings that they would otherwise forfeit to taxes. Combining his various contentions, Hansmann concludes that nonprofits should qualify for exemption where they are the more efficient producers (i.e., where there is contract failure) and are undercapitalized. [183]

Hansmann's arguments, while perhaps applicable to some nonprofit organizations (largely those that finance their operations primarily through donations), do not provide a compelling theory for exempting the modern nonprofit hospital. Interestingly, Hansmann provides the best argument against his own theory as it applies to nonprofit hospitals. First, Hansmann argues that contract failure does not appear to be a problem in the hospital industry, because patients rarely purchase goods directly from the hospital. *433 Instead, their doctors act as de facto purchasing agents. [184] Thus, there is no evidence that nonprofit hospitals are more efficient providers than their for-profit counterparts. [185]

Secondly, Hansmann argues that hospitals are overcapitalized, not undercapitalized. [186] He warns that the continued exemption of nonprofit hospitals might simply encourage “excessive capital investment.” [187] Moreover, any discussion of hospitals and capital must include mention of the massive expansion of the industry as a result of nonprofit hospitals' ability to issue tax-exempt bonds. Professors Mark Hall and John Colombo argue that this power and direct grants provide much more efficient capital inputs than Hansmann's theory, which they argue “does not explain why the income tax exemption should be used in preference, or even as a supplement, to these other methods.” [188] Further, Hall and Colombo also critique Hansmann's theory on the grounds that it fails to incorporate traditional and historical notions of charity and philanthropy and is pure economical analysis. [189]

4. The Donative Theory

Professors Mark Hall and John Colombo posit that nonprofit organizations should receive exemption based on the organization's ability to generate substantial donative support from the public. [190] Hall and Colombo explain that nonprofits typically step in where both the market and the government have failed to provide a desired good or service. [191] Market failure exists where public goods are subject to the “free rider” problem. The free rider problem arises where no one has an incentive to pay for public goods, and the private market therefore fails to provide them. Government failure is the result of our majoritarian voting system. That is, economists have argued that the government will provide services in an amount that roughly corresponds with the wishes of the majority of voters, possibly failing to meet the public needs of those in the minority. Accordingly, Hall and Colombo argue, the charitable exemption encourages nonprofit organizations to fill a need existing because of market or government failure.

Hall and Colombo argue that the donative theory provides an ideal rationale for exemption because it identifies institutions worthy of public *434 subsidization. [192] They argue that if public support exists for the services, then there must be a need and demand for them. Further, they explain that the theory avoids the direct vs. indirect subsidy question. If the public is funding these services, then the government clearly is not, so an indirect subsidy is necessarily the second-best option. Put differently, if majoritarian support is lacking to provide a direct government subsidy, then the second-best option for those in the minority desiring a good or service not otherwise available in the market is the charitable exemption. Finally, Hall and Colombo argue that their theory accords with historical notions of charity and philanthropy by identifying the types of organizations that have traditionally been exempt: those funded with voluntary public support.

Yet, the donative theory is not a sufficient rationale for the per se exemption of modern nonprofit hospitals under the community benefit standard. As Professors Hall and Colombo note, most nonprofit hospitals do not actively solicit donations from the public and therefore would not qualify for exemption under the theory. [193] Indeed, because these institutions operate primarily via fee-for-service commercial transactions and government funding [194] and are thus quasi-businesslike entities, they bear no resemblance to the traditional charitable hospitals of the late nineteenth century, which relied on public support for a third of their operating budget and the majority of their capital expenditures.

5. The Altruism Theory

Professor Rob Atkinson proposes altruism as a theory. [195] Atkinson reasons that the decision of a nonprofit organization's founders to forgo profits is itself an appropriate justification for extending exemption. [196] Therefore, Atkinson argues that when an organization's income subsidizes the consumption of persons not in control of the organization, no inquiry need be made into the merits of the organization's mission, goods, or services: it is worthy of exemption, provided it complies with the nondistribution constraint. This has been described as a “plow-back” theory, because, generally speaking, it requires only that an organization adopt a nonprofit structure and plow-back its earnings into the organization rather than distribute them to those in control of the organization. [197]

The altruism theory is effectively coterminous with the community benefit standard and would award exemption to any hospital willing to adopt a nonprofit corporation structure and abstain from distributing profits to its directors, officers, or others in control of the organization. Thus, the limitations inherent in the community benefit standard are also evident in the altruism theory. Professors Hall and Colombo note two issues. First, because the theory relies only on the form and structure of a nonprofit organization and does not evaluate the value of any public benefits the organization provides, it fails to distinguish why nonprofit hospitals are deserving of exemption and for-profits are not. [198] Atkinson's argument requires that the decision to forgo profits is itself enough to justify exemption, a case that Atkinson himself declines to make. [199] Second, the altruism theory does not illustrate why the subsidy is necessary. [200] In essence, Atkinson's theory appears to elegantly restate the private inurement doctrine as a rationale for exemption. But that alone is only one statutory requirement for exemption and does not explain why the government should subsidize an organization based solely on this criterion. [201]

IV. A WAY FORWARD

Because the community benefit standard is flawed, it should be replaced. Although some have argued for the repeal of the charitable exemption of hospitals altogether, this is undesirable, in part because of reliance interests and switching costs. A historical argument can also be made for the charitable exemption of nonprofit hospitals. The English ancestors of the modern charitable hospital are approaching their 1000th anniversary, and there is something to be said for tradition. Nonetheless, change is needed.

Hence, I argue for offering a charitable exemption for nonprofit hospitals based on the access theory proposed by Professor John Colombo. [202] First, millions of newly insured individuals are entering the marketplace and seeking health care in the wake of the passage of the Affordable Care Act. [203] Assuredly, many of these individuals will be insured by Medicaid, which has historically paid lower reimbursement rates to providers than their costs of *436 care. As a result, many providers refuse to see Medicaid patients. Thus, conditioning a hospital's exemption on its commitment to provide access to care, regardless of payor source, would ensure that these newly insured patients are able to secure care. Second, while most of the empirical data studying the behavioral patterns of for-profit and nonprofit hospitals suggest that they exhibit little, if any, difference in behavior, Professor Jill Horowitz has adduced evidence showing that nonprofit hospitals do differ in at least one significant way. Specifically, nonprofit hospitals provide unprofitable, but necessary, services in greater numbers than their for-profit counterparts. [204]

Drawing on legal precedent, Colombo has presented a doctrinal test for exemption focused on two broad categories. The first category would incorporate process-based rules such as mandating a community-based board of directors, and requiring detailed, mission-based, board-approved, organizational plans for enhancing access to hospital services. [205] The second category would require output measurements as quantifiable evidence that the organization is increasing access in two meaningful ways: (1) the organization must prove it is doing more than its for-profit competitors to enhance access; and (2) the organization must prove it is utilizing a substantial portion of its assets to further its charitable mission. [206]

The access theory addresses the defects in the current community benefit standard. First, the doctrinal test Colombo has proposed establishes clear criteria on which the exemption will be conditioned. Second, it specifically requires that a nonprofit hospital prove that it is doing more than its for-profit competitors to enhance access. Finally, the access theory provides a compelling rationale for extending the charitable exemption to nonprofit hospitals by conditioning the exemption on a measurable public good: access to care for underserved populations, or access to services not otherwise available in the marketplace.

V. CONCLUSION

It is fair to state that the community benefit standard is an indefinite criterion for exemption that causes confusion in the courts and results in inequities between for-profit and nonprofit hospitals. It is also fair to state that as a per se exemption test the community benefit standard fails to comport with any compelling theory for the charitable exemption. Thus, my argument is that the community benefit standard is flawed and should be repealed. In its place, I argue for an exemption test based on a theory of access advanced by Professor John Colombo. Such a test will promote sound tax policy while augmenting ongoing health reform efforts.

(Editor: Zhang Chi)

Personal details:

Mark C. Westenberger, First prize winner (tie) of the 2014 Theodore Tannenwald, Jr. Foundation for Excellence in Tax Scholarship writing competition; J.D. candidate, Washington University School of Law, 2015, M.M.; Southern Illinois University Edwardsville, 2002, B.M., Southern Illinois University Edwardsville, 2000.

[1]. The Joint Committee on Taxation has estimated that the value of the federal, state, and local government exemptions to nonprofit hospitals in 2002 was $12.6 billion, half of which came from federal exemptions and the remainder from state and local exemptions. The $12.6 billion figure estimates revenues foregone from exempting nonprofit hospitals from the corporate income tax, tax-exempt bond financing, and the charitable contributions deduction. CONGRESSIONAL BUDGET OFFICE, NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS 5 (Dec. 2006). See also MOLLY F. SHERLOCK & JANE G. GRAVELLE, AN OVERVIEW OF THE NONPROFIT AND CHARITABLE SECTOR 37 (Cong. Research Serv. Nov. 17, 2009) (questioning whether the benefits of preferential tax treatment for nonprofits are justified) [hereinafter SHERLOCK & GRAVELLE, SECTOR 37].

[2]. As tax-exempt organizations under section § 501(c)(3), nonprofit hospitals enjoy three major federal tax benefits: (1) corporate income tax exemption; (2) the ability to receive deductible charitable contributions from the public under section 170; and (3) the ability to issue tax-exempt bonds, which allows hospitals to issue debt at a lower interest rate because the bond holders do not pay tax on the interest. This Article will focus primarily on the corporate income tax exemption.

[3]. Rev. Rul. 56-185, 1956-1 C.B. 202 (requiring that section 501(c)(3) tax-exempt hospitals treat indigent patients “to the extent of their financial ability” and “not refuse to accept patients in need of hospital care who cannot pay for such services”).

[4]. Rev. Rul. 69-545, 1969-2 C.B. 117.

[5]. See MINORITY STAFF OF S. COMM. ON FINANCE, 1 10TH CONG., TAX-EXEMPT HOSPITALS: DISCUSSION DRAFT, (July 18, 2007) http:// www.grassley.senate.gov/releases/2007/07182007.pdf (“The staff believes that the present community benefit standard is extraordinarily vague and does not correlate with the federal tax benefits received by the hospital.”) (emphasis added).

[6]. Under Revenue Ruling 69-545's “community benefit” standard, the promotion of health itself is a charitable purpose “deemed beneficial to the community as a whole” even if it excludes indigent members of the community. Rev. Rul. 69-545, 1969-2 C.B. 117.

[7]. See M. Gregg Bloche, Health Policy Below the Waterline: Medical Care and the Charitable Exemption, 80 MINN. L. REV. 299, 300-01 (1995) ( “[N]onprofit hospitals today enjoy virtually per se federal exemption.”) [hereinafter Bloche, Health Policy].

[8]. See, e.g., Daniel M. Fox & Daniel C. Schaffer, Tax Administration as Health Policy: Hospitals, the Internal Revenue Service, and the Courts, 16 J. HEALTH POL. POL'Y & L. 251 (1991) (quoting Paul Streckfus, editor of the Tax Exempt Organization Review) [hereinafter Fox & Schaffer, Health Policy].

[9]. See infra Part III.B. for a discussion of empirical data suggesting limited behavioral differences between for-profit and nonprofit hospitals.

[10]. See, e.g., Elisabeth Rosenthal, Benefits Questioned in Tax Breaks for Nonprofit Hospitals, N.Y. TIMES, Dec. 16, 2013, http:// www.nytimes.com/2013/12/17/us/benefits-questioned-in-tax-breaks-for-nonprofit-hospitals.html.

[11]. Id. The hospitals argue that such figures are misconstrued because the hospitals donate significant sums in other ways, e.g., treating Medicaid patients, financing college scholarships, and educating health care professionals. Id.

[12]. See John D. Colombo, The Failure of Community Benefit, 15 HEALTH MATRIX 29 (2005) [hereinafter Colombo, Failure of Community Benefit].

[13]. See, e.g., Mark A. Hall & John D. Colombo, The Charitable Status of Nonprofit Hospitals: Toward a Donative Theory of Tax Exemption, 66 WASH. L. REV. 307, 389 (1991) (hereinafter Hall & Colombo, Charitable Status].

[14]. See, e.g., Robert Charles Clark, Does the Nonprofit Form Fit the Hospital Industry?, 93 HARV. L. REV. 1417, 1473 (arguing for the elimination of tax-exempt status for nonprofit hospitals because the subsidization of “activities and entities that are not socially superior to comparable nonsubsidized activities and entities” is “irrational” and “inequitable” and “the case for the social superiority of nonprofit hospitals has not been shown”) [hereinafter Clark, Nonprofit Form]. See also Bloche, Health Policy, supra note 7, at 404 (“[P]hase-out of the exemption ought to be a long run tax (and health) policy aim.”).

[15]. See.e.g., SHERLOCK & GRAVELLE, SECTOR 37, supra note 1, at 37.

[16]. See Colombo, Failure of Community Benefit, supra note 12, at 30-37; John M. Quirk, Turning Back the Clock on the Health Care Organization Standard for Federal Tax Exemption, 43 WILLAMETTE L. REV. 69, 75-83 (2007) [hereinafter Quirk, Turning Back the Clock]; JAMES J. FLSHMAN & STEPHEN SCHWARZ, NONPROFIT ORGANIZATIONS 328-39 (4th ed. 2010) [hereinafter FISHMAN & SCHWARTZ, NONPROFIT ORGANIZATIONS].

[17]. See FISHMAN & SCHWARTZ, NONPROFIT ORGANIZATIONS, supra note 16, at 328.

[18]. See Colombo, Failure of Community Benefit, supra note 12, at 44-51.

[19]. See U.S. DEPT. OF THE TREAS., TAX REFORM FOR FAIRNESS, SIMPLICITY, AND ECONOMIC GROWTH: THE TREASURY DEPARTMENT REPORT TO THE PRESIDENT 14 (Nov. 1984).

[20]. Five theories for the charitable exemption will be discussed in Part III.C.

[21]. See APOCALYPSE NOW (American Zoetrope 1979) (U.S. Army Captain Willard is told his mission is to “terminate the command” of the rogue U.S. Army Colonel Kurtz “with extreme prejudice.”).

[22]. I will note at least three reasons for continuing the exemption. First, there is something to be said for history and tradition, and nonprofit hospitals have a long legacy. Second, there are likely to be considerable switching costs involved with the elimination of the exemption. Third, although difficult to quantify, many patients seem to be uncomfortable with the idea of for-profit hospitals, and there may be certain psychological benefits to a nonprofit hospital sector.

[23]. John D. Colombo, The Role of Access in Charitable Tax Exemption, 82 WASH. U. L.Q. 343 (2004) [hereinafter Colombo, Role of Access].

[24]. Id. at 345.

[25]. The hospital industry represents a very powerful lobby in Washington, D.C. The Center for Responsive Politics lists the hospital industry (along with the nursing home industry) as having spent $1,208,026,494 on lobbying from 1998-2014. This places it 10th overall. (The top spender listed is the pharmaceutical/health products industry with $2,859,259,960 in spending during the same period.) The Center for Responsive Politics, Top Industries, OPENSECRETS.ORG (June 22, 2014), https:// www.opensecrets.org/lobby/top.php?showYear=a&indexType=i.

[26]. The Patient Protection and Affordable Care Act, Pub. L. No. 111 - 148, 124 Stat. 119(2010).

[27]. Paula H. Song, Op-Ed, Nonprofit Hospitals Can Help Medicaid and Uninsured Patients, N.Y. TIMES (Mar. 6, 2014), http:// www.nytimes.com/roomfordebate/2014/03/05/2014/03/05/hospital-systems-vs-private-practice-doctors/nonprofit-hospitals-can-help-medicaid-and-uninsured-patients.

[28]. Jill R. Horwitz, Why We Need the Independent Sector: The Behavior, Law, and Ethics of Not-for-Profit Hospitals, 50 UCLA L. REV. 1345 (2003) [hereinafter Horwitz, Independent Sector].

[29]. FISHMAN & SCHWARTZ, NONPROFIT ORGANIZATIONS, supra note 16, at 294.

[30]. Id. See also Miranda Perry Fleischer, Theorizing the Charitable Tax Subsidies: The Role of Distributive Justice, 87 WASH. U. L. REV. 505, 511 (2010).

[31]. Thomas Kelley, Rediscovering Vulgar Charity: A Historical Analysis of America's Tangled Nonprofit Law, 73 FORDHAM L. REV. 2437, 2440-43 (2005).

[32]. Id. at 2440-41.

[33]. Id. at 2443. See also Chauncey Belknap, The Federal Income Tax Exemption of Charitable Organizations: Its History and Underlying Policy, IV RESEARCH PAPERS SPONSORED BY THE [FILER] COMMISSION ON PRIVATE PHILANTHROPY AND PUBLIC NEEDS 2025, 2027 (1977) [hereinafter Belknap, Policy].

[34]. Belknap, Policy, supra note 33, at 2027.

[35]. The crown viewed the church's wealth and power as a threat to its authority. Id.

[36]. Id. See also John P. Persons, John J. Osborn, Jr. & Charles F. Feldman, Criteria for Exemption Under Section 501(c)(3), IV RESEARCH PAPERS SPONSORED BY THE [FILER] COMMISSION ON PRFVATE PHILANTHROPY AND PUBLIC NEEDS 1909, 1916 (1977) [hereinafter Persons, Osborn Jr. & Feldman, Criteria].

[37]. Persons, Osborn, Jr. & Feldman, Criteria, supra note 36, at 1916-17. See also MARION R. FREMONT-SMITH, GOVERNING NONPROFIT ORGANIZATIONS: FEDERAL AND STATE LAW AND REGULATION 22-26 (First Harvard Press paperback ed. 2008) [hereinafter FREMONT-SMITH, GOVERNING].

[38]. FISHMAN & SCHWARZ, NONPROFIT ORGANIZATIONS, supra note 16, at 74.

[39]. 43 Eliz., ch. 4 (1601). The Statute was enacted with two goals: first, to create a series of commissions that would regulate the charitable sector; and second, to define those purposes which would be considered charitable. See Persons, Osborn, Jr. & Feldman, Criteria, supra note 36, at 1912-13.

[40]. Persons, Osborn, Jr. & Feldman, Criteria, supra note 36, at 1912.

[41]. 43 Eliz., ch. 4 (1601). In addition to “relief of aged, impotent and poor people,” among the charitable purposes enumerated in the preamble are the “maintenance of ... schools of learning, free schools and scholars in universities”; the “repair of bridges, ports, havens, causeways, churches, sea-banks, and highways”; the “education and preferment of orphans”; the “relief, stock or maintenance for houses of correction”; and the “marriages of poor maids.”

[42]. FISHMAN & SCHWARTZ, NONPROFIT ORGANIZATIONS, supra note 16, at 74; Persons, Osborn, Jr. & Feldman, Criteria, supra note 36, at 1912-13.

[43]. Persons, Osborn, Jr. & Feldman, Criteria, supra note 36, at 1913 (citing GARETH JONES, HISTORY OF THE LAW OF CHARITY 27 (1969)).

[44]. I.R.C. § 501(c)(3).

[45]. Organizations seeking exemption from federal income tax under section 501(c)(3) are subject to three statutory requirements. First, the organization must be “organized and operated exclusively for religious, charitable, scientific ... or educational purposes.” Second, the organization must not violate the prohibition against private inurement, which requires that “no part of the net earnings of [the organization may] inure[] to the benefit of any private shareholder or individual.” Third, the organization must refrain completely from engaging in any political campaigns or activities, and must not engage in more than an insubstantial amount of lobbying. The second and third requirements will not be discussed in this Article.

[46]. I.R.C. § 501(c)(3) includes several other acceptable exempt purposes. In addition to those purposes listed above, an organization may be formed for “testing for public safety, literary ... or to foster national or international amateur sports competition ... or for the prevention of cruelty to children or animals.”

[47]. STAFF OF JOINT COMMITTEE TAXATION, JCX-29-05, HISTORICAL DEVELOPMENT AND PRESENT LAW OF THE FEDERAL TAX EXEMPTION FOR CHARITABLE AND OTHER TAX-EXEMPT ORGANIZATIONSS 62 (April 19, 2005) [hereinafter JCT, HISTORICAL DEVELOPMENT].

[48]. 461 U.S. 574, 586(1983).

[49]. Tariff Act of 1894, ch. 349, § 32, 28 Stat. 509, 556 (1894).

[50]. “The draftsmen of the 1894 income tax law, which included the first charitable exemption provision, relied heavily on English concepts of taxation; and the list of exempt organizations appears to have been patterned upon English income tax statutes.” Bob Jones Univ., 461 U.S. at 589 n. 13.

[51]. Tariff Act of 1894, ch. 349, § 32, 28 Stat. 509, 556 (1894).

[52]. Revenue Act of 1913, ch. 16, § 11(G), 38 Stat. 114, 172 (1913). See Bob Jones Univ., 461 U.S. at 589 n. 14.

[53]. Bob Jones Univ., 461 U.S. at 589.

[54]. Id. at 590 (quoting 55 Cong. Rec. 6728 (1917)).

[55]. Id. at 589.

[56]. Id. at 586.

[57]. Id. at 585-92.

[58]. Reg. § 1.501(c)(3)-1(a-c).

[59]. Reg. § 1.501 (c)(3)-1(b)(1)(i)(a).

[60]. Reg. § 1.501(c)(3)-1(b)(1)(i)(b).

[61]. Reg. § 1.501 (c)(3)-1(d)(1)(i).

[62]. JCT, HISTORICAL DEVELOPMENT, supra note 47, at 48-49.

[63]. Reg.§1.501(c)(3)-l(c)(1).

[64]. JCT, HISTORICAL DEVELOPMENT, supra note 47, at 50 (quoting B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352, 358 (1978)).

[65]. Reg. § 1.501(c)(3)-l(d)(2).

[66]. Id. This statement applies to hospitals, as the promotion of health is not specifically enumerated in section 501(c)(3).

[67]. Compare Reg. § 1.501(c)(3)-1(d)(2) with 43 Eliz., ch. 4 (1601). The Treasury Regulations include as charitable purposes the “[r]elief of the poor and distressed or of the underprivileged”; the “advancement of religion”; the “erection or maintenance of public buildings, monuments, or works”; the “lessening of the burdens of Government”; and the “promotion of social welfare.” See also Boris I. Bittker & George K. Rahdert, The Exemption of Nonprofit Organizations from Federal Income Taxation, 85 YALE L. J. 299, 330-33 (1976) [hereinafter Bittker & Rahdert, Exemption].

[68]. Bittker & Rahdert, Exemption, supra note 67, at 330-33.

[69]. Oliver A. Houck, With Charity for All, 93 YALE L. J. 1415, 1422-23 (1984).

[70]. G. BARRY CARRUTHERS, M.D. & LESLEY A. CARRUTHERS, A HISTORY OF BRITAIN'S HOSPITALS 3 (2005) [hereinafter CARRUTHERS & CARRUTHERS, HISTORY].

[71]. Id. at 3-7.

[72]. Id.

[73]. Id. at 9.

[74]. Id. at 11.

[75]. Professor Paul Starr uses this phrase to describe early hospitals and contrast them with modern hospitals, which he describes as “awesome citadels of science and bureaucratic order.” See PAUL STARR, THE SOCIAL TRANSFORMATION OF AMERICAN MEDICINE 145 (1982) [hereinafter STARR, AMERICAN MEDICINE].

[76]. CARRUTHERS & CARRUTHERS, HISTORY, supra note 70, at 12.

[77]. Id.

[78]. Id. at 24-25.

[79]. Id. at 24.

[80]. Id. at 25.

[81]. 43 Eliz., ch. 4 (1601).

[82]. Id.

[83]. In re Resch's Will Trusts, [1969] 1 A. C. 514, 540 (P.C.).

[84]. STARR, AMERICAN MEDICINE, supra note 75, at 149.

[85]. Id. at 150.

[86]. Id. at 145.

[87]. Id. at 151.

[88]. Id. at 150-51.

[89]. Id. at 146.

[90]. Tariff Act of 1894, ch. 349, § 32, 28 Stat. 509, 556 (1894).

[91]. Bloche, Health Policy, supra note 7, at 304-05.

[92]. Bittker & Rahdert, Exemption, supra note 67, at 302. (“Perhaps because the distinction between profitmaking corporations and nonprofit institutions was thought obvious, Congress devoted little discussion to a separate section of the Act exempting various charitable, religious, educational, and fraternal benefit organizations from income taxation.”). Sen. Hill defended the exemption by stating that because nonprofit organizations were not “conducted as a business for gain” they should not be subject to the income tax. 26 CONG. REC. 6623 (1894).

[93]. FISHMAN & SCHWARTZ, NONPROFIT ORGANIZATIONS, supra note 16, at 323.

[94]. FREMONT-SMITH, GOVERNING, supra note 37, at 243.

[95]. Bloche, Health Policy, supra note 7, at 304-06.

[96]. To my knowledge, no one has proffered an explanation for its absence.

[97]. Rev. Rul. 69-545, 1969-2 C.B. 117 (citing RESTATEMENT (SECOND) OF TRUSTS, § 368 and § 372; IV Scott on Trusts (3rd ed. 1967).

[98]. Rev. Rul. 56-185, 1956-1 C.B. 202.

[99]. Id.

[100]. Rev. Rul. 69-545, 1969-2 C.B. 117.

[101]. Fox & Schaffer, Health Policy, supra note 8, at 260-66.

[102]. Id. at 260-61.

[103]. Id. at 261-62 (internal quotes omitted).

[104]. Id. at 262.

[105]. Id.

[106]. Rev. Rul. 69-545, 1969-2 C.B. 117.

[107]. Id.

[108]. See Bloche, Healthy Policy, supra note 7.

[109]. 370 F. Supp. 325(1973).

[110]. The plaintiffs claimed a standard for charitable exemption that did not require hospitals to provide charity was invalid. Id.

[111]. “Accordingly, the Court finds that Revenue Ruling 69-545 was improperly promulgated and is without effect inasmuch as it allows private nonprofit hospitals to qualify as charities under the Internal Revenue Code of 1954 without requiring the hospitals to offer special financial consideration to persons unable to pay.” Id. at 338.

[112]. E. Kentucky Welfare Rights Org. v. Simon, 506 F.2d 1278 (1974), vacated, 426 U.S. 26(1976).

[113]. Id at 1288.

[114]. Id.

[115]. Simon v. E. Kentucky Welfare Rights Org., 426 U.S. 26, 45-46 (1976).

[116]. See Colombo, Failure of Community Benefit, supra note 12; Quirk, Turning Back the Clock, supra note 16.

[117]. The Tax-Exempt Hospital Sector: Hearing Before the H. Comm. on Ways and Means, 109th Cong. 11-14 (2005) (statement of Mark Everson, Commissioner, IRS).

[118]. This concept of a “plus” is developed below in the discussion of IHC Health Plans, Inc. v. Commissioner, 325 F.3d 1188 (10th Cir. 2003).

[119]. While Revenue Ruling 69-545 arguably requires nothing more for exemption than an open emergency room, the Service “appears to have retreated from the permissive standard suggested by Revenue Ruling 69-545 and contributed to a confused state of the law.” FISHMAN & SCHWARZ, NONPROFIT ORGANIZATIONS, supra note 16, at 328.

[120]. See Sound Health Ass'n v. Commissioner, 71 T.C. 158 (1978).

[121]. 62 T.C.M. (CCH) 1656, 1991 T.C.M. (RIA) ¶ 91, 649, rev'd, 985 F.2d 1210 (3d Cir. 1993).

[122]. Geisinger had adopted a subsidized dues program to offer membership to indigent members, but had not implemented it. Plus, the plan only expected to enroll 35 indigent members in the first three years. Id.

[123]. Id.

[124]. Id.

[125]. Id.

[126]. Id. at 1217.

[127]. Geisinger Health Plan, 26 T.C.M. (CCH) at 1217, 1991 T.C.M. (RIA) ¶ 91, 649.

[128]. Prof. Colombo has called this a “promotion of health plus” standard. Colombo, Failure of Community Benefit, supra note 12, at 37.

[129]. 325 F.3d 1188 (10th Cir. 2003).

[130]. Id. at 1197.

[131]. Id. (citing Bob Jones Univ. v. United States, 461 U.S. 574, 591 (1983)).

[132]. Id. at 1198.

[133]. CONGRESSIONAL BUDGET OFFICE, NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS 2 (2006) (finding that the average “uncompensated-care share” for nonprofit hospitals was 4.7 percent and for for-profit hospitals was 4.2 percent). Hall & Colombo, Charitable Status, supra note 13, at 374-76 (“By and large, the literature demonstrates that the two sectors are remarkably similar in their performance characteristics.”). Bloche, Health Policy, supra note 7, at 317-18. Colombo, Failure of Community Benefit, supra note 12, 44-51.

[134]. Bloche, Health Policy, supra note 7, at 318.

[135]. Id. at 317.

[136]. Id. at 317-18.

[137]. Colombo, Failure of Community Benefit, supra note 12, at 44-51.

[138]. Id. at 49.

[139]. Id.

[140]. U.S. DEPT. OF THE TREAS., TAX REFORM FOR FAIRNESS, SIMPLICITY, AND ECONOMIC GROWTH: THE TREASURY DEPARTMENT REPORT TO THE PRESIDENT 14 (Nov. 1984).

[141]. Id.

[142]. Belknap, Policy, supra note 33, at 2039.

[143]. Id. See also Developments in the Law--Nonprofit Corporations, 105 HARV. L. REV. 1612, 1620 (1992); FISHMAN & SCHWARTZ, NONPROFIT ORGANIZATIONS, supra note 16, at 298. These benefits often are subject to the “free rider” market failure problem. That is, the public at large enjoys and utilizes them, but because the entire public enjoys them there is a lack of incentive to pay for them. Moreover, there is also a lack of profit motive to prompt the private sector to step in. Hall & Colombo, Charitable Status, supra note 13, at 391-94.

[144]. Bob Jones Univ. v. U.S., 461 U.S. 574, 591 (1983).

[145]. JCT, HISTORICAL DEVELOPMENT, supra note 47, at 70 (citing Reg. § 1.501(c)(3)-l(d)(2)).

[146]. H.R.Rep. No. 1860, 75th Cong., 3d Sess. 19 (1938) (quoted in Bob Jones Univ., 461 U.S., at 590 (1983) and JCT, HISTORICAL DEVELOPMENT, supra note 47, at 69).

[147]. See Belknap, Policy, supra note 33, at 2039.

[148]. Id. at 2031-32.

[149]. Id.

[150]. I.R.C. § 170.

[151]. Saul Levmore, Taxes as Ballots, 65 U.CHI. L. REV. 387, 404-08 (1998). I must note that while Prof. Levmore's “vote” theory applies in the section 170 context, it does not necessarily apply in the section 501(c)(3) context, as individual taxpayers may not “vote” with their contributions until an organization has applied for and received tax-exempt status.

[152]. Id.

[153]. Regan v. Taxation with Representation, 461 U.S. 540, 544 (1983).

[154]. STANLEY S. SURREY, PATHWAYS TO TAX REFORM: THE CONCEPT OF TAX EXPENDITURES (1973). See also JOINT COMM. ON TAXATION, JCX-37-08, A RECONSIDERATION OF TAX EXPENDITURE ANALYSIS 2 (May 12, 2008). Of course, finding consensus on what constitutes the “normal” tax base for purposes of identifying tax expenditures is controversial. See id. at 22. However, further discussion of these issues is beyond the scope of this Article.

[155]. PUB. L. NO. 93-344.

[156]. Taxation with Representation, 461 U.S., at 544.

[157]. Id. at note 5.

[158]. JOINT COMMITTEE ON TAXATION, JCS-1-13, ESTIMATES OF FEDERAL TAX EXPENDITURES FOR FISCAL YEARS 2012-2017 8-9 (Feb. 1, 2013).

[159]. IHC Health Plans, Inc. v. Commissioner, 325 F.3d 1188, 1197 (2003).

[160]. CONGRESSIONAL BUDGET OFFICE, NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS 2 (Dec. 2006) (examining the operating expenses of nonprofit and for-profit hospitals and finding that the average uncompensated care percentage was 4.7 percent at nonprofit hospitals and 4.2 percent at for-profit hospitals).

[161]. Hall & Colombo, Charitable Status, supra note 13, at 346-54.

[162]. Bloche, Health Policy, supra note 7, at 384-87.

[163]. Id.

[164]. Bittker & Rahdert, Exemption, supra note 67.

[165]. Id. at 307-16.

[166]. Id. at 308-09.

[167]. Id. at 309-10.

[168]. Id. at 314-16.

[169]. Id. at 315.

[170]. That is, donations to a nonprofit are not necessarily “income,” because the nonprofit essentially serves a distributive function.

[171]. Id.

[172]. Id.

[173]. Henry Hansmann, The Rationale for Exempting Nonprofit Organizations from Corporate Income Taxation, 91 YALE L. J. 54, 59-60 (1981) [hereinafter Hansmann, Rationale for Exempting Nonprofit Organizations].

[174]. Id.

[175]. Id.

[176]. See generally Henry B. Hansmann, The Role of Nonprofit Enterprise, 89 YALE L. J. 835 (1980) [hereinafter Hansmann, Role of Nonprofit Enterprise]; Henry B. Hansmann, Reforming Nonprofit Corporation Law, 129 U. PA. L. REV. 497 (1981) [hereinafter Hansmann, Reforming Nonprofit Corporation Law]; Hansmann, Rationale for Exempting Nonprofit Organizations, supra note 173.

[177]. Hansmann, Role of Nonprofit Enterprise, supra note 176, at 843-45.

[178]. Hansmann, Reforming Nonprofit Corporation Law, supra note 176, at 501-02.

[179]. Id.

[180]. See I.R.C.§ 501(c)(3).

[181]. Hansmann, Reforming Nonprofit Corporation Law, supra note 176, at 504-07.

[182]. Hansmann, Rationale for Exempting Nonprofit Organizations, supra note 173, at 72-75.

[183]. Id. at 86.

[184]. Hansmann, Role of Nonprofit Enterprise, supra note 176, at 866-67.

[185]. Professor Robert Clark has made this same contention. See Clark, Nonprofit Form, supra note 14, at 1473-77.

[186]. Hansmann, Rationale for Exempting Nonprofit Organizations, supra note 173, at 89.

[187]. Id.

[188]. Hall & Colombo, Charitable Status, supra note 13, at 388.

[189]. Id. at 387-89.

[190]. Id. at 389-05.

[191]. Id. at 391-94.

[192]. Id. at 402-05.

[193]. Id. at 405.

[194]. Id. at 406-07.

[195]. Rob Atkinson, Altruism in Nonprofit Organizations, 31 B.C. L. REV. 501 (1990) [hereinafter Atkinson, Altruism].

[196]. Id. at 616-20.

[197]. Hall & Colombo, Charitable Status, supra note 13, at 383.

[198]. Id. at 383-84.

[199]. Hall & Colombo point out that Atkinson states making such a case “‘is too ambitious' because it entails ascertaining ‘what is ultimately good.”’ Id. at 384 (quoting Atkinson, Altruism, supra note 196, at 630).

[200]. Id.

[201]. Id.

[202]. Colombo, Role of Access, supra note 23. See supra Part I.

[203]. Mark Landler & Michael D. Shear, Enrollments Exceed Obama's Target for Health Care Act, N. Y. TIMES, April 17, 2014, available at http:// www.nytimes.com/2014/04/18/us/obama-says-young-adults-push-health-care-enrollment-above-targets.html?_r=0

[204]. Horwitz, Independent Sector, supra note 28.

[205]. Colombo, Role of Access, supra note 23, at 371-75.

[206]. Id.