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December 16, 2021

IRS revokes hospital's tax-exempt status following sale of all assets

The IRS revoked (202149024) the tax-exempt status under IRC Section 501(c)(3) of a hospital that sold all of its assets, no longer operated as a corporate entity, and therefore ceased to have an exempt purpose. In addition, the hospital failed to file articles of dissolution with the applicable state and failed to inform the IRS that it intended to dissolve and forfeit its tax-exempt status.


In its exemption revocation decision, the IRS emphasizes that:

  • To meet the requirements of IRC Section 501(c)(3), an organization must satisfy the organizational and operational tests by (1) being organized and operated exclusively for charitable, educational, or other exempt purposes and (2) allowing no part of its net earnings to inure to the private benefit of any shareholder or individual
  • The term "charitable" for IRC Section 501(c)(3) purposes includes providing relief to the poor and distressed, advancing education and science, and lessening the burdens of government
  • Tax-exempt organizations must keep permanent books or records showing items of gross income, receipts and disbursements, and provide them to the IRS (Treas. Reg. Section 1.1600-1)
  • An organization will fail the operational test if it has any nonexempt purpose that is substantial (Better Business Bureau v. United States, 326 U.S. 279 (1945)), "regardless of the number or importance of truly exempt purposes" it might also have
  • An exempt organization "must prove unambiguously … that it qualifies for a tax exemption" (United States v. Wells Fargo Bank, 485 U.S. 351 (1900)

IRS's position and ruling

The IRS contends the hospital no longer provided medical or other hospital-related services in furtherance of its tax-exempt purposes following the sale of assets. However, the successor hospital organization provided medical services at the facilities that the prior hospital sold. Citing Treas. Reg. Section l.501(c)(3)-1(c)(1), the IRS notes that an organization is considered "operated exclusively" for an exempt purpose only if it engages primarily in activities that accomplish an exempt purpose described in IRC Section 501(c)(3). Due to its lack of activities conducted after the sale, "the [hospital] could not have been considered to have operated exclusively for an exempt purpose because there was no primary activity," the IRS states. Therefore, the hospital failed to qualify for IRC Section 501(c)(3) status once it terminated its operation as a hospital under its employer identification number (EIN). Consequently, the IRS has revoked the hospital entity's tax-exempt status.


This exemption revocation illustrates the danger of maintaining a dormant IRC Section 501(c)(3) organization, and the need for such an organization to engage in at least some charitable activity during a tax year to satisfy the operational test and preserve its tax exemption for that year. It also underscores the need for an exempt organization to keep accurate and up-to-date records of its operations, and to file proper paperwork with the IRS and applicable states to finalize its termination.

Organizations that are tax-exempt under IRC Section 501(c)(3) should consider analyzing whether a sale of their assets will hurt their ability to satisfy the operational test for exemption. If an organization decides to dissolve, it must notify the IRS of its dissolution (e.g., by filing a final Form 990 return). If a tax-exempt organization were to cease operations without dissolving in the same year, it could fail the operational test and forfeit its tax exemption for that year, possibly subjecting it to federal income tax and jeopardizing the deductibility of its donors' contributions under IRC Section 170(a)(1). Retaining a dormant tax-exempt entity with aspirations of using it in the future generally does not meet the operational test for exemption, therefore risking revocation of the entity's exempt status.

For more information, see our earlier Tax Alert, "Exempt status of inactive organizations revoked," addressing other IRS revocations of the IRC Section 501(c)(3) exemption of dormant organizations due to their failure to meet the operational test for exemption.


Contact Information
For additional information concerning this Alert, please contact:
Tax-Exempt Organization Services
   • Steve Clarke (
   • Melanie McPeak (
   • Morgan Moran (
   • Bridget O’Connell (