The IRS, in Letter 202521025, revoked the tax-exempt status of a governmental hospital organization under IRC Section 501(r) because the community health needs assessment (CHNA) provided during examination did not indicate it applied to the specific hospital, and because the hospital did not prepare or adopt an implementation strategy.

Facts

The IRS previously granted the organization's request for recognition of tax exemption under IRC Section 501(c)(3) as a hospital organization described in IRC Sections 509(a)(1) and 170(b)(1)(A)(iii). The organization was not required to file Form 990, because it qualified as a governmental unit or an affiliate of a governmental unit described in Revenue Procedure 95-48. Otherwise, the organization had to adhere to the requirements for tax-exempt hospitals under IRC Section 501(r) because of its IRC Section 501(c)(3) tax-exempt status. The IRS selected the organization for examination of possible deficiencies under IRC Section 501(r) and requested that it provide its CHNA report and its implementation strategy, which it was required to prepare under IRC Section 501(r)(3).

In response to the examination request, the organization provided the IRS with its:

1. Policies regarding charity care for indigent patients and billing
2. Documentation that the hospital claimed was a CHNA report
3. Collections policy
4. Emergency department admission protocol
5. Request for termination of exempt status under IRC Section 501(c)(3)

The hospital's CHNA report could be accessed via a link on its website, where it was labeled as the Community Needs Assessment Certification. This CHNA report indicated that it applied to multiple organizations, but did not list the specific hospital by name. The hospital also did not provide an implementation strategy.

Law and analysis

To meet the requirements of IRC Section 501(r), an organization must, among other things, have conducted a CHNA during the tax year in question or in either of the two immediately preceding tax years, in accordance with IRC Section 501(r)(3)(A)(i). Additionally, the organization must adopt an implementation strategy to describe how it plans to address certain prioritized community health needs identified in the CHNA, in accordance with IRC Section 501(r)(3)(A)(ii).

Treas. Reg. Section 1.501(r)-3(b) lists the specific requirements for conducting a CHNA. Under Treas. Reg. Section 1.501(r)-3(b)(6)(v)(A), a joint CHNA report will satisfy the requirements if an authorized body of the facility adopts a joint CHNA report that, among other things, clearly identifies that it applies to the organization.

The IRS concluded that the organization failed to meet all the requirements of Treas. Reg. Section 1.501(r)-3 because (1) it did not adopt an implementation strategy in accordance with IRC Section 501(r)(3)(A)(ii) and (2) the CHNA report did not clearly identify that it applied to the hospital.

Implications

The revocation of the organization's tax-exempt status highlights the IRS's heightened scrutiny of IRC Section 501(r) compliance and the community benefit standard, which have faced significant scrutiny by Congress in recent years (see Tax Alert 2024-2329).

The revocation underscores the importance of a tax-exempt hospital complying with IRC Section 501(r) by, among other actions, timely conducting a CHNA and adopting a CHNA report and implementation strategy that clearly apply to the hospital describe how it identified, prioritized, and plans to address significant community health needs.

IRC Section 501(r) applies to all licensed hospitals recognized by the IRS as tax-exempt under IRC Section 501(c)(3), including hospitals operated by or affiliated with government entities. While most governmental organizations qualify to exclude their income from federal taxation without needing to apply for IRS recognition of exemption under Section 501(c)(3), they may seek IRS recognition of IRC Section 501(c)(3) status to qualify for certain grants and other benefits. If the IRS recognizes a government hospital organization as tax-exempt under IRC Section 501(c), the organization must comply with IRC Section 501(r) requirements to maintain its IRC Section 501(c)(3) status. Like the hospitals in prior IRS revocations of exemption based on IRC Section 501(r) noncompliance, this hospital was operated by a governmental organization that requested IRS revocation of its IRC Section 501(c)(3) status, presumably so that it could avoid having to comply with IRC Section 501(r).