Program Manual, Ch. XIX, issued November 10, 1974, by the U.S. Department of Health, Education, and Welfare. PSROs also have specific authority to issue sanction reports regarding providers participating in the program and to notify appropriate licensing authorities concerning such providers. 42 U.S.C. §§ 1320c-9(b)(1), (c).
InRev.Rul. 77-69, 1977-1 C.B. 143, the IRS granted exemption status under section 501(c)(3) to an organization operated as a Health Systems Agency (HSA) pursuant to the National Health Planning and Resources Development Act of 1974, 42 U.S.C. § 300k et seq.
In its ruling, IRS emphasized that HSAs are established in conjunction with recommended national guidelines for health planning policy issued by the Secretary of HEW designed to assure that quality health services will be available at a reasonable cost for all residents in HSA areas; that HSA funding is primarily achieved through federal funds and grants and locally-generated funds not contributed by persons directly interested in support of health resources; and that the governing boards of HSAs must have a majority of consumers, with the remainder being made up of health care providers. No mention is made of the possible financial or public relations benefits that might accrue to health care providers who participate in the HSA program.
It is difficult to reconcile that ruling with the ruling issued in this case. The similarity between HSAs and PSROs and PSRO support centers is obvious. PSROs collect and analyze data, establish regional norms and criteria of care, and coordinate activities with HSAs and other federal and state health planning entities. S.Rep.No.95-393, 95th Cong., 1st Sess., 62, 63 (1977). Both types of organizations were created by Congress to fill voids in the promulgation and development of national health care services and standards. Each, if successful, will promote the esteem of the medical profession, and obviate or minimize the need for government intervention and regulation in their respective areas of concern. There are, to be sure, differences in the membership of the organizations and the type of duties they perform, but these differences have no overwhelming relevance as regards the requirements for tax exemption.
It is not totally without significance in this context that the Department of Health, Education, and Welfare, which is charged with implementation of the PSRO program, has consistently expressed its disagreement with the IRS position. Indeed, a letter dated May 31, 1977, from the Acting Associate Administrator for Health Standards and Quality, to IRS requested "strongly and emphatically" that the Internal Revenue Service reconsider its ruling here.
Case law is likewise unfavorable to defendants. In two significant decisions dealing with the tax exempt status of private bar associations, Dulles v. Johnson, supra, and St. Louis Union Trust Co. v. United States, supra, U.S. courts of appeals squarely rejected arguments almost identical to those made by defendants here.
In Dulles, supra, the court held that various New York bar associations were organized and operated exclusively for charitable purposes,
placing particular emphasis on their performance of regulatory functions, and holding (273 F.2d at 366) that "if these activities were not undertaken by the Associations, the cost of the necessary regulation would fall upon the public."
In St. Louis Union Trust Co., supra, the court found that the Bar Association of St. Louis was organized and operated exclusively for charitable purposes although there were a variety of potentially non-charitable activities. For example, the court noted the educational programs run by the Bar, including seminars, lectures, speakers, and publications and stated that (374 F.2d at 434): " . . . education of this kind results in increased professional capacity for the lawyer students or in increased professional stature and repute for the lawyer participants, do not transform the activities into something other than educational pursuits within the meaning of the statute" (citations omitted). The court rejected the government's contention that a lawyer referral service run by the Bar is a means of securing a large amount of "untapped legal business," noting (374 F.2d at 435) that "we think the government overemphasizes the incidental economic benefits and unjustifiably would taint with an accusation of commercialism legal activity which is dedicated to the public good." The court joined the Dulles court in emphasizing the public interest effect of the Bar's disciplinary activities, indicating (374 F.2d at 436) that while a "profession's image and its relations with the public will be enhanced when it demonstrates ethics, effective discipline, and the protection of the public from invasion externally by incompetent and ill-trained persons and from imposition internally by the rascals of the profession . . . this is an incident and a result rather than a basic characteristic of the endeavor."
The government makes no serious effort to distinguish these decisions,
but it simply maintains that they "were wrongly decided; and the Service has never acquiesced in these decisions" (Memorandum, p. 16).
The plain fact is that plaintiffs here meet the standards applied by federal courts and the IRS itself in determining whether a charitable organization is operated exclusively for charitable purposes. They engage in no legislative lobbying, political activities, or public relations which might cast doubt on their charitable purposes. The record does not reveal that they have engaged in financial transactions designed to benefit the members of the organizations or the organizations themselves, activities in the nature of a patient-referral service, or other potential money-making activities designed to benefit members or participants. Any benefits which might accrue to participants in the PSRO program are wholly of an incidental nature, and not inconsistent with the charitable purposes and operations of the plaintiff organizations. The plaintiffs' activities are performed in accordance with federal law and are in the public interest.
The Court finds no proper basis for the Internal Revenue Service's denial of plaintiffs' application for tax exemption pursuant to section 501(c)(3), and it will enter, concomitant with this Opinion, an Order declaring plaintiffs' right to such an exemption.