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CHART, INC. v. UNITED STATES

December 4, 1979

Chart, Inc., Plaintiff
v.
United States of America, Defendant.



The opinion of the court was delivered by: RICHEY

MEMORANDUM OPINION

This action presents to the Court a question of first impression: whether an organization which qualifies under section 501(e) of the Internal Revenue Code of 1954 (hereinafter, "the Code"), which is the tax-exemption provision enacted by Congress specifically for cooperative hospital service organizations, may also qualify under section 501(c)(3) of the Code, which is the general provision for tax-exempt organizations? For the reasons that follow, the Court answers the question in the affirmative.

 I. BACKGROUND

 The plaintiff is a not-for-profit corporation incorporated and operated for the exclusive purpose of providing, on a non-profit basis, shared electronic data processing services to its tax-exempt non-profit member hospitals.

 The plaintiff's membership consists entirely of hospitals which are exempt from federal income tax pursuant to section 501(c)(3) of the Code. The plaintiff, as a membership corporation, has no capital stock, no stockholders, and pays no dividends of any kind. Only employees who are actually engaged in the daily operation of the plaintiff's activities are compensated for their services. The sole source of financial support for the plaintiff is membership fees which are structured upon the plaintiff's annual budgeted operating costs. Such operating costs are incurred solely for the purpose of providing shared electronic data processing services to its member hospitals. The services which the plaintiff provides to its members are an integral part of the hospital's activities. The plaintiff provides highly specialized services that are not available from commercial enterprises. The plaintiff has never offered its services to any one other than its members, nor has it ever engaged in activities other than the rendering of shared electronic data processing services.

 The plaintiff's assets are dedicated to exempt purposes. No part of the plaintiff's net earnings inure to the benefit of any private shareholder or individual. No substantial part of the plaintiff's activities consists of carrying on propaganda or otherwise attempting to influence legislation. The plaintiff does not participate in or intervene in any political campaign on behalf of any candidate for public office.

 The plaintiff has exhausted its administrative remedies. The Court has jurisdiction over this action pursuant to section 7428 of the Code and 28 U.S.C. ¬ß 1346(e).

 II. THE STATUTORY SCHEME

 In relevant part, section 501(c)(3) of the Code provides an exemption for:

 
corporations . . . organized and operated exclusively for . . . charitable . . . purposes . . . no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation, and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of any candidate for public office.

 Section 502(a) of the Code provides that:

 
An organization operated for the primary purpose of carrying on a trade or business for profit shall not be exempt from taxation under section 501 on the ground that all of its profits are payable to one or more organizations exempt from taxation under section 501.

 Organizations described in section 502(a) are called "feeder organizations." Such organizations are further defined by the Internal Revenue Service in the regulations. Section 1.502-1(b) of the Treasury Regulations attempts to further ...


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