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HCSC-LAUNDRY v. UNITED STATES

July 10, 1979

HCSC-LAUNDRY
v.
UNITED STATES of America



The opinion of the court was delivered by: TROUTMAN

MEMORANDUM AND ORDER

Plaintiff Hospital Central Services, Inc. is claiming a refund for federal income taxes paid for plaintiff's fiscal year ending June 30, 1976, in the amount of $ 10,395.00. Plaintiff is a nonprofit corporation under Pennsylvania law and its sole activity is providing laundry and linen services to fifteen member nonprofit hospitals in southeastern Pennsylvania and to a nonprofit volunteer ambulance service. The issue is whether plaintiff, in furnishing this service, is exempt from taxation under Section 501(a) of the Internal Revenue Code of 1954, 26 U.S.C. § 501(a) as an organization described in 26 U.S.C. § 501(c)(3).

 Both sides have moved for summary judgment. The following facts have been stipulated. Plaintiff was incorporated on January 3, 1967, as a nonprofit corporation under the Pennsylvania Nonprofit Corporation Law, adopted May 5, 1933. (Stipulation of Facts, P 1.) Its principal office is located at 2171 28th Street, S.W., Allentown, Pennsylvania. (P 2). Plaintiff's purpose is set forth in paragraph 4 of the Articles of Incorporation as amended May 29, 1970:

 
"A. To operate and maintain a hospital laundry and linen supply program for those public hospitals and nonprofit hospitals or related health facilities organized and operated exclusively for religious, charitable, scientific, or educational purposes that contract with this corporation.
 
B. To cooperate with the Greater Lehigh Valley Hospital and Health Planning Council in carrying out the foregoing purposes.
 
C. To accomplish the foregoing purposes in a manner consistent with the provisions of Section 501(c)(3) of the Internal Revenue Code of 1954". (P 1, Exhibit A.)

 Plaintiff provides laundry and linen services to fifteen nonprofit hospitals located in the Greater Lehigh Valley, Reading, Scranton and suburban Philadelphia, Pennsylvania, areas, and to the Cetronia Ambulance Corps serving the Village of Cetronia, Pennsylvania. All of the hospitals served and the ambulance corps have received federal income tax exemptions under Section 501(c)(3) of the Internal Revenue Code. (P 9.) In order to discharge its purposes, a hospital requires reliable and quality laundry and linen services. (s 10.)

 Other stipulations state that plaintiff constructed its plant to serve hospitals, some of which had in-plant facilities (P 19); that plaintiff meets sanitary and quality standards for hospital linens (P 21); the Lehigh Valley Hospital and Health Planning Council (the Council) concluded that plaintiff's shared approach to laundry service allows for more economical processing than in-plant processing (P 16) and the Council concluded that better quality service would be supplied in this fashion (P 25); all funds paid by member hospitals in excess of cost are placed in a fund for acquisition and replacement of equipment (P 27); plaintiff has never made a distribution of money or property nor have any net earnings inured to the benefit of any member or individual (P 29).

 The Government contends that plaintiff is not an exempt organization for two reasons. First, it is not a cooperative hospital service as defined in § 501(e), and because the Congress specifically intended to leave shared laundry service out of § 501(e), it follows that plaintiff is also not exempt under § 501(c)(3). *fn1" The Government also contends that plaintiff is a feeder organization as defined in § 502(a) *fn2" and thus is not an exempt organization.

 Both of these contentions have been rejected by every Court that has ever considered them. See United Hospital Services, Inc. v. United States, 384 F. Supp. 776 (D.Ind.1974); Metropolitan Detroit Area Hospital Services, Inc. v. United States, 445 F. Supp. 857 (E.D.Mich.1978); Northern California Central Services, Inc. v. United States, 219 Ct. Cl. 60, 591 F.2d 620 (Ct.Claims, 1979); Community Hospital Services, Inc. v. United States, 43 AFTR 2d 79-931 (E.D.Mich.1979); Hospital Central Services Association v. United States, 40 AFTR 2d 77-5642 (W.D.Wash.1977). *fn3" While it is true that Congress did consider shared hospital services and expressly decline to include them in § 501(e)"s list of exempted activities, the courts have not held that such an exclusion had any application to the exemption of shared laundry service under § 501(c)(3). As Judge Dillin observed in the leading United Hospital Services case, the addition of § 501(e) to the Code did not exclude plaintiff in that case from consideration as a § 501(c)(3) charitable organization on its own merits. The purpose of § 501(e) was to enlarge the category of charitable organizations exempt under § 501(c)(3), not to modify or narrow § 501(c)(3). Thus, it is improper to consider the addition of § 501(e) as causing to be excluded from § 501(c)(3) any organization that would have been included in § 501(c)(3) but for § 501(e), even if such organization was explicitly excluded from § 501(e) itself. "(This) latter section (s 501(c)(3)) was not modified by the legislature in any way, and the legislation does not purport to take away charitable status from a corporation which had already acquired it. Insofar as this case is concerned, Section 501(e) is irrelevant". United Hospital Services, Inc. v. United States, supra, at p. 781.

 There is no inherent contradiction in holding that shared laundry service may be exempt from tax under § 501(c)(3) even though such service was explicitly denied an exemption under § 501(e). In declining to include shared laundry service within the express exemption provisions of § 501(e) Congress was merely declining to become embroiled in a very sensitive issue. As the Court of Claims noted, commercial laundries were vehemently opposed to such tax exemption, and faced with such a heated controversy, it appears that the Congress, deciding it was not at that time sufficiently informed to decide the issue, left such a matter to the courts, by leaving such services out of § 501(e), yet leaving § 501(c)(3) unaffected.

 Having decided that the absence of an express § 501(e) exemption does not automatically bar exemption under § 501(c)(3), we must decide if exemption under § 501(c)(3) is proper. We conclude that plaintiff is a charitable organization. Membership in plaintiff's organization is limited to public or non-profit hospitals, which hospitals themselves are charitable organizations. Net earnings by plaintiff, in excess of costs and funds for necessary reserves, are allocated to member hospitals in proportion to respective quantity or value of business done with each member hospital for the year giving rise to such earnings. (Stipulation Exhibit A, By-Laws, Article XI, Section 1.) It is undisputable that a hospital cannot discharge its purposes without reliable and quality laundry and linen services, which service must meet standards particular to hospital situations. Therefore, plaintiff undisputedly performs an integral and necessary function of charitable organizations, and we conclude that plaintiff is a charitable organization. This conclusion is consistent with the unanimous decisions of the courts that have considered this issue. See United Hospital Services, ...


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