Hospital Bureau of Standards and Supplies v. United States, 478-54.

• Decision Date: 15 January 1958
• Docket Number: No. 478-54.,478-54.
• Parties: HOSPITAL BUREAU OF STANDARDS AND SUPPLIES, Incorporated, v. UNITED STATES.
• Court: U.S. Claims Court

158 F. Supp. 560

HOSPITAL BUREAU OF STANDARDS AND SUPPLIES, Incorporated, v. UNITED STATES.

No. 478-54.

United States Court of Claims.

January 15, 1958.

Melber Chambers, New York City, for plaintiff. Ralph K. Smith, Jr., New York City, was on the brief.

John A. Rees, Washington, D. C., with whom was Acting Asst. Atty. Gen. John N. Stull, for defendant. James P. Garland, Washington, D. C., was on the brief.

JONES, Chief Judge.

The Hospital Bureau of Standards and Supplies, Incorporated, brings this action to recover Federal income taxes paid by it for the calendar years 1952 and 1953. Exemption from such taxes is claimed by the plaintiff under the provisions of section 101(6) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 101(6). That portion of section 101(6) relevant to a determination of the issue here presented provides a tax exemption for "Corporations, * * * organized and operated exclusively for * * * charitable, * * purposes, * * *."¹ The Government challenges the assertion that plaintiff's activities were exclusively charitable in nature. It is further argued by the Government that should the plaintiff be designated a charitable organization it has, nevertheless, failed to sustain the burden of proving that it was so organized and operated during the years in question.

The plaintiff was incorporated under the Membership Corporations Law of the State of New York, McKinney's Consol. Laws, c. 35, in 1934. Since that time, its principal place of business has been in the city of New York. The by-laws of the plaintiff, set forth in finding 4, provide:

"Section 1. Any hospital or similar institution not conducted for profit, and engaged in whole or in part in charitable work, is eligible to membership in this Corporation as an institutional member."

Findings 5 and 8 indicate that plaintiff was established as a successor to an organization of a similar name. Twelve directors, each residing at a different hospital, were named in plaintiff's certificate of incorporation. The certificate also specified that the plaintiff was not organized for "pecuniary profit."

To implement its express purposes, quoted in finding 5, the plaintiff initiates purchasing, or "jobbing," arrangements with various suppliers, whereby the member organizations can purchase hospital supplies as a group and thus realize savings not possible under individual purchases. Under this plan the merchandise is shipped directly to the hospitals but the invoices are sent to the plaintiff. To take advantage of discount savings, the plaintiff promptly pays the invoices and later collects from the members which have ordered and received the supplies. Rather than permit release of information as to net prices and thereby create friction between the plaintiff and its suppliers and between the suppliers and their competitors, the plaintiff adopted a policy in 1945 of billing its member hospitals at a higher price than that paid to the suppliers. The excesses resulting from collections from members, known as "patronage refunds," are credited to them, and they receive a credit memo or check at the end of each quarter.

In addition, the plaintiff maintains a research department to establish uniform standards as to the quality and price of supplies ordinarily used by the member institutions. Laboratory and service tests are conducted which frequently result in improved economy and use of materials. This information is passed along to the member hospitals to be used in selecting the items they customarily purchase. Material on the conservation of hospital equipment is also available to the members. Special technical consultant service is offered by the plaintiff. In addition to its publications, the plaintiff also maintains contact with its members through field representatives who make personal calls at member hospitals to discuss problems related to the plaintiff's services.

The plaintiff derives an income from dues paid by its member institutions, from cash discounts secured through prompt payment to suppliers, and from a service charge on all "jobbing" items. Income in excess of operating expenses is retained in a revolving fund for purchases for members. Being a membership corporation, the plaintiff has no capital stock, has no stockholders, and pays no interest or dividends of any kind. The executive director is the only officer receiving a salary from the plaintiff corporation, and only those employees who are actually and wholly engaged in the daily operation of the plaintiff are compensated for their services. The membership of the Hospital Bureau of Standards and Supplies, Incorporated, consisted of 207 institutions in the year 1952.

Unquestionably the technical analysis and purchase of hospital supplies from suppliers are necessary and indispensable to the operations of the plaintiff's member hospitals. It was with a view to provide this highly specialized service, that the plaintiff was incorporated. We have confirmed in finding 16 that plaintiff's activities effected savings to its member institutions. Where the taxpayer is engaged in a business enterprise that bears a close and intimate relationship to the functioning of a tax-exempt educational institution, it has been held that the taxpayer is entitled to an exemption as an educational institution within the meaning of section 101(6) of the Internal Revenue Code of 1939. Squire v. Students Book Corporation, 9 Cir., 191 F.2d 1018. The facts in that case overturn the Government's argument that the Hospital Bureau of Standards and Supplies, Incorporated, was not an integral part of the operations of its hospital members since "it performed no hospital services." There the taxpayer was a corporation organized to operate a bookstore and restaurant on the campus of a state college, and whose profits were to be utilized primarily in constructing a student union building which was to become state property. Squire v. Students Book Corporation, supra. The fact that the taxpayer did not render "educational services" was not controlling in that decision. The Tax Court has likewise extended recognition to the view that the activities of a taxpayer need not involve "educational services," to the extent of providing formal instruction under the supervision of a regular faculty, as the Government's argument would lead us to believe, in order to qualify for exemption as an educational institution under the provision of section 101(6) of the...