St. David's Health Care System v. U.S.

• Decision Date: 07 November 2003
• Docket Number: No. 02-50959.,No. 02-51312.,02-50959.,02-51312.
• Citation: 349 F.3d 232
• Parties: ST. DAVID'S HEALTH CARE SYSTEM, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

349 F.3d 232

ST. DAVID'S HEALTH CARE SYSTEM, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 02-50959.

No. 02-51312.

United States Court of Appeals, Fifth Circuit.

November 7, 2003.

John J. McKetta, III, Robert J. Hearon, Jr. (argued), Boyce C. Cabaniss, Graves, Dougherty, Hearon & Moody, Terry Lee Vanderburg, Austin, TX, for Plaintiff-Appellee.

Teresa Ellen McLaughlin, Judith Ann Hagley (argued), U.S. Dept. of Justice, Tax Div., Washington, DC, for Defendant-Appellant.

Sedora Jefferson, David Allan Smith, Austin, TX, for City of Austin, TX, Amicus Curiae.

Appeals from the United States District Court for the Western District of Texas.

Before EMILIO M. GARZA and DENNIS, Circuit Judges, and VANCE^*, District Judge.

EMILIO M. GARZA, Circuit Judge:

St. David's Health Care System, Inc. ("St. David's") brought suit in federal court to recover taxes that it paid under protest. St. David's argued that it was a charitable hospital, and therefore tax-exempt under 26 U.S.C. § 501(c)(3). The Government responded that St. David's was not entitled to a tax exemption because it had formed a partnership with a for-profit company and ceded control over its operations to the for-profit entity. Both St. David's and the Government filed motions for summary judgment. The district court granted St. David's motion, and ordered the Government to refund the taxes paid by St. David's for the 1996 tax year. The district court also ordered the Government to pay $951,569.83 in attorney's fees and litigation costs. The Government filed the instant appeal. We conclude that this case raises genuine issues of material fact, and that the district court thus erred in granting St. David's motion for summary judgment. We therefore vacate the district court's decision, and remand for further proceedings.

I

For many years, St. David's owned and operated a hospital and other health care facilities in Austin, Texas. For most of its existence, St. David's was recognized as a charitable organization entitled to tax-exempt status under § 501(c)(3).¹

In the 1990s, due to financial difficulties in the health care industry, St. David's concluded that it should consolidate with another health care organization. Ultimately, in 1996, St. David's decided to form a partnership with Columbia/HCA Healthcare Corporation ("HCA"), a for-profit company that operates 180 hospitals nationwide. HCA already owned several facilities in the suburbs of Austin, and was interested in entering the central Austin market. A partnership with St. David's would allow HCA to expand into that urban market.

St. David's contributed all of its hospital facilities to the partnership. HCA, in turn, contributed its Austin-area facilities. The partnership hired Galen Health Care, Inc. ("Galen"), a subsidiary of HCA, to manage the day-to-day operations of the partnership medical facilities.

In 1998, the IRS audited St. David's and concluded that, due to its partnership with HCA, St. David's no longer qualified as a charitable (and, thus, tax-exempt) hospital. The IRS ordered St. David's to pay taxes. St. David's paid the requisite amount under protest, and subsequently filed the instant action, requesting a refund.

The parties filed cross-motions for summary judgment. The district court granted the motion filed by St. David's and ordered the Government to refund the taxes paid by the hospital for the 1996 tax year. The court also decided that, because the Government's position (that St. David's was not entitled to an exemption) was not substantially justified, the Government should pay attorney's fees and other litigation costs in the amount of $951,569.83. See 26 U.S.C. § 7430(c)(4)(A),(B) (indicating that the "prevailing party" in a tax case is entitled to attorney's fees and costs, unless the Government is the non-prevailing party and establishes that its position was "substantially justified"). The Government filed this appeal.

II

We review the district court's ruling on a motion for summary judgment de novo, applying the same legal standard as the district court. Wyatt v. Hunt Plywood Co., 297 F.3d 405, 408 (5th Cir.2002). Summary judgment should be granted only when there is "no genuine issue as to any material fact[.]" FED.R.CIV.P. 56(c); Wyatt, 297 F.3d at 408-09. An issue of fact is material only "if its resolution could affect the outcome of the action." Wyatt, 297 F.3d at 409.

In determining whether there is a dispute as to any material fact, we consider all of the evidence in the record, but we do not make credibility determinations or weigh the evidence. Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150, 120 S.Ct. 2097, 147 L.Ed.2d 105 (2000). Instead, we "draw all reasonable inferences in favor of the nonmoving party[.]" Id.; Wyatt, 297 F.3d at 409. If we determine, after accepting the facts as presented by the nonmoving party, that "the moving party is entitled to a judgment as a matter of law," we affirm the grant of summary judgment. FED.R.CIV.P. 56(c).

The Government claims that the district court erred in concluding that St. David's was entitled to § 501(c)(3) tax-exempt status. The burden was on St. David's to prove that it qualified for a tax exemption. See Nationalist Movement v. Commissioner, 37 F.3d 216, 219 (5th Cir. 1994); Senior Citizens Stores, Inc. v. United States, 602 F.2d 711, 713 (5th Cir.1979) ("It is the burden of the party claiming the exemption ... to prove entitlement to it.").

In order to qualify for tax-exempt status, St. David's was required to show that it was "organized and operated exclusively" for a charitable purpose. 26 C.F.R. § 1.501(c)(3)-1(a). The "organizational test" required St. David's to demonstrate that its founding documents: (1) limit its purpose to "one or more exempt purposes"; and (2) do not expressly empower St. David's to engage more than "an insubstantial part of its activities" in conduct that fails to further its charitable goals. Id. § 1.501(c)(3)-1(b). The parties agree that St. David's articles of incorporation satisfy the organizational test.

To pass the "operational test," St. David's was required to show: (1) that it "engage[s] primarily in activities which accomplish" its exempt purpose; (2) that its net earnings do not "inure to the benefit of private shareholders or individuals"; (3) that it does "not expend a substantial part of its resources attempting to influence legislation or political campaigns"; and (4) that it "serve[s] a valid purpose and confer[s] a public benefit." Nationalist Movement, 37 F.3d at 219-20. The parties appear to agree that, because St. David's contributed all of its medical facilities to the partnership, we must look to the activities of the partnership to determine if St. David's satisfies the operational test.

The Government argues that St. David's cannot demonstrate the first element of the operational test.² The Government asserts that, because of its partnership with HCA, St. David's cannot show that it engages "primarily" in activities that accomplish its charitable purpose. The Government does not contend that a non-profit organization should automatically lose its tax-exempt status when it forms a partnership with a for-profit entity. Instead, the Government argues that a non-profit organization must sacrifice its tax exemption if it cedes control over the partnership to the for-profit entity. The Government asserts that, when a non-profit cedes control, it can no longer ensure that its activities via the partnership primarily further its charitable purpose. In this case, the Government contends that St. David's forfeited its exemption because it ceded control over its operations to HCA.

St. David's responds in part that the central issue in determining its tax-exempt status is not which entity controls the partnership. Instead, St. David's appears to assert, the pivotal question is one of function: whether the partnership engages in activities that further its exempt purpose. St. David's argues that it passes the "operational test" because its activities via the partnership further its charitable purpose of providing health care to all persons.

St. David's relies in particular on a revenue ruling issued by the IRS, which provides guidelines for hospitals seeking a § 501(c)(3) exemption. Revenue Ruling 69-545 sets forth what has come to be known as the "community benefit standard." See IHC Health Plans, Inc. v. Commissioner, 325 F.3d 1188, 1197 (10th Cir.2003); see also Rev. Rul. 83-157, 1983-2 C.B. 94, 1983 WL 190185 (1983) (noting that hospitals can be tax-exempt if various factors demonstrate that the "hospitals operate exclusively to the benefit of the community"). The IRS generally accords tax-exempt status to independent non-profit hospitals that satisfy this standard.

Under the "community benefit standard," a non-profit hospital can qualify for a tax exemption if it: (1) provides an emergency room open to all persons, regardless of their ability to pay; (2) is willing to hire any qualified physician; (3) is run by an independent board of trustees composed of representatives of the community ("community board"); and (4) uses all excess revenues to improve facilities, provide educational services, and/or conduct medical research. See Rev. Rul. 69-545, 1969-2 C.B. 117, 1969 WL 19168 (1969) (outlining the community benefit standard); see also IHC Health Plans, 325 F.3d at 1197 n. 16 (noting several relevant factors for determining whether a hospital confers a significant community benefit, including the provision of free or below-cost care; the treatment of individuals eligible for Medicare or Medicaid; the use of extra funds for research and educational programs; and the composition of the board of trustees). A hospital need not demonstrate all of these factors in order to qualify for § 501(c)(3) tax-exempt status. See Geisinger, 985 F.2d at 1219; Rev. Rul. 69-545, 1969-2 C.B. 117 (1969) (stating that "[t]he...