Prior to enactment of IRC Section 501(r), the tax-exempt status of a hospital was determined under the general rules of IRC Section 501(c)(3), as interpreted by administrative rulings and case law. The new statute does not repeal the existing rules, but sets forth additional requirements that must be met.

The new requirements of IRC Section 501(r) are designed to remedy perceived abuses of tax-exempt status by nonprofit hospitals. These new rules require tax-exempt hospitals to:

Perform a community health needs assessment;

Establish a financial assistancepolicy;

Limit charges for patients who are eligible under the financial assistance policy; and

Follow new billing and collections requirements.

IRC Section 501(r)(2)(A) applies to any organization that operates a facility required by any state to be licensed, registered, or otherwise recognized as a hospital. According to IRC Section 501(r)(2)(B) a nonprofit hospital organization that operates more than one hospital facility must meet the statutory requirements separately for each facility.

In planning a joint venture between a tax-exempt health care entity and a for-profit entity, it is necessary to determine if the tax-exempt partner and the resulting entity are required to meet the rules of IRC Section 501(c)(3). Obviously, this is the case where the tax-exempt entity transfers all its assets to a new entity that operates as a hospital. It is less clear whether the requirements of IRC Section 501(r) must be met by an entity that is only an ancillary joint venture between a tax-exempt and for-profit entity. The basic issue in that case is whether the ancillary joint venture is operating a hospital.