APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (D.C. Civil No. 78-1409)
Before Rosenn, Sloviter, Circuit Judges and Layton, District Judge.*fn*
On this appeal by the IRS from summary judgment entered against it, we must decide whether Congress, in enacting section 501(e) of the Internal Revenue Code, which specifically permits joint hospital facilities performing specified services to be treated as tax exempt charitable organizations under section 501(c)(3) of the Code, intended that joint hospital facilities performing services not specifically included in section 501(e) could nevertheless be treated as tax exempt charitable organizations under section 501(c)(3).
Plaintiff HCSC-Laundry, a non-profit corporation with its principal office in Allentown, Pennsylvania, was incorporated under the Pennsylvania Nonprofit Corporation Law on January 3, 1967.*fn1 It provides laundry and linen service to fifteen non-profit hospitals located in the Greater Lehigh Valley, Reading, Scranton, and suburban Philadelphia, Pennsylvania, and to the Cetronia Ambulance Corps, which serves a village adjacent to Allentown, Pennsylvania. All the hospitals and the ambulance corps have received federal income tax exemptions under section 501(c)(3) of the Internal Revenue Code.
The formation of HCSC-Laundry followed an investigation into the various possible ways in which laundry service could be provided to the area hospitals. In early 1966 the Lehigh Valley and Health Planning Council, an agency under the Hill-Burton Act,*fn2 received requests from some of the area hospitals to approve funds requested to modernize their hospitals' in-plant laundries. The Council investigated and considered alternate sources of laundry services available to area hospitals. Among the options the Council considered were individual hospital laundries, commercial off-premises facilities, joint facilities with a single hospital laundry providing services to one or more hospitals beside itself, and shared non-profit, off-premises laundries which service several non-profit hospitals. A joint service was rejected because no hospital in the area had sufficient laundry facilities to service more than itself. A commercial laundry contacted was not interested in handling the full volume of laundry business of all the hospitals involved, and most of the other available commercial laundries were considered incapable of handling the heavy volume. The Council concluded that a shared non-profit, off-premises laundry would best accommodate the requirements of the member hospitals both from the viewpoint of quality of the service and economies of scale. Accordingly, HCSC-Laundry was formed.*fn3 Its laundry plant was built and equipped at a cost of approximately 2 million dollars, which it secured from local banks by using as collateral fifteen year contracts from 10 area hospitals. It employs approximately 125 people.
The corporation has no capital stock. Each participating hospital is a dues-paying member of the corporation. HCSC dues were $500 for the taxable year in issue. Centronia Ambulance Corps does not pay dues in order to receive laundry service. HCSC-Laundry's only income in addition to the dues is a laundry charge of 11/2 per pound of laundry serviced which is charged to each customer over the actual cost. "Cost" for this purpose includes operating expenses, debt retirement, and linen replacement. This charge in excess of cost is placed in a fund for equipment replacement and acquisition.
HCSC-Laundry sought exemption from federal income tax and, on March 26, 1976, filed an Application for Recognition of Exemption (Internal Revenue Service Form 1023) under Section 501(c)(3) of the Internal Revenue Code. This section authorizes exemption for corporations "organized and operated exclusively for religious, charitable, scientific, . . . or . . . educational purposes . . . no part of the net earnings of which inures to the benefit of any private shareholder or individual . . . ." I.R.C. § 501(c)(3).*fn4 It is stipulated that plaintiff has never made a distribution of money or property nor have any net earnings inured to the benefit of any member or individual.
The IRS denied the application stating:
Section 501(e) of the Code provides for exemption from Federal income tax of certain hospital service organizations organized and operated solely to perform specified services for member hospitals. Section 501(e)(I)(a) (sic) of the Code lists the specified services as data processing, purchasing, warehousing, billing and collection, food, industrial engineering, laboratory, printing, communications, record center, and personnel (including selection, testing, training, and education of personnel) services.
Since laundry services are not one of the services specified in section 501(e) (I)(a) (sic), the organization does not meet the requirements of section 501(e) of the Code, and thus is not exempt from Federal income tax under Section 501(c)(3). See Rev.Rul. 69-160 C.B. 1969-I, 147. Also see Rev.Rul. 69-633.
On December 16, 1976, HCSC-Laundry filed a federal corporate income tax return (form 1120) for the fiscal year ending June 30, 1976 indicating taxable income of $123,521.00 on which a federal income tax of $10,395.00 was paid. Promptly thereafter, it filed a Claim for Refund for overpaid federal income tax in the full amount paid, asserting it was "a tax-exempt organization under sections 501(c)(3) and/or 501(e) of the Internal Revenue Code of 1954." Although the IRS has informally advised HCSC-Laundry that the claim for the ...