FEIKENS, District Judge.
Plaintiff, Metropolitan Detroit Area Hospital Services, Inc. (Metropolitan) is a nonprofit corporation owned and operated cooperatively by six Detroit area hospitals; its purpose is to provide laundry services to those hospitals. Prior to the incorporation of Metropolitan on June 15, 1970, each participating hospital maintained separate "in-house" laundry facilities to furnish services now provided by Metropolitan. In essence, the hospitals pooled their resources to form the laundry cooperative and now pay to Metropolitan a rate designed to cover the laundry's costs and overhead, including debt retirement. Metropolitan is controlled by a Board of Trustees the members of which are appointed by the governing bodies of the participating hospitals. Each hospital appoints two members to the Board of Metropolitan.
Although presently Metropolitan provides laundry services only, its Articles of Incorporation allow for a significant expansion of hospital services. Each participating hospital is exempt from federal income tax or is publicly owned and operated as a municipal corporation. Metropolitan is exempt from Michigan ad valorem personal and real property taxes and from Michigan sales tax. M.C.L.A. 211.7; Hospital Purchasing Service v. City of Hastings, 11 Mich.App. 500, 161 N.W.2d 759 (1968).
In 1973 Metropolitan paid $4,811.00 in federal income taxes. The pleadings do not show what amount, if any, Metropolitan paid in income taxes for 1974. In 1975 it paid $39,822.00. On April 17, 1975 Metropolitan filed with the Internal Revenue Service an application for recognition of exemption, asserting that it was a charitable organization under Int.Rev.Code § 501(c)(3); 26 U.S.C. § 501(c)(3) and, thus, entitled to federal income tax exemption because of Int.Rev.Code § 501(a); 26 U.S.C. § 501(a). IRS denied it an exemption on September 1,
Metropolitan also filed a claim for refund in an amended U.S. corporation income tax return, dated October 26, 1976. To support this claim it furnished supplemental information to the IRS in a letter dated November 12, 1976. IRS, however, found insufficient grounds upon which to reduce Metropolitan's tax liability and so informed Metropolitan on February 11, 1977.
On April 1, 1977 Metropolitan filed its complaint in this court against the IRS to recover $44,633.00. It now seeks summary judgment, pursuant to F.R.C.P. 56, contending there is no genuine issue as to any material fact and that it is entitled, therefore, to judgment in its favor as a matter of law. I agree.
The facts as stated are not disputed by the parties. The only question demanding resolution is whether, under these facts, the plaintiff is entitled to a federal income tax exemption under Section 501(a) because of Section 501(c)(3) of the Internal Revenue Code. Although this question is singular, it must be analyzed in three parts. First, is plaintiff, as a cooperative organization owned and operated by tax exempt hospitals, entitled to claim a tax exemption under Section 501(c)(3) of the Internal Revenue Code, or must it qualify for an exemption, if at all, under the more narrowly drawn Section 501(e)? Second, is plaintiff a charitable organization within the meaning of Section 501(c)(3) and, therefore, entitled to a Section 501(a) exemption? Third, is plaintiff a feeder organization under Section 502 and, therefore, not entitled to an exemption under Section 501(a)?
Section 501(a) of the Internal Revenue Code provides generally for certain tax exemptions:
Plaintiff contends that since it is a charitable organization as described in Section 501(c)(3), it is entitled to a Section 501(a) exemption. Section 501(c)(3) provides:
Defendant counters this argument in part by maintaining that plaintiff, as a cooperative hospital service organization, must qualify for exemption, if at all, under Section 501(e), rather than under Section 501(c)(3). Section 501(e) provides in part:
Defendant argues that since laundry service is not included in the list of exempt hospital services in Section 501(e), plaintiff cannot receive a Section 501(a) exemption.
Plaintiff responds, and with this I agree, that as to cooperative hospital service organizations, Section 501(e) contains a list of exempt organizations additional to those included in Section 501(c) and is not, as defendant maintains, an exclusive list. In United Hospital Services, Inc. v. United States, 384 F.Supp. 776 (S.D.Ind.1974), Judge Dillin took the identical position:
384 F.Supp. at 780, 781.
A federal district court in Hospital Central Service Association v. United States, 77-2 U.S.T.C., P 9601, 40 A.F.T.R.2d 77-5646, accepted Judge Dillin's analysis without further comment.
Defendant nonetheless argues that United Hospital and Hospital Central are distinguishable from the instant case in that those cases held exempt laundry service organizations incorporated before the enactment of Section 501(e). This argument is not persuasive for two reasons. First, although
I hold, therefore, that Section 501(e) does not preclude Metropolitan from receiving a general charitable exemption under 501(c)(3) provided it meets the qualifications for exemption under that section. It is this issue which is next discussed.
Plaintiff contends that it is a charitable organization within the meaning of Section 501(c)(3), and, therefore, entitled to a Section 501(a) tax exemption. Defendant counters that since plaintiff offers services normally provided by commercial rather than charitable organizations it cannot receive a charitable exemption.
That plaintiff provides a service frequently offered by commercial establishments does not preclude its classification as a charitable organization. Nursing homes, hospitals and service organizations operated as charities frequently compete vigorously with their commercial counterparts for the same business. Plaintiff's organization as a laundry service, therefore, does not preclude it from receiving a charitable exemption provided it can meet the somewhat amorphous definitional requirements:
Treas.Reg. § 1.501(c)(3)-1(d)(2).
In determining whether a particular organization falls within this definition courts consider both the general policy behind Section 501(c)(3) and those pertinent factors which, in a given case, suggest that the organization is charitable:
384 F.Supp. at 779.
I agree with Judge Dillin's analysis of the policy supporting Section 501(c)(3) and find the following factors in this case indicative of Metropolitan's charitable nature and purposes: (1) Metropolitan is governed by a Board of Trustees the members of which also serve on governing boards of the various participating hospitals. Consequently, hospital members collectively control and operate Metropolitan in their own interest; (2) All members receive a benefit from Metropolitan's centralized, standardized services, including reduced costs and increased floor space; (3) For profit hospitals are not permitted to participate in the cooperative and no profits (as that term is traditionally defined) are realized by Metropolitan; (4) Metropolitan provides a service which is essential to the proper functioning of its tax exempt members. Indeed, prior to the incorporation of Metropolitan each member hospital performed these services independently through "in-house" laundries; (5) The Articles of Incorporation of Metropolitan provide that upon its dissolution all proceeds shall be distributed to charitable organizations exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code.
As the courts held in United Hospital and Hospital Central, I find that a non-profit laundry cooperative organized such as Metropolitan is a charitable organization entitled to an exemption because of Sections 501(c)(3) and 501(a) of the Internal Revenue Code.
Defendant also argues that plaintiff's motion for summary judgment should be denied because plaintiff is a feeder organization as defined in Section 502 of the Internal Revenue Code, and, therefore, not entitled to an exemption under Section 501(a). Section 502 provides:
See also Treas.Reg. § 1.502-1.
In both United Hospital and Hospital Central it was held that cooperative, nonprofit
An additional issue merits discussion here. In United Hospital the court placed weight upon its finding that the hospital laundry service involved there did not compete with commercial laundries in the area. This factor played a part in the court's finding that the laundry service was a charitable organization within the meaning of Section 501(c)(3); it also appears to have played a part in the court's refusal to classify the laundry as a feeder organization under Section 502. In Hospital Central the defendant did not contest the plaintiff's representation that the laundry service there performed such a unique function that it did not compete with commercial laundries in the area. The court, therefore, found it unnecessary to analyze the significance or insignificance of the no competition factor.
In this case plaintiff contends, in affidavits in support of its motion for summary judgment, that Metropolitan provides unique laundry services not offered by commercial establishments. Defendant, in opposing affidavits, states that commercial laundries in the Detroit area provide services "similar" to those offered by Metropolitan and actively compete with Metropolitan for hospital laundry business.
If a charitable organization was defined in part by its failure to compete with profitable businesses it would be necessary to hear evidence relating to the competition question raised by the parties in their affidavits. Similarly, if non-competition with profitable trades or businesses was a prerequisite to exclusion from the definition set forth in Section 502, I would hear evidence on this issue. However, as stated above, the competitive or non-competitive nature of an organization neither restricts nor expands its definition as a charity. Furthermore, a cursory study of Section 502 and Treas.Reg. 1.502-1 suggest that the competition factor is also irrelevant in defining an organization as a feeder. Defendant may be correct in suggesting that the general purpose behind the enactment of Section 502 was to restrict competition between charitable and profitable enterprises. Nevertheless, defendant cannot ask this court to classify an organization as a feeder to further Congress' purposes where, as here, the organization in question does not meet the clear definitional language in the statute itself.
(a) In the case of an organization operated for the primary purpose of carrying on a trade or business for profit, exemption is not allowed under section 501 on the ground that all the profits of such organization are payable to one or more organizations exempt from taxation under section 501. In determining the primary purpose of an organization, all the circumstances must be considered, including the size and extent of the trade or business and the size and extent of those activities of such organization which are specified in the applicable paragraph of section 501.
(b) If a subsidiary organization of a tax-exempt organization would itself be exempt on the ground that its activities are an integral part of the exempt activities of the parent organization, its exemption will not be lost because, as a matter of accounting between the two organizations, the subsidiary derives a profit from its dealings with its parent organization, for example, a subsidiary organization which is operated for the sole purpose of furnishing electric power used by its parent organization, a tax-exempt educational organization, in carrying on its educational activities. However, the subsidiary organization is not exempt from tax if it is operated for the primary purpose of carrying on a trade or business which would be an unrelated trade or business (that is, unrelated to exempt activities) if regularly carried on by the parent organization. For example, if a subsidiary organization is operated primarily for the purpose of furnishing electric power to consumers other than its parent organization (and the parent's tax-exempt subsidiary organizations), it is not exempt since such business would be an unrelated trade or business if regularly carried on by the parent organization. Similarly, if the organization is owned by several unrelated exempt organizations, and is operated for the purpose of furnishing electric power to each of them, it is not exempt since such business would be an unrelated trade or business if regularly carried on by any one of the tax-exempt organizations. For purposes of this paragraph, organizations are related only if they consist of—
(1) A parent organization and one or more of its subsidiary organizations; or
(2) Subsidiary organizations having a common parent organization.
An exempt organization is not related to another exempt organization merely because they both engage in the same type of exempt activities.
(c) In certain cases an organization which carries on a trade or business for profit but is not operated for the primary purpose of carrying on such trade or business is subject to the tax imposed under section 511 on its unrelated business taxable income.