HCSC-LAUNDRY v. UNITED STATES

PER CURIAM.

Petitioner HCSC-Laundry is a Pennsylvania nonprofit corporation. It was organized in 1967 under the law of that Commonwealth "[t]o operate and maintain a hospital laundry and linen supply program for those public hospitals and non-profit hospitals or related health facilities organized and operated exclusively for religious, charitable, scientific, or educational purposes that contract with [it]."1

Petitioner provides laundry and linen service to 15 nonprofit hospitals and to an ambulance service. All these are located in eastern Pennsylvania. Each organization served possesses a certificate of exemption from federal income taxation under § 501 (c) (3) of the Internal Revenue Code of 1954, 26 U. S. C. § 501 (c) (3).2 Each participating hospital pays petitioner annual membership dues based upon bed capacity. The ambulance service pays no dues. Petitioner's only other income is derived from (a) a charge for laundry and linen service based upon budgeted costs and (b) a charge of 11/2 cents per pound of laundry. Budgeted costs include operating expenses, debt retirement, and linen replacement. The amounts charged in excess of costs have been placed in a fund for equipment acquisition and replacement.

No part of petitioner's net earnings inures to the benefit of any individual.

Petitioner was formed after the Lehigh Valley Health Planning Council determined that a shared, nonprofit, off-premises laundry would best accommodate the requirements of the member hospitals with respect to both quality of service and economies of scale. The Council had investigated various alternatives. It had rejected a joint service concept because no member hospital had sufficient laundry facilities to serve more than itself. A commercial laundry had declined an offer for the laundry business of all the hospitals, and most of the other available commercial laundries were not capable of managing the heavy total volume.

Petitioner's laundry plant was built and equipped at a cost of about $2 million. This was financed through loans from local banks, with 15-year contracts from 10 of the hospitals used as collateral. Petitioner employs approximately 125 persons.

In 1976, petitioner applied for exemption under § 501 (c) (3) from federal income taxation. The Internal Revenue Service denied the exemption application on the grounds that § 501 (e)3 of the code was the exclusive provision under which a cooperative hospital service organization could qualify as "an organization organized and operated exclusively for charitable purposes" and therefore exempt. Because subsection (e) (1) (A) does not mention laundry, the Service reasoned that petitioner was not entitled to tax exemption.

Petitioner duly filed its federal corporate income tax return for its fiscal year ended June 30, 1976. that return showed taxable income of $123,521 and a tax of $10,395. The tax was paid. Shortly thereafter, petitioner filed a claim for refund of that tax and, when the Internal Revenue Service took no action on the claim within six months, see 26 U. S. C. § 6532 (a) (1), petitioner commenced this refund suit in the United States District Court for the Eastern District of Pennsylvania.

On stipulated facts and cross-motions for summary judgment, the District Court ruled in favor of petitioner, holding that it was entitled to exemption as an organization described in § 501 (c) (3). 473 F.Supp. 250 (1979). The United States Court of Appeals for the Third Circuit, however, reversed. It held that § 501 (e) was the exclusive provision under which a cooperative hospital service organization could obtain an income tax exemption, and that the omission of laundry services from § 501 (e) (1) (A)'s specific list of activities demonstrated that Congress intended to deny exempt status to cooperative hospital service laundries. 624 F.2d 428 (1980).

Because the ruling of the Court of Appeals is in conflict with decisions elsewhere,4 we grant certiorari, and we now affirm.

This Court has said: "The starting point in the determination of the scope of `gross income' is the cardinal principle that Congress in creating the income tax intended `to use the full measure of its taxing power.'" Commissioner v. Kowalski, 434 U.S. 77, 82 (1977), quoting from Helvering v. Cliford, 309 U.S. 331, 334 (1940). See § 61 (a) of the Code, 26 U. S. C. § 61 (a). Under our system of federal income taxation, therefore, every element of gross income of a person, corporate or individual, is subject to tax unless there is a statute or some rule of law that exempts that person or element.

Sections 501 (a) and (c) (3) provide such an exemption, and a complete one, for a corporation fitting the description set forth in subsection (c) (3) and fulfilling the subsection's requirements. But subsection (e) is also a part of § 501. And it expressly concerns the tax status of a cooperative hospital service organization. It provides that such an organization is exempt if, among other things, its activities consist of "data processing, purchasing, warehousing, billing and collection, food, clinical, industrial engineering, laboratory, printing, communications, record center, and personnel (including selection, testing, training, and education of personnel) services." Laundry and linen service, so essential to a hospital's operation, is not included in that list and, indeed, is noticeable for its absence. The issue, thus, is whether that omission prohibits petitioner from qualifying under § 501 as an organization exempt from taxation. The Government's position is that subsection (e) is controlling and exclusive, and because petitioner does not qualify under it, exemption is not available. Petitioner takes the opposing position that § 501 (c) (3) clearly entitles it to the claimed exemption.

Without reference to the legislative history, the Government would appear to have the benefit of this skirmish, for it is a basic principle of statutory construction that a specific statute, here subsection (e), controls over a general provision such as subsection (c) (3), particularly when the two are interrelated and closely positioned, both in fact being parts of § 501 relating to exemption of organization from tax. See Bulova Watch Co. v. United States, 365 U.S. 753, 761 (1961).

Additionally, however, the legislative history provides strong and conclusive support for the Government's position. It persuades us that Congress intended subsection (e) to be exclusive and controlling for cooperative hospital service organizations. Prior to the enactment of subsection (e) in 1968, the law as to the tax status of shared hospital service organizations was uncertain. The Internal Revenue Service took the position that if two or more tax-exempt hospitals created an entity to perform commercial services for them, that entity was not entitled to exemption. See Rev. Rul. 54-305, 1954-2 Cum. Bull. 127.5 See also § 502, as amended, of the 1954 Code, 26 U. S. C. § 502. This position, however, was rejected by the Court of Claims in Hospital Bureau of Standards and Supplies, Inc. v. United States, 141 Ct. Cl. 91, 158 F.Supp. 560 (1958). After expressly noting the uncertainty in the law,6 Congress enacted subsection (e). See Revenue and Expenditure Control Act of 1968, Pub. L. 90-364, § 109 (a), 82 Stat. 269.

In considering the provisions of the tax adjustment bill of 1968 that ultimately became subsection (e), the Senate sought to include laundry in the list of services that a cooperative hospital service organization could provide and still maintain its tax-exempt status. The Treasury Department supported the Senate amendment. See 114 Cong. Rec. 7516, 8111-8112 (1968). At the urging of commercial interests, however (see Hearings on Certain Committee Amendments to H. R. 10612 before the Senate Committee on Finance, 94th Cong., 2d Sess., 608 (1976)), the Conference Committee would accept only a limited version of the Senate amendment. In recommending the adoption of subsection (e), the managers on the part of the House emphasized that shared hospital service organizations performing laundry services were not entitled to tax-exempt status under the new provision. See H. R. Conf. Rep. No. 1533, 90th Cong., 2d Sess., 43 (1968); Senate Committee on Finance and House Committee on Ways and Means, Revenue and Expenditure Control Act of 1968, Explanation of the Bill H. R. 15414, 90th Cong., 2d Sess., 1, 20 (Comm. Print 1968).

Later, in 1976, at the urging of the American Hospital Association, the Senate Committee on Finance proposed an amendment that would have added laundry to the list of services specified in subsection (e) (1) (A). Hearings on H. R. 10612 before the Senate Committee on Finance, 94th Cong., 2d Sess., 2765-2772 (1976); S. Rep. No. 94-938, pt. 2, pp. 76-77 (1976). The amendment, however, was defeated on the floor of the Senate. 122 Cong. Rec. 25915 (1976).

In view of all this, it seems to us beyond dispute that subsection (e) (1) (A) of § 501, despite the seemingly broad general language of subsection (c) (3), specifies the types of hospital service organizations that are encompassed within the scope of § 501 as charitable organizations. Inasmuch as laundry service was deliberately omitted from the statutory list and, indeed, specifically was refused inclusion in that list, it inevitably follows that petitioner is not entitled to tax-exempt status. The Congress easily can change the statute whenever it is so inclined.7

The judgment of the Court of Appeals is affirmed.

It is so ordered.

JUSTICE WHITE dissents and would set the case for plenary consideration.

JUSTICE STEVENS, dissenting.

Today the Court summarily decides that § 501, read in light of the legislative history of § 501 (e), requires that nonprofit cooperative hospital laundries be denied an exemption from federal income tax, even though they may satisfy the requirements of §§ 501 (a) and 501 (c) (3). In my opinion, the Court's summary disposition is ill-advised because a full understanding of the question presented in this case requires an examination of the history underlying the present state of the law with respect to the tax status of cooperative hospital service organizations. When the statute is read against that background—indeed, even when it is read in isolation— its plain language unambiguously entitles this petitioner to an exemption.

I

In 1950, Congress amended § 101 of the Internal Revenue Code of 1939 by adding to that section a paragraph dealing with so-called "feeder organizations." Revenue Act of 1950, § 301 (b), Pub. L. 814, ch. 994, 64 Stat. 953. This paragraph was subsequently reenacted without substantial change as § 502 (a) of the Internal Revenue Code of 1954.1 In 1952, the Treasury Department adopted a regulation designed to implement the feeder provision of § 101. Treas. Regs. 111, § 29.101-3 (b).2 Although this regulation did not specifically address cooperative hospital service organizations, it did indicate that the Treasury considered cooperative ventures operated by tax-exempt entities for the purpose of providing necessary services to those entities nonexempt feeder organizations.3

The Internal Revenue Service first applied this regulation to cooperative hospital service organizations in a 1954 Revenue Ruling, Rev. Rul. 54-305, 1954-2 Cum. Bull. 127. In that Ruling, the Service held that a corporation organized and operated for the primary purpose of operating and maintaining a purchasing agency for the benefit of its members—tax-exempt hospitals and other charitable institutions—fell within the feeder regulation and thus was not entitled to an income tax exemption. The corporation at issue realized substantial profits from its operations and distributed only a portion of those profits to its members. Ibid. Accordingly, the Service found that the corporation was operated for the primary purpose of carrying on a trade or business for profit within the meaning of § 101 of the 1939 Code. This Revenue Ruling, and the regulation on which it was based, are the sources of the Treasury's pre-1968 position that cooperative hospital service organizations were not entitled to tax-exempt status.

The first judicial consideration of this position came in 1958 in Hospital Bureau of Standards & Supplies, Inc. v. United States, 141 Ct. Cl. 91, 158 F.Supp. 560.4 In that case, a group of nonprofit, tax-exempt hospitals formed a nonprofit corporation to act as their joint purchasing agent and to perform certain research functions on their behalf. The corporation brought suit against the Government to recover income taxes assessed for 1952 and 1953, alleging that it was entitled to a tax exemption under § 101 (6) of the 1939 Code, the predecessor of present § 501 (c) (3). The Government opposed the claimed exemption, arguing primarily that the corporation was a feeder organization under Treas. Regs. 118, § 39.101-2 (b) (1953). The Court of Claims held that the feeder provision was inapplicable in that case because the corporation was not organized and operated for the primary purpose of carrying on a trade or business for profit as required by the statute, even though it had reported net income for the two tax years in question. 141 Ct. Cl., at 95-96, 158 F. Supp., at 563-564. Accordingly, the court ruled that the corporation was entitled to a tax exemption under § 101 (6).5

Almost 10 years passed before the next important development in this area. In 1967, in connection with the Social Security Amendments of 1967, the original version of § 501 (e) was proposed as an amendment to § 501. The proposed amendment provided that a cooperative hospital service organization would be exempt from income taxation as long as it satisfied certain requirements, among them a requirement that it perform only services which, if performed by the member hospitals themselves, would constitute an integral part of their exempt activities. See S. Rep. No. 744, Social Security Amendments of 1967, Report of the Senate Committee on Finance, 90th Cong., 1st Sess., 201-202, 318-319 (1967). The legislative history indicates that laundry services were considered within the scope of the proposed amendment. Id., at 201. The legislative history also indicates that Congress was aware of the Treasury's belief that such cooperative ventures were not tax exempt because of the Code's feeder provision. Id., at 200-201.6 However, the Senate Report noted as well that the Court of Claims in Hospital Bureau, "the leading case in point," had rejected the Treasury's position. S. Rep. No. 744, at 201, and n. 1.

The proposed amendment was not accepted by the House in its original form. See H. R. Conf. Rep. No. 1030, 90th Cong., 1st Sess., 73 (1967). Rather, during 1968, § 501 (e) in its present form was enacted into law as part of the Revenue and Expenditure Control Act of 1968.7 The 1968 legislative history is set forth in adequate detail in the majority opinion, ante, at 6-7, and in the opinion of the Court of Appeals, 624 F.2d 428, 433-434 (CA3 1980), and does not warrant repetition here.8 As I read that legislative history, it establishes that Congress deliberately omitted laundry services from § 501 (e) and clearly intended that joint hospital laundries not be entitled to claim an income tax exemption under § 501 (e). These conclusions are reinforced by Congress' rejection in 1976 of a proposed amendment to § 501 (e) that would have added laundry services to that subsection's list of eligible services. See ante, at 7.

Despite the enactment of § 501 (e) in 1968, it was not until 1980 that a federal court decided that nonprofit cooperative hospital laundries were not entitled to an income tax exemption under § 501.9 Between 1968 and 1980, six federal courts rejected the Treasury's contention that hospital service organizations providing services other than those listed in § 501 (e) were not entitled to claim an exemption under § 501 (c) (3).10 These courts also rejected the Treasury's alternative contention that, even if such entities were not automatically excluded from consideration under § 501 (c) (3), they nonetheless were nonexempt feeder organizations under § 502 (a) and Treas. Reg. § 1.502-1 (b). In 1980, however, three Courts of Appeals concluded that § 501 (e) provides the exclusive means by which a hospital service organization may acquire an income tax exemption.11 These courts relied primarily upon the 1968 and 1976 legislative history cited by the majority. The decision of the Third Circuit, the first in this series of Court of Appeals decisions, is presently before us.

II

In the District Court in this case, the Government argued, as it had on five previous occasions, that because Congress deliberately omitted hospital laundries from § 501 (e), it necessarily followed that they also were outside the scope of § 501 (c) (3). See 473 F.Supp. 250, 252 (ED Pa. 1979). The District Court rejected this argument, choosing instead to align itself with the then-unbroken line of precedent. Id., at 253-254.12 The District Court also rejected the Government's alternative argument based upon § 502 (a). On appeal, the Government abandoned this argument, see 624 F. 2d, at 432, n. 6, and relied solely upon § 501 (e).13 Thus, as shaped by the proceedings below, the question presented here is whether Congress, in enacting § 501 (e), intended that cooperative hospital service organizations must qualify for tax exemption under that statute or not at all. The Court concludes that the statutory language and legislative history require an affirmative answer to that question. Neither factor, in my judgment, supports the Court's conclusion.

A

Correct analysis of the income tax exemption provisions at issue in this case should focus upon the language of the statutory provision which actually creates the exemption. That provision is § 501 (a), which states:

This language is clear and unambiguous. Insofar as relevant in this case, it provides that organizations meeting the requirements of § 501 (c) (3) shall be exempt from the federal income tax.14 Such organizations are to be denied exemption only if they fall within the provisions of §§ 502 or 503. Section 501 (a) contains no reference to § 501 (e), nor does § 501 (c) (3) indicate that it is in any way limited by § 501 (e).

Applying this plain statutory language to the facts of this case, it is clear that, but for § 501 (e), petitioner is entitled to a tax exemption under §§ 501 (a) and 501 (c) (3). It is undisputed that petitioner satisfies the requirements of § 501 (c) (3).15 Therefore, under § 501 (a) petitioner is exempt from taxation unless one of the two express exceptions identified in that subsection applies. The District Court found § 502 inapplicable because petitioner was not operated on a "for profit" basis. 473 F. Supp., at 254-255. This finding has not been challenged by the Government. Section 503 is simply irrelevant in this case. Therefore, the plain language of the relevant statutes clearly states that petitioner is a tax-exempt organization.

The majority overrides this plain statutory language by construing § 501 (e) as an exception to the broad charitable exemption created by §§ 501 (a) and 501 (c) (3). Construed in this manner. § 501 (e) operates to deny a tax exemption to organization that otherwise satisfy the express statutory requirements for exemption. The § 501 (e) exception itself, however, is not express: rather than identifying particular organizations as nonexempt, § 501 (e) identifies particular organizations as exempt and, apparently by implication, denies all similar but unlisted organizations the exemption otherwise available under §§ 501 (a) and 501 (c) (3).

The Court silently dismisses the fact that §§ 501 (a) and 501 (c) (3) contain no reference indicating that § 501 (e) is to have this limiting effect; the necessary connection between the statutes is supplied instead by the Court's finding that § 501 (e) is "interrelated" with and "closely positioned" to § 501 (c) (3). Ante, at 6. It cannot be denied that § 501 (e) is close in position to § 501 (c) (3). But a statute's text is surely more significant than its physical location.16 And to state, as the majority does, that §§ 501 (c) (3) and 501 (e) are "interrelated" is to substitute conclusion for analysis. Apart from their proximity to one another, the only express relationship between these statutes is that certain entities described in § 501 (e) are to be treated as charitable organizations under § 501 (c) (3) for federal income tax purposes. Nothing in any of the relevant statutes suggests that § 501 (e) is to have the effect of denying an exemption to organizations that satisfy the requirements of § 501 (c) (3). When Congress wanted a statute to have such an effect, it had no difficulty making its intention unmistakably plain, as is evident from § 501 (a)'s reference to §§ 502 and 503. The language Congress employed in § 501 (e) reflects an intention to enlarge, not to reduce, the category of organizations entitled to exemption under § 501 (c) (3).17

B

The Court supports its interpretation of § 501 with a discussion of legislative history. However, this discussion makes no reference to the legislative history of the statutory provisions primarily at issue in this case, §§ 501 (a) and 501 (c) (3). Instead, the Court focuses upon the legislative history of § 501 (e). In my opinion, insofar as the Court relies upon this legislative history, its decision rests upon a non sequitur. Because the text and legislative history of § 501 (e), which was enacted in 1968, persuade the Court that petitioner is not entitled to an exemption under that section, the Court concludes that petitioner also is not entitled to claim exemption under § 501 (c) (3), which was enacted in 1954.18 Unless the later statute limited the scope of the earlier statute, the conclusion is not supported by the premise.

The legislative history of § 501 (e) might support the Court's position if it unambiguously revealed: (1) that Congress in 1968 believed that no cooperative hospital service organization could satisfy the requirements of § 501 (c) (3) and it therefore enacted § 501 (e) to extend a tax exemption to certain entities previously not entitled to exemption; or (2) that Congress in 1968 believed that cooperative hospital service organizations were at least arguably entitled to tax exemption under § 501 (c) (3) and it enacted § 501 (e) to withdraw this exemption from some, but not all, of these entities. The legislative history provides persuasive support for neither proposition.

In my opinion, § 501 (e) unambiguously granted a tax exemption to certain entities that arguably already were entitled to an exemption under § 501 (c) (3). There is absolutely no evidence that the 1968 statute was intended to withdraw any benefits that were already available under the 1954 Act. Proper analysis, therefore, should focus on the question whether petitioner would have been entitled to an exemption under pre-1968 law.

The 1954 Act created a broad category of exempt organizations, including corporations "operated exclusively for . . . charitable . . . purposes." That hospitals could qualify for exemption has always been clear. The question whether a cooperative organization formed by a group of tax-exempt hospitals to provide services for the hospitals could also qualify for exemption was less clear. As discussed in Part I, supra, prior to 1968 the Treasury took the position that such a cooperative was a "feeder organization" within the meaning of § 502 of the Code.19 This position, however, was rejected by the Court of Claims which—quite properly in my opinion—held that such a cooperative was not a "feeder" and was exempt under what is now § 501 (c) (3). See Hospital Bureau of Standards & Supplies, Inc. v. United States, 141 Ct. Cl. 91, 158 F.Supp. 560 (1958).

As a matter of history—presumably because cooperative service organizations were fairly common in the hospital industry —the § 502 issue arose in disputes between the Treasury Department and hospital affiliates. Conceptually, however, there is no reason why the identical issue could not arise if other tax-exempt entities, such as schools or churches, might find it advantageous to form cooperatives to perform some of their essential functions for them.20 In any event, when the issue was brought to the attention of Congress in 1967 and 1968, the focus of the dispute still concerned hospital affiliates. Congress then made an unequivocal policy choice rejecting the position of the Treasury and granting an unambiguous exemption to cooperative hospital service organizations performing certain described functions.21 Nothing in the 1968 legislation explicitly or implicitly qualified the exemption previously available under § 501.22

Section 501 (e) does not confer an exemption on cooperative educational or religious service organizations.23 If such organizations would previously have been exempt under § 501 (c) (3), should the 1968 Act be construed to have withdrawn the exemption by reason of the fact that Congress saw fit to confine the benefit of its clarifying amendment to "cooperative hospital service organizations"? I think the answer is clear and that the same answer should apply to a hospital cooperative that is not expressly covered by the 1968 Act. Its tax status should be evaluated on the basis of the remaining relevant provisions of the Internal Revenue Code.

I recognize that both in 1968 and in 1976 attempts were made to extend the explicit § 501 (e) exemption to encompass hospital laundry cooperatives and that these attempts were rejected. This legislative history proves nothing more than what is already plainly stated in the statute itself: the § 501 (e) exemption is not available to petitioner. That is equally true of a cooperative educational service organization. But that fact does not evidence any intent by Congress to withdraw whatever exemption would be available to such organizations under other provisions of the Code.

Nor does logic compel the conclusion that Congress intended to withdraw a pre-existing exemption. As a matter of tax policy, nothing that I have read provides any obvious legitimate basis for giving hospital service organizations more favorable treatment than other charitable service organizations, or for giving a data processing or food service organization better treatment than a laundry service organization. Furthermore, I cannot accept the kind of reasoning—which unfortunately may characterize our summary dispositions— that interprets a statute that was plainly intended to do nothing more than extend a certain benefit to some taxpayers as though it were intended to withdraw a benefit otherwise available to other taxpayers.

I respectfully dissent.