legislation in 19135 allowing for federal personal and corporate income taxation, the charitable trust framework providing for income tax exemption for qualifying eleemosynary organizations (nonprofits that served “religious, charitable, scientific, literary, or educational purposes”)6 was adopted and maintained in every update of the tax code since the original ruling.

In this era of the advent of corporate income taxation and accompanying tax exemption in the United States, there also arose an accompanying effort to establish a more uniform regulatory structure for the formation of nonprofit organizations. While the size of the nonprofit sector was relatively small at this point in U.S. history, legislators also recognized a need for a more uniform process to determine which organizations qualified for tax exemption and the extent of their tax preferred status. This became increasingly important in the twentieth century, as the nonprofit sector entered a period of dramatic growth.

A major factor in this trend was the emergence of nonprofits that derived the majority of their income from the sale of personal services. Chief among these types of organizations were voluntary hospitals. By 1910, there were approximately 4,000 such institutions in the United States (Stevens, 1982). Rapid advances in medical technology during the 1930s and 1940s transformed the hospital into a provider of highly sophisticated services. The modern hospital bore little resemblance to the almshouses of the eighteenth and nineteenth centuries, which had a limited role to provide free custodial care to poor people. The hospital now operated fully in the marketplace, charging fees for an increasing array of costly services. Services for the poor were limited to what could be covered by a combination of donations, public sector contracts, and surplus revenue from fees charged to insured populations (Stevens, 1982).

By 1956, concern about medical care for the poor contributed to the issuance of IRS Revenue Ruling 56-185, which established explicit “relief of poverty” criteria for hospitals to qualify for tax exemption as 501(c)(3) nonprofit organizations.7 While the ruling included language that acknowledged the practical limits to the volume of charitable services that could be provided by nonprofit hospitals,8 only services to the poor would qualify the organization for tax exemption.

The relief of poverty interpretation of charity remained the standard for nonprofit hospitals until the issuance of IRS Revenue Ruling 69-545 in


Revenue Act of 1913.


Pollock v. Farmers’ Loan & Trust Co., 158 U.S. 601 (1895).


Rev. Rul. 56-185, 1956-1 C.B. 202.


Rev. Rul. 56-185, 1956-1 C.B. 202; section 2.

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