B.H.W. Anesthesia Foundation v. Commissioner

B.H.W. Anesthesia Foundation (the foundation) (plaintiff) was a nonprofit corporation affiliated with the Boston Hospital for Women (hospital) and Harvard University Medical School (Harvard), both of which were § 501(c)(3) organizations. The foundation was essentially the incorporation of the hospital’s department of anesthesiology. The members of the foundation were all anesthesiologists who were staff members of the hospital and members of Harvard’s faculty. The members conducted research and provided medical care to the hospital’s patients without regard to ability to pay. More than 10 percent of the patients served by the foundation’s members were served without compensation. The foundation’s members also provided clinical and classroom instruction to Harvard students and the hospital’s interns and residents, in addition to performing administrative duties. The foundation usually billed patients or their insurance carriers directly for services rendered by the member physicians. A significant portion of those receipts were used to pay the salaries of the member physicians, who also received compensation from the hospital and Harvard. Although the member physicians were well paid, they could have earned more in private practice. The rest of the foundation’s receipts were used to cover the costs of operating the anesthesiology department. The foundation applied for tax-exempt status under § 501(c)(3) of the Internal Revenue Code (code). The commissioner of internal revenue (commissioner) (defendant) did not issue a determination, and after exhausting its administrative remedies, the foundation filed suit. The commissioner conceded that the foundation engaged in activities that accomplished charitable and educational purposes but argued that the foundation was not entitled to the exemption because it was operated for the private benefit of its members.