Q & A: Why are hospitals grouped with schools as public charities?

This question flows from one of the tax code's more insidious and retrograde provisions with regard to tax exemption. 

First, some background.

In a nutshell, the Internal Revenue Code divides 501(c)(3) organizations into two major categories: public charities and private foundations.  Both are 501(c)(3)s, but private foundations are subject to a few more restrictions.  (Folks who want a short-and-sweet summary should really click that last link.  Really.)  In order to avoid these restrictions most 501(c)(3)s prefer to be treated as public charities. 

But how do you get recognized as a public charity?  The right side of the chart below sums it up:  you want to meet the standards set out in one of the sections in Code Section 509(a).  For most organizations the path lies in sections 509(a)(1)-(3), although 509(a)(4) also provides a way out for organizations testing for public safety. 

The groups listed above "Section 509(a)(1)" take us to our main question.  Publicly supported public charities have to meet complicated mathematical tests, as do 509(a)(2) public charities.  509(a)(3)s have to meet complex tests relating to organizational structure, and they're also subject to some additional rules.  However, churches, schools and hospitals have it easier--if they fit the relevant definition, they don't have to bother with the mathematical or structural tests.

What are the relevant definitions? They can be a bit hard to remember, but fortunately the main details are spelled out for you in the application for recognition as a 501(c)(3) organization, IRS Form 1023--and I've clipped the pertinent parts here.

Read the standards carefully and you'll get a sense as to why this subset of 509(a)(1) organizations is sometimes referred to "traditional public charities."  The standard explanation for the grouping is that churches, schools and hospitals have traditionally been associated with serving the interests of the general public, but the definitions follow tradition in deeper sense:    

To qualify as a church, school or hospital, your organization has to look like something out of 1954. 

A church has such things as a hierarchy, a place of worship, a code of doctrine and Sunday school.

A school has a faculty, curriculum, buildings (or other physical "facilities") and enrolled students. 

A hospital is, well, a hospital, a real-world facility providing discrete medical services to patients.

And that's the real story.  These organizations were not given privileged treatment because they are most responsive to the public--if they were, the standards would be written so as to allow the categories to adapt as society itself evolves. Rather, this is yet another example--all too common in law--of the wealthiest, most powerful organizations using their influence to get out of burdensome rules that apply to less well connected groups. 

An established "church" doesn't have to meet either the mathematical or supporting organization tests; an upstart "religious organization" does, in part precisely because its approach to worship is non-traditional.  No accident, this--at the time the rules were written, mainstream Christian churches were a central component of America's civic identity.  Similarly, private schools and hospitals were seen as an extension of the governmental system of education and medical care, with entrenched bureaucracies, a fixed infrastructure and centralized control.

In sum, the grouping of these three institutions is designed to keep privileged social status as the status quo, all in the guise of protecting the organizations most responsive to ordinary people. 

Bah.