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For almost one hundred years, America's nonprofit hospitals have enjoyed nearly automatic exemption from federal income taxation. During this time, nonprofit hospitals transformed themselves from resting places of last resort for the sick poor into centers of high-technology intervention for all income groups. The financing of their services evolved in parallel, from primary dependence on the generosity of religious orders and charitable donors, to almost exclusive reliance on payments for services rendered. Meanwhile, the exemption's doctrinal underpinnings were repeatedly reinvented to accommodate change in the hospital industry's financial structure and social role. When Congress first enacted a charitable exemption to the income tax, including hospitals within its reach seemed an unexceptional instance of the exemption's availability to entities engaged in relief of the poor. Well into the 1950s, the Treasury Department continued to expect exempt hospitals to offer some free care to the poor, although it interpreted this requirement with increasing laxity. By the end of the 1960s, however, exemption of hospitals had lost all of its doctrinal moorings to either charitable giving or care for the poor.

In 1969, a landmark Internal Revenue Service ruling formally decoupled hospitals' eligibility for exemption from any obligation to provide free care for the poor. With only minor modifications, nonprofit hospitals today enjoy virtually per se federal exemption. This per se exemption has been sharply criticized by advocates of charity care requirements and those who would prefer to put an end to tax exemption of hospitals altogether. Yet the exemption persists, protected politically by the interests that have come to depend on it and legally by the weight of decades of administrative and judicial precedent.

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80 Minn. L. Rev. 299-405 (1995)