[Federal Register Volume 78, Number 66 (Friday, April 5, 2013)]
[Proposed Rules]
[Pages 20523-20544]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-07959]



[[Page 20523]]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 53

[REG-106499-12]
RIN 1545-BL30


Community Health Needs Assessments for Charitable Hospitals

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that provide 
guidance to charitable hospital organizations on the community health 
needs assessment (CHNA) requirements, and related excise tax and 
reporting obligations, enacted as part of the Patient Protection and 
Affordable Care Act of 2010. These proposed regulations also clarify 
the consequences for failing to meet these and other requirements for 
charitable hospital organizations. These regulations will affect 
charitable hospital organizations.

DATES: Comments and requests for a public hearing must be received by 
July 5, 2013.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-106499-12), room 
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
106499-12), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at http://www.regulations.gov (IRS REG-106499-12).

FOR FURTHER INFORMATION CONTACT: Concerning these proposed regulations, 
Amy F. Giuliano or Preston J. Quesenberry at (202) 622-6070; concerning 
submissions of comments and requests for a public hearing, 
Oluwafunmilayo Taylor at (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review and approval under OMB control number 1545-0047, in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)). Comments on the collection of information should be sent to 
the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, 
Washington, DC 20224. Comments on the collection of information should 
be received by June 4, 2013. Comments are specifically requested 
concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    The collection of information in these proposed regulations is in 
Sec.  1.501(r)-3 and Sec.  1.6033-2(a)(2)(ii)(l). The collection of 
information flows from sections 501(r)(3) and 6033(b)(15) of the 
Internal Revenue Code (Code), which require a hospital organization to 
conduct a CHNA and adopt an implementation strategy to meet the 
community health needs identified through the CHNA at least once every 
three years, report on its annual information return how it is meeting 
the needs identified through the CHNA, and attach to its annual 
information return a copy of its audited financial statements. The 
expected recordkeepers are hospital organizations described in sections 
501(c)(3) and 501(r)(2).
    The following estimates are based on information that is available 
to the IRS and averaged over a three-year time period, to reflect the 
fact that the information collection generally will be spread over the 
statutory three-year cycle during which a hospital organization is 
required to conduct a CHNA and adopt an implementation strategy. A 
particular hospital organization may require more or less time, 
depending on the circumstances.
    Estimated number of recordkeepers: 3,377.
    Estimated average annual burden hours per recordkeeper: 80 hours.
    Estimated total annual recordkeeping burden: 270,160 hours.
    The burden for the collection of information contained in the 
proposed amendments to Sec.  1.6033-2 will be reflected in the burden 
on Form 990, ``Return of Organization Exempt from Tax,'' after it is 
revised to require the additional information in the regulation.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
return information are confidential, as required by section 6103.

Background

    The Patient Protection and Affordable Care Act, Public Law 111-148 
(124 Stat. 119 (2010)) (the ``Affordable Care Act''), enacted section 
501(r) of the Code, which imposes additional requirements on charitable 
hospital organizations. Section 501(r)(1) states that a hospital 
organization described in section 501(r)(2) will not be treated as a 
tax-exempt organization described in section 501(c)(3) unless the 
organization meets the requirements of section 501(r)(3) through 
501(r)(6). The Affordable Care Act did not otherwise affect the 
substantive standards for tax exemption that charitable hospital 
organizations are required to meet under section 501(c)(3).
    Section 501(r)(2)(A) defines a hospital organization as: (i) An 
organization that operates a facility required by a state to be 
licensed, registered, or similarly recognized as a hospital; and (ii) 
any other organization that the Secretary determines has the provision 
of hospital care as its principal function or purpose constituting the 
basis for its exemption under section 501(c)(3).
    Section 501(r)(2)(B)(i) requires a hospital organization that 
operates more than one hospital facility to meet the requirements of 
section 501(r) separately with respect to each hospital facility. 
Section 501(r)(2)(B)(ii) provides that a hospital organization will not 
be treated as described in section 501(c)(3) with respect to any 
hospital facility for which the requirements of section 501(r) are not 
separately met.
    Section 501(r)(3) requires a hospital organization to conduct a 
CHNA at least once every three years and adopt an implementation 
strategy to meet the community health needs identified through the 
CHNA. The CHNA must take into account input from persons who represent 
the broad interests of the community served by the hospital

[[Page 20524]]

facility, including those with special knowledge of or expertise in 
public health. The CHNA must also be made widely available to the 
public.
    Section 4959 imposes a $50,000 excise tax on a hospital 
organization that fails to meet the CHNA requirements for any taxable 
year. A hospital organization must report the amount of any excise tax 
imposed on it under section 4959 on its annual information return (that 
is, Form 990, ``Return of Organization Exempt From Income Tax,'' and 
related schedules) pursuant to section 6033(b)(10)(D).
    Section 6033(b)(15)(A) requires a hospital organization to report 
on its Form 990 a description of how the organization is addressing the 
needs identified in each CHNA and a description of any needs that are 
not being addressed together with the reasons why the needs are not 
being addressed.
    Section 6033(b)(15)(B) requires a hospital organization to file 
with its Form 990 a copy of its audited financial statements (or, in 
the case of an organization the financial statements of which are 
included in consolidated financial statements with other organizations, 
its consolidated financial statements).

Notice 2010-39

    In May 2010, the Department of the Treasury (``Treasury 
Department'') and the IRS issued Notice 2010-39 (2010-24 IRB 756 (May 
27, 2010)), which solicited comments regarding the application of the 
additional requirements imposed by section 501(r). The Treasury 
Department and the IRS received approximately 125 comments in response 
to Notice 2010-39 and considered the comments relating to the 
consequences for failing a section 501(r) requirement in drafting these 
proposed regulations. The principal comments considered are discussed 
in this preamble under Explanation of Provisions.

Notice 2011-52

    In July 2011, the Treasury Department and the IRS issued Notice 
2011-52 (2011-30 IRB 60 (July 8, 2011)), which addressed the CHNA 
requirements of section 501(r)(3). Notice 2011-52 described provisions 
related to the CHNA requirements that the Treasury Department and the 
IRS anticipated would be included in these proposed regulations and 
solicited comments from the public. Specifically, Notice 2011-52 
described anticipated regulatory provisions regarding the documentation 
of a CHNA, how and when a CHNA is conducted, the community served by a 
hospital facility, persons representing the broad interests of the 
community, making a CHNA widely available to the public, the 
implementation strategy, excise taxes on failures to meet the CHNA 
requirements, reporting requirements related to CHNAs, and the 
effective dates of the CHNA provisions. The Treasury Department and the 
IRS received more than 80 comments in response to Notice 2011-52. The 
principal comments considered in drafting these proposed regulations on 
the CHNA requirements are discussed in this preamble under Explanation 
of Provisions.
    Notice 2011-52 provided that hospital organizations could rely on 
the anticipated regulatory provisions described in the notice for any 
CHNA made widely available to the public, and any implementation 
strategy adopted, on or before the date that is six months after the 
date further guidance regarding the CHNA requirements is issued. Thus, 
hospital organizations may continue to rely on the interim guidance 
described in Notice 2011-52 for any CHNA made widely available to the 
public, and any implementation strategy adopted, on or before October 
5, 2013.

Notice of Proposed Rulemaking on Section 501(r)(4) Through 501(r)(6)

    On June 26, 2012, the Treasury Department and the IRS published a 
notice of proposed rulemaking in the Federal Register (REG-130266-11; 
77 FR 38148) (``2012 proposed regulations'') that contains proposed 
regulations regarding the requirements of section 501(r)(4) (which 
requires hospitals to establish financial assistance and emergency 
medical care policies), section 501(r)(5) (which limits the amount 
hospitals can charge for certain care provided to individuals eligible 
for financial assistance), and section 501(r)(6) (which prohibits a 
hospital from engaging in extraordinary collection actions before 
making reasonable efforts to determine whether an individual is 
eligible for financial assistance).
    The 2012 proposed regulations also provide guidance on the hospital 
organizations and facilities that must meet the section 501(r) 
requirements. In particular, the 2012 proposed regulations contain a 
definitions section that defines ``hospital organization,'' ``hospital 
facility,'' and other key terms used in the regulations. See Sec.  
1.501(r)-1 of the proposed regulations. In accordance with section 
501(r)(2)(A)(i), the 2012 proposed regulations define ``hospital 
organization'' as an organization recognized (or seeking to be 
recognized) as described in section 501(c)(3) that operates one or more 
hospital facilities, including a hospital facility operated through a 
disregarded entity. Also in accordance with section 501(r)(2)(A)(i), 
the 2012 proposed regulations define ``hospital facility'' as a 
facility that is required by a state to be licensed, registered, or 
similarly recognized as a hospital. In addition, the 2012 proposed 
regulations note that references to a hospital facility taking certain 
actions are intended to include instances in which the hospital 
organization operating the hospital facility takes action through, or 
on behalf of, the hospital facility. These definitions and concepts 
generally apply for purposes of these proposed regulations on the CHNA 
requirements and the consequences for failing to meet the section 
501(r) requirements, although these proposed regulations make minor 
amendments to the definitions of ``hospital facility'' and ``hospital 
organization'' contained in the 2012 proposed regulations, as discussed 
further in the ``Explanation of Provisions'' section of this preamble.
    The comment period for the 2012 proposed regulations closed on 
September 24, 2012. The Treasury Department and the IRS have received 
more than 200 comments in response to the 2012 proposed regulations and 
are continuing to consider these comments as they work toward 
finalizing those proposed regulations. The Treasury Department and the 
IRS intend to finalize the 2012 proposed regulations in conjunction 
with the finalization of these proposed regulations.

Explanation of Provisions

    These proposed regulations provide guidance on the CHNA 
requirements of section 501(r)(3), and on the related reporting 
obligations of section 6033. In addition, these proposed regulations 
provide guidance on the consequences described in sections 501(r)(1), 
501(r)(2)(B), and 4959 for failing to satisfy any of the section 501(r) 
requirements, including the section 501(r)(4) through 501(r)(6) 
requirements addressed in the 2012 proposed regulations. These proposed 
regulations generally do not otherwise provide further guidance 
regarding the section 501(r)(4) through 501(r)(6) requirements. They 
do, however, make minor amendments to the definitions of ``hospital 
facility'' and ``hospital organization'' contained in the 2012 proposed 
regulations and also provide a new definition of ``operating'' a 
hospital facility that is applicable for purposes of all of the section 
501(r) requirements.

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    In interpreting the CHNA requirements of section 501(r)(3), the 
Treasury Department and the IRS sought to preserve hospital facilities' 
flexibility to determine the best way to identify and meet the 
particular health needs of the specific communities they serve while 
requiring a transparent assessment process with ample opportunity for 
community input.

1. Hospital Facilities and Organizations

a. Hospital Organization for Purposes of Section 4959
    Section 4959 imposes a $50,000 excise tax on ``a hospital 
organization to which section 501(r) applies'' that fails to meet the 
requirements of section 501(r)(3) for any taxable year. For purposes of 
section 501(r), the 2012 proposed regulations define the term 
``hospital organization'' to mean an organization ``recognized (or 
seeking to be recognized) as described in section 501(c)(3)'' that 
operates one or more hospital facilities. These proposed regulations 
clarify that the section 4959 excise tax will apply to a hospital 
organization that fails to meet the section 501(r)(3) requirements 
during a taxable year in which its section 501(c)(3) status is revoked. 
These proposed regulations do not otherwise change the substance of the 
``hospital organization'' definition contained in the 2012 proposed 
regulations.
b. Multiple Buildings Under a Single Hospital License
    The definition of ``hospital facility'' in the 2012 proposed 
regulations provides that multiple buildings operated by a hospital 
organization under a single state license may be considered a single 
hospital facility. This special rule for multiple buildings was 
intended to allow flexibility but has the disadvantage of making it 
harder for the IRS and the public to understand and to evaluate the 
information reported on a hospital organization's Form 990, 
particularly if multiple buildings under a single state license are 
reported differently (as a single facility or as multiple facilities) 
from year to year. To increase the certainty and consistency in the 
designation of hospital facilities, these proposed regulations amend 
this definition to provide that multiple buildings operated by a 
hospital organization under a single state license ``are'' (rather than 
``may be'') considered a single hospital facility. The Treasury 
Department and the IRS request comments regarding whether (and under 
what circumstances) a hospital organization should be able to treat 
multiple buildings under a single state license as separate hospital 
facilities for purposes of the CHNA and other section 501(r) 
requirements and, if so, how certainty and consistency in the 
designation of hospital facilities can be achieved.
c. Tribal Hospital Facilities
    Several commenters recommended that these proposed regulations make 
clear that a hospital facility operated by an Indian tribe or tribal 
organization is not subject to the section 501(r) requirements, even if 
the hospital facility is part of an organization described in section 
501(c)(3). These commenters stated that tribal hospital facilities are 
not typically ``required by a state to be licensed, registered, or 
similarly recognized as a hospital,'' as contemplated in section 
501(r)(2)(A)(i). The Treasury Department and the IRS note that section 
501(r)(2)(A)(i) refers only to a hospital facility licensed or 
registered by a state, not an Indian tribal government, and that 
section 7871 does not provide that an Indian tribal government is 
treated as a state for purposes of section 501(r). Accordingly, pending 
any future guidance regarding other categories of hospital 
organizations or facilities, a tribal facility that is not required by 
a state to be licensed, registered, or similarly recognized as a 
hospital is not a ``hospital facility'' for purposes of section 501(r), 
and a section 501(c)(3) organization will not be considered a 
``hospital organization'' solely as a result of operating such a tribal 
facility.
d. Operating a Hospital Facility Through a Partnership
    Notice 2011-52 stated the intention of the Treasury Department and 
the IRS to include within the definition of ``hospital organization'' 
any organization described in section 501(c)(3) that operates a 
hospital facility through a joint venture, limited liability company, 
or other entity treated as a partnership for federal tax purposes. 
Notice 2011-52 also requested comments regarding whether (and under 
what circumstances) an organization should not be considered to 
``operate'' a hospital facility for purposes of section 501(r) as a 
result of its owning a small interest (other than a general partner or 
similar interest) in an entity treated as a partnership for federal tax 
purposes that operates the hospital facility.
    In response to Notice 2011-52, a few commenters recommended that a 
hospital organization generally should not be considered to operate a 
hospital facility through a partnership when it holds a minority 
interest in that partnership. In defining ``minority interest,'' 
commenters suggested ownership thresholds ranging from less than 50 
percent to less than 20 percent. Commenters stated that a hospital 
organization with such a minority interest in a hospital facility joint 
venture would not have the necessary control over the joint venture to 
ensure that the hospital facility in question complied with the 
requirements of section 501(r).
    Another commenter recommended that section 501(r) should not apply 
to a hospital facility operated by a partnership if the partner 
described in section 501(c)(3) treats the income derived from that 
facility as unrelated business taxable income (UBTI) that is taxed 
under section 511. This commenter argued that the line on the 
applicability of section 501(r) should be drawn based on the taxability 
of the hospital facility's income rather than on the basis of a 
particular percentage of ownership.
    Yet another commenter suggested that these proposed regulations 
should provide that an organization that owns a minority limited 
partnership interest in a partnership that operates a hospital facility 
should not be considered to ``operate'' that hospital facility for 
purposes of section 501(r) if the organization entered into the limited 
partnership agreement prior to the date section 501(r) was enacted 
(that is, March 23, 2010) and has a primary tax-exempt purpose other 
than the provision of community health care. As an example of such an 
organization, this commenter cited a university medical school that 
entered into a partnership agreement to operate a hospital facility 
that gives the university control over the joint venture sufficient to 
ensure the operation of the hospital facility furthers its exempt 
educational purpose, but insufficient to ensure the hospital facility 
is in compliance with section 501(r).
    Rev. Rul. 2004-51 (2004-1 CB 974) provides that the activities of 
an entity that is treated as a partnership for federal tax purposes are 
treated as the activities of the tax-exempt partner for purposes of 
determining whether the tax-exempt partner is operated exclusively for 
exempt purposes and engages in an unrelated trade or business. See also 
Rev. Rul. 98-15 (1998-1 CB 718). Consequently, consistent with Notice 
2011-52, these proposed regulations provide that, as a general rule, a 
hospital organization ``operates'' a hospital facility if it is a 
partner in a joint venture, limited liability company, or other entity 
treated as a partnership for federal income tax

[[Page 20526]]

purposes that operates the hospital facility.
    However, in light of the comments received, these proposed 
regulations provide two exceptions to this general rule. First, as 
commenters observed, an organization without the control over the 
operation of a hospital facility sufficient to ensure that the hospital 
facility furthers an exempt purpose is unlikely to have the control 
sufficient to ensure compliance with section 501(r). As a general rule, 
if a tax-exempt partner does not have control sufficient to ensure that 
a trade or business activity regularly carried on by the partnership 
furthers (or is substantially related to) its exempt purposes, that 
activity will be considered an unrelated trade or business with respect 
to the tax-exempt partner. See Rev. Rul. 2004-51; Rev. Rul. 98-15. 
These proposed regulations provide that if a section 501(c)(3) partner 
of a partnership operating a hospital facility does not have control 
over the operation of the hospital facility sufficient to ensure that 
the operation of the hospital facility furthers an exempt purpose 
described in section 501(c)(3) and thus treats the operation of the 
hospital facility, including the facility's provision of medical care, 
as an unrelated trade or business, the hospital organization will not 
be considered to ``operate'' the hospital facility for purposes of 
section 501(r).
    Second, as another commenter observed, some tax-exempt 
organizations may have entered into partnership arrangements prior to 
the enactment of section 501(r) that gave them control over a 
partnership sufficient to ensure that the partnership furthers 
charitable purposes other than the provision of community health care, 
but not sufficient to ensure compliance with section 501(r). In 
response to this comment, these proposed regulations provide a 
grandfather rule under which a hospital organization will not be 
considered to ``operate'' a hospital facility for purposes of section 
501(r) if certain conditions are met. First, at all times since March 
23, 2010, the hospital organization must have been organized and 
operated primarily for educational or scientific purposes and must not 
have engaged primarily in the operation of one or more hospital 
facilities. Second, pursuant to a partnership arrangement (including 
any side agreements) entered into before March 23, 2010, the hospital 
organization must not own more than 35 percent of the capital or 
profits interest in the partnership, not own a general partner or 
similar interest, and not have sufficient control over the operation of 
the hospital facility to ensure that the hospital facility complies 
with the requirements of section 501(r).
    Finally, like both Notice 2011-52 and the 2012 proposed 
regulations, these proposed regulations make clear that a hospital 
organization operates a hospital facility if it operates a hospital 
facility through a wholly-owned entity that is disregarded as separate 
from the hospital organization for federal tax purposes.
e. Activities Unrelated to the Operation of a Hospital Facility
    In response to Notice 2010-39, a few commenters asked whether the 
requirements of section 501(r) apply to those aspects of a hospital 
organization's operations that do not relate to the operation of a 
hospital facility. Section 501(r)(2)(B) provides that the requirements 
of section 501(r) apply separately with respect to each of the hospital 
facilities a hospital organization operates. Similarly, section 
1.501(r)-2 of these proposed regulations (which describes consequences 
for failing to satisfy the requirements of section 501(r)) only applies 
to circumstances in which a hospital organization fails to meet one or 
more of the requirements of section 501(r) ``separately with respect to 
one or more hospital facilities'' it operates. Thus, the Treasury 
Department and the IRS intend that a hospital organization is not 
required to meet the requirements of section 501(r) with respect to any 
activities unrelated to the operation of a hospital facility. For 
example, if a hospital organization operates a facility that is not 
required to be licensed as a hospital by the state in which the 
facility is located, the hospital organization is not required to meet 
the requirements of section 501(r) with respect to that facility.
f. Authorized Body of a Hospital Organization or Facility
    For purposes of determining whether a hospital organization has 
established a policy required under section 501(r)(4) for a hospital 
facility it operates, the 2012 proposed regulations would require an 
authorized body to adopt the policy for the hospital facility. The 2012 
proposed regulations define the term ``authorized body'' to include: 
(1) The governing body (that is, the board of directors, board of 
trustees, or equivalent controlling body) of the hospital organization; 
(2) a committee of, or other party authorized by, the governing body of 
the hospital organization, to the extent permitted under state law; or 
(3) in the case of a hospital facility that has its own governing body 
and is recognized as an entity under state law but is a disregarded 
entity for federal tax purposes, the governing body of that hospital 
facility, or a committee of, or other party authorized by, that 
governing body to the extent permitted under state law.
    Because the definition of an ``authorized body'' of a hospital 
facility that adopts a CHNA report or implementation strategy required 
under section 501(r)(3) should be the same as the definition of an 
``authorized body'' for purposes of section 501(r)(4), the term 
``authorized body of a hospital facility'' is defined in Sec.  
1.501(r)-1 of these proposed regulations so that it may apply for 
purposes of both the section 501(r)(3) and the section 501(r)(4) 
requirements.

2. Failures To Satisfy the Requirements of Section 501(r)

a. Minor and Inadvertent Omissions and Errors
    Numerous commenters to Notice 2010-39 requested guidance on the 
consequences of failing to meet one or more of the requirements of 
section 501(r). In addition, commenters have noted that the guidance 
released so far on section 501(r) (in Notice 2011-52 and the 2012 
proposed regulations) has proposed multiple specific requirements, and 
that hospitals, as large complex institutions, may experience minor and 
inadvertent compliance failures notwithstanding their good faith 
efforts to comply with the requirements. Commenters representing 
hospitals expressed the view that a failure to meet a section 501(r) 
requirement should only result in adverse consequences for a hospital 
organization if the failure is a substantial one. The Treasury 
Department and the IRS received similar informal comments from patient 
advocates. Commenters also recommended that no adverse consequences 
should result from a hospital organization's failure if the 
organization corrects the failure, with many of these commenters 
specifically suggesting that such corrections be required to be made 
``by the end of the fiscal year being reported.''
    The Treasury Department and the IRS recognize that minor and 
inadvertent errors may occur even in circumstances in which a hospital 
facility has practices and procedures in place that are reasonably 
designed to facilitate overall compliance with section 501(r) and has 
implemented safeguards reasonably calculated to prevent errors. 
Therefore, these proposed regulations provide that a hospital 
facility's omission of required

[[Page 20527]]

information from a policy or report described in Sec.  1.501(r)-3 or 
Sec.  1.501(r)-4, or error with respect to the implementation or 
operational requirements described in Sec.  1.501(r)-3 through Sec.  
1.501(r)-6, will not be considered a failure to meet a requirement of 
section 501(r) if the omission or error was minor, inadvertent, and due 
to reasonable cause, and the hospital facility corrects such omission 
or error as promptly after discovery as is reasonable given the nature 
of the omission or error.
b. Excusing Certain Failures if a Hospital Facility Corrects and Makes 
Disclosure
    With respect to omissions or errors that rise above the level of 
minor and inadvertent, the Treasury Department and the IRS recognize 
that a hospital facility's prompt discovery and correction of such 
omissions or errors is in the best interests of patients and that 
requiring hospital facilities to report such omissions or errors and 
disclose how such omissions or errors were corrected (for example, on 
the Form 990) would achieve transparency, which is an important 
objective of section 501(r). Increased transparency, in turn, will 
permit organizations concerned with community health needs to use this 
information to promote adoption of practices and procedures that 
advance the goals of the section 501(r) requirements and encourage 
promulgation of best practices. To provide an incentive for hospital 
facilities to take steps not only to avoid errors but to correct and 
provide disclosure when they occur, the Treasury Department and the IRS 
will issue a revenue procedure, notice, or other guidance published in 
the Internal Revenue Bulletin which will provide that a hospital 
facility's failure to meet one or more of the requirements described in 
Sec.  1.501(r)-3 through Sec.  1.501(r)-6 that is neither willful nor 
egregious will be excused if the hospital facility corrects and 
provides disclosure in accordance with the rules set forth in the 
guidance. The Treasury Department and the IRS anticipate that this 
guidance will provide that correction and disclosure should be 
reasonable and appropriate for the failure at issue.
    For purposes of this provision, willful is to be interpreted 
consistent with the meaning of that term in the context of civil 
penalties, which would include a failure due to gross negligence, 
reckless disregard, or willful neglect. Furthermore, correction and 
disclosure will not create a presumption that the failure was neither 
willful nor egregious.
    The Treasury Department and the IRS intend to issue the guidance 
regarding correction and disclosure in proposed form in order to 
provide an opportunity to comment on the procedures described therein.
c. Facts and Circumstances Considered in Determining Whether To Revoke 
501(c)(3) Status
    Section 501(r)(1) provides that a hospital organization will not be 
treated as described in section 501(c)(3) unless it meets the 
requirements of section 501(r). These proposed regulations interpret 
this language as giving the IRS the authority to revoke a hospital 
organization's section 501(c)(3) status if the organization fails to 
meet one or more requirements of section 501(r). However, the Treasury 
Department and the IRS agree with commenters that the IRS should 
consider the relative size, scope, nature, and significance of any 
failures to meet the section 501(r) requirements, as well as the 
reasons for such failures and whether the same type of failures have 
previously occurred, when determining whether revocation of section 
501(c)(3) status is warranted. In addition, the Treasury Department and 
the IRS consider it desirable that these proposed regulations provide 
incentives for a hospital facility to establish and routinely follow 
practices and procedures reasonably designed to promote and facilitate 
overall compliance with the section 501(r) requirements and identify 
any problems that arise and the reasons for their occurrence. Hospital 
facilities should also have incentives to correct any section 501(r) 
failures as promptly after discovery as is reasonable given the nature 
of the failure and implement safeguards reasonably calculated to 
prevent similar failures from occurring in the future. Accordingly, 
these proposed regulations provide that the IRS will consider all of 
these facts and circumstances in determining whether to continue to 
recognize the section 501(c)(3) status of a hospital organization that 
fails to meet one or more requirements of section 501(r). In general, 
the Treasury Department and the IRS expect that application of these 
facts and circumstances will ordinarily result in revocation of the 
section 501(c)(3) status of a hospital organization if the 
organization's failures to meet the requirements of section 501(r) are 
willful or egregious.
d. Taxation of Noncompliant Hospital Facilities
    A number of commenters recommended that if a hospital organization 
fails to meet a section 501(r) requirement with respect to a particular 
hospital facility it operates, only that hospital facility should be 
treated as not described in section 501(c)(3), and the facility's 
failure should not negate the tax exemption of the hospital 
organization as a whole. A few commenters recommended that if a 
hospital organization ceases to qualify as an organization described in 
section 501(c)(3) with respect to a particular hospital facility but 
continues to qualify as an organization described in section 501(c)(3) 
overall, then any net income derived from the disqualified facility 
should be subject to the unrelated business income tax under section 
511.
    Section 501(r)(2)(B)(ii) provides that a hospital organization 
operating more than one hospital facility shall not be treated as 
described in section 501(c)(3) with respect to any such hospital 
facility for which the requirements of section 501(r)(1) are not 
separately met (a ``noncompliant hospital facility''). Status under 
section 501(c)(3) is determined at the organizational level, and 
treating an organization as not described in section 501(c)(3) ``with 
respect to'' a particular hospital facility it operates (or a 
particular branch, division, or activity of the organization) has no 
generally recognized meaning under the provisions of the Code governing 
tax-exempt organizations. Notwithstanding this fact, the language in 
section 501(r)(2)(B)(ii) suggests that a particular noncompliant 
hospital facility operated by a hospital organization with more than 
one facility may be treated as not described in section 501(c)(3) 
without affecting the section 501(c)(3) status of the hospital 
organization. A noncompliant hospital facility that is treated as not 
described in section 501(c)(3), but that is owned and operated by a 
hospital organization that continues to be described in section 
501(c)(3), cannot be described in another subsection of 501(c) (such as 
section 501(c)(4)), since the plain language of section 501(c) makes 
clear that only organizations (not facilities, branches, divisions, or 
other components of organizations) can be described in any one 
subsection of 501(c). Thus, these proposed regulations interpret 
section 501(r)(2)(B)(ii) to mean that a hospital organization that is 
not treated as described in section 501(c)(3) ``with respect to'' a 
particular noncompliant hospital facility ceases to be exempt from 
taxation under section 501(a) with respect to that facility, even while 
the hospital organization as a whole (with respect to its other 
hospital facilities and activities) continues to be otherwise exempt 
from taxation under

[[Page 20528]]

section 501(a) because it is described in section 501(c)(3).
    Accordingly, these proposed regulations provide that if a hospital 
organization operating more than one hospital facility fails to meet 
one or more of the requirements of section 501(r) separately with 
respect to a hospital facility during a taxable year but continues to 
be recognized as described in section 501(c)(3), the income derived 
from the noncompliant hospital facility during that taxable year will 
be subject to tax computed as provided in section 11 (or as provided in 
section 1(e) if the hospital organization is a trust described in 
section 511(b)(2)). To maintain consistency with the treatment of 
organizations operating a single hospital facility, this tax will apply 
only if the hospital organization would not continue to be described in 
section 501(c)(3) based on the facts and circumstances described in 
section 2.c of this preamble if the noncompliant hospital facility were 
the only hospital facility that the organization operated. This tax 
would not apply in the event of minor and inadvertent omissions or 
errors described in section 2.a of this preamble or of failures that 
are excused in accordance with the guidance described in section 2.b of 
this preamble.
    In applying the tax, the income derived from a noncompliant 
hospital facility during a taxable year will be the gross income 
derived from that hospital facility during the taxable year, less the 
deductions allowed by chapter 1 of the Code that are directly connected 
to the operation of that hospital facility during the taxable year. 
These proposed regulations provide that this computation will exclude 
any gross income and deductions already taken into account in computing 
any UBTI described in section 512 derived from the facility during the 
taxable year.
    To be directly connected with the operation of a noncompliant 
hospital facility, these proposed regulations provide that an item of 
deduction must have proximate and primary relationship to the operation 
of the hospital facility. Expenses, depreciation, and similar items 
attributable solely to the operation of a hospital facility are 
proximately and primarily related to such operation, and therefore 
qualify for deduction to the extent that they meet the requirements of 
section 162, section 167, or other relevant provisions of the Code. 
These proposed regulations further provide that where expenses, 
depreciation, and similar items are attributable to more than one 
hospital facility operated by the hospital organization (and/or to 
activities of the hospital organization unrelated to the operation of 
hospital facilities), such items shall be allocated between the 
hospital facilities (and/or other activities) on a reasonable basis.
    In addition, these proposed regulations provide the gross income 
and allowed deductions of a noncompliant hospital facility may not be 
aggregated with the gross income and allowed deductions of the hospital 
organization's other noncompliant hospital facilities or its unrelated 
trade or business activities described in section 513. Thus, a hospital 
organization operating more than one noncompliant hospital facility 
that is subject to the facility-level tax must compute each facility's 
taxable income separately and may not use net operating losses from one 
noncompliant hospital facility to offset taxable income derived from 
another noncompliant hospital facility. Similarly, a hospital 
organization may not use net operating losses from a noncompliant 
hospital facility to offset any UBTI derived from the organization's 
unrelated trade or business activities.
    A number of commenters expressed concern that interest on bonds 
issued as qualified 501(c)(3) bonds to finance a hospital facility will 
become taxable if the facility fails one or more requirements of 
section 501(r). These proposed regulations make clear that if a 
hospital organization operating a noncompliant hospital facility 
continues to be recognized as described in section 501(c)(3) and 
otherwise exempt from tax under section 501(a), the fact that a 
facility-level tax is imposed as a result of the facility's failure to 
comply with section 501(r) will not itself cause the interest on such 
bonds to be taxable.
    Finally, these proposed regulations make clear that the facility-
level tax described in this section 2.d of the preamble will be 
reported on the Form 990-T.

3. Community Health Needs Assessments

    Consistent with section 501(r)(3)(A), these proposed regulations 
provide that a hospital organization meets the requirements of section 
501(r)(3) in any taxable year with respect to a hospital facility it 
operates only if the hospital facility has conducted a CHNA in such 
taxable year or in either of the two immediately preceding taxable 
years and an authorized body of the hospital facility has adopted an 
implementation strategy to meet the community health needs identified 
through the CHNA by the end of the taxable year in which the hospital 
facility conducts the CHNA. In general, these proposed regulations are 
consistent with the anticipated rules described in Notice 2011-52, with 
certain modifications intended to be responsive to the more than 80 
comments received on Notice 2011-52.
a. Conducting a Community Health Needs Assessment
    In conducting a CHNA, these proposed regulations provide that a 
hospital facility must define the community it serves and assess the 
health needs of that community. In assessing the community's health 
needs, the hospital facility must, consistent with section 
501(r)(3)(B)(i), take into account input from persons who represent the 
broad interests of its community, including those with special 
knowledge of or expertise in public health. The hospital facility must 
also document the CHNA in a written report (``CHNA report'') that is 
adopted for the hospital facility by an authorized body of the hospital 
facility. Finally, consistent with section 501(r)(3)(B)(ii), the 
hospital facility must make the CHNA report widely available to the 
public. These proposed regulations provide that a CHNA is considered 
``conducted'' on the date the hospital facility has completed all of 
these steps. Because a hospital facility must make a CHNA report widely 
available to the public continuously for a number of years (as 
discussed in section 3.a.vi of this preamble), these proposed 
regulations clarify that a hospital facility is considered to have 
completed the step of making the CHNA report widely available to the 
public on the date it first makes the CHNA report widely available to 
the public.
i. Community Served by the Hospital Facility
    Notice 2011-52 stated the intention of the Treasury Department and 
the IRS to allow a hospital facility to take into account all of the 
relevant facts and circumstances in defining the community it serves. 
Notice 2011-52 noted that, generally, the Treasury Department and the 
IRS would expect a hospital facility's community to be defined 
geographically but that, in some cases, the definition might also take 
into account target populations served or specialized functions. 
Notwithstanding this generally flexible approach to defining community, 
Notice 2011-52 stated that a community could not be defined in a manner 
that circumvented the requirement to assess the health needs of the 
hospital facility's community by excluding, for example, medically 
underserved populations,

[[Page 20529]]

low-income persons, minority groups, or those with chronic disease 
needs. Finally, Notice 2011-52 requested comments on the relative 
merits of different geographically-based definitions of community and, 
more specifically, on whether future guidance should define the 
geographic community of a hospital facility as the Metropolitan 
Statistical Area (MSA) or Micropolitan Statistical Area ([mu]SA) in 
which the facility is located or, if the hospital facility is a rural 
facility not located in a MSA or [mu]SA, as the county in which the 
facility is located.
    Many commenters supported the facts-and-circumstances approach to 
defining a hospital facility's community outlined in Notice 2011-52 and 
recommended against a definition based on specified geographic 
boundaries. These commenters noted that each hospital facility is in 
the best position to determine its community and that requiring the 
community to be defined as a specific geographic area may not be 
appropriate or correspond to the actual populations served, especially 
in the case of specialized and regional hospitals. These commenters 
also recommended against defining the community served by a hospital 
facility as the MSA, [mu]SA, or county in which the facility is 
located, noting that such areas or politically-defined jurisdictions 
are often unrelated to hospital service areas.
    Other commenters recommended a geographic definition of community, 
but requested one that would be flexible in the method of definition 
(for example, not restricted to specific political jurisdictions). A 
few commenters went further and stated that the geographic definition 
of community should include the political jurisdiction in which the 
hospital facility is located or where the hospital facility is an 
essential provider. These commenters recommended against definitions of 
community based on the demographics or residence of the hospital 
facility's specific patient populations, noting that a hospital 
facility's current patient population does not necessarily reflect the 
broader community.
    Consistent with Notice 2011-52, these proposed regulations provide 
a hospital facility with the flexibility to take into account all of 
the relevant facts and circumstances in defining the community it 
serves, including the geographic area served by the hospital facility, 
target populations served (for example, children, women, or the aged), 
and principal functions (for example, focus on a particular specialty 
area or targeted disease). These proposed regulations also clarify that 
a hospital facility may define its community to include populations in 
addition to its patient populations and geographic areas outside of 
those in which its patient populations reside. For example, a hospital 
facility collaborating with other hospital facilities in its MSA in 
conducting a CHNA may define its community as the entire MSA in which 
all of the collaborating hospital facilities are located, even if the 
hospital facility itself only generally serves and draws its patients 
from a portion of that MSA.
    While desiring to give a hospital facility the flexibility it needs 
to define its community served in a manner appropriate to its specific 
facts and circumstances, the Treasury Department and the IRS continue 
to share the interest expressed by some commenters in ensuring that 
hospital facilities assess and address the needs of medically 
underserved, low-income, and minority populations in the areas they 
serve. Thus, similar to the restriction included in Notice 2011-52, 
these proposed regulations provide that a hospital facility may not 
define its community in a way that excludes medically underserved, low-
income, or minority populations who are part of its patient 
populations, live in geographic areas in which its patient populations 
reside (unless they are not part of the hospital facility's target 
populations or affected by its principal functions), or otherwise 
should be included based on the method used by the hospital facility to 
define its community. These proposed regulations clarify that medically 
underserved populations include populations experiencing health 
disparities or at risk of not receiving adequate medical care as a 
result of being uninsured or underinsured or due to geographic, 
language, financial, or other barriers. (For reasons discussed in 
section 3.a.iii.B of this preamble, these proposed regulations do not 
list those with chronic disease needs as a separate category of persons 
that must not be excluded.) Finally, if a hospital facility uses a 
method of defining its community that takes into account patient 
populations, these proposed regulations require the hospital facility 
to treat as patients all individuals who receive care from the hospital 
facility, without regard to whether (or how much) they or their 
insurers pay for the care received or whether they are eligible for 
financial assistance.
ii. Assessing Community Health Needs
    These proposed regulations provide that in order to ``assess'' the 
health needs of the community it serves, a hospital facility must 
identify significant health needs of the community, prioritize those 
health needs, and identify potential measures and resources (such as 
programs, organizations, and facilities in the community) available to 
address the health needs. For these purposes, health needs include 
requisites for the improvement or maintenance of health status in both 
the community at large and in particular parts of the community (such 
as particular neighborhoods or populations experiencing health 
disparities). Requisites for the improvement or maintenance of health 
status in a community may include improving access to care by removing 
financial and other barriers to care, such as a lack of information 
regarding sources of insurance designed to benefit vulnerable 
populations.
    Notice 2011-52 stated the intention of the Treasury Department and 
the IRS to require a hospital facility to prioritize all of the 
community health needs identified through the CHNA. A few commenters 
suggested that only the most significant of the likely extensive list 
of community health needs identified through a CHNA should have to be 
prioritized. These proposed regulations respond to this comment by 
clarifying that a CHNA need only identify significant health needs and 
need only prioritize, and otherwise assess, those significant health 
needs identified. A hospital facility may determine whether a health 
need is significant based on all of the facts and circumstances present 
in the community it serves.
    A few commenters asked for additional guidance regarding how a CHNA 
should prioritize community health needs. These proposed regulations do 
not require a hospital facility to use any particular methods or 
criteria in prioritizing health needs. They do, however, list as 
possible examples of prioritization criteria the burden, scope, 
severity, or urgency of the health need; the estimated feasibility and 
effectiveness of possible interventions; the health disparities 
associated with the need; and/or the importance the community places on 
addressing the need. This list of possible prioritization criteria is 
not intended to be exhaustive, and a hospital facility may use any 
criteria it deems appropriate.
iii. Persons Representing the Broad Interests of the Community
    In assessing the health needs of the community it serves, these 
proposed regulations require a hospital facility to (consistent with 
section 501(r)(3)(B)(i)) take into account input from persons

[[Page 20530]]

who represent the broad interests of the community served by the 
hospital facility, including those with special knowledge of or 
expertise in public health. Specifically, these proposed regulations 
require a hospital facility to take into account input from, at a 
minimum: (1) At least one state, local, tribal, or regional 
governmental public health department (or equivalent department or 
agency) with knowledge, information, or expertise relevant to the 
health needs of the community; (2) members of medically underserved, 
low-income, and minority populations in the community, or individuals 
or organizations serving or representing the interests of such 
populations; and (3) written comments received on the hospital 
facility's most recently conducted CHNA and most recently adopted 
implementation strategy.
    Notice 2011-52 stated that the Treasury Department and the IRS 
intended to require a CHNA to take into account input from, at a 
minimum: (1) Persons with special knowledge of or expertise in public 
health; (2) federal, tribal, regional, state, or local health or other 
departments or agencies, with current data or other information 
relevant to the health needs of the community served by the hospital 
facility; and (3) leaders, representatives, or members of medically 
underserved, low-income, and minority populations, and populations with 
chronic disease needs, in the community served by the hospital 
facility.
A. Governmental Public Health Departments
    With respect to the requirement described in Notice 2011-52 to take 
into account input from federal, tribal, regional, state, or local 
health or other departments, many commenters urged that a hospital 
facility should be able to choose the level and type of governmental 
public health department from which it seeks input, noting that not 
every local jurisdiction has a local public health department. On the 
other hand, a number of public health organizations suggested that 
these proposed regulations should require a hospital facility to 
consult with the state public health department in the state where the 
hospital facility is licensed and/or the local public health department 
in the local jurisdiction where the hospital facility is located. These 
organizations noted that such departments can play a critically 
important role in coordinating CHNA efforts and provide expertise in 
CHNA planning and execution, access to existing health data, and 
knowledge of local conditions, needs, and resources.
    These proposed regulations preserve the flexibility in Notice 2011-
52 of allowing a hospital facility to choose the jurisdictional level 
of government (for example, state, local, tribal, or regional) that it 
feels is most appropriate for its CHNA. These proposed regulations do 
not require a hospital facility to seek input from a local public 
health department, in particular, in recognition of some commenters' 
observation that not all jurisdictions will have local public health 
departments available to participate in the CHNA process. However, in 
recognition of the planning and subject-matter expertise that public 
health departments can offer to the CHNA process, a hospital facility 
is required to seek input from a public health department (or 
equivalent department or agency) in particular, rather than any 
governmental departments with current data or other information 
relevant to the health needs of the community (as described in Notice 
2011-52). Such input could include input from the state public health 
official or any local public health official.
    In addition, given commenters' emphasis on the importance of input 
from public health departments at the state or local level, these 
proposed regulations require a hospital facility to seek input from a 
public health department at a state or local, not a federal, level. 
Because a governmental public health department presumably has special 
knowledge of or expertise in public health, requiring input from a 
public health department eliminates the need for a separate requirement 
to consult with a person with special knowledge of or expertise in 
public health (as provided in Notice 2011-52).
B. Medically Underserved, Low-Income, and Minority Populations
    Commenters generally supported the purpose behind the requirement 
to take into account input from medically underserved, low-income, and 
minority populations in the community but asked for clarification on 
who may be considered ``leaders'' or ``representatives'' of such 
populations. One commenter noted that the term ``chronic disease 
needs'' is broad and could potentially require a hospital facility to 
seek input from a large number of individuals in order to address every 
chronic disease in its community.
    These proposed regulations maintain the requirement to take into 
account input from medically underserved, low-income, and minority 
populations in the community served by the hospital facility but 
respond to comments by clarifying and simplifying the approach taken in 
Notice 2011-52. To address the numerous comments expressing confusion 
over the terms ``leaders'' and ``representatives'' of such populations, 
these proposed regulations clarify that a hospital facility may seek 
input either directly from members of medically underserved, low-
income, and minority populations in the community (for example, in the 
form of meetings, focus groups, surveys, or interviews) or from 
individuals or organizations serving or representing the interests of 
those populations. To address the concern with requiring input related 
to every chronic disease in a community, these proposed regulations do 
not refer to chronic disease needs in particular but rather define 
``medically underserved populations'' in a manner that focuses on 
disparities in coverage, access, and other barriers to care for persons 
with health needs that may include, but are not limited to, chronic 
diseases.
C. Written Comments
    A few commenters recommended an input requirement not contained in 
Notice 2011-52: a requirement that a hospital facility take into 
account public input and comments on a draft version of its CHNA report 
before the report is finalized. These commenters noted the importance 
of a public comment process for ensuring that the CHNA accurately 
reflects the community's views and priorities and adequately analyzes 
available data.
    These proposed regulations do not adopt the specific 
recommendations to require hospital facilities to make a draft copy of 
a CHNA report available for public comment due to the complexity of the 
additional timeframes and procedures such a process would require. 
However, the Treasury Department and the IRS recognize the value of 
providing a mechanism for public feedback on CHNA reports and their 
related implementation strategies. Therefore, these proposed 
regulations respond to these comments by requiring a hospital facility 
to consider written comments received from the public on the hospital 
facility's most recently conducted CHNA and most recently adopted 
implementation strategy. (As discussed in section 4 of this preamble, 
the public will be able to review a hospital facility's most recently 
adopted implementation strategy because it will either be attached to 
the Form 990 of the hospital organization that operates it or made 
widely available on a Web site.) Because a new CHNA must be conducted 
and an implementation strategy adopted at least once every three years, 
this requirement establishes

[[Page 20531]]

the same sort of continual feedback on CHNA reports suggested by 
commenters, albeit over a longer period of time. It is anticipated that 
this opportunity for feedback on CHNA reports and implementation 
strategies will result in a meaningful exchange over time and that the 
longer timeframe will give the public sufficient time to provide 
comments and hospital facilities sufficient time to consider the 
public's comments and take the comments into account when conducting 
their next CHNA. In addition, as discussed in section 3.a.vi of this 
preamble, to help facilitate the option of posting a draft CHNA report 
for public review and comment, these proposed regulations provide that 
the posting of draft CHNA reports will not trigger the start of a 
hospital facility's next three-year CHNA cycle.
D. Input on Financial and Other Barriers and From Other Sources
    In addition, some commenters recommended that a hospital facility 
should be required to integrate evaluations of financial assistance 
policies and procedures and the need for uncompensated care into its 
CHNA. The Treasury Department and the IRS recognize that the need to 
improve access to care by removing financial barriers can be among the 
significant health needs assessed in a CHNA. Accordingly, these 
proposed regulations provide that input from persons representing the 
broad interests of the community includes, but is not limited to, input 
on any financial and other barriers to access to care in the community.
    Finally, similar to Notice 2011-52, these proposed regulations 
provide that a hospital facility may take into account input from a 
broad range of persons located in or serving its community who may have 
special knowledge of or expertise in public health, including, but not 
limited to, health care consumers and consumer advocates, nonprofit and 
community-based organizations, academic experts, local government 
officials, local school districts, health care providers and community 
health centers, health insurance and managed care organizations, 
private businesses, and labor and workforce representatives. As 
discussed in section 3.a.vi of this preamble, one way for a hospital 
facility to take into account input from such a broad range of persons 
is to pursue the option of posting on its Web site a draft CHNA report 
for public review and comment. The Treasury Department and the IRS 
believe a CHNA with broad input from the community can increase the 
likelihood of well-targeted initiatives that address the needs of 
communities and improve the health of residents.
iv. Documentation of a CHNA
    Similar to the documentation rule described in Notice 2011-52, 
these proposed regulations provide that a hospital facility must 
document its CHNA in a CHNA report that is adopted by an authorized 
body of the hospital facility and includes: (1) A definition of the 
community served by the hospital facility and a description of how the 
community was determined; (2) a description of the process and methods 
used to conduct the CHNA; (3) a description of how the hospital 
facility took into account input from persons who represent the broad 
interests of the community it serves; (4) a prioritized description of 
the significant health needs of the community identified through the 
CHNA, along with a description of the process and criteria used in 
identifying certain health needs as significant and prioritizing such 
significant health needs; and (5) a description of potential measures 
and resources identified through the CHNA to address the significant 
health needs.
    Like Notice 2011-52, the proposed regulations provide more detail 
about two of these required elements of the CHNA report: the 
description of the process and methods used to conduct the CHNA and the 
description of how the hospital facility took into account input from 
persons who represent the broad interests of the community. However, in 
response to comments about the need for greater flexibility, these 
proposed regulations provide that a hospital facility's CHNA report 
``will be considered to'' describe each of these elements if it 
contains certain information instead of prescribing a single method of 
meeting the requirement.
A. Description of Process and Methods
    These proposed regulations provide that a hospital facility's CHNA 
report will be considered to describe the process and methods used to 
conduct the CHNA if the CHNA report: (1) describes the data and other 
information used in the assessment, as well as the methods of 
collecting and analyzing this data and information, and (2) identifies 
any parties with whom the hospital facility collaborated, or with whom 
it contracted for assistance, in conducting the CHNA.
B. Description of Community Input
    In describing how the hospital facility took into account input 
from persons who represent the broad interests of the community it 
serves, Notice 2011-52 stated that a hospital facility would have to 
describe when and how the organization consulted with such persons. A 
number of commenters sought clarification that a general summary of 
``when and how'' would be sufficient. Specifically, some of these 
commenters noted that a detailed account of each instance of feedback 
could be quite burdensome and may create the impression that less 
formal interactions with community members are insufficient or unworthy 
of consideration or hinder the free flow of information.
    In response to these comments, these proposed regulations clarify 
that the CHNA report may summarize, in general terms, how and over what 
time period input was provided (for example, whether through meetings, 
focus groups, interviews, surveys, or written comments and between what 
dates) and need not provide a detailed description of each instance of 
feedback. These proposed regulations also clarify that the CHNA report 
may contain a general summary of the input received. Thus, for example, 
a hospital facility may describe a series of town hall meetings by 
noting that four meetings were held over a three-month period and 
generally summarizing the input received, without necessarily having to 
provide the specific dates of each meeting, a list of attendees, or 
minutes of the discussion.
    Notice 2011-52 stated that a hospital facility taking into account 
input from an organization would be required to identify in the CHNA 
report not only the organization but also the name and title of at 
least one individual in the organization with whom the hospital 
facility consulted. Commenters, however, were generally opposed to 
inclusion in the publicly available CHNA report of the names and roles 
of private individuals who gave input into the CHNA process, noting 
that the information may not add much value to the overall CHNA but 
could raise privacy concerns and deter individuals from providing 
input. In response to these comments, these proposed regulations do not 
specifically require the CHNA report to contain the names or titles of 
any individuals contacted within an organization. In addition, the 
proposed regulations specify that a CHNA report does not need to name 
or otherwise individually identify any individuals participating in 
community forums, focus groups, survey samples, or similar groups.
    However, the Treasury Department and the IRS continue to believe 
that a

[[Page 20532]]

CHNA report should identify the organizations that provided input into 
the CHNA and summarize the nature and extent of that input. In 
addition, a CHNA report should describe the medically underserved, low-
income, or minority populations being represented by the organizations 
or individuals providing input. Accordingly, these proposed regulations 
provide that a hospital facility's CHNA report will be considered to 
describe how the hospital facility took into account input if the CHNA 
report: (1) Summarizes, in general terms, the input provided and how 
and over what time period such input was provided; (2) provides the 
names of organizations providing input and summarizes the nature and 
extent of the organization's input; and (3) describes the medically 
underserved, low-income, or minority populations being represented by 
organizations or individuals providing input.
    The Treasury Department and the IRS request comments regarding 
whether these proposed rules provide for sufficient disclosure 
regarding the community input into a CHNA report, or whether the CHNA 
report should be required to provide any other information regarding 
input provided, in order to ensure transparency in the CHNA process.
C. Description of Prioritization of the Community's Health Needs and of 
Potential Measures and Identified Resources to Address Such Needs
    With respect to the requirement in Notice 2011-52 to describe the 
existing health care facilities and other resources within the 
community available to meet the health needs identified through the 
CHNA, many commenters asked that the description of these resources be 
limited to known or available facilities and resources. These 
commenters argued that a community-wide inventory of health care 
resources is not the responsibility of any one hospital facility, but 
rather a task more appropriate to public health departments. 
Accordingly, these proposed regulations limit the description of 
resources available to address health needs to those known or 
identified in the course of conducting the CHNA.
    Additional commenters remarked that both the prioritization of 
health needs and a description of resources available to meet the 
health needs identified through the CHNA are more appropriate in an 
implementation strategy than in a CHNA report. On the other hand, other 
commenters noted the importance of community input in the overall CHNA 
process and sought an opportunity to provide input on potential 
interventions and programs that may be included in a hospital 
facility's implementation strategy. In fact, such commenters asked that 
the implementation strategy, in addition to the CHNA, be subject to 
public input and made widely available to the public.
    The Treasury Department and the IRS recognize that conducting a 
CHNA and developing an implementation strategy are part of one fluid 
process, with no definite point at which the CHNA ends and the 
implementation strategy begins. Prioritizing health needs and 
identifying potential measures and resources to address health needs, 
for example, could reasonably be interpreted as part of ``assessing'' 
those health needs or, alternatively, as the first step in devising a 
strategy to meet those needs. Accordingly, these proposed regulations 
respond to commenters' requests for enhanced transparency and an 
opportunity for community input by requiring items that could 
reasonably be included as part of either the CHNA or the implementation 
strategy to be described in the CHNA report. Thus, these proposed 
regulations require the CHNA report to include a prioritized 
description of the significant health needs of the community identified 
through the CHNA, along with a description of the process and criteria 
used in prioritizing these health needs. These proposed regulations 
also require the CHNA report to include a description of the potential 
measures and resources identified through the CHNA to address the 
significant health needs.
v. Collaboration on CHNA Reports
    Notice 2011-52 stated that the Treasury Department and the IRS 
intend to allow a hospital organization to conduct a CHNA in 
collaboration with other organizations, including related 
organizations, other hospital organizations, for-profit and government 
hospitals, and public health and other departments of state and local 
governments. However, even in cases where collaboration between 
hospitals occurs, Notice 2011-52 stated that the Treasury Department 
and the IRS intended to require each hospital facility to document its 
CHNA in a separate written report. Many commenters recommended that 
when several hospital facilities within the same defined community work 
collaboratively on a CHNA, they should be able to issue a joint CHNA 
report or separate CHNA reports that are substantively identical. These 
commenters argued that joint reporting would encourage collaboration, 
reduce redundancy and expense, and provide a more coherent picture of 
the community's health needs. Some of these commenters suggested that 
the joint CHNA report could be required to contain different sections 
for each particular hospital facility. On the other hand, other 
commenters recommended retaining the requirement for separate CHNA 
reports, noting that facility-level reporting ensures that information 
for each hospital facility is clearly presented and easily accessible.
    In balancing these concerns, these proposed regulations provide, 
generally, that every hospital facility must document its CHNA in a 
separate CHNA report. However, these proposed regulations provide that 
if a hospital facility is collaborating with other facilities and 
organizations in conducting its CHNA or is basing its CHNA, in part, on 
a CHNA for all or part of its community conducted by another 
organization, portions of the hospital facility's CHNA report may be 
substantively identical to the CHNA report of a collaborating hospital 
facility or the other organization conducting a CHNA, if appropriate 
under the facts and circumstances. For example, if a hospital facility 
conducts a survey of the health needs of residents of homeless shelters 
located in the community in collaboration with other hospital 
facilities, the description of that survey in the hospital facility's 
CHNA report may be identical to the description contained in the CHNA 
reports for the other collaborating hospital facilities. Similarly, if 
the state or local public health department with jurisdiction over the 
community served by the hospital facility conducts an inventory of 
community health improvement resources available in that community, the 
hospital facility may include that inventory in its CHNA report.
    These proposed regulations also provide an exception to the general 
requirement of separate CHNA reports: namely, if a hospital facility 
collaborates with other hospital facilities in conducting its CHNA, all 
of the collaborating hospital facilities may produce a joint CHNA 
report as long as all of the facilities define their community to be 
the same and conduct a joint CHNA process. In addition, the joint CHNA 
report must clearly identify each hospital facility to which it applies 
and an authorized body of each collaborating hospital facility must 
adopt the joint CHNA report as its own.
    Thus, for example, if a hospital facility collaborates with nine 
other hospital facilities that are all located in and serving a 
particular MSA, all ten hospital facilities define their

[[Page 20533]]

community as constituting the entire MSA, and all ten hospital 
facilities conduct a joint CHNA process, the ten hospital facilities 
may prepare a joint CHNA report that identifies all of the 
collaborating hospital facilities by name. Under these proposed 
regulations, such a joint CHNA report would satisfy the requirement to 
document the CHNA in a written CHNA report for any one of the 
collaborating hospital facilities as long as the joint CHNA report is 
adopted by an authorized body of the hospital facility.
vi. Making the CHNA Report Widely Available to the Public
    Consistent with Notice 2011-52, these proposed regulations provide 
that in order to make its CHNA report widely available to the public, a 
hospital facility must post the CHNA report on the hospital facility's 
Web site or, if the hospital facility does not have its own Web site 
separate from the hospital organization that operates it, on the 
hospital organization's Web site. Alternatively, the hospital facility 
may post the CHNA report on a Web site established and maintained by 
another entity as long as either the hospital facility or hospital 
organization's Web site (if the facility or organization has a Web 
site) provides a link to the Web page on which the CHNA report is 
posted, along with clear instructions for accessing the report on that 
Web site. In addition, the hospital facility must ensure that 
individuals with access to the Internet can access, download, view, and 
print a hard copy of the CHNA report without requiring special computer 
hardware or software (other than software that is readily available to 
members of the public without payment of any fee) and without payment 
of a fee to the hospital facility, hospital organization, or other 
entity maintaining the Web site. Finally, the hospital facility must 
provide individuals who ask how to access a copy of the CHNA report 
online with the direct Web site address, or URL, of the Web page on 
which the document is posted.
    Commenters generally supported the requirement outlined in Notice 
2011-52 to make the CHNA report widely available on a Web site. Many of 
these commenters believed that this Web posting requirement alone was 
sufficient to make the CHNA report widely available to the public. 
Others, however, urged the Treasury Department and the IRS to expand 
the requirements for making a CHNA widely available to the public to 
require the hospital facility to provide paper copies of the CHNA 
report for free to any individual requesting it. Some commenters 
requested a requirement that the hospital facility identify strategies 
to inform various sectors of the community that the CHNA report is 
widely available on a Web site.
    A few commenters also recommended expanding the requirements 
associated with making CHNA reports widely available on a Web site. 
Some commenters recommended requiring that the CHNA reports be 
conspicuously posted on the applicable Web site, for example by 
requiring a highly visible link on the Web site's homepage. Another 
commenter recommended requiring past, as well as current, CHNA reports 
to be posted, to demonstrate improvement of health care objectives over 
the long term. Yet another commenter recommended requiring that 
individuals do not need to provide personally identifiable information 
or create an account to access the CHNA report.
    Because of the focus on increased transparency of hospital 
facilities in section 501(r), the Treasury Department and the IRS have 
adopted most of the comments seeking to enhance transparency of a 
hospital facility's CHNA by expanding the requirements to make the CHNA 
report widely available to the public. Specifically, these proposed 
regulations make four changes to the interim rule described in Notice 
2011-52 for making the CHNA report widely available to the public. 
First, these proposed regulations require a complete version of the 
CHNA report to be ``conspicuously'' posted on a Web site, to ensure 
that the CHNA report can be easily located on the Web site. Second, 
instead of requiring the CHNA report to be posted on the Web site until 
the next CHNA report is posted, these proposed regulations require the 
CHNA report to remain on the Web site until two subsequent CHNA reports 
have been posted, so information on trends will be available to the 
public. Third, these proposed regulations add that an individual must 
not be required to create an account or otherwise be required to 
provide personally identifiable information in order to access the CHNA 
report on a Web site. Fourth, these proposed regulations add a 
requirement that a hospital facility must make a paper copy of its CHNA 
report available for public inspection without charge at the hospital 
facility at least until the date the hospital facility has made 
available for public inspection, without charge, a paper copy of its 
two subsequent CHNAs.
    Because the requirement to make a document ``widely available on a 
Web site'' applies not only to a hospital facility's CHNA reports but 
also, under the 2012 proposed regulations, to its financial assistance 
policy and related documents, the term ``widely available on a Web 
site'' is defined in the definitions section of these proposed 
regulations and will apply to both rules.
    Finally, to facilitate the sharing of draft versions of the CHNA 
report for comment as requested by some commenters, these proposed 
regulations provide that a hospital facility will not be considered to 
have made the CHNA report widely available to the public for purposes 
of determining the date on which the hospital facility has conducted 
the CHNA if it makes widely available on a Web site (and/or for public 
inspection) a version of the CHNA report that is expressly marked as a 
draft on which the public may comment. Thus, a hospital facility may 
post a draft CHNA report for public review and comment without starting 
its next three-year CHNA cycle.
b. Implementation Strategies
    Notice 2011-52 noted the intention of the Treasury Department and 
the IRS to define an ``implementation strategy'' for a hospital 
facility as a written plan that addresses each of the health needs 
identified through a CHNA for the facility. Notice 2011-52 further 
provided that an implementation strategy would ``address'' a health 
need identified through a CHNA if the written plan either: (1) 
describes how the hospital facility plans to meet the health need, or 
(2) identifies the health need as one the hospital facility does not 
intend to meet and explains why the hospital facility does not intend 
to meet the health need.
    A number of commenters asked that the implementation strategy be 
required to address only significant or priority health needs 
identified through the CHNA. Other commenters asked if the 
implementation strategy could address health needs identified from a 
source other than the hospital facility's CHNA.
    As indicated in section 3.a.ii of this preamble, these proposed 
regulations limit the health needs that a hospital facility must 
identify through its CHNA to significant health needs and the health 
needs covered in the implementation strategy are limited to those 
significant health needs identified through the CHNA. In addition, 
these proposed regulations do not require a hospital facility to 
develop a strategy or plan to address each identified significant 
health need. Rather, consistent with section 6033(b)(15)(A) of the 
Code, these proposed regulations follow the approach set forth in 
Notice 2011-52 and clarify that a hospital facility's implementation 
strategy must,

[[Page 20534]]

with respect to each significant health need identified through the 
CHNA, either: (1) describe how the hospital facility plans to address 
the health need; or (2) identify the health need as one the hospital 
facility does not intend to address and explain why the hospital 
facility does not intend to address the health need. Accordingly, an 
implementation strategy may describe how the hospital facility plans to 
address only a few of the significant health needs identified through a 
CHNA, as long as it explains why it does not intend to address the 
other identified significant health needs for which no plan is 
provided.
    Although an implementation strategy must address the significant 
health needs identified through a hospital facility's CHNA, these 
proposed regulations do not limit an implementation strategy to 
addressing only those health needs, and it may describe activities to 
address health needs that the hospital facility identifies in other 
ways.
i. Describing How a Hospital Facility Plans To Address a Significant 
Health Need
    Commenters recommended that the implementation strategy be required 
to describe its intended impact on health outcomes. Some of these 
commenters recommended that the descriptions of intended impacts 
include short- and long-term measurable goals and objectives, as well 
as methods to evaluate the plan's effectiveness. One commenter stated 
that an implementation strategy should assign an economic value to each 
strategy or activity, and an aggregate total benefit. Others 
recommended requiring the implementation strategy to include a 
mechanism to receive ongoing community feedback.
    In describing how a hospital facility plans to address a 
significant health need identified through the CHNA, these proposed 
regulations adopt some of the commenters' recommendations by requiring 
the implementation strategy to describe, in addition to the actions the 
hospital facility intends to take to address the health need, the 
anticipated impact of these actions and the plan to evaluate such 
impact. For example, a hospital facility's CHNA may identify as 
significant health needs financial or other barriers to care in the 
community, such as high rates of financial need or large numbers of 
uninsured individuals and families. Its implementation strategy could 
describe a program to decrease the impact of these barriers, such as by 
expanding its financial assistance program or helping uninsured 
individuals and families learn about and enroll in sources of insurance 
such as Medicare, Medicaid, Children's Health Insurance Program (CHIP), 
and the new Health Insurance Marketplaces (also known as the 
Exchanges); state how it anticipates its program will reduce these 
barriers to care; and identify the data sources it will use to track 
the program's impact on the barriers.
    These proposed regulations also require the implementation strategy 
to identify the programs and resources the hospital facility plans to 
commit to address the health need. Finally, the implementation strategy 
must describe any planned collaboration between the hospital facility 
and other facilities or organizations in addressing the health need.
    While these proposed regulations do not require the implementation 
strategy itself to include any particular mechanism for community 
input, they do provide that a hospital facility must establish an 
ongoing feedback mechanism by requiring a hospital facility, in 
conducting a CHNA, to take into account written comments received on 
its most recently adopted implementation strategy, as described in 
section 3.a.iii.C of this preamble.
ii. Describing Why a Hospital Facility Is Not Addressing a Significant 
Health Need
    Several commenters sought clarification regarding the level of 
detail required in the implementation strategy's explanation of why the 
hospital facility does not intend to address a significant health need. 
Some of these commenters stated that an explanation of the 
prioritization strategy together with comments noting that another 
facility or organization is addressing the health need should be 
sufficient.
    These proposed regulations clarify that a brief explanation of why 
a hospital facility does not intend to address the significant health 
need is sufficient. Some possible examples of reasons a hospital 
facility might offer for not addressing a health need, include, but are 
not limited to, resource constraints, relative lack of expertise or 
competency to effectively address the need, a relatively low priority 
assigned to the need, a lack of identified effective interventions to 
address the need, and/or the fact that the need is being addressed by 
other facilities or organizations in the community. This list of 
possible reasons is not intended to be exhaustive, and a hospital 
facility may provide whatever reasons reflect its particular facts and 
circumstances.
iii. Joint Implementation Strategies
    Notice 2011-52 noted that the Treasury Department and the IRS 
intended to allow hospital facilities to collaborate with other 
facilities and organizations in developing an implementation strategy 
but to still require each hospital facility to separately document its 
implementation strategy. Some commenters requested that hospital 
facilities conducting a joint CHNA should be permitted to adopt a joint 
implementation strategy while other commenters recommended retaining 
the requirement for separate implementation strategies, with each side 
advancing arguments similar to those advanced for and against joint 
CHNA reports.
    In balancing these concerns, these proposed regulations state that 
a hospital facility may develop an implementation strategy in 
collaboration with other facilities and organizations. In addition, 
these proposed regulations provide that a hospital facility that 
collaborates with other facilities or organizations in developing its 
implementation strategy generally must document its implementation 
strategy in a separate written plan that is tailored to the hospital 
facility and takes into account its specific programs and resources.
    However, these proposed regulations also provide an exception to 
the general requirement of separate implementation strategies: namely, 
a hospital facility collaborating with other hospital facilities may 
adopt a joint implementation strategy as long as it documents its CHNA 
in a joint CHNA report (as described in section 3.a.v of this preamble) 
and the joint implementation strategy meets three requirements. First, 
the joint implementation strategy must be clearly identified as 
applying to the hospital facility. Second, the joint implementation 
strategy must clearly identify the hospital facility's particular role 
and responsibilities in taking the actions described in the 
implementation strategy and the programs and resources the hospital 
facility plans to commit in taking those actions. Third, the joint 
implementation strategy must include a summary or other tool that helps 
the reader easily locate those portions of the joint implementation 
strategy that relate to the hospital facility.
iv. When the Implementation Strategy Must Be Adopted
    In order to satisfy the CHNA requirements with respect to any 
taxable year, section 501(r)(3)(A)(ii) requires a hospital facility to 
adopt an

[[Page 20535]]

implementation strategy to meet the health needs identified through the 
CHNA described in section 501(r)(3)(A)(i). Consistent with this 
statutory language, Notice 2011-52 stated the intention of the Treasury 
Department and the IRS to require a hospital facility to adopt an 
implementation strategy to meet the health needs identified through a 
CHNA by the end of the same taxable year in which it conducts that 
CHNA. A number of commenters sought additional time to complete the 
implementation strategy, in part to accommodate collaborating hospital 
facilities with different taxable years. Most of these commenters 
recommended that the implementation strategy should be adopted within 
12 months after completion of the CHNA or by the end of the next 
taxable year, rather than by the end of the same taxable year in which 
the CHNA is completed.
    Because a hospital facility only has to conduct a CHNA once every 
three years and may begin the CHNA process at any time during the 
three-year period, a hospital facility should have ample time to 
complete the CHNA earlier in the third taxable year and adopt an 
implementation strategy by the end of that same taxable year. The 
flexibility afforded by a three-year cycle should also allow hospital 
facilities with different tax years sufficient time to collaborate. 
Thus, consistent with Notice 2011-52, these proposed regulations 
provide that an authorized body of the hospital facility must adopt the 
implementation strategy by the end of the same taxable year in which 
the hospital facility finishes conducting the CHNA (typically, by 
making the CHNA report widely available to the public). These proposed 
regulations also clarify that if a hospital facility begins working on 
a CHNA in one taxable year but completes the final required step for 
the CHNA (and hence is considered to have conducted it) in the 
subsequent taxable year, it is not required to adopt the implementation 
strategy until the taxable year in which the CHNA process is considered 
conducted, not the year it began. The Treasury Department and the IRS 
seek comments on whether this rule will materially inhibit the ability 
of hospital facilities with different taxable years to collaborate with 
each other or otherwise burden hospital facilities unnecessarily.
    Notwithstanding the general rule that the implementation strategy 
must be adopted in the same taxable year the CHNA is considered 
conducted, these proposed regulations provide transition relief for the 
adoption of a hospital facility's implementation strategy for its first 
CHNA conducted after the effective date of section 501(r)(3), in 
recognition of the fact that certain hospital facilities may not have a 
full three years in which to conduct their first CHNA. This transition 
relief is described in section 3.d of this preamble.
c. New Hospital Facilities
    Notice 2011-52 requested comments regarding when a hospital 
facility that is newly acquired or placed into service must conduct a 
CHNA. Comments received on this issue ranged from requiring such a 
hospital facility to conduct a CHNA within the first taxable year of 
acquisition or licensing to allowing the facility three taxable years 
following the date of acquisition or licensing. In addition, at least 
two commenters asked for clarification on when a for-profit hospital 
that converts to section 501(c)(3) status must conduct a CHNA. 
Additional commenters asked if a short taxable year resulting from, for 
example, a change in ownership, is considered a ``taxable year'' for 
purposes of the three-year CHNA cycle.
    These proposed regulations provide that a hospital facility that is 
newly acquired or placed into service by a hospital organization, or 
that becomes newly subject to section 501(r) because the hospital 
organization that operates it is newly recognized as described in 
section 501(c)(3), must conduct a CHNA and adopt an implementation 
strategy to meet the community health needs identified through that 
CHNA by the last day of the second taxable year beginning after the 
date, respectively, the hospital facility is acquired or placed into 
service, or newly subject to section 501(r).
    A short taxable year of less than twelve months is considered a 
taxable year for purposes of section 501(r). Thus, the taxable year in 
which a hospital facility is acquired or placed into service, or 
becomes subject to section 501(r), is a taxable year for purposes of 
the CHNA requirements, regardless of whether that taxable year is less 
than twelve months. As a result, a deadline of the last day of the 
second taxable year beginning after the date of acquisition, licensure, 
or section 501(c)(3) recognition provides these new hospital facilities 
with three taxable years (even if less than three full calendar years) 
to meet the section 501(r)(3) requirements.
d. Transition Rules
    A number of commenters requested various forms of transition 
relief, noting the complexity of the new CHNA requirements. In 
particular, a few commenters asked if a CHNA conducted before the 
effective date of the CHNA requirements could satisfy the CHNA 
requirements for a taxable year beginning after the effective date 
(that is, for a taxable year beginning after March 23, 2012). In 
addition, several commenters specifically requested transition relief 
with respect to the first implementation strategy adopted after the 
effective date of the CHNA requirements. The suggestions for transition 
relief for the adoption of the first implementation strategy ranged 
from 30 to 60 days after the end of the taxable year in which the CHNA 
was conducted to the end of the taxable year following the taxable year 
in which the CHNA was conducted. In response to these comments, these 
proposed regulations provide transition relief that is tailored to the 
taxable year after March 23, 2010, in which a hospital facility 
conducts its first CHNA.
i. CHNA Conducted in Taxable Year Beginning Before March 23, 2012
    These proposed regulations provide that a hospital facility that 
conducted a CHNA described in section 501(r)(3) in either of its first 
two taxable years beginning after March 23, 2010, does not need to meet 
the requirements of section 501(r)(3) again until the third taxable 
year following the taxable year in which the hospital facility 
conducted the CHNA. To qualify for this transition relief, the hospital 
facility must adopt an implementation strategy to meet the community 
health needs identified through the CHNA conducted in its first taxable 
year beginning after March 23, 2010 or 2011 on or before the 15th day 
of the fifth calendar month following the close of its first taxable 
year beginning after March 23, 2012. Thus, for example, if a hospital 
facility reporting on a calendar-year basis conducts a CHNA in 2012 and 
adopts an implementation strategy for that CHNA on or before May 15, 
2014, it does not need to meet the section 501(r)(3) requirements again 
until 2015.
ii. CHNA Conducted in First Taxable Year Beginning After March 23, 2012
    If a hospital facility conducts a CHNA described in section 
501(r)(3) in its first taxable year beginning after March 23, 2012, 
these proposed regulations provide that the hospital facility will be 
deemed to satisfy the requirement to adopt an implementation strategy 
in the same taxable year the CHNA is conducted if an authorized body of 
the hospital facility adopts an implementation strategy to meet the 
community health needs identified through that CHNA on or before the

[[Page 20536]]

15th day of the fifth calendar month following the close of its first 
taxable year beginning after March 23, 2012.

4. Reporting Requirements Related to CHNAs

    Notice 2011-52 stated the intention of the Treasury Department and 
the IRS to require a hospital organization to attach to its annual 
information return (Form 990) the most recently adopted implementation 
strategy for each of the hospital facilities it operates. A few 
commenters stated that, rather than require the entire implementation 
strategy to be attached to the Form 990, the Treasury Department and 
the IRS should permit a narrative summary description of the contents 
of its implementation strategy to be provided on the Form 990. One of 
these commenters noted that the implementation strategy is only 
required to be updated every three years, so in many instances a 
narrative may provide more relevant and timely information. A number of 
other commenters recommended requiring the implementation strategy to 
be made widely available to the public, rather than merely attached to 
the Form 990, in order to encourage greater transparency and provide an 
opportunity for public input and comment.
    These proposed regulations allow a hospital organization either to 
attach to its Form 990 a copy of the most recently adopted 
implementation strategy for each hospital facility it operates or to 
provide on the Form 990 the URL(s) of the Web page(s) on which it has 
made each implementation strategy widely available on a Web site. An 
implementation strategy must describe, with respect to each significant 
health need identified through the CHNA, how the hospital facility 
plans to address the health need or why the hospital facility does not 
intend to address the health need. Similarly, section 6033(b)(15)(A) 
requires a hospital organization to furnish annually information 
setting forth a ``description of how the organization is addressing the 
needs identified in each'' CHNA and ``a description of any such needs 
that are not being addressed together with the reasons why such needs 
are not being addressed.'' Thus, the requirement in these proposed 
regulations to attach the implementation strategy to the Form 990, or 
provide on the Form 990 the URL where the implementation strategy is 
made widely available on a Web site, partially implements section 
6033(b)(15)(A).
    However, the requirement in section 6033(b)(15)(A) also encompasses 
an annual, up-to-date description of the actions actually taken by a 
hospital facility during the taxable year to address the significant 
health needs identified through the most recently conducted CHNA 
(which, presumably, will typically be steps taken during a taxable year 
to execute the hospital facility's most recently adopted implementation 
strategy). Accordingly, these proposed regulations require a hospital 
organization to provide annually on the Form 990 a description of the 
actions taken during the taxable year to address the significant health 
needs identified through its most recent CHNA for each hospital 
facility it operates or, if no actions were taken with respect to one 
or more of these health needs, the reason or reasons why no actions 
were taken.
    These proposed regulations also reiterate the requirement of 
section 6033(b)(15)(B) that a hospital organization attach to its Form 
990 a copy of its audited financial statements for the taxable year--or 
in the case of an organization the financial statements of which are 
included in consolidated financial statements with other organizations, 
such consolidated financial statements. The Treasury Department and the 
IRS request comments regarding whether hospital organizations whose 
financial statements are included in consolidated financial statements 
should be able to redact financial information about any taxable 
organizations that are members of the consolidated group.
    Finally, consistent with section 6033(b)(10), these proposed 
regulations require a hospital organization to disclose the amount of 
the excise tax imposed on the organization under section 4959 during 
the taxable year for failures to meet the requirements of section 
501(r)(3).
    A few commenters requested clarification regarding whether 
government hospitals will continue to be excepted from these and other 
Form 990 reporting requirements under Rev. Proc. 95-48 (1995-2 C.B. 
418). In Rev. Proc. 95-48, the IRS exercised its discretionary 
authority under section 6033(a)(3)(B) to relieve certain governmental 
units and affiliates of governmental units from the requirement to file 
a Form 990. The Affordable Care Act did not change the requirements 
regarding which organizations are required to file a Form 990. 
Accordingly, a government hospital (other than one that is described in 
section 509(a)(3)) that has been excused from filing a Form 990 under 
Rev. Proc. 95-48 or a successor revenue procedure is not required to 
file a Form 990. Because government hospitals described in Rev. Proc. 
95-48 (other than those described in section 509(a)(3)) are relieved 
from the annual filing requirements under section 6033, they are also 
relieved from any new reporting requirements imposed on hospital 
organizations by these proposed regulations under section 6033, 
including under sections 6033(b)(10)(D) and (b)(15) and the proposed 
requirement to attach one or more implementation strategies to a Form 
990.

5. Excise Tax on Failure to Meet CHNA Requirements

    Section 4959 imposes a $50,000 excise tax on a hospital 
organization that fails to meet the CHNA requirements of section 
501(r)(3) with respect to any taxable year.
    Notice 2011-52 indicated the intent of the Treasury Department and 
the IRS to impose the $50,000 tax with respect to a failure by a 
hospital facility to satisfy section 501(r)(3) in any three-year 
period, making it possible for the excise tax to apply in sequential 
years. Notice 2011-52 provided an example of a hospital organization 
that reports on a calendar-year basis and operates only one hospital 
facility, which is subject to the $50,000 excise tax in 2013 because 
the hospital facility failed to conduct a CHNA in 2011, 2012, and 2013. 
If the hospital facility again fails to conduct a CHNA by the last day 
of 2014, Notice 2011-52 noted the hospital organization will again be 
subject to the $50,000 excise tax in 2014 for the hospital facility's 
failure to conduct a CHNA in 2012, 2013, and 2014. These proposed 
regulations include this example of the application of the section 4959 
excise tax and confirm that the excise tax may be imposed for each 
taxable year that a hospital facility fails to meet the section 
501(r)(3) requirements. These proposed regulations also make clear that 
the excise tax may be imposed in addition to any tax imposed on a 
noncompliant hospital facility as described in section 2.d of this 
preamble or that results from revocation of a hospital organization's 
section 501(c)(3) status.
    In addition, Notice 2011-52 stated the intention of the Treasury 
Department and the IRS to apply the section 4959 excise tax separately 
with respect to each hospital facility's failure to meet the CHNA 
requirements. Thus, if a hospital organization that operates two 
hospital facilities fails to meet the requirements of section 501(r)(3) 
with respect to both facilities in any taxable year, the hospital 
organization will be subject to a total excise tax of $100,000

[[Page 20537]]

($50,000 for each hospital facility) for that taxable year.
    At least one commenter argued that applying the $50,000 excise tax 
on a facility-by-facility basis is inconsistent with the statutory 
language in section 4959 that ``there is imposed on the organization a 
tax equal to $50,000.'' On the other hand, two commenters explicitly 
supported applying the section 4959 excise tax at the hospital facility 
level. One of these commenters expressed concern that if the $50,000 
excise tax were imposed on a hospital organization without regard to 
the number of hospital facilities it operates that have failed the 
section 501(r)(3) requirements, a hospital organization operating 
multiple facilities may choose to pay the tax rather than conduct a 
CHNA and adopt an implementation strategy for every facility it 
operates.
    The Treasury Department and the IRS note that section 
501(r)(2)(B)(i) requires a hospital organization operating more than 
one hospital facility to meet the CHNA requirements ``separately with 
respect to each such facility'' and section 501(r)(2)(B)(ii) suggests 
that one hospital organization can fail to meet the CHNA requirements 
separately with respect to each hospital facility. Thus, a hospital 
organization with multiple hospital facilities can ``fail[] to meet the 
requirements of section 501(r)(3)'' within the meaning of section 4959 
separately with respect to each hospital facility. Accordingly, these 
proposed regulations adopt the approach in Notice 2011-52 of applying 
the excise tax on a facility-by-facility basis.
    One commenter requested clarification that the excise tax will be 
imposed on any hospital organization that fails to satisfy any 
requirement under section 501(r)(3), including the requirement to adopt 
an implementation strategy, and is not limited to a failure related to 
conducting the CHNA. These proposed regulations, in adopting the 
approach taken in Notice 2011-52, clarify that the excise tax is 
imposed on a failure to meet any of the requirements under section 
501(r)(3), including the requirement to adopt an implementation 
strategy described in section 501(r)(3)(A)(ii).

Effective/Applicability Dates

    The 2012 proposed regulations under section 501(r)(4) through 
(r)(6) were proposed to apply for taxable years beginning on or after 
the date those rules are published in the Federal Register as final or 
temporary regulations. By contrast, these proposed regulations provide 
that both these proposed regulations and the 2012 proposed regulations 
will generally be effective on the date these rules are published in 
the Federal Register as final or temporary regulations. Providing for 
an immediate effective date gives immediate effect to the transition 
relief described in Sec.  1.501(r)-3(e) and will also allow the 
Treasury Department and the IRS to consider transition relief for the 
requirements under Sec.  1.501(r)-4 through Sec.  1.501(r)-6 of the 
2012 proposed regulations based on the estimated amount of time to come 
into compliance with those rules rather than a particular hospital 
organization's taxable year. The proposed regulations under sections 
6033(b)(10) and (b)(15)(A) are proposed to be effective for returns 
filed on or after the date these rules are published in the Federal 
Register as final or temporary regulations.
    A hospital facility may rely on Sec.  1.501(r)-3 of these proposed 
regulations for any CHNA conducted or implementation strategy adopted 
on or before the date that is six months after the date these proposed 
regulations are published as final or temporary regulations in the 
Federal Register. As provided in Notice 2011-52, hospital organizations 
may continue to rely on the interim rules described in Notice 2011-52 
for any CHNA conducted or implementation strategy adopted on or before 
October 5, 2013, which is the date that is six months after these 
proposed regulations are published. After October 5, 2013, Notice 2011-
52 is obsolete. The Treasury Department and the IRS invite comments on 
whether, and what type of, additional transitional relief may be 
necessary.
    Hospital organizations should note that the statutory effective 
date of section 501(r)(3) is a hospital organization's first taxable 
year beginning after March 23, 2012. The effective date for the other 
requirements under section 501(r) is a hospital organization's first 
taxable year beginning after March 23, 2010.

Availability of IRS Documents

    IRS notices, revenue rulings, and revenue procedures cited in this 
preamble are made available by the Superintendent of Documents, U.S. 
Government Printing Office, Washington, DC 20402.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866, as supplemented by Executive Order 13563. Therefore, a 
regulatory assessment is not required. It also has been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
does not apply to this proposed regulation. It is hereby certified that 
the collection of information in these regulations will not have a 
significant economic impact on a substantial number of small entities. 
The collection of information is in Sec.  1.501(r)-3 and Sec.  1.6033-
2(a)(2)(ii)(l) of the regulations. This certification is based on the 
following:
    Consistent with the requirements imposed by statute, Sec.  
1.501(r)-3 of the regulations requires hospital facilities to conduct a 
CHNA and adopt an implementation strategy. However, these requirements 
need only be satisfied once over a period of three taxable years. 
Moreover, some hospital facilities already conduct similar community 
needs assessments under state law, and the Treasury Department and the 
IRS expect that these facilities will be able to draw upon pre-existing 
processes and resources to some extent.
    Consistent with the requirements imposed by statute, Sec.  1.6033-
2(a)(2)(ii)(l) of the regulations requires affected organizations to 
report annually on a Form 990 actions taken during the year to address 
community health needs and to attach audited financial statements to 
the Form 990. To assist the IRS and the public, the regulations also 
require affected organizations to attach to the Form 990 a copy of the 
most recently adopted implementation strategy or provide the URL of a 
Web page where it is available to the public. For affected 
organizations, the burden of providing either a copy of the 
implementation strategy or the address of a Web site where it can be 
found will be minimal. Consequently, the regulations do not add to the 
impact on small entities imposed by the statutory scheme.
    For these reasons, the collection of information in this regulation 
that is subject to the Regulatory Flexibility Act will not impose a 
significant economic burden upon the affected organizations. 
Accordingly, a Regulatory Flexibility Analysis under the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to 
section 7805(f) of the Code, this regulation has been submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small entities.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble

[[Page 20538]]

under ADDRESSES. The Treasury Department and the IRS request comments 
on all aspects of the proposed rules. All comments will be available at 
www.regulations.gov or upon request.
    A public hearing will be scheduled if requested in writing by any 
person that timely submits written comments. If a public hearing is 
scheduled, notice of the date, time, and place for the public hearing 
will be published in the Federal Register.

Drafting Information

    The principal authors of these proposed regulations are Preston J. 
Quesenberry and Amy F. Giuliano, Office of the Chief Counsel (Tax-
Exempt and Government Entities). However, other personnel from the 
Treasury Department and the IRS participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 53

    Excise taxes, Foundations, Investments, Lobbying, Reporting and 
recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 53 are proposed to be amended as 
follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *

0
Par. 2. Section 1.501(r)-0 as proposed to be amended at 77 FR 38160 
(June 26, 2012) is proposed to be further amended as follows:
0
1. Adding a new entry to Sec.  1.501(r)-1, paragraph (c).
0
2. Adding new entries to Sec.  1.501(r)-2 and Sec.  1.501(r)-3.
0
3. Revising the entry to Sec.  1.501(r)-7.
    The revision and additions to read as follows:


Sec.  1.501(r)-0  Outline of regulations.

* * * * *


Sec.  1.501(r)-1  Definitions.

* * * * *
    (c) Additional definitions.
    (1) Authorized body of a hospital facility.
    (2) Operating a hospital facility.
    (3) Partnership agreement.
    (4) Widely available on a Web site.


Sec.  1.501(r)-2  Failures to satisfy section 501(r).

    (a) Revocation of section 501(c)(3) status.
    (b) Minor and inadvertent omissions and errors.
    (c) Excusing certain failures if hospital facility corrects and 
discloses.
    (d) Taxation of noncompliant hospital facilities.
    (1) In general.
    (2) Noncompliant facility income.
    (3) No aggregation.
    (4) Interaction with other Code provisions.


Sec.  1.501(r)-3  Community health needs assessments.

    (a) In general.
    (b) Conducting a CHNA.
    (1) In general.
    (2) Date a CHNA is conducted.
    (3) Community served by the hospital facility.
    (4) Assessing community health needs.
    (5) Persons representing the broad interests of the community.
    (6) Medically underserved populations.
    (7) Documentation of a CHNA.
    (8) Making the CHNA report widely available to the public.
    (c) Implementation strategy.
    (1) In general.
    (2) Description of how the hospital facility plans to address a 
significant health need.
    (3) Description of why a hospital facility is not addressing a 
significant health need.
    (4) Joint implementation strategies.
    (5) When the implementation strategy must be adopted.
    (d) New hospital facilities.
    (e) Transition rules.
    (1) CHNA conducted in taxable year beginning before March 23, 2012.
    (2) CHNA conducted in first taxable year beginning after March 23, 
2012.
* * * * *


Sec.  1.501(r)-7  Effective/applicability dates.

    (a) Effective/applicability date.
    (b) Reliance and transition period.
0
Par. 3. Section 1.501(r)-1 as proposed to be amended at 77 FR 38160 
(June 26, 2012) is proposed to be further amended by revising 
paragraphs (b)(15) and (b)(16) and adding new paragraph (c) to read as 
follows:


Sec.  1.501(r)-1  Definitions.

* * * * *
    (b) * * *
    (15) Hospital facility means a facility that is required by a state 
to be licensed, registered, or similarly recognized as a hospital. 
Multiple buildings operated under a single state license are considered 
to be a single hospital facility. For purposes of this paragraph 
(b)(15), the term ``state'' includes only the 50 states and the 
District of Columbia and not any U.S. territory or foreign country. 
References to a hospital facility taking actions include instances in 
which the hospital organization operating the hospital facility takes 
actions through or on behalf of the hospital facility.
    (16) Hospital organization means an organization recognized (or 
seeking to be recognized) as described in section 501(c)(3) that 
operates one or more hospital facilities. If the section 501(c)(3) 
status of such an organization is revoked, the organization will, for 
purposes of section 4959, continue to be treated as a hospital 
organization during the taxable year in which such revocation becomes 
effective.
* * * * *
    (c) Additional definitions--(1) Authorized body of a hospital 
facility means--
    (i) The governing body (that is, the board of directors, board of 
trustees, or equivalent controlling body) of the hospital organization 
that operates the hospital facility, or a committee of, or other party 
authorized by, that governing body to the extent such committee or 
other party is permitted under state law to act on behalf of the 
governing body; or
    (ii) If the hospital facility has its own governing body and is 
recognized as an entity under state law but is a disregarded entity for 
federal tax purposes, the governing body of that hospital facility, or 
a committee of, or other party authorized by, that governing body to 
the extent such committee or other party is permitted under state law 
to act on behalf of the governing body.
    (2) Operating a hospital facility includes operating the facility 
through the organization's own employees or contracting out to another 
organization to operate the facility. For example, if an organization 
hires a management company to operate the facility, the hiring 
organization is considered to operate the facility. An organization 
also operates a hospital facility if it is the sole member or owner of 
a disregarded entity that operates the hospital facility. In addition, 
an organization operates a hospital facility if it owns a capital or 
profits interest in, or is a member of, a joint venture, limited 
liability company, or other entity treated as a partnership for federal 
income tax purposes that operates the hospital facility unless either--

[[Page 20539]]

    (i) The organization does not have control over the operation of 
the hospital facility sufficient to ensure that the operation of the 
hospital facility furthers an exempt purpose described in section 
501(c)(3) and thus treats the operation of the hospital facility, 
including the facility's provision of medical care, as an unrelated 
trade or business described in section 513(a) with respect to the 
hospital organization; or
    (ii) At all times since March 23, 2010, the organization has been 
organized and operated primarily for educational or scientific purposes 
and has not engaged primarily in the operation of one or more hospital 
facilities and, pursuant to a partnership agreement entered into prior 
to March 23, 2010,--
    (A) Does not own more than 35 percent of the capital or profits 
interest in the partnership (determined in accordance with section 
707(b)(3));
    (B) Does not own a general partner interest, managing-member 
interest, or similar interest in the partnership; and
    (C) Does not have control over the operation of the hospital 
facility sufficient to ensure that the hospital facility complies with 
the requirements of section 501(r).
    (3) Partnership agreement, for purposes of paragraph (c)(2)(ii) of 
this section, includes all written agreements among the partners, or 
between one or more partners and the partnership, concerning affairs of 
the partnership and responsibilities of the partners, whether or not 
embodied in a document referred to by the partners as the partnership 
agreement, entered into before March 23, 2010. A partnership agreement 
also includes any modifications to the agreement agreed to by all 
partners, or adopted in any other manner provided by the partnership 
agreement, but no such modifications adopted on or after March 23, 
2010, that affect whether or not the agreement is described in 
paragraph (c)(2)(ii) of this section. In addition, a partnership 
agreement includes provisions of Federal, state, or local law, as in 
effect before March 23, 2010, that govern the affairs of the 
partnership or are considered under such law to be part of the 
partnership agreement.
    (4) Widely available on a Web site means--
    (i) The hospital facility conspicuously posts a complete and 
current version of the document on--
    (A) The hospital facility's Web site;
    (B) If the hospital facility does not have its own Web site 
separate from the hospital organization that operates it, the hospital 
organization's Web site; or
    (C) A Web site established and maintained by another entity, but 
only if the Web site of the hospital facility or hospital organization 
(if the facility or organization has a Web site) provides a 
conspicuously-displayed link to the Web page on which the document is 
posted, along with clear instructions for accessing the document on 
that Web site;
    (ii) Individuals with access to the Internet can access, download, 
view, and print a hard copy of the document without requiring special 
computer hardware or software (other than software that is readily 
available to members of the public without payment of any fee); without 
payment of a fee to the hospital facility, hospital organization, or 
other entity maintaining the Web site; and without creating an account 
or being otherwise required to provide personally identifiable 
information; and
    (iii) The hospital facility provides individuals who ask how to 
access a copy of the document online with the direct Web site address, 
or URL, of the Web page on which the document is posted.
0
Par. 4. Sections 1.501(r)-2 and 1.501(r)-3 are added to read as 
follows:


Sec.  1.501(r)-2  Failures to satisfy section 501(r).

    (a) Revocation of section 501(c)(3) status. Except as otherwise 
provided in paragraphs (b) and (c) of this section, a hospital 
organization failing to meet one or more of the requirements of section 
501(r) separately with respect to one or more hospital facilities it 
operates may have its section 501(c)(3) status revoked as of the first 
day of the taxable year in which the failure occurs. In determining 
whether to continue to recognize the section 501(c)(3) status of a 
hospital organization that fails to meet one or more of the 
requirements of section 501(r) with respect to one or more hospital 
facilities, the Commissioner will consider all relevant facts and 
circumstances including, but not limited to, the following--
    (1) Whether the organization has previously failed to meet the 
requirements of section 501(r), and, if so, whether the same type of 
failure previously occurred;
    (2) The size, scope, nature, and significance of the organization's 
failure(s);
    (3) In the case of an organization that operates more than one 
hospital facility, the number, size, and significance of the facilities 
that have failed to meet the section 501(r) requirements relative to 
those that have complied with these requirements;
    (4) The reason for the failure(s);
    (5) Whether the organization had, prior to the failure(s), 
established practices and procedures (formal or informal) reasonably 
designed to promote and facilitate overall compliance with the section 
501(r) requirements;
    (6) Whether the practices and procedures had been routinely 
followed and the failure(s) occurred through an oversight or mistake in 
applying them;
    (7) Whether the organization has implemented safeguards that are 
reasonably calculated to prevent similar failures from occurring in the 
future;
    (8) Whether the organization corrected the failure(s) as promptly 
after discovery as is reasonable given the nature of the failure(s); 
and
    (9) Whether the organization took the measures described in 
paragraphs (a)(7) and (a)(8) of this section before the Commissioner 
discovered the failure(s).
    (b) Minor and inadvertent omissions and errors. A hospital 
facility's omission of required information from a policy or report 
described in Sec.  1.501(r)-3 or Sec.  1.501(r)-4, or error with 
respect to the implementation or operational requirements described in 
Sec.  1.501(r)-3 through Sec.  1.501(r)-6, will not be considered a 
failure to meet a requirement of section 501(r) if--
    (1) Such omission or error was minor, inadvertent, and due to 
reasonable cause; and
    (2) The hospital facility corrects such omission or error as 
promptly after discovery as is reasonable given the nature of the 
omission or error.
    (c) Excusing certain failures if hospital facility corrects and 
discloses. Pursuant to guidance set forth by revenue procedure, notice, 
or other guidance published in the Internal Revenue Bulletin, a 
hospital facility's failure to meet one or more of the requirements 
described in Sec.  1.501(r)-3 through Sec.  1.501(r)-6 that is neither 
willful nor egregious shall be excused for purposes of this section if 
the hospital facility corrects and makes disclosure in accordance with 
the rules set forth in the guidance. If a hospital facility's failure 
was willful or egregious, the failure will not be excused, even if the 
hospital facility corrects and makes disclosure in accordance with the 
guidance, and no presumption will be created by a hospital facility's 
correction and disclosure that the failure was neither willful nor 
egregious. For purposes of this paragraph (c), willful is to be 
interpreted consistent with the meaning of that term in the context of 
civil penalties, which would include a failure due to gross negligence, 
reckless

[[Page 20540]]

disregard, or willful neglect. Furthermore, notwithstanding a hospital 
facility's compliance with such future guidance, a hospital facility 
may, in the discretion of the IRS, be subject to an excise tax under 
section 4959 for failures to meet the requirements of section 
501(r)(3).
    (d) Taxation of noncompliant hospital facilities--(1) In general. 
Except as otherwise provided in paragraphs (b) and (c) of this section, 
if a hospital organization that operates more than one hospital 
facility fails to meet one or more of the requirements of section 
501(r) separately with respect to a hospital facility during a taxable 
year, the income derived from the noncompliant hospital facility 
(``noncompliant facility income'') during that taxable year will be 
subject to tax computed as provided in section 11 (or as provided in 
section 1(e) if the hospital organization is a trust described in 
section 511(b)(2)), but substituting ``noncompliant facility income'' 
for ``taxable income,'' if--
    (i) The hospital organization continues to be recognized as 
described in section 501(c)(3) during the taxable year, but
    (ii) The hospital organization would not continue to be recognized 
as described in section 501(c)(3) during the taxable year based on the 
facts and circumstances described in paragraph (a) of this section (but 
disregarding paragraph (a)(3)) if the noncompliant hospital facility 
were the only hospital facility operated by the organization.
    (2) Noncompliant facility income--(i) In general. For purposes of 
this paragraph (d), the noncompliant facility income derived from a 
hospital facility during a taxable year will be the gross income 
derived from that hospital facility during the taxable year, less the 
deductions allowed by chapter 1 of the Internal Revenue Code (Code) 
that are directly connected to the operation of that hospital facility 
during the taxable year, excluding any gross income and deductions 
taken into account in computing any unrelated business taxable income 
described in section 512 that is derived from the facility during the 
taxable year.
    (ii) Directly connected deductions. For purposes of this paragraph 
(d), to be directly connected with the operation of a hospital facility 
that has failed to meet the requirements of section 501(r), an item of 
deduction must have proximate and primary relationship to the operation 
of the hospital facility. Expenses, depreciation, and similar items 
attributable solely to the operation of a hospital facility are 
proximately and primarily related to such operation, and therefore 
qualify for deduction to the extent that they meet the requirements of 
section 162, section 167, or other relevant provisions of the Code. 
Where expenses, depreciation, and similar items are attributable to a 
noncompliant hospital facility and other hospital facilities operated 
by the hospital organization (and/or to other activities of the 
hospital organization unrelated to the operation of hospital 
facilities), such items shall be allocated between the hospital 
facilities (and/or other activities) on a reasonable basis. The portion 
of any such item so allocated to a noncompliant hospital facility is 
proximately and primarily related to the operation of that facility and 
shall be allowable as a deduction in computing the facility's 
noncompliant facility income in the manner and to the extent it would 
meet the requirements of section 162, section 167, or other relevant 
provisions of the Code.
    (3) No aggregation. In computing the noncompliant facility income 
of a hospital facility, the gross income from (and the deductions 
allowed with respect to) the hospital facility may not be aggregated 
with the gross income from (and the deductions allowed with respect to) 
the hospital organization's other noncompliant hospital facilities 
subject to tax under this paragraph (d) or its unrelated trade or 
business activities described in section 513.
    (4) Interaction with other Code provisions--(i) Hospital 
organization operating a noncompliant hospital facility continues to be 
treated as tax-exempt. A hospital organization operating a noncompliant 
hospital facility subject to tax under this paragraph (d) shall 
continue to be treated as an organization that is exempt from tax under 
section 501(a) because it is described in section 501(c)(3) for all 
purposes of the Code. Thus, for example, the application of this 
paragraph (d) shall not, by itself, affect the tax-exempt status of 
bonds issued to finance the noncompliant hospital facility.
    (ii) Noncompliant hospital facility operated by a tax-exempt 
hospital organization is subject to tax. A noncompliant hospital 
facility described in paragraph (d)(1) of this section is subject to 
tax under this paragraph (d), notwithstanding the fact that the 
hospital organization operating the hospital facility is otherwise 
exempt from tax under section 501(a) and subject to tax under section 
511(a) and that Sec.  1.11-1(a) of this chapter states such 
organizations are not liable to the tax imposed under section 11.
    (iii) Noncompliant hospital facility not a business entity. A 
noncompliant hospital facility subject to tax under this paragraph (d) 
is not considered a business entity for purposes of Sec.  301.7701-
2(b)(7) of this chapter.


Sec.  1.501(r)-3  Community health needs assessments.

    (a) In general. With respect to any taxable year, a hospital 
organization meets the requirements of section 501(r)(3) with respect 
to a hospital facility it operates only if--
    (1) The hospital facility has conducted a community health needs 
assessment (CHNA) that meets the requirements of paragraph (b) of this 
section in such taxable year or in either of the two taxable years 
immediately preceding such taxable year; and
    (2) An authorized body of the hospital facility (as defined in 
Sec.  1.501(r)-1(c)(1)) has adopted an implementation strategy to meet 
the community health needs identified through the CHNA, as described in 
paragraph (c) of this section, by the end of the taxable year in which 
the hospital facility conducts the CHNA.
    (b) Conducting a CHNA--(1) In general. To conduct a CHNA for 
purposes of paragraph (a) of this section, a hospital facility must 
complete all of the following steps--
    (i) Define the community it serves;
    (ii) Assess the health needs of that community;
    (iii) In assessing the health needs of the community, take into 
account input from persons who represent the broad interests of that 
community, including those with special knowledge of or expertise in 
public health;
    (iv) Document the CHNA in a written report (``CHNA report'') that 
is adopted for the hospital facility by an authorized body of the 
hospital facility; and
    (v) Make the CHNA report widely available to the public.
    (2) Date a CHNA is conducted. For purposes of this section, a 
hospital facility will be considered to have conducted a CHNA on the 
date it has completed all of the steps described in paragraph (b)(1) of 
this section. Solely for purposes of determining the date on which a 
CHNA has been conducted, a hospital facility will be considered to have 
made the CHNA report widely available to the public on the date it 
first makes the CHNA report widely available to the public as described 
in paragraph (b)(8)(i) of this section.
    (3) Community served by the hospital facility. In defining the 
community it serves for purposes of paragraph (b)(1)(i) of this 
section, a hospital facility may take into account all of the relevant 
facts and circumstances, including the geographic area served by the 
hospital

[[Page 20541]]

facility, target populations served (for example, children, women, or 
the aged), and principal functions (for example, focus on a particular 
specialty area or targeted disease). A hospital facility may define its 
community to include populations in addition to its patient populations 
and geographic areas outside of those in which its patient populations 
reside. However, a hospital facility may not define its community to 
exclude medically underserved, low-income, or minority populations who 
are part of its patient populations, live in geographic areas in which 
its patient populations reside (unless they are not part of the 
hospital facility's target populations or affected by its principal 
functions), or otherwise should be included based on the method the 
hospital facility uses to define its community. In addition, if a 
hospital facility's method of defining its community takes into account 
patient populations, the hospital facility must treat as patients all 
individuals who receive care from the hospital facility, without regard 
to whether (or how much) they or their insurers pay for the care 
received or whether they are eligible for assistance under the hospital 
facility's financial assistance policy.
    (4) Assessing community health needs. To assess the health needs of 
the community it serves for purposes of paragraph (b)(1)(ii) of this 
section, a hospital facility must identify significant health needs of 
the community, prioritize those health needs, and identify potential 
measures and resources (such as programs, organizations, and facilities 
in the community) available to address the health needs. For these 
purposes, the health needs of a community include requisites for the 
improvement or maintenance of health status in both the community at 
large and in particular parts of the community (such as particular 
neighborhoods or populations experiencing health disparities). A 
hospital facility may determine whether a health need is significant 
based on all of the facts and circumstances present in the community it 
serves. In addition, a hospital facility may use any criteria to 
prioritize the significant health needs it identifies, including, but 
not limited to, the burden, scope, severity, or urgency of the health 
need; the estimated feasibility and effectiveness of possible 
interventions; the health disparities associated with the need; or the 
importance the community places on addressing the need.
    (5) Persons representing the broad interests of the community. To 
take into account input from persons who represent the broad interests 
of the community it serves (including those with special knowledge of 
or expertise in public health) for purposes of paragraph (b)(1)(iii) of 
this section, a hospital facility must take into account input from the 
sources listed in paragraphs (b)(5)(i), (b)(5)(ii), and (b)(5)(iii) of 
this section in assessing the health needs of its community. Input from 
these persons includes, but is not limited to, input on any financial 
and other barriers to access to care in the community. In addition, a 
hospital facility may take into account input from a broad range of 
persons located in or serving its community, including, but not limited 
to, health care consumers and consumer advocates, nonprofit and 
community-based organizations, academic experts, local government 
officials, local school districts, health care providers and community 
health centers, health insurance and managed care organizations, 
private businesses, and labor and workforce representatives. A hospital 
facility must take into account input from the following sources in 
assessing the health needs of its community--
    (i) At least one state, local, tribal, or regional governmental 
public health department (or equivalent department or agency) with 
knowledge, information, or expertise relevant to the health needs of 
that community;
    (ii) Members of medically underserved, low-income, and minority 
populations in the community served by the hospital facility, or 
individuals or organizations serving or representing the interests of 
such populations; and
    (iii) Written comments received on the hospital facility's most 
recently conducted CHNA and most recently adopted implementation 
strategy.
    (6) Medically underserved populations. For purposes of this 
paragraph (b), medically underserved populations include populations 
experiencing health disparities or at risk of not receiving adequate 
medical care as a result of being uninsured or underinsured or due to 
geographic, language, financial, or other barriers.
    (7) Documentation of a CHNA--(i) In general. For purposes of 
paragraph (b)(1)(iv) of this section, the CHNA report adopted for the 
hospital facility by an authorized body of the hospital facility must 
include--
    (A) A definition of the community served by the hospital facility 
and a description of how the community was determined;
    (B) A description of the process and methods used to conduct the 
CHNA;
    (C) A description of how the hospital facility took into account 
input from persons who represent the broad interests of the community 
it serves;
    (D) A prioritized description of the significant health needs of 
the community identified through the CHNA, along with a description of 
the process and criteria used in identifying certain health needs as 
significant and prioritizing such significant health needs; and
    (E) A description of the potential measures and resources 
identified through the CHNA to address the significant health needs.
    (ii) Process and methods used to conduct the CHNA. A hospital 
facility's CHNA report will be considered to describe the process and 
methods used to conduct the CHNA for purposes of paragraph (b)(7)(i)(B) 
of this section if the CHNA report describes the data and other 
information used in the assessment, as well as the methods of 
collecting and analyzing this data and information, and identifies any 
parties with whom the hospital facility collaborated, or with whom it 
contracted for assistance, in conducting the CHNA.
    (iii) Input from persons who represent the broad interests of the 
community served by the hospital facility. A hospital facility's CHNA 
report will be considered to describe how the hospital facility took 
into account input from persons who represent the broad interests of 
the community it serves for purposes of paragraph (b)(7)(i)(C) of this 
section if the CHNA report summarizes, in general terms, the input 
provided by such persons and how and over what time period such input 
was provided (for example, whether through meetings, focus groups, 
interviews, surveys, or written comments and between what dates); 
provides the names of organizations providing input and summarizes the 
nature and extent of the organization's input; and describes the 
medically underserved, low-income, or minority populations being 
represented by organizations or individuals that provided input. A CHNA 
report does not need to name or otherwise individually identify any 
individuals participating in community forums, focus groups, survey 
samples, or similar groups.
    (iv) Separate CHNA reports. While a hospital facility may conduct 
its CHNA in collaboration with other organizations and facilities 
(including, but not limited to, related and unrelated hospital 
organizations and facilities, for-profit and government hospitals, 
governmental departments, and nonprofit organizations), every hospital 
facility must document the information described in this paragraph 
(b)(7) in a

[[Page 20542]]

separate CHNA report to satisfy paragraph (b)(1)(iv) of this section 
unless it is eligible to adopt a joint CHNA report as described in 
paragraph (b)(7)(v) of this section. However, if a hospital facility is 
collaborating with other facilities and organizations in conducting its 
CHNA or if another organization has conducted a CHNA for all or part of 
the hospital facility's community, portions of the hospital facility's 
CHNA report may be substantively identical to portions of a CHNA report 
of a collaborating hospital facility or the other organization 
conducting a CHNA, if appropriate under the facts and circumstances. 
For example, if a hospital facility conducts a survey of the health 
needs of residents of homeless shelters located in the community in 
collaboration with other hospital facilities, the description of that 
survey in the hospital facility's CHNA report may be identical to the 
description contained in the CHNA reports for the other collaborating 
hospital facilities. Similarly, if the state or local public health 
department with jurisdiction over the community served by the hospital 
facility conducts an inventory of community health improvement 
resources available in that community, the hospital facility may 
include that inventory in its CHNA report.
    (v) Joint CHNA reports--(A) In general. A hospital facility that 
collaborates with other hospital facilities in conducting its CHNA will 
satisfy paragraph (b)(1)(iv) of this section if an authorized body of 
the hospital facility adopts for the hospital facility a joint CHNA 
report produced for all of the collaborating hospital facilities, as 
long as all of the collaborating hospital facilities define their 
community to be the same and conduct a joint CHNA process, and the 
joint CHNA report is clearly identified as applying to the hospital 
facility.
    (B) Example. The following example illustrates this paragraph 
(b)(7)(v):

    Example. P is one of ten hospital facilities located in and 
serving the populations of a particular Metropolitan Statistical 
Area (MSA). P and the other nine facilities in the MSA, some of 
which are unrelated to P, decide to collaborate in conducting a CHNA 
for the MSA and to each define their community as constituting the 
entire MSA. The ten hospital facilities work together with the state 
and local health departments of jurisdictions in the MSA to assess 
the health needs of the MSA and collaborate in conducting surveys 
and holding public forums to receive input from the MSA's residents, 
including its medically underserved, low-income, and minority 
populations. The hospital facilities then work together to prepare a 
joint CHNA report documenting this joint CHNA process that contains 
all of the elements described in paragraph (b)(7)(i) of this 
section. The joint CHNA report identifies all of the collaborating 
hospital facilities, including P, by name, both within the report 
itself and on the cover page. The board of directors of the hospital 
organization operating P adopts the joint CHNA report for P. P has 
complied with the requirements of this paragraph (b)(7)(v) and, 
accordingly, has satisfied paragraph (b)(1)(iv) of this section.

    (8) Making the CHNA report widely available to the public--(i) In 
general. For purposes of paragraph (b)(1)(v) of this section, a 
hospital facility's CHNA report is made widely available to the public 
only if the hospital facility--
    (A) Makes the CHNA report widely available on a Web site, as 
defined in Sec.  1.501(r)-1(c)(4), at least until the date the hospital 
facility has made widely available on a Web site its two subsequent 
CHNA reports; and
    (B) Makes a paper copy of the CHNA report available for public 
inspection without charge at the hospital facility at least until the 
date the hospital facility has made available for public inspection 
without charge a paper copy of its two subsequent CHNA reports.
    (ii) Making draft CHNA reports widely available. Notwithstanding 
paragraph (b)(8)(i) of this section, if a hospital facility makes 
widely available on a Web site (and/or for public inspection) a version 
of the CHNA report that is expressly marked as a draft on which the 
public may comment, the hospital facility will not be considered to 
have made the CHNA report widely available to the public for purposes 
of determining the date on which the hospital facility has conducted a 
CHNA under paragraph (a) of this section.
    (c) Implementation strategy--(1) In general. For purposes of 
paragraph (a)(2) of this section, a hospital facility's implementation 
strategy to meet the community health needs identified through the 
hospital facility's CHNA is a written plan that, with respect to each 
significant health need identified through the CHNA, either--
    (i) Describes how the hospital facility plans to address the health 
need; or
    (ii) Identifies the health need as one the hospital facility does 
not intend to address and explains why the hospital facility does not 
intend to address the health need.
    (2) Description of how the hospital facility plans to address a 
significant health need. In describing how a hospital facility plans to 
address a significant health need identified through a CHNA for 
purposes of paragraph (c)(1)(i) of this section, the implementation 
strategy must describe the actions the hospital facility intends to 
take to address the health need, the anticipated impact of these 
actions, and a plan to evaluate such impact. The implementation 
strategy must also identify the programs and resources the hospital 
facility plans to commit to address the health need. Finally, the 
implementation strategy must describe any planned collaboration between 
the hospital facility and other facilities or organizations in 
addressing the health need.
    (3) Description of why a hospital facility is not addressing a 
significant health need. In explaining why it does not intend to 
address a significant health need for purposes of paragraph (c)(1)(ii) 
of this section, a hospital facility may provide a brief explanation of 
its reason for not addressing the health need, including, but not 
limited to, resource constraints, other facilities or organizations in 
the community addressing the need, relative lack of expertise or 
competencies to effectively address the need, a relatively low priority 
assigned to the need, and/or a lack of identified effective 
interventions to address the need.
    (4) Joint implementation strategies. A hospital facility may 
develop an implementation strategy in collaboration with other 
facilities and organizations, including, but not limited to, related 
and unrelated hospital organizations and facilities, for-profit and 
government hospitals, governmental departments, and nonprofit 
organizations. In general, a hospital facility that collaborates with 
other facilities and organizations in developing its implementation 
strategy must still document its implementation strategy in a separate 
written plan that is tailored to the particular hospital facility, 
taking into account its specific programs and resources. However, a 
hospital facility that adopts a joint CHNA report described in 
paragraph (b)(7)(v) of this section may also adopt a joint 
implementation strategy that, with respect to each significant health 
need identified through the joint CHNA, either describes how the 
collaborating hospital facilities plan to address the health need or 
identifies the health need as one the hospital facilities do not intend 
to address and explains why the hospital facilities do not intend to 
address the health need, as long as the joint implementation strategy--
    (i) Is clearly identified as applying to the hospital facility;
    (ii) Clearly identifies the hospital facility's particular role and 
responsibilities in taking the actions described in the implementation 
strategy and the programs and resources

[[Page 20543]]

the hospital facility plans to commit to such actions; and
    (iii) Includes a summary or other tool that helps the reader easily 
locate those portions of the joint implementation strategy that relate 
to the hospital facility.
    (5) When the implementation strategy must be adopted--(i) In 
general. For purposes of paragraph (a)(2) of this section, in order to 
have adopted an implementation strategy to meet the health needs 
identified through a hospital facility's CHNA by the end of the same 
taxable year in which the hospital facility conducts that CHNA, an 
authorized body of the hospital facility must adopt the implementation 
strategy during the taxable year in which the hospital facility 
completes the final step for the CHNA described in paragraph (b)(1) of 
this section, regardless of whether the hospital facility began working 
on the CHNA in a prior taxable year.
    (ii) Example. The following example illustrates this paragraph 
(c)(5):

    Example.  M is a hospital facility that last conducted a CHNA 
and adopted an implementation strategy in Year 1. In Year 3, M 
defines the community it serves, assesses the health needs of that 
community, and takes into account input from persons who represent 
the broad interests of that community. In Year 4, M documents its 
CHNA in a CHNA report that is adopted by an authorized body of M, 
makes the CHNA report widely available on a Web site, and makes 
paper copies available for public inspection. To meet the 
requirements of paragraph (a)(2) of this section, an authorized body 
of M must adopt an implementation strategy to meet the health needs 
identified through that CHNA by the last day of Year 4.

    (d) New hospital facilities. A hospital facility that is newly 
acquired or placed into service, or that becomes newly subject to the 
requirements of section 501(r) because the hospital organization that 
operates it is newly recognized as described in section 501(c)(3), must 
meet the requirements of section 501(r)(3) by the last day of the 
second taxable year beginning after the date, respectively, the 
hospital facility is acquired; licensed, registered, or similarly 
recognized by its state as a hospital; or newly subject to the 
requirements of section 501(r) as a result of the hospital organization 
operating it being recognized as described in section 501(c)(3).
    (e) Transition rules--(1) CHNA conducted in taxable year beginning 
before March 23, 2012. A hospital facility that conducted a CHNA 
described in section 501(r)(3) in either its first taxable year 
beginning after March 23, 2010, or its first taxable year beginning 
after March 23, 2011, does not need to meet the requirements of section 
501(r)(3) again until the third taxable year following the taxable year 
in which the hospital facility conducted that CHNA, provided that the 
hospital facility has adopted an implementation strategy to meet the 
community health needs identified through that CHNA on or before the 
15th day of the fifth calendar month following the close of its first 
taxable year beginning after March 23, 2012.
    (2) CHNA conducted in first taxable year beginning after March 23, 
2012. A hospital facility that conducts a CHNA described in section 
501(r)(3) in its first taxable year beginning after March 23, 2012, 
will be deemed to satisfy paragraph (a)(2) of this section during that 
taxable year if an authorized body of the hospital facility adopts an 
implementation strategy to meet the community health needs identified 
through that CHNA on or before the 15th day of the fifth calendar month 
following the close of its first taxable year beginning after March 23, 
2012.
0
Par. 5. Section 1.501(r)-7 as proposed to be amended at 77 FR 38169 
(June 26, 2012) is proposed to be further amended by revising the 
section to read as follows:


Sec.  1.501(r)-7  Effective/applicability dates.

    (a) Effective/applicability date. The rules of Sec.  1.501(r)-1 
through Sec.  1.501(r)-6 are effective on the date of publication of 
the Treasury decision adopting these rules as final or temporary 
regulations.
    (b) Reliance and transition period. A hospital facility may rely on 
Sec.  1.501(r)-3 of the proposed regulations published in the Federal 
Register on April 5, 2013, for any CHNA conducted or implementation 
strategy adopted on or before the date that is six months after these 
regulations are published as final or temporary regulations in the 
Federal Register.
0
Par. 6. Section 1.6012-2 is amended by redesignating paragraphs (i) 
through (k) as paragraphs (j) through (l) and adding new paragraph (i) 
to read as follows:


Sec.  1.6012-2  Corporations required to make returns of income.

* * * * *
    (i) Hospital organizations with noncompliant hospital facilities. 
Every hospital organization (as defined in Sec.  1.501(r)-1(b)(16)) 
that is subject to the tax imposed by Sec.  1.501(r)-2(d) shall make a 
return on Form 990-T. The filing of a return to pay the tax described 
in Sec.  1.501(r)-2(d) does not relieve the organization of the duty of 
filing other required returns.
* * * * *
0
Par. 7. Section 1.6012-3 is amended by adding new paragraph (a)(10) to 
read as follows:


Sec.  1.6012-3  Returns by fiduciaries.

    (a) * * *
    (10) Hospital organizations organized as trust with noncompliant 
hospital facilities. Every fiduciary for a hospital organization (as 
defined in Sec.  1.501(r)-1(b)(16)) organized as a trust described in 
section 511(b)(2) that is subject to the tax imposed by Sec.  1.501(r)-
2(d) shall make a return on Form 990-T. The filing of a return to pay 
the tax described in Sec.  1.501(r)-2(d) does not relieve the 
organization of the duty of filing other required returns.
* * * * *
0
Par. 8. Section 1.6033-2 is amended by adding paragraphs (a)(2)(ii)(l) 
and (k)(4) to read as follows:


Sec.  1.6033-2  Returns by exempt organizations (taxable years 
beginning after December 31, 1969) and returns by certain nonexempt 
organizations (taxable years beginning after December 31, 1980).

    (a) * * *
    (2) * * *
    (ii) * * *
    (I) In the case of a hospital organization (as defined in Sec.  
1.501(r)-1(b)(16)) described in section 501(c)(3) during the taxable 
year--
    (1) A copy of its audited financial statements for the taxable year 
(or, in the case of an organization the financial statements of which 
are included in consolidated financial statements with other 
organizations, such consolidated financial statements);
    (2) Either a copy of the most recently adopted implementation 
strategy, within the meaning of Sec.  1.501(r)-3(c), for each hospital 
facility it operates or the URL of each Web page on which it has made 
each such implementation strategy widely available on a Web site within 
the meaning of Sec.  1.501(r)-1(c)(4) along with or as part of the 
community health needs assessment (CHNA) to which the implementation 
strategy relates;
    (3) For each hospital facility it operates, a description of the 
actions taken during the taxable year to address the significant health 
needs identified through its most recently conducted CHNA, within the 
meaning of Sec.  1.501(r)-3(b), or, if no actions were taken with 
respect to one or more of these health needs, the reason(s) why no 
actions were taken; and

[[Page 20544]]

    (4) The amount of the excise tax imposed on the organization under 
section 4959 during the taxable year.
* * * * *
    (k) * * *
    (4) The applicability of paragraph (a)(2)(ii)(l) of this section 
shall be limited to returns filed on or after the date the regulations 
adding (a)(2)(ii)(l) are published as final or temporary regulations in 
the Federal Register.

PART 53--FOUNDATION AND SIMILAR EXCISE TAXES

0
Par. 9. The authority citation for part 53 continues to read in part as 
follows:

    Authority:  26 U.S.C. 7805 * * *

0
Par. 10. Section 53.4959-1 is added to read as follows:


Sec.  53.4959-1  Taxes on failures by hospital organizations to meet 
section 501(r)(3).

    (a) Excise tax for failure to meet the section 501(r)(3) 
requirements--(1) In general. If a hospital organization (as defined in 
Sec.  1.501(r)-1(b)(16)) fails to meet the requirements of section 
501(r)(3) separately with respect to a hospital facility it operates in 
any taxable year, there is imposed on the hospital organization a tax 
equal to $50,000. If a hospital organization operates multiple hospital 
facilities and fails to meet the requirements of section 501(r)(3) with 
respect to more than one facility it operates, the $50,000 tax is 
imposed on the hospital organization separately for each hospital 
facility's failure. The tax may be imposed for each taxable year that a 
hospital facility fails to meet the requirements of section 501(r)(3). 
The tax imposed by this section may be imposed in addition to any tax 
imposed by Sec.  1.501(r)-2(d) or as a result of revocation of a 
hospital organization's section 501(c)(3) status.
    (2) Examples. The following examples illustrate this paragraph (a):

    Example 1.  (i) U is a hospital organization that operates only 
one hospital facility, V. In Year 1, V conducts a community health 
needs assessment (CHNA) and adopts an implementation strategy to 
meet the health needs identified through the CHNA. In Years 2 and 3, 
V does not conduct a CHNA. V fails to conduct a CHNA by the last day 
of Year 4. Accordingly, U has failed to meet the requirements of 
section 501(r)(3) with respect to V in Year 4 because V has failed 
to conduct a CHNA in Years 2, 3, and 4. U is subject to a tax equal 
to $50,000 for Year 4.
    (ii) V also fails to conduct a CHNA by the last day of Year 5. 
Accordingly, U has failed to meet the requirements of section 
501(r)(3) with respect to V in Year 5 because V has failed to 
conduct a CHNA in Years 3, 4, and 5. U is subject to a tax equal to 
$50,000 for Year 5.
    Example 2.  P is a hospital organization that operates only one 
hospital facility, Q. In Year 1, Q conducts a CHNA and adopts an 
implementation strategy to meet the health needs identified through 
the CHNA. In Years 2 and 3, Q does not conduct a CHNA. In Year 4, Q 
conducts a CHNA but does not adopt an implementation strategy to 
meet the health needs identified through that CHNA by the last day 
of Year 4. Accordingly, P has failed to meet the requirements of 
section 501(r)(3) with respect to Q in Year 4 because Q has failed 
to adopt an implementation strategy by the end of the taxable year 
in which Q conducted its CHNA. P is subject to a tax equal to 
$50,000 for Year 4.
    Example 3.  R is a hospital organization that operates two 
hospital facilities, S and T. In Year 1, S and T each conduct a CHNA 
and adopt an implementation strategy to meet the health needs 
identified through the CHNA. In Years 2 and 3, S and T do not 
conduct a CHNA. S and T each fail to conduct a CHNA by the last day 
of Year 4. Accordingly, R has failed to meet the requirements of 
section 501(r)(3) with respect to both S and T in Year 4. R is 
subject to a tax equal to $100,000 ($50,000 for S's failure plus 
$50,000 for T's failure) for Year 4.

    (b) Effective/applicability dates. These rules are effective on the 
date of publication of the Treasury decision adopting these rules as 
final or temporary regulations.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2013-07959 Filed 4-3-13; 4:15 pm]
BILLING CODE 4830-01-P