Eastern Kentucky Welfare Rights Organization v. William E. Simon, Secretary of the Treasury

J. SKELLY WRIGHT, Circuit Judge

(concurring in part and dissenting in part):

I concur in Part II of the court’s opinion affirming the District Court on the jurisdictional issues raised on this appeal. On the merits I would also affirm the District Court for the reasons stated in its opinion holding Revenue Ruling 69-545 invalid. See Eastern Kentucky Welfare Rights Organization v. Shultz, D.D.C., 370 F.Supp. 325 (1973).

Assuming the defendants had the legal right to eliminate the requirement that nonprofit hospitals serve indigents in order to be eligible for “charitable” tax status under the Code, I would still find Revenue Ruling 69-545 invalid because it was issued without compliance with the informal rule-making procedures required by Section 553 of the Administrative Procedure Act, 5 U.S.C. § 553 (1970). Revenue Ruling 69-545 replaced Revenue Ruling 56-185 which provided that a hospital could qualify for tax exempt status only if it was “operated to the extent of its financial ability for those not able to pay for the services rendered and not exclusively for those who are able and expected to pay.” Revenue Ruling 69-545 provided “Revenue Ruling 56-185 is hereby modified to remove therefrom the requirements relating to earing for patients without charge or at rates below cost.” Thus Revenue Ruling 69-545 worked a substantial change in the availability of hospital services for the poor. Yet, admittedly, neither the poor nor anyone else was given notice of the proposed change or allowed to comment on it.

The Internal Revenue Service is not expert in health care delivery needs and, consequently, was unable to draw on any expertise of its own in determining to free “charitable” hospitals from their obligations under existing IRS rulings to serve the poor. Comment from disciplines more directly related to health care and poverty could doubtless have assisted the IRS in deciding whether to relax the obligations of these hospitals to the poor. In proceeding without complying with the requirements of the Administrative Procedure Act, the IRS denied itself access to education which would have allowed it to make a more informed judgment. “Section 553 was enacted to give the public an opportuni *1292 ty to participate in the rule-making process. It also enables the agency promulgating the rule to educate itself before establishing rules and procedures which have a substantial impact on those regulated.” Texaco, Inc. v. FPC, 3 Cir., 412 F.2d 740, 744 (1969).

Before BAZELON, Chief Judge, and WRIGHT, McGOWAN, TAMM, LEVENTHAL, ROBINSON, MacKINNON, ROBB and WILKEY, Circuit Judges.

ORDER

PER CURIAM.

Appellees’ suggestion that the matter be considered en banc having been circulated to the full court, and there not being a majority of the judges in regular active service in favor of having this case reheard en banc, it is

Ordered by the court en banc that appellees’ aforesaid suggestion is denied.

Statement of BAZELON, Chief Judge, with whom J. SKELLY WRIGHT and SPOTTSWOOD W. ROBINSON, III, Circuit Judges, concur, as to why he voted to grant rehearing en banc.

Statement of J. SKELLY WRIGHT, Circuit Judge, with whom BAZELON, Chief Judge, and SPOTTSWOOD W. ROBINSON, III, Circuit Judge, concur, as to why he voted to grant rehearing en banc.

Statement of BAZELON, Chief Judge, as to why he voted to grant rehearing en banc:

I concur in Judge Wright’s dissent and statement as to why he voted to grant rehearing en banc on the issue of compliance with the rulemaking procedures of the Administrative Procedure Act, 5 U.S.C. § 553 (1970). I add only this further thought. The panel opinion concedes, as it must, that rulemaking procedures are required if Rev.Rul. 69-545 has an “independent binding effect.” If the Rev.Rul. were no more than “an opinion of the legal staff” of the Treasury, 1 I might agree with the majority that courts “are not bound by [the Revenue Ruling] unless they choose to accept it” and that, therefore, the Rev.Rul. has no independent binding effect. But in light of the traditional deference to Internal Revenue Service regulations in the interpretation of the more general sections of the Internal Revenue Code of 1954, 2 I think it a truly heroic assumption that courts will not be bound by the Ruling “unless they choose to accept it.” Indeed, this tradition of deference informs the panel majority’s own approach to the legality of Rev.Rul. 69-545. The majority does not review the issue de novo but instead concludes that the Ruling “is founded on a permissible definition of the term ‘charitable’ and is not contrary to any express Congressional intent.” 3 If the majority were to re *1293 view the issue de novo, it would, I take it, certainly want more information than is contained in the record before us here. And it is for expressly that reason, as Judge Wright so persuasively argues, that rulemaking hearings are required. 4 So the majority tells the plaintiffs that it will not be bound by the Internal Revenue Service interpretation of the term “charitable” and then turns right around and upholds the Service interpretation as a permissible exercise of discretion on the basis of factual assumptions which are not supported by a record and which plaintiffs have not had an opportunity to rebut. I will not concur in such reasoning.

Statement of J. SKELLY WRIGHT, Circuit Judge, as to Why He Voted to Grant Rehearing En Banc

Revenue Ruling 69-545, which the panel majority upholds, replaced Revenue Ruling 56-185 which provided that a hospital could qualify for tax exempt status only if it was “operated to the extent of its financial ability for those not able to pay for the services rendered and not exclusively for those who are able and expected to pay.” Revenue Ruling 69-545 provides: “Revenue Ruling 56-185 is hereby modified to remove therefrom the requirements relating to caring for patients without charge or at rates below cost.” Thus Revenue Ruling 69-545 worked a substantial change in the availability of hospital services for the poor. Yet, admittedly, neither the poor nor anyone else was given notice of the proposed change or allowed to comment on it.

On the basis of assumed social, economic, and technological changes in the need of the poor for free medical care, the panel majority approves Revenue Ruling 69-545. The record in this case does not reflect what the needs of the poor for free medical care really are because the Internal Revenue Service did not comply with the rule-making procedures required by Section 553 of the Administrative Procedure Act, 5 U.S.C. § 553 (1970). Thus millions of poor people are effectively denied medical care without the procedural protections provided by law. If these procedural protections had been provided, doubtless it would have been disclosed that millions of Americans are indeed too poor to pay for hospital services and have no means of obtaining those services except as charity patients at our nonprofit hospitals. With this fact established as a matter of record, I confidently believe that Revenue Ruling 69-545 would never have been promulgated in the first place.

I would affirm the District Court in this case for the reasons stated in its opinion holding Revenue Ruling 69-545 invalid (see Eastern Kentucky Welfare Rights Organization v. Shultz, D.D.C., 370 F.Supp. 325 (1973)). I would also hold Revenue Ruling 69-545 invalid because it was issued without compliance with the rule-making procedures required by Section 553 of the Administrative Procedure Act, 5 U.S.C. § 553 , as indicated in my dissent to the panel opinion.

. American President Lines, Ltd. v. Federal Maritime Comm’n, 114 U.S.App.D.C. 418 , 316 F.2d 419, 422 (1968). See Hou Ching Chow v. Attorney-General, 362 F.Supp. 1288, 1292 (D.D.C.1973); Continental Oil Co. v. Burns, 317 F.Supp. 194 (D.Del.1970). Cf. Pacific Gas & Elec. Co. v. FPC, 164 U.S.App.D.C. -, at -, n. 14,---, 506 F.2d 33 , at 37, n. 14, 38-40 (1974); Lewis-Mota v. Secretary of Labor, 469 F.2d 478 (2d Cir. 1972); California Citizens Band Ass’n v. United States, 375 F.2d 43 (9th Cir.), cert. denied, 389 U.S. 844 , 88 S.Ct. 96 , 19 L.Ed.2d 112 (1967). There is nothing in Gibson Wine Co. v. Snyder, 90 U.S.App.D.C. 135 , 194 F.2d 329 (1952), which is inconsistent with these cases. There is, I think no one would doubt, a very substantial difference between regulations defining a type of grape and regulations interpreting such legislative phrases as “the public interest” or “tax avoidance purpose.”

. See United States v. Cartwright, 411 U.S. 546, 550 , 93 S.Ct. 1713 , 36 L.Ed.2d 528 (1973); Bingler v. Johnson, 394 U.S. 741, 749-751 , 89 S.Ct. 1439 , 22 L.Ed.2d 695 (1969); Commissioner of Internal Revenue v. South Texas Lumber Co., 333 U.S. 496, 501 , 68 S.Ct. 695 , 92 L.Ed. 831 (1948); Commissioner of Internal Revenue v. O. Liquidating Corp., 292 F.2d 225, 231 (3d Cir.), cert. denied, 368 U.S. 898 , 82 S.Ct. 177 , 7 L.Ed.2d 94 (1961); Kern v. Granquist, 291 F.2d 29, 32 (9th Cir. 1961). Compare Kurzner v. United States, 413 F.2d 97, 112 (5th Cir. 1969) with O’Neill v. United States, 410 F.2d 888 (6th Cir. 1969).

. At 1290 (emphasis added).

. See also NLRB v. Wyman-Gordon Co., 394 U.S. 759, 775-780 , 89 S.Ct. 1426 , 22 L.Ed.2d 709 (1969) (Douglas, J., dissenting).