                        T.C. Memo. 1996-251



                      UNITED STATES TAX COURT



   UNIVERSITY MEDICAL RESIDENT SERVICES, P.C., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

    UNIVERSITY DENTAL RESIDENT SERVICES, P.C., Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket Nos. 21401-94X, 21402-94X.          Filed May 30, 1996.



     Lawrence M. Ross, for petitioners.

     Joan Ronder Domike, for respondent.



                        MEMORANDUM OPINION


     FOLEY, Judge:   Petitioners, University Medical Resident

Services, P.C. (UMRS), and University Dental Resident Services,

P.C. (UDRS), seek a declaratory judgment under section 7428(a)

that they are exempt from Federal income taxation under section
                                - 2 -

501(a) as organizations meeting the requirements of section

501(c)(3).    Although they filed separate petitions, these cases

were consolidated under Rule 141(a).       Pursuant to Rule 122, the

cases were submitted for decision based on the stipulated

administrative records as defined in Rule 210(b)(10).

Petitioners have exhausted their administrative remedies within

the Internal Revenue Service as required by section 7428(b)(2)

and Rule 210(c)(4), received final adverse rulings dated August

26, 1994, and invoked the jurisdiction of this Court by petitions

filed on November 21, 1994.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code, and all Rule references are to the Tax

Court Rules of Practice and Procedure.

                              Background

     Petitioners are professional service corporations organized

under the not-for-profit corporation law of the State of New

York.    Each petitioner's principal place of business was in

Buffalo, New York, at the time their respective petitions were

filed.

     Prior to 1983, the State University of New York at Buffalo,

New York (the University), sponsored graduate clinical training

programs in medicine and dentistry.     Within the University, these

programs were administered by the School of Medicine and

Biomedical Sciences and the School of Dental Medicine
                                - 3 -

(collectively, the Schools).    The clinical training provided is a

prerequisite to the professional licensing of doctors and

dentists in New York State.

     The University does not maintain its own medical center.    To

provide the necessary clinical training, the University relies on

its affiliation with several teaching hospitals in the Buffalo

area.   All clinical programs are conducted at one or more

teaching hospitals.

     Prior to 1983, the Schools and the affiliated teaching

hospitals administered their own programs for the clinical

education of medical and dental residents and fellows

(hereinafter residents and fellows will be referred to

collectively as residents).    Each hospital employed its own

residents, met its own payroll, and provided its own benefits

packages.   No one hospital or school had the resources necessary

to implement a comprehensive program.    As a result, the Schools

and the affiliated teaching hospitals had difficulty maintaining

accreditation for their programs.

     In 1981, new accreditation standards, effective beginning in

1982, were announced by the Accreditation Council for Graduate

Medical Education (ACGME).    These standards required greater

centralization of decision-making where two or more institutions

join together to provide medical education.    In such cases, the

standards required the establishment of mechanisms to ensure that
                              - 4 -

the operations of individual institutions are consistent with the

overall mission of the group of institutions.

     In 1983, the Schools and the affiliated teaching hospitals

responded to the new accreditation standards by entering into a

contract entitled “The Graduate Medical and Dental Education

Consortium of Buffalo” (the Consortium Agreement).    The

Consortium Agreement created a membership organization (the

Consortium) comprising the Schools and several affiliated

teaching hospitals.

     Through the Consortium Agreement, decision-making related to

the conduct of clinical training programs was centralized, and

the Consortium became the sole sponsoring institution with

ultimate responsibility for all clinical training programs

conducted at any of the hospitals.    The Consortium Agreement

states:

     The Graduate Medical Dental Education Consortium of
     Buffalo * * *, established in 1983, is a membership
     organization designed to coordinate and manage the
     graduate medical and dental education programs * * *
     approved by the Accreditation Council for Graduate
     Medical Education (ACGME) and the American Dental
     Association (ADA) throughout the affiliated teaching
     institutions in Western New York. * * * [The
     Consortium] is the sponsoring institution of record for
     graduate medical and dental education programs in
     Western New York in compliance with the requirements of
     the ACGME and ADA. * * * [The Consortium] provides
     overall management and assumes final responsibility for
     that graduate medical and dental education.

     All decisions relating to program operations, resource

allocations, residents' grievances, disciplinary actions, and
                                 - 5 -

policy development are made by the Consortium.    It makes and

implements these decisions through meetings of the Consortium, a

coordinating board that makes recommendations to the Consortium,

and three standing committees.    Each of these organizational

units consists of representatives from the Schools and the

affiliated teaching hospitals.    Prior to 1991, the Schools and

the member hospitals employed their own residents.

     In June of 1991, UMRS and UDRS were incorporated.    The

certificates of incorporation, filed in June of 1991 and amended

in April of 1992, state that the corporations were formed to

render those professional services that a doctor (in the case of

UMRS) or a dentist (in the case of UDRS) is authorized to render.

They further state that the corporations may engage in any

activity that a professional service corporation is permitted to

engage in under New York law, subject to the limitation that the

corporations may not engage in any activity that would prevent

them from qualifying under section 501(c)(3) as tax-exempt

organizations.   In the event of dissolution, all assets of each

corporation are to be paid to the University or, in the event

that the University loses its tax-exempt status under section

501(c)(3), to a tax-exempt organization qualified under section

501(c)(3) and selected by each petitioner's board of directors.

     Under New York law, the shares of professional service

corporations can be issued only to individuals authorized to

practice the profession that the corporation is authorized to
                                - 6 -

practice.    Although the corporations were each authorized to

issue 200 shares of stock, each corporation issued only 1 share.

The UMRS share is held by Michael F. Noe, M.D., UMRS's president.

The UDRS share is held by Sanford I. Nusbaum, D.D.S., UDRS's

president.   Each shareholder is a faculty member of the

University and an employee of one of the affiliated teaching

hospitals.   Each serves without compensation from petitioners.

     In July of 1991, the Consortium, affiliated teaching

hospitals, UMRS, and UDRS entered into the "Graduate Medical and

Dental Education Consolidation Contract" (the Consolidation

Contract).   The Recitals section of the Consolidation Contract

provides as follows:

          I. * * * [The Consortium] is the institution of
     record for governing graduate medical and dental
     education programs in Western New York to comply with
     the requirements of the Accreditation Council on
     Graduate Medical Education, and * * * [the Consortium]
     provides overall management and program control for
     that graduate medical and dental education. * * *
     [UMRS] AND * * * [UDRS] * * * are professional service
     corporations controlled by * * * [the Consortium].

          II. To promote the pooling of resources dedicated
     to graduate medical and dental education, to improve
     hospital and ambulatory care and related health care
     for patients in the Western New York area and to
     coordinate more closely the academic medical and dental
     programs in the Teaching Hospitals, the Teaching
     Hospitals and * * * [the Consortium] desire to provide
     for the direct employment by * * * [UMRS] of the
     medical residents and fellows and the direct employment
     by * * * [UDRS] of the dental residents and fellows who
     are enrolled in * * * [the University] training
     programs conducted at the Teaching Hospitals, with
     coordination of the medical and dental education
     aspects of this employment by the Administrative
     Committee of * * * [the Consortium]. * * * [UMRS] and
                                 - 7 -

     * * * [UDRS] have been established to provide for that
     respective direct employment of the medical and dental
     residents and fellows.

     The Consolidation Contract allocates responsibility among

the Schools, the hospitals, the Consortium, and petitioners.     It

provides that, commencing July 1, 1991, all residents enrolled in

academic medical programs administered by the Consortium “shall

become employed by” UMRS, and all residents enrolled in academic

dental programs administered by the Consortium “shall become

employed by” UDRS.   It further provides that the affiliated

teaching hospitals would contract with petitioners for the

provision of residents.    Petitioners serve only the Schools and

the affiliated teaching hospitals, each of which is a tax-exempt

organization qualified under section 501(c)(3).

     Under the Consolidation Contract, the Schools and the

hospitals follow specific procedures with respect to the

allocation of residents.   The program directors at each of the

teaching hospitals project their hospital's needs for residents

and communicate that estimate to the Consortium.    Applicants for

residency positions submit an application to the Consortium.     The

Schools, the Consortium, and the teaching hospitals then select

residents to meet each hospital's needs and communicate that

selection to UMRS (in the case of medical residents) or UDRS (in

the case of dental residents).    Thereafter, a certificate of

residency is issued by the Consortium, and the resident is
                               - 8 -

assigned to the appropriate hospital.   The Consolidation Contract

provides:

     The parties recognize that, due to the fact that the
     employment of the * * * [residents] is ancillary to the
     primary purpose of graduate medical and dental
     education, the selection, credentialing, academic
     instruction and supervision of the * * * [residents]
     is, to a large extent, uniquely within the province of
     * * * [the University] and * * * [the Consortium],
     subject to the legal obligations of the respective
     Teaching Hospitals to supervise professional practice
     and other matters within their respective facilities.
     Accordingly, it is contemplated that * * * [UMRS] and
     * * *[UDRS] would have limited input into the process
     selecting the individuals comprising the Housestaff
     * * *.

     The Consolidation Contract also states that petitioners have

the power to “hire and fire” residents.   The affiliated teaching

hospitals, however, supervise the residents and have the right to

refuse to accept the assignment of a particular resident.    The

Consortium and the affected teaching hospital have the right to

discipline residents.   The Consolidation Contract provides that

petitioners are not legally liable for lawsuits resulting from

such disciplinary actions.   The Consolidation Contract further

states that each hospital must provide medical malpractice

insurance for the residents working at its facility and must

indemnify petitioners for all liability arising out of alleged

malpractice on the part of residents.

     Once a resident is selected and allocated to a member

hospital, the relevant petitioner assumes responsibility for the

payment of all wages, benefits, and related payroll taxes and
                               - 9 -

deductions in connection with the resident's employment.   The

Consortium determines the amount of compensation and benefits.

At least 5 days prior to the date UMRS or UDRS makes a payment

for compensation, the relevant school or hospital remits to UMRS

or UDRS funds equal to the amount of the payment.   Petitioners do

not engage in fund-raising activities and receive all of their

funding from the Schools and hospitals.

     Under the Consolidation Contract, petitioners must provide

the Schools and hospitals with quarterly reports describing all

receipts and disbursements, and the Consortium has the right to

audit petitioners’ books and records.   Because petitioners have

no administrative employees, petitioners' administrative

activities (i.e., processing invoices sent to the Schools and

hospitals and salary payments made to residents) are performed by

employees of the Schools.   Each petitioner's actual and projected

annual profits, as of May of 1992, were less than one-tenth of 1

percent of gross revenue.

     On August 26, 1994, respondent issued final adverse rulings

notifying petitioners that they did not qualify for tax

exemption.   The rulings each stated in pertinent part:

     You have failed to establish that you will be operated
     exclusively for exempt purposes as required by section
     501(c)(3) of the Code. Your primary activity is to
     provide administrative services to teaching hospitals
     affiliated through the Consortium with the State
     University of New York at Buffalo residency training
     program by paying salaries and fringe benefits of the
     residents working in these hospitals. This activity
                              - 10 -

      does not advance education within the meaning of
      section 1.501(c)(3)-1(d)(1) of the Income Tax
      Regulations. You also do not qualify under section
      501(e) of the Code because you are not operating on a
      cooperative basis.

                            Discussion

I.    In General

      Section 501(a) provides an exemption from Federal income tax

for organizations described in section 501(c).   Section 501(c)

sets forth a list of exempt organizations.   The list includes

organizations “organized and operated exclusively for * * *

charitable * * * or educational purposes”.   Sec. 501(c)(3).

      Section 501(e), entitled “Cooperative Hospital Service

Organizations”, provides that an organization will be treated as

meeting the requirements of section 501(c)(3) if the organization

is:   (1) Organized and operated exclusively to provide listed

services solely to two or more hospitals meeting certain

requirements; (2) organized on a cooperative basis and paying net

earnings to members within a specified time period; and (3)

wholly owned by the members if the organization has capital

stock.   Sec. 501(e).

      Petitioners contend that they are charitable and educational

organizations within the meaning of section 501(c)(3).

Respondent counters that petitioners are neither charitable nor

educational organizations and that they are operated for a

substantial nonexempt purpose.   Respondent further argues that

petitioners do not fit within section 501(e), and that, pursuant
                              - 11 -

to the Supreme Court's decision in HCSC-Laundry v. United States,

450 U.S. 1 (1981), petitioners cannot qualify under section

501(c)(3).

     As a preliminary matter, we note that, in this case, section

501(e) does not preclude an analysis under section 501(c)(3).    In

HCSC-Laundry v. United States, supra, the Supreme Court held that

section 501(e) is the exclusive provision for hospital

cooperatives to qualify under section 501(c)(3) and that a

hospital cooperative that does not satisfy section 501(e) cannot

qualify independently under section 501(c)(3).   To qualify as a

hospital cooperative under section 501(e), the organization must

provide services “solely for two or more hospitals”.   Petitioners

serve schools in addition to hospitals.   Thus, they are not

hospital cooperatives, and section 501(e) does not preclude

petitioners from qualifying under section 501(c)(3).

     To qualify under section 501(c)(3), petitioners must

establish that they are both “organized and operated” exclusively

for exempt purposes.   Sec. 1.501(c)(3)-1(a)(1), Income Tax Regs.

Respondent concedes that petitioners are organized exclusively

for exempt purposes but argues that petitioners are not operated

exclusively for such purposes.   An organization will be regarded

as operated exclusively for exempt purposes only if it engages

primarily in activities that accomplish one or more exempt

purposes listed in section 501(c)(3).   Sec. 1.501(c)(3)-1(c)(1),

Income Tax Regs.   Whether an organization is operated exclusively
                               - 12 -

for one or more exempt purposes is a question of fact to be

resolved on the basis of all the evidence in the administrative

record.    B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352, 357

(1978); Washington Research Found. v. Commissioner, T.C. Memo.

1985-570.    Petitioners have the burden of establishing that the

grounds for denying exemption stated in the final notices of

determination were inadequate.    Rule 217(c)(2)(A); Florida Hosp.

Trust Fund v. Commissioner, 103 T.C. 140, 146 (1994), affd. 71

F.3d 808 (11th Cir. 1996).

II.   Qualification as “Charitable” Under Section 501(c)(3)

      Petitioners argue that they are operated exclusively for

“charitable” purposes.    The term charitable is used in section

501(c)(3) in its generally accepted legal sense, which includes

the “advancement of education” and “lessening the burdens of

Government”.    Nationalist Movement v. Commissioner, 102 T.C. 558,

576, affd. 37 F.3d 216 (5th Cir. 1994); Sec. 1.501(c)(3)-1(d)(2),

Income Tax Regs.

      A.    Advancement of Education

      Petitioners contend that they advance education in two ways.

We reject both of petitioners' contentions.    First, petitioners

argue that they advance education by assisting the Schools in

meeting several requirements imposed by the ACGME accreditation

standards.    Petitioners contend that they assist in the provision

of uniform pay and benefits for residents of similar experience

levels, as required by the accreditation standards.    The
                               - 13 -

Consortium Agreement, however, states that the Consortium, not

petitioners, determines resident compensation levels.

Petitioners contend that they assist in the provision of

professional liability insurance for residents, as required by

the accreditation standards.   The Consolidation Contract,

however, states that the member hospitals, not petitioners,

provide such insurance.   Petitioners contend that they assist in

the provision of adequate financial support to residents, as

required by the accreditation standards.   The Consolidation

Contract, however, states that the Schools and hospitals, not

petitioners, provide all funding of resident salaries and

benefits.    Indeed, the Consortium Agreement states that it is the

Consortium, not petitioners, that generally has responsibility

for ensuring compliance with the accreditation standards.

Consequently, we conclude that petitioners provide the Schools

and hospitals minimal, if any, assistance in meeting these

standards.

     Second, petitioners argue that they advance education by

working with the Schools and hospitals to manage program-related

activities.   Petitioners, however, do not manage any educational

programs.    Petitioners emphasize that they have the right to hire

and fire residents.   The Schools and hospitals, however, have an

effective veto over petitioners’ hiring decisions because the

Schools and hospitals have the right to refuse to allow a

resident to perform his or her duties.   In addition, the
                               - 14 -

Consortium handles all resident grievances including matters of

termination of employment.   Thus, even if the Consolidation

Contract grants petitioners the right to hire and fire residents,

other provisions of the contract supersede that right by

delegating substantial responsibility to the Consortium and its

members.   Further, even if petitioners did have responsibility

for the program, they have no administrative employees, so it is

unclear how they would discharge this responsibility.

Petitioners have not met their burden of establishing that they

advance the education of residents.

     B.    Lessening the Burdens of Government

     Petitioners also argue that they lessen the burdens of

Government.   An organization lessens the burdens of Government if

(1) the activities undertaken are those that the Government

considers to be its burden, and (2) those activities actually

lessen such burdens.    Columbia Park & Recreation Association v.

Commissioner, 88 T.C. 1, 21 (1987), affd. without published

opinion 838 F.2d 465 (4th Cir. 1988).

     Petitioners have not established that the Schools and/or

hospitals constitute governmental agencies.   Nor have they

established that the activities they have undertaken are those

that the Government considers its burden.   Even if we assume that

petitioners had established these points, their activities do not

lessen any burdens.    All of petitioners' financial support comes

from the Schools and hospitals.   The cost of paying salaries and
                                 - 15 -

providing benefits is passed on to the Schools and hospitals and

is the cost that would be incurred if the Schools and hospitals

payed the residents themselves.     Further, the administrative

costs of these activities are not assumed by petitioners because

the work is performed by employees of the Schools.

     Petitioners argue that Rev. Rul. 85-2, 1985-1 C.B. 178,

supports their contention that they should qualify as exempt

organizations.    We disagree.   In that revenue ruling, the rules

of a local court required the appointment of guardians ad litem

to represent children in cases involving abuse.     An organization

was formed to train volunteer guardians who ultimately replaced

court-hired attorneys.    The organization was not fully funded by

the court.    Thus, the organization lessened the burdens of

Government.    In the present case, petitioners are funded in full

by the Schools and hospitals.     Petitioners do not contribute any

funds toward the education of residents.     Consequently, the

revenue ruling is not applicable.

III. Qualification as “Educational” under Section 501(c)(3)

     Petitioners' final argument is that they qualify as

“educational” organizations.     Generally, the term "educational"

as used in section 501(c)(3) relates to (1) the instruction or

training of an individual for the purpose of improving or

developing his capabilities or (2) the instruction of the public

on subjects useful to an individual and beneficial to the

community.    Sec. 1.501(c)(3)-1(d)(3), Income Tax Regs.
                              - 16 -

Petitioners do not claim to qualify independently as educational

organizations, but contend, under the integral part doctrine,

that they are entitled to share in the Consortium members’ exempt

status.   See Hospital Bureau of Standards & Supplies, Inc. v.

United States, 141 Ct. Cl. 91, 158 F. Supp. 560 (1958).

     The integral part doctrine is not a codified rule, but is a

judicial doctrine recognized in cases, regulations, and revenue

rulings as a basis for derivative exemption under section

501(c)(3).   The cases applying this doctrine have held that where

an organization (1) bears a “close and intimate relationship” to

the operation of one or more tax-exempt organizations, and (2)

provides a "necessary and indispensable" service solely to those

tax-exempt organizations, it will take on the exempt status of

those organizations.   See, e.g., Hospital Bureau of Standards &

Supplies, Inc. v. United States, supra at 562; Council for

Bibliographic & Info. Technologies v. Commissioner, T.C. Memo.

1992-364.

     The rationale behind the integral part doctrine is that an

organization that takes over an essential task which would

otherwise have to be performed by the organizations served should

be exempt because the members would continue to be exempt if they

performed the task themselves.   Cf. Hospital Bureau of Standards

& Supplies, Inc. v. United States, supra at 562-563 (concluding

that an organization that took over an essential task was exempt

under integral part doctrine); Nonprofits' Ins. Alliance v.
                               - 17 -

United States, 32 Fed. Cl. 277, 288 (1994) (concluding that an

organization that took over a nonessential task was not exempt

under the integral part doctrine).      In cases granting exemption

based on the integral part doctrine, the organization seeking

exemption invariably contributed to the attainment of its

members’ exempt purpose.    Nonprofits' Ins. Alliance v. United

States, supra; cf. Northern Cal. Cent. Servs., Inc. v. United

States, 219 Ct. Cl. 60, 591 F.2d 620 (1979) (involving an

independent corporation that provided higher quality laundry

services for member hospitals at lower cost in furtherance of

their exempt purpose); Estate of Thayer v. Commissioner, 24 T.C.

384 (1955) (involving an independently funded trust that

published a newsletter and operated a scholarship program in

furtherance of a university’s exempt purpose).

     In the present case, petitioners’ function is merely

incidental to the exempt purpose of the organizations they

serve.    Indeed, the Consolidation Contract states that "the

employment of the * * * [residents] is ancillary to the primary

purpose of graduate medical and dental education".     (Emphasis

added.)    A comparison of the facts in Hospital Bureau and Council

for Bibliographic & Info. Technologies with those in the present

case further establishes this point.     In Hospital Bureau and

Council for Bibliographic & Info. Technologies, the organizations

seeking exemption took over functions previously performed by the

organizations they served in order to achieve cost reductions and
                              - 18 -

better achieve the organizations’ exempt purpose.   Hospital

Bureau of Standards & Supplies v. United States, supra (involving

a corporation that took over the purchasing of hospital supplies

in order to achieve volume discounts for its members); Council

for Bibliographic & Info. Technologies v. Commissioner, supra

(involving a corporation that took over operation and maintenance

of a computerized library research system enabling member

libraries to better perform their exempt functions).    In the

present case, petitioners are superfluous corporate shells that

make no cognizable contribution to the education of residents.

Despite petitioners' incorporations, all funds continue to be

provided by the Schools and hospitals, and all program-related

decisions continue to be made through the Consortium.    The

Schools and the hospitals continue to supervise and train the

residents and pay their salaries.   In addition, the Consortium

continues to make the policy decisions, just as it has since

1983.   The only change since the incorporation of petitioners is

that the money used to pay residents is funneled through

petitioners before it reaches the residents.   As the

Consolidation Contract states, the Consortium has “overall

management and program control” with respect to the education of

residents.   Petitioners are merely "corporations controlled by

* * * [the Consortium]."   In substance, petitioners appear to be

appendages rather than integral parts.
                               - 19 -

IV.   Conclusion

      We hold that petitioners have not satisfied their burden of

establishing that respondent's final adverse determinations were

erroneous.    Our holding is consistent with the policy underlying

section 501(c)(3).   The Supreme Court has stated that Congress,

in enacting section 501(c)(3), sought to “encourage the

development of private institutions that serve a useful public

purpose or supplement or take the place of public institutions of

the same kind.”    Bob Jones Univ. v. United States, 461 U.S. 574,

588 (1983).   In essence, an organization obtains exemption from

tax under section 501(c)(3) in recognition of its contribution to

the public.   Petitioners make no such contribution.

      To reflect the foregoing,


                                          Decisions will be entered

                                     for respondent.
