The Law of Tax-Exempt Healthcare Organizations, + Website

THOMAS K. HYATT is a Partnerand the Chair of Dentons US LLP's Health Care practice. He focuses on corporate and tax-exempt organization issues for health care providers. He represents organizations including public and private hospitals, multi-hospital systems, integrated delivery systems, academic medical centers, home health agencies, health maintenance organizations, continuing care retirement communities, provider associations, physician clinics, faculty practice plans, physician-hospital organizations, and shared services organizations. Tom is the Chair Emeritus and serves on the faculty of the annual Tax Issues for Healthcare Organizations seminar sponsored by the American Health Lawyers Association (AHLA), and past chair of AHLA's Tax and Finance practice group. BRUCE R. HOPKINS is a senior partner with the firm Polsinelli PC and an adjunct professor at the University of Kansas School of Law. He is also the author of more than twenty-eight books, including The Law of Tax-Exempt Organizations, Tenth Edition; Tax-Exempt Organizations and Constitutional Law: Nonprofit Law as Shaped by the U.S. Supreme Court; Nonprofit Law Made Easy; and Private Foundations: Tax Law and Compliance, Fourth Edition, as well as the monthly newsletter Bruce R. Hopkins' Nonprofit Counsel, all published by Wiley.

Preface xv

About the Authors xvii

Book Citations xxi

Part One Introduction to The Law of Tax-Exempt Healthcare Organizations

1 Tax-Exempt Healthcare Organizations—An Overview 3

1.1 Constitutional Law Perspective 5

1.2 Defining Tax-Exempt Organizations 6

1.3 Rationales for Tax Exemption 9

1.4 Categories of Tax-Exempt Healthcare Organizations 13

1.5 Charitable Healthcare Organizations 14

1.6 The Law of Charitable Trusts 16

1.7 Relief of Poverty 16

1.8 Promotion of Health 19

1.9 Social Welfare Organizations 20

2 Advantages and Disadvantages of Tax Exemption 23

2.1 Source of Tax Exemption 23

2.2 Advantages of Tax Exemption 27

2.3 Disadvantages of Tax Exemption 30

2.4 Alternatives to Tax-Exempt Status 32

2.5 No Contract, Third-Party Beneficiaries, Right of Action, or Charitable Trust 34

2.6 Small Employer Insurance Tax Credit 37

3 Criticisms of Tax Exemption 39

3.1 Criticisms in General 40

3.2 Criticisms of Tax Exemption for Healthcare Organizations 43

3.3 Commerciality Doctrine 56

Part Two Fundamental Exempt Organization Principles Applied to Healthcare Organizations

4 Private Inurement, Private Benefit, and Excess Benefit Transactions 71

4.1 Essence of Private Inurement 72

4.2 Requisite Insider 77

4.3 Physicians as Insiders 84

4.4 Private Inurement—Scope and Types 86

4.5 Private Inurement Per Se 104

4.6 Essence of Private Benefit 107

4.7 Private Inurement and Private Benefit Distinguished 113

4.8 A Case Study 113

4.9 Excess Benefit Transactions 116

5 Public Charities and Private Foundations 137

5.1 Public Institutions 138

5.2 Publicly Supported Organizations—Donative Entities 143

5.3 Publicly Supported Organizations—Service Provider Organizations 150

5.4 Comparative Analysis of the Two Categories of Publicly Supported Charities as Applied to Healthcare Organizations 155

5.5 Supporting Organizations 156

5.6 Recognition of Change in Public Charity Status 172

5.7 Relationships Created for Avoidance Purposes 172

5.8 Income Attribution Rules 173

5.9 Reliance by Grantors and Contributors 173

5.10 Private Foundation Rules 175

6 Community Benefit 179

6.1 Community Benefit and Operation for Charitable Purposes 179

6.2 The Traditional Community Benefit Standard 180

6.3 The New Community Benefit Standard 183

7 Lobbying and Political Activities 193

7.1 Legislative Activities Limitation 193

7.2 Business Expense Deduction Rules and Lobbying 205

7.3 Federal Disclosure of Lobbying 206

7.4 Political Activities Limitation 209

7.5 Business Expense Deduction Rules and Political Activities 218

7.6 Internet Activities 219

7.7 Public Policy Advocacy Activities 222

7.8 Political Activities of Social Welfare Organizations 223

7.9 Constitutional Law Considerations 225

Part Three Tax Status of Healthcare Provider and Supplier Organizations

8 Hospitals 229

8.1 Federal Tax Law Definition of Hospital 229

8.2 Private Charitable Hospitals 234

8.3 Public Hospitals 238

8.4 Religious Hospitals 238

8.5 Proprietary Hospitals 240

9 Managed Care Organizations 243

9.1 Introduction 243

9.2 Health Maintenance Organizations 245

9.3 Commercial-Type Insurance Providers 279

9.4 Preferred Provider Organizations 287

9.5 Recent Developments 289

10 Home Health Agencies 293

10.1 Freestanding Home Health Agencies 293

10.2 Hospital-Based Home Health Agencies 299

10.3 Private Duty Nursing Companies 300

11 Homes for the Aged 303

11.1 Introduction 303

11.2 Overview of Tax Exemption for Homes for the Aged 303

11.3 Specific Types of Healthcare Facilities for the Aged 307

11.4 Other Considerations 310

12 Tax-Exempt Physician Organizations 313

12.1 Tax-Exempt Clinics 313

12.2 Teaching Hospital Faculty Organizations 319

13 Other Provider and Supplier Organizations 325

13.1 Blue Cross and Blue Shield Associations 325

13.2 High-Risk Individuals Healthcare Coverage Organizations 335

13.3 Qualified Health Insurance Issuers 336

13.4 Health Insurance Exchanges 337

13.5 Accountable Care Organizations 339

Part Four Tax Status of Health-Related Organizations

14 Development Foundations 355

14.1 Basic Concepts 355

14.2 Other Considerations 361

14.3 Case Study 362

14.4 A Potential Alternative 363

15 Title-Holding Companies 365

15.1 Single-Parent Title-Holding Companies 366

15.2 Multi-Parent Title-Holding Companies 369

15.3 Unrelated Business Considerations 371

16 For-Profit Subsidiaries 373

16.1 Establishing a Subsidiary 374

16.2 Financial Considerations 378

16.3 Attribution of Subsidiary’s Activities to Exempt Parent 383

16.4 Asset Accumulations 387

16.5 Effect of For-Profit Subsidiaries on Public Charity Status 388

16.6 Subsidiaries in Partnerships 390

17 Exempt and Nonexempt Cooperatives 393

17.1 Cooperative Hospital Service Organizations 393

17.2 Subchapter T Cooperatives 403

18 Business Leagues 405

18.1 Business Leagues in General 405

18.2 Healthcare Trade Associations 412

18.3 Certification Organizations and Peer Review Boards 413

18.4 Legislative Activities of Business Leagues 417

19 Other Health-Related Organizations 431

19.1 Physician Referral Services 431

19.2 Nurse Registries 432

19.3 Charitable Risk Pools 435

19.4 Hospital Management Services Organizations 436

19.5 Regional Health Information Organizations 442

Part Five Organizational Issues

20 Healthcare Provider Reorganizations 447

20.1 Some Basics about Reorganizations 447

20.2 Parent Holding Corporations 449

21 Mergers and Conversions 457

21.1 Mergers and Consolidations between Exempt Healthcare Organizations 457

21.2 Mergers and Consolidations between Exempt and Nonexempt Healthcare Organizations 460

21.3 Conversion from Exempt to Nonexempt Status 461

21.4 Conversion from Nonexempt to Exempt Status 472

21.5 Joint Operating Agreements 476

22 Partnerships and Joint Ventures 485

22.1 Tax Law Fundamentals 485

22.2 Tax-Exempt Healthcare Entities in Partnerships 490

22.3 Partnerships and Tax Exemption 493

22.4 Limited Liability Companies as Exempt Organizations 496

22.5 Information Reporting 499

22.6 Joint Ventures 500

22.7 Partnerships, Joint Ventures, and Private Inurement 503

22.8 Partnerships, Joint Ventures, and Per Se Private Inurement 504

22.9 Whole-Hospital Joint Ventures 505

22.10 Provider-Sponsored Organization Joint Ventures 524

22.11 Ancillary Services Joint Ventures 524

22.12 Single-Member Limited Liability Companies 543

23 Integrated Delivery Systems 547

23.1 Introduction 547

23.2 Tax Status of IDS Organizations 548

23.3 Physician Practice Acquisitions 570

Part Six Operational Issues

24 Tax Treatment of Unrelated Business Activities 575

24.1 Introduction 577

24.2 Definition of Trade or Business 579

24.3 Definition of Regularly Carried On 588

24.4 Definition of Substantially Related 592

24.5 Application of Substantially Related Test to Healthcare Organizations 599

24.6 Definition of Patient 604

24.7 Gift Shops, Cafeterias, and Coffee Shops 606

24.8 Fitness Centers 608

24.9 Parking Facilities 609

24.10 Temporary Residential Facilities 610

24.11 Pharmacy, Medical Supplies, and Services Sales 611

24.12 Laboratory Testing Services 614

24.13 Medical Research 617

24.14 Medical Office Buildings 622

24.15 Transactions between Related Organizations 623

24.16 Services for Small Hospitals 626

24.17 Corporate Sponsorships 627

24.18 Other Exceptions to Unrelated Income Taxation 630

24.19 Internet Activities 641

24.20 Revenue from Controlled Organizations 644

24.21 Unrelated Debt-Financed Income 648

24.22 Specific Deduction 652

24.23 Computation of Unrelated Business Taxable Income 653

24.24 The Commerciality Doctrine 655

25 Physician Recruitment and Retention 657

25.1 Introduction 657

25.2 The IRS Position 660

25.3 The OIG Position 661

25.4 Guidelines for Analyzing Recruitment and Retention Techniques 662

25.5 Specific Recruitment and Retention Techniques 663

25.6 Hermann Hospital Closing Agreement 679

25.7 Physician Recruitment Revenue Ruling 692

26 Charity Care 711

26.1 Introduction 712

26.2 The Financial Ability Standard 712

26.3 The Community Benefit Standard 713

26.4 The Emergency Room Exception 716

26.5 Legal Challenges to Hospital Charity Care Practices 717

26.6 Definitional and Reporting Issues 719

26.7 IRS Compliance Check and Form 990 Redesign 725

26.8 Federal Legislative Initiatives 727

26.9 Charity Care and National Health Reform 731

26.10 Additional Statutory Requirements for Hospitals 732

26.11 The Constitutionality of the Affordable Care Act 749

27 Worker Classification and Employment Taxes 757

27.1 Federal Employment Taxes 758

27.2 Employees and Independent Contractors Distinguished 759

27.3 The Common-Law Factors 761

27.4 Safe Harbors 762

27.5 Classification of Healthcare Workers 764

27.6 Coordinated Issue Papers 768

27.7 Medical Residents and the Student Exception 774

28 Compensation and Employee Benefits 777

28.1 The Reasonable Compensation Standard 778

28.2 Hospital–Physician Compensation Arrangements 781

28.3 Executive Compensation 784

28.4 Board Compensation 791

28.5 Overview of Employee Benefits Law 792

28.6 Deferred Compensation in General 796

29 Medicare and Medicaid Fraud and Abuse and Its Effect on Exemption 803

29.1 The Conflict and Confluence of Tax Policy and Health Policy 803

29.2 Fraud and Abuse Violations as a Basis for Revocation of Exemption 808

29.3 Hospital Incentives to Physicians 811

30 Tax-Exempt Bond Financing 813

30.1 Overview of Qualified 501(c)(3) Bonds 814

30.2 Overview of the Qualified 501(c)(3) Bond Issuance Process 824

30.3 Disqualification of Tax-Exempt Bonds 826

30.4 Internal Revenue Service Developments 831

31 Fundraising Regulation 835

31.1 State Law Regulation 836

31.2 Federal Law Regulation 848

32 Rural Healthcare Organizations 873

32.1 Introduction 873

32.2 Application of the Substantial Private Benefit Prohibition 874

32.3 Application of Unrelated Business Income Rules 874

32.4 Physician Recruitment and Retention in Rural Areas 877

33 Governance 879

33.1 Introduction 880

33.2 Overview of Common Law and Statutory Duties of Officers and Directors 880

33.3 Good Governance Practices 891

33.4 Conflicts of Interest 897

33.5 Board Oversight of Executive Compensation 900

33.6 Government Oversight of Executive Compensation 901

33.7 Federal Legislative Initiatives 906

33.8 State Regulatory Enforcement of Corporate Responsibility Obligations 907

Part Seven Obtaining and Maintaining Exempt Status for Healthcare Organizations

34 Exemption and Public Charity Recognition Processes 913

34.1 Exemption Recognition Process 916

34.2 Application Disclosure Requirements 928

34.3 Special Requirements for Charitable Healthcare Organizations 930

34.4 Special Requirements for Health Insurance Issuers 937

34.5 Public Charity Status 937

34.6 Group Exemption 939

34.7 Integral Part Doctrine 944

34.8 Procedure Where Determination Is Adverse 949

35 Maintenance of Tax-Exempt Status and Avoidance of Penalties 953

35.1 Material Changes 954

35.2 Changes in Form 956

35.3 Annual Reporting Requirements 958

35.4 Redesigned Annual Information Return 965

35.5 Disclosure Requirements 979

35.6 IRS Disclosure to State Officials 986

35.7 Form 990 and Community Benefit 988

35.8 Reporting of Noncash Gifts in General 988

36 IRS Audits of Healthcare Organizations 1003

36.1 IRS Audits in General 1003

36.2 Audit Procedures 1007

36.3 Hospital Audit Guidelines 1011

36.4 IRS Compliance Check Projects 1022

36.5 Revocation of Exemption and Closing Agreements 1037

About the Companion Website 1043

Index 1045