The Law of Tax-Exempt Healthcare Organizations

THOMAS K. HYATT (Washington DC) is a Partner and the Chair of SNR Denton'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 in Healthcare Organizations seminar sponsored by the American Health Lawyers Association (AHLA), and past Chair of AHLA's Tax and Finance practice. BRUCE R. HOPKINS (Kansas City MO) is a senior partner with the firm Polsinelli Shughart PC. He is also the author of more than 35 books, including The Law of Tax-Exempt Organizations, 10e, The Law of Fundraising, 4e, Nonprofit Law for Colleges and Universities, Nonprofit Governance, and Nonprofit Law Made Easy, as well as the monthly newsletter Bruce R. Hopkins' Nonprofit Counsel, all published by Wiley. Hopkins earned his Juris Doctorate and Master of Laws degrees at the George Washington University. He has practiced law for 40 years and is a member of the District of Columbia and Missouri bars. Hopkins received the 2007 Outstanding Nonprofit Lawyer Award (Vanguard Lifetime Achievement Award) from the American Bar Association, Section of Business Law, and Committee on Nonprofit Corporations. He is listed in The Best Lawyers in America, Nonprofit Organizations/Charities Law, 2007-2008.

Preface ix

About the Authors xi

Book Citations xv

1 Tax-Exempt Healthcare Organizations: An Overview 1

*§ 1.1 Constitutional Law Perspective 1

§ 1.2 Defining Tax-Exempt Organizations 2

*§ 1.5 Charitable Healthcare Organizations 3

§ 1.8 Promotion of Health 3

*§ 1.10 ABLE Programs (New) 4

3 Criticisms of Tax Exemption 7

§ 3.3 Commerciality Doctrine 7

4 Private Inurement, Private Benefit, and Excess Benefit Transactions 13

§ 4.4 Private Inurement—Scope and Types 13

§ 4.6 Essence of Private Benefit 15

§ 4.9 Excess Benefit Transactions 16

5 Public Charities and Private Foundations 19

§ 5.1 Public Institutions 19

§ 5.6 Recognition of Change in Public Charity Status 20

7 Lobbying and Political Activities 23

§ 7.1 Legislative Activities Limitation 23

§ 7.4 Political Activities Limitation 24

§ 7.5 Business Expense Deduction Rules and Political Activities 27

§ 7.7 Public Policy Advocacy Activities 27

*§ 7.8 Political Activities of Social Welfare Organizations 27

8 Hospitals 29

*§ 8.1 Federal Tax Law Definition of Hospital 29

§ 8.3 Public Hospitals 30

*§ 8.6 Pandemic Relief (New) 31

9 Managed Care Organizations 35

§ 9.3 Commercial-Type Insurance Providers 35

§ 9.5 Recent Developments 35

13 Other Provider and Supplier Organizations 41

§ 13.3 Qualified Nonprofit Health Insurance Issuers 41

§ 13.5 Accountable Care Organizations 42

*§ 13.6 Cannabis-Related Services Organizations (New) 45

16 For-Profit Subsidiaries 49

§ 16.3 Attribution of Subsidiary’s Activities to Exempt Parent 49

17 Exempt and Nonexempt Cooperatives 51

§ 17.1 Cooperative Hospital Service Organizations 51

18 Business Leagues 53

§ 18.1 Business Leagues in General 53

§ 18.2 Healthcare Trade Associations 55

§ 18.3 Certification Organizations and Peer Review Boards 55

19 Other Health-Related Organizations 57

§ 19.4 Hospital Management Services Organizations 57

§ 19.5 Regional Health Information Organizations 58

20 Healthcare Provider Reorganizations 61

§ 20.1 Some Basics about Reorganizations 61

21 Mergers and Conversions 63

§ 21.4 Conversion from Nonexempt to Exempt Status 63

§ 21.5 Joint Operating Agreements 63

22 Partnerships and Joint Ventures 65

§ 22.9 Whole-Hospital Joint Ventures 65

23 Integrated Delivery Systems 67

§ 23.2 Tax Status of IDS Organizations 67

24 Tax Treatment of Unrelated Business Activities 69

§ 24.2 Definition of Trade or Business 69

§ 24.3 Definition of Regularly Carried On 72

§ 24.5 Application of Substantially Related Test to Healthcare Organizations 72

§ 24.5A Deemed Unrelated Business Income 73

§ 24.11 Pharmacy, Medical Supplies, and Service Sales 73

§ 24.12 Laboratory Testing Services 74

§ 24.13 Medical Research 74

§ 24.18 Other Exceptions to Unrelated Income Taxation 76

§ 24.20 Revenue from Controlled Organizations 78

§ 24.20A Partnership Rules 78

§ 24.21 Unrelated Debt-Financed Income 79

§ 24.23 Computation of Unrelated Business Taxable Income 79

25 Physician Recruitment and Retention 89

§ 25.5 Specific Recruitment and Retention Techniques 89

26 Charity Care 91

§ 26.6 Definitional and Reporting Issues 91

§ 26.9 Charity Care and National Health Reform 92

§ 26.10 Additional Statutory Requirements for Hospitals 92

*§ 26.12 Provider Taxes (New) 115

27 Worker Classification and Employment Taxes 117

§ 27.7 Medical Residents and the Student Exception 117

28 Compensation and Employee Benefits 119

§ 28.3 Executive Compensation 119

§ 28.5 Overview of Employee Benefits Law 121

§ 28.6 Deferred Compensation in General 121

*§ 28.7 Excess Executive Compensation (New) 124

30 Tax-Exempt Bond Financing 143

§ 30.3 Disqualification of Tax-Exempt Bonds 143

31 Fundraising Regulation 153

§ 31.2 Federal Law Regulation 153

33 Governance 155

§ 33.3 Good Governance Practices 155

*§ 33.4A IRS Ruling Policy 157

34 Exemption and Public Charity Recognition Processes 163

§ 34.1 Exemption Recognition Process 163

§ 34.5 Public Charity Status 174

§ 34.6 Group Exemption 174

§ 34.7A Notice Requirements for Social Welfare Organizations (New) 180

§ 34.8 Procedure Where Determination Is Adverse 182

§ 34.9 Constitutional Law Aspects of Process (New) 184

35 Maintenance of Tax-Exempt Status and Avoidance of Penalties 187

§ 35.1 Material Changes 187

§ 35.2A Modification of Tax Exemption (New) 189

§ 35.4 Redesigned Annual Information Return 190

§ 35.5 Disclosure Requirements 190

*§ 35.6 IRS Disclosure to State Officials 191

36 IRS Audits of Healthcare Organizations 193

§ 36.2 Audit Procedures 193

Online Resources 207

Cumulative Table of Cases 209

Cumulative Table of IRS Revenue Rulings 221

Cumulative Table of IRS Revenue Procedures 225

Cumulative Table of IRS Private Letter Rulings 227

Cumulative Table of IRS Technical Advice Memoranda 233

Table of Chief Counsel Advice Memoranda 235

Cumulative Table of IRS General Counsel Memoranda 237

Table of Tax Reform Legislation 239

Cumulative Index 245