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