The Law of Tax-Exempt Healthcare Organizations, + Website

A completely revised and expanded one-volume legal resource for tax-exempt healthcare organizations A complete and up-to-date legal resource for tax-exempt healthcare organizations and their advisors, this Fourth Edition, equips you with a comprehensive, one-volume source of detailed information on federal law covering tax-exempt healthcare organizations. The Fourth Edition of this practical, down-to-earth book tackles complex legal issues by providing you with plain-English explanations and the appropriate legal citations for further research. Revised with new discussions on healthcare reform, the Affordable Care Act, IRS initiatives, executive compensation, commercial activity by tax-exempt organizations, political campaign activity, charitable reforms, governance, restrictions on supporting organizations, intermediate sanctions, and much more Provides detailed documentation and citations, including references to regulations, rulings, cases, and tax literature Includes an exhaustive index allowing for quick and easy reference Offers annual supplements to keep readers apprised of the latest developments affecting tax-exempt healthcare organizations Written by leading experts in the fields of healthcare and nonprofit law, this comprehensive and vital resource has been completely revised and updated to present a clear view of complicated legal and tax issues.

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