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The Law of Tax-Exempt Healthcare Organizations, + Website, 4th Edition

The Law of Tax-Exempt Healthcare Organizations, + Website, 4th Edition

Thomas K. Hyatt, Bruce R. Hopkins

ISBN: 978-1-118-64624-3

Jun 2013

1088 pages

Description

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