Volume Nine Number Ten October 2007 Published Monthly Earn CEU credit sEE insErt Meet Deann M. Baker get ready: Corporate Compliance & privacy Officer, rACs may be Alaska native tribal Health Consortium nationwide sooner pAgE 14 than expected! Also: pAgE 4 tax compliance for the new millennium: Feature Focus: risk Assessments redesigned and Compliance Form 990—part ii pAgE 46 pAgE 22
Tax compliance for the new millennium: IRS releases Discussion Draft of redesigned JaMes r. king Form 990—Part II By James R. King, JD and Gerald M. Griffith, JD Editor’s note: James R. King is a partner in This new Schedule has five parts: the Jones Day law firm in its Columbus, ■ Part I – Community Benefjt Report Ohio office and a member of the Jones Day ■ Part II – Billing and Collection Practices Data gathering for policy makers. Tie Health Law and Tax Practices. Mr. King ■ Part III – Management Companies and inference here, of course, is that the data is currently a Vice Chair of the American Joint Ventures collected in Schedule H can be used not only Health Lawyers Association (AHLA) Tax ■ Part IV – General Information to assist the IRS in enforcing the community & Finance Practice Group. He may be ■ Part V – Facility Information benefjt standard, but also to compare the reached by telephone at 614/281-3928 or operations of exempt hospitals with those of by e-mail at jrking@jonesday.com Schedule H will, of course, be the key sched- non-exempt hospitals. Policy makers can then ule for all hospitals. It is where the rubber hits use that data for future legislative efgorts, if it Gerald M. Griffith is a partner in the the road for hospitals in telling their story reveals that no material behavioral difgerences Jones Day law firm in its Chicago office about how they meet the community benefjt exist to justify the current level of tax subsidy and a member of the Jones Day Health standard for exemption. In that regard, the that exempt hospitals enjoy. Law and Tax Practices. Mr. Griffith is a eight pages of instructions that accompany former Chair of the AHLA Tax & Finance Schedule H provide readable and largely help- Increased transparency. Tie IRS also stated, Practice Group and a current member of ful defjnitions and clarifjcations for complet- “Tie proposed schedule is designed to AHLA’s Board of Directors. He may be ing the schedule. In addition, the community combat the lack of transparency surround- reached by telephone at 312/269-1507 or benefjt portion of Schedule H is accompanied ing the activities of tax-exempt organizations by e-mail at ggriffith@jonesday.com. by eight helpful Worksheets. 1 Tie Worksheets that provide hospital or medical care.” 3 are not to be fjled as a part of the Form 990 Regardless of whether a lack of transparency Part I of this two-part series on IRS Form fjling, but are to be retained to support the existed in the past, the IRS clearly advances 990 appeared in the September 2007 issue information provided on Schedule H. transparency in the areas that Schedule H of Compliance Today . addresses. Additionally, Schedule H will irs rationale and operating assumptions make it possible to compare exempt hospitals he Discussion Draft of the redesigned T Tie IRS explains some of its rationale in with for-profjt hospitals and also with other Form 990 contains a Core Form and designing Schedule H in the materials ac- exempt hospitals of similar size and mission. 15 Schedules. For a full list of the companying the Schedule. Tie IRS notes, (It is likely, however, that in the early years of Schedules, please see Part 1 of the article. at one point, “In the hospital area, concerns reporting under the new regime, many “false continue to be raised about whether there are positives” will occur as hospitals learn the in’s schedule H –information for hospitals difgerences between for-profjt and tax-exempt and out’s of how to consistently report all of Organizations that operate a facility that pro- hospitals. While the health care sector has the information that Schedule H requires.) vides hospital or medical care must complete changed dramatically over the last forty years, new Schedule H, which covers community IRS view of the substantive law. Tie IRS the general tax rules governing this sector benefit and other information for hospitals. have not.” 2 then goes on to say that, “In drafting the October 2007 Health Care Compliance Association • 888-580-8373 • www.hcca-info.org 46
schedule, the Service tried to quantify, in an Tiese are just the starting point for the analysis. objective manner, the community benefjt In addition, the organization must demonstrate standard applicable to tax-exempt hospitals.” 4 that it satisfjes one or more otherwise unmet While the Discussion Draft does not make, community needs or that it supplements or ad- geralD M. griFFith nor does it purport to make, any changes in vances governmental programs aimed at meet- substantive law, the inference here is that the ing those same community needs. Moreover, IRS believes the factors cataloged in Schedule the organization must engage these activities at H are the “objective” metrics under the com- a level that is substantial enough to allow the munity benefjt standard. inference that furthering public benefjt is the organization’s primary purpose. Schedule H will In that regard, Schedule H only sets forth the assist the IRS and organizations in quantify- factors that the IRS believes indicate whether ing how well organizations address the various an organization is engaging in activities that metrics involved. advance community benefjt. Schedule H does part i – the Community Benefit report not express any view of how much commu- Specific comment on the CHA approach According the Congressional Budget Offjce, 9 nity benefjt is enough. Tiat task will be left to community benefit. Finally, the IRS based on calendar year 2002 data (the most to the 20/20 hindsight judgment inherent in states that, current data available), nonprofjt hospitals the overall facts and circumstances analysis “For purposes of advancing the discussion receive, in aggregate, approximately $12.6 of Revenue Ruling 69-545 and the courts. in this area, the Service chose to utilize billion in governmental tax subsidies, broken See, for example, IHC Health Plans, Inc. v. the Catholic Health Association’s (CHA) down roughly evenly between the federal Commissioner , 5 in which the court sum- community benefjt reporting model. CHA government and various state and local tax marized the community benefjt standard and is a respected leader in the area of charity exemptions and benefjts. Tiis means that, posited the following “plus” test for deter- care and community benefjt reporting. in aggregate, tax-exempt hospitals receive an mining whether an organization provides Tie Service recognizes, however, that there annual tax “subsidy” from the federal govern- suffjcient benefjts to merit § 501(c)(3) status: will be alternative reporting models and ment of about $6.3 billion in the form of the welcomes comments in this area.” 7 basic exemption from paying income tax on In summary, under section 501(c)(3), a net income, the ability to receive contribu- health-care provider must make its services Tiis statement acknowledges the fjne work the tions that are deductible by the contributors, available to all in the community plus CHA has done over the past 15 years, but it and the cost savings from the advantages of provide additional community or public also acknowledges that there is not complete tax-exempt fjnancings. Tiey receive another benefits. The benefit must either further agreement on all factors within the hospital roughly $6.3 billion from various state and the function of government-funded insti- community and that many respected members local governmental entities in the form of tutions or provide a service that would not of the hospital community have difgerent views sales and use tax exemptions, income tax likely be provided within the community in some areas. For example, while they agree exemptions, and real estate tax exemptions. but for the subsidy. Further, the additional on many points, CHA and the American public benefit conferred must be sufficient Hospital Association (AHA) disagree on some Quid pro quo information for tax benefits. to give rise to a strong inference that the points, such as whether to take the Medicare Because of the substantial subsidies, the Com- public benefit is the primary purpose “shortfall” into account as an item of com- munity Benefjt Report will be the fjrst place for which the organization operates. In munity benefjt. IRS expressly acknowledges that the IRS and state regulators look to see conducting this inquiry, we consider the this disagreement among knowledgeable and whether a fjling organization provides enough totality of the circumstances. 6 respected members of the health care sector. 8 “bang for the buck” – the community benefjt As a result, we can expect extensive comment it provides in comparison to the level of tax Tius, under the IHC “plus” formulation, it is on which portions of the CHA approach subsidy that it receives. Tiis report will also be not enough to promote health, nor is it enough should be followed and where there should be the fjrst place that the news media will look, to ofger care to the entire community for a fee. deviation from the CHA approach. Continued on page 50 October 2007 Health Care Compliance Association • 888-580-8373 • www.hcca-info.org 47
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