Chapter 10.B.2 (or 3.B.2)
--Charitable Tax Exemption
For a good
practical overview of federal requirements for hospitals and clinics, including
a discussion of joint ventures, see the IRS document Health Care Provider
Reference Guide. For a review
of varying state standards, see GAO, Nonprofit Hospitals:
Variation in Standards and Guidance Limits Comparison of How Hospitals Meet
Community Benefit Requirements (Sept. 2008). See generally John D. Colombo, et al., Charity Care for
Nonprofit Hospitals (Aspen, 2010).
The IRS
has caused a stir by adopting a revised Schedule H to the informational Form
990 that tax-except hospitals must file each year. The new form asks much more detailed questions about the
amount and type of community benefits that hospitals provide, including charity
care. The IRS has not said yet
what it will do with the information, but the mere collecting of it appears to
have galvanized non-profit hospitals to do a better job of at least measuring
their community benefits. See http://www.irs.gov/charities/article/0,,id=185561,00.html http://www.990forhospitals.org/
The 9th Cir. ruled that an organization formed to provide vision care services
to subscribers does not qualify for a 501(c)(4) exemption as a social welfare
organization. Vision
Service Plan Inc. v. United States (9th Cir., No. 06-15269, unpublished
1/30/08).
In a
long-running dispute, the Ill. Ct. of Appeals upheld a taxing authority’s
denial of local property tax exemption to a non-profit hospital, based on a
variety of factors analyzed in the 55-page opinion. Provena Covenant Med. Ctr. v. Dept. of
Revenue, 384 Ill. App. 3d 734, 2008 WL 3989685 (Ill. App. 2008).
Payroll Taxes for Contracting
Physicians.
General Counsel Memorandum 39862 clarifies that compensation and payment
incentives are much less controversial when they are in exchange for tangible
services performed by the physician. Then, the only test is one of commercial
reasonableness. Arrangements where the hospital bills directly for the services
of hospital-based physicians and then compensates them with a portion of the
receipts are not as uncommon as the GCM suggests; the reimbursement changes it
describes relate only to Medicare, not to private insurance. Indeed, under
capitation payment, bundling of hospital and physician services is becoming
even more common.
This raises a different tax issue of some
importance, however, namely whether as indicated in n.3 of the GCM, these
physicians are to be considered employees rather than independent contractors.
Hospitals greatly prefer the independent contractor label, not only because
they avoid payroll taxes, but also because of vicarious liability and corporate
practice of medicine considerations. The IRS, however, has cracked down on this
characterization with numerous hospital audits resulting in some very large
demands for back taxes. See Tech. Advice Memoranda 9535001-9535002 (1995).
These rulings are causing great consternation and are likely to be challenged
in court. One went so far as to opine that a radiologist with an independent
practice who reads electrocardiograms part time at several different hospitals
and is paid piece work could still be classified as a part-time employee at
each hospital. The best route to avoiding this result is for a physician to
employ herself through a professional corporation which then contracts with the
hospitals. It is much harder to characterize a corporation as an employee.
Taxation of Health Insurance. One more point is necessary to have a complete picture of health insurance taxation. Health insurers that are taxable face the accounting question of whether anticipated loss payouts and contributions to their capital reserves count as business expense deductions that lower their earned income. To answer this question, the tax laws have devised special, favorable accounting rules that apply only to insurers. For a while, the IRS resisted extending these accounting rules to HMOs, under the logic expressed in Jordan (page 1323) that they are not insurers, but it has since relented. See B. Brooke, T. Dirig & M. Yuhas, Taxation of HMOs after Section 461(h) and General Dynamics, 68 J. Tax'n 329 (1988).
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