Practices: Charity Care and Tax Exemption

As your not-for-profit hospital or other healthcare provider organization enters into joint ventures, acquires or divests assets and enters into contracting arrangements, you face increasing scrutiny from federal and state taxing authorities on whether these activities are consistent with your tax-exempt status. “Private inurement” issues in physician or executive compensation, private benefit risks, unrelated business income taxation concerns, and qualification for state and local property tax exemption are also major concerns for any nonprofit healthcare provider. Add to this the ongoing complexity of securing tax-exempt financing, and you need a comprehensive approach that integrates tax planning, transactional assistance and tax controversy resolution.

Exceptional Skill

Ungaretti & Harris has exceptional skill in dealing with healthcare tax and charity care issues. Healthcare providers throughout Illinois and the Midwest seek our help to handle all their tax and charity care-related concerns, and particularly to secure and maintain their tax-exempt status under the Internal Revenue Code and with related state-level agencies. Because many tax-exempt healthcare organizations own or are in business arrangements with operations that generate taxable revenue, an important part counsel involves the tax treatment of unrelated business income. Similarly, hospitals and other health care organizations get the help they need on the tax treatment of divesting for-profit subsidiaries and divisions, and on mergers or joint ventures with other for-profit entities.

We know that maintaining your 501(c)(3) tax-exempt status and related state-level tax exemptions is of paramount importance, and use our broad experience and our strong working relationships with taxing authorities on your behalf. You also get the help you need on dealing with the tax implications of physician recruitment, tax-exempt financing and other operational concerns.

Charity Care

As both state and federal agencies continue to focus on charity care and community need practices of tax-exempt providers—including clinics, hospitals, physician practices and FQHCs—exemption from income taxes, sales taxes, and property taxes may be at risk for organizations that fail to maintain or adequately document sufficient charity care practices. We are experienced in assessing charity care policy and procedures and in counseling clients responding to subpoenas for related information or otherwise involved in charity care investigation or controversy. Our lobbyists track evolving legislation in this area and we routinely educate senior management and board members on charity care matters.

Property Taxation

In Illinois and many other states, taxing authorities are aggressively seeking new sources of tax revenue by questioning the tax exemption of nonprofit healthcare organizations. If state taxing authorities seek to use a merger or acquisition as an opportunity to reassess your property and sales tax exemption, our knowledge of the processes and criteria used by senior administrators at the Illinois Department of Taxation and tax authorities in other states can often help us ensure continuity of your tax-exempt status. If taxing authorities do impose assessments on your post-acquisition organization, we can pursue Certificate of Error filings to get your exemption reinstated, and can also take the matter before the Department of Taxation’s Board of Review. Because this is a constantly evolving issue—and recent ruling against exempt hospitals and other providers in certain states indicate a troubling trend toward heightened scrutiny and heightened standards for exemption—we remain alert to all new developments in the law and revenue code and seek to maintain and maximize your tax advantage wherever possible.

Exempt Status

For taxable and tax-exempt entities entering business transactions, we develop creative strategies to maintain 501(c)(3) classification: we create new charitable or religious entities, review and revise organizational charters and bylaws so that they conform to tax code requirements, and establish new corporate structures or leasing arrangements to handle unrelated business income tax issues. You can also rely on us to ensure that your Form 990 (reporting on your mission, programs and finances) and Form 1023 (application for exemption) are properly filed with the IRS. If there are IRS questions about actions taken, you get effective representation and negotiation that fully and persuasively supports your position.

Private Inurement and Private Benefit

Your provider organization may use financial incentives to help recruit specialty practice physicians or to secure the senior administrative expertise that you need. However, nonprofit healthcare organizations cannot allow any part of their net income to “inure” to the benefit of a private individual – or risk losing their 501(c)(3) tax-exempt status. We can give you sound guidance in structuring physician recruitment packages in order to avoid private inurement or impermissible private benefit, and also to take advantage of those private benefit provisions that the tax code allows. Private inurement and private benefit can be a particular concern in connection with joint ventures and other arrangements with for-profit organizations, and we work to protect your tax-exempt status in these ventures. Our lawyers also give your tax-exempt organization the guidance you need on other compensation-related issues, such as “excess benefit” transactions with executives and other insiders, which can cause the IRS to impose intermediate sanctions against both your organization and individual officers and directors.

Tax Controversies

Many healthcare clients seek our help when faced with an audit by the Internal Revenue Service or state or local tax authorities, particularly in the area of charity care audits or audits of financial arrangements with private physicians. You will get an effective defense in audit disputes and administrative hearings before the IRS and state and local taxing authorities, thanks to an approach that combines a willingness to litigate with the skill to work out a negotiated settlement. If litigation is necessary, particularly in U.S. tax court or other federal courts, the focus shifts to resolving the most significant issues. You get the benefit of our thorough familiarity with the procedures of the IRS and other taxing authorities to reduce penalties, obtain IRS private letter rulings, secure favorable determination letters and prohibited transaction exemptions, advise on IRS demands for documents, challenge administrative summonses, and resolve any reporting or compliance issues. When health care providers face tax audits or disputed property tax assessments, we are consistently successful at resolving the matter in negotiations with state and local taxing authorities.

Effective Advocate

Tax law represents one of the most complex regulatory areas in healthcare administration. Every level of government has its own tax objectives, and the interplay between tax-exempt and taxable businesses in today’s healthcare market often brings those objectives into conflict with your business and patient care goals. Ungaretti & Harris knows the best way to work with taxing authorities on your behalf, preserving all the tax advantages your organization is entitled to while defending you in tax controversies and helping you remain strong and viable to fulfill your healthcare mission.