Advisory Committee on Tax Exempt and Government Entities (ACT ...

The Appropriate Role Of The Internal Revenue Service With Respect To Tax-Exempt Organization Good Governance Issuesrequirement. The origin of the specific concern was that it was not uncommon in the1950s, 1960s and 1970s for hospitals to be owned by a small group of communityphysicians; and a number of these hospitals came to seek tax exemption but operatedso as to serve the private interests of their founders. 189 Thus, the requirement wasimposed to show that the hospital would be operated for charitable purposes.Over the years, the IRS has imposed additional governance-type requirements onhealth care organizations as a condition of exemption, in each case trying to distinguishthose that not only promote health but also are organized and operated for charitablepurposes from those that serve private purposes. The most common requirement hasrelated to an independent board. The IRS has been particularly leery of physiciancontrolledhealth care organizations, 190 especially where the physicians determine theirown compensation. 191 Courts, however, have been more lenient in awarding exemptionto physician-controlled practice entities, at least where compensation safeguards are inplace. Thus, the courts have granted exemption to faculty practice plans controlled byphysicians despite the IRS’s view to the contrary. 192 In the context of integrateddelivery systems, the IRS has limited physician representation on the board of directorsto a stricter 20 percent. 193189See, e.g., Harding Hospital, Inc. v. Comm’r, 505 F.2d 1068 (6 th Cir. 1974); Kenner v. Comm’r, 33 TCM 1239 (1974); SonoraCommunity Hosp. v. Comm’r, 397 F.2d 814 (9 th Cir. 1968) (mem.), aff’g 46 TC 519 (1966); Lowry Hospital Ass’n v. Comm’r, 66 TC850 (1976); Maynard Hosp., Inc. v. Comm’r, 52 TC 1006 (1969). See also the non-qualifying hospital example in Rev. Rul. 69-545,1969-2 C.B. 117.190In fact, there have been practitioners who encouraged for-profit physician groups to consider tax exemption for their grouppractices. See, e.g., Konrad Friedmann, Tax Exempt Status for Medical Clinics: A Complex, Rewarding Option, HealthSpan,July/August 1990, at 11 reprinted in 3 Exempt Org. Tax Rev. 1233 (1991).191See, e.g., Rev. Rul. 69-266, 1969-1 C.B. 151 (clinic created and controlled by physicians not exempt as does not differsignificantly from private practice of medicine for profit); Lorain Ave. Clinic v. Comm’r, 31 TC 141 (1958); Fort Scott Clinic and Hosp.,Corp. v. Broderick, 99 F. Supp. 515 (D. Kan. 1951); Labrenz Found. v. Comm’r, 33 TCM 1374 (1974).192See, e.g., the three initial cases involving academic physician practice plans: B.H.W. Anesthesia Found., Inc. v. Comm’r, 72 TC681 (1979), nonacq., 1980-2 CB 2; University of Mass. Medical School Group Practice v. Comm’r, 74 TC 1299 (1980), acq., 1980-2C.B. 2; University of Md. Physicians, P.A. v. Comm’r, 41 TCM 732 (1981). See also, Akron Clinic Found. v U.S., 64-1 USTC 9233(ND Ohio 1964)(clinic).193In the early 1990s, the IRS was confronted with the establishment of integrated delivery systems that included the creation ofnetworks comprised of one or more hospitals and one or more groups of employed or captive physicians. Ultimately, the IRS ruledfavorably but it took the aggressive step of limiting physician control of the combined entity to 20 percent of the board. See, e.g.,Charles F. Kaiser & T.J. Sullivan, Integrated Delivery Systems and Health Care Update, Exempt Org. Continuing Prof. Educ. Tech.Instruction Program for FY 1996 384; Charles F. Kaiser et al., Integrated Delivery Systems and Joint Venture Dissolutions Update,Exempt Org. Continuing Prof. Educ. Tech. Instruction Program for FY 1995 153; Charles F. Kaiser & John Francis Reilly, IntegratedDelivery Systems, Exempt Org. Continuing Prof. Educ. Tech. Instruction Program for FY 1994 212; IRS Officials Alert Hospitals toCurrent Concerns, 7 Exempt Org. Tax Rev. 713 (1993). For a short period, the IRS included all financially interested persons withinits 20 percent maximum,( Rockford Memorial Health Services Corp. of Rockford, Illinois. See, e.g., Paul Streckfus, Another IDSRuling Released by IRS National Office, 9 Exempt Org. Tax Rev. 992 (1994); Integrated Delivery System, System Joining Clinic,Hospital, Managed Care Entities Wins Exemption, 3 Health L. Rep. (BNA) 498 (1994), although it later relented, including within the20 percent only physicians selling assets to, or providing professional services in conjunction with, the integrated delivery systemand characterizing the 20 percent limit as a “safe harbor” applicable to organizations without a track record. See, e.g., Charles F.Kaiser & T.J. Sullivan, Integrated Delivery Systems and Health Care Update, Exempt Org. Continuing Prof. Educ. Tech. InstructionProgram for FY 1996 384, 390-91. In one case that may be aberrational, the IRS applied the 20 percent limitation to a for-profitphysician hospital organization (PHO). See Participation in PHO Will Not Jeopardize Tax-Exempt Status, 10 Exempt Org. Tax Rev.1323 (1994); Burda, “IRS Gives Nod to PHO, But Physicians Say No,” Modern Healthcare 3 (Oct. 24, 1994); 4 Health L. Rep. (BNA)151 (1995).ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 86