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 Issuespurposes included: exclusive control by the university over the content of the seminars(which was the same as its on-campus seminars), instructors, training materials, andthe standards for successfully completing the seminars; while the for-profit entity alonedetermined video link locations and approved personnel other than instructors, theparties shared equal control with respect to other issues; ownership interests wereproportional to capital contributions, returns of capital, allocations and distributions; andthe governing documents precluded the joint venture from engaging in any activities thatwould jeopardize the university’s tax exempt status and required all contracts andtransactions be at arm’s length and at fair market value.In the physician recruitment context, the IRS has suggested several corporategovernance safeguards, including board involvement, written agreements, and marketsurveys. In Revenue Ruling 97-21, 197 the IRS provided four situations in which ahospital’s payment of physician recruitment incentives is deemed not to violate thehospital’s exemption (and a fifth situation where it does violate the hospital’sexemption). In each of the four favorable situations, the incentives were approved bythe hospital’s board of trustees or its designees; all incentives were set forth in a writtenagreement; and the incentives that included a guaranteed net income fell within therange reflected in regional or national surveys regarding income earned by physicians inthe specialty. The physician recruitment ruling followed the publication of a closingagreement entered into between the IRS and Hermann Hospital to resolve certainphysician recruitment and retention arrangements and other transactions with thehospital. Because the hospital was resolving transgressions, the IRS was in theposition to extract additional commitments. The corporate governance aspects of theagreement included increased board involvement, greater oversight by seniormanagement and legal and tax counsel, and required documentation and recordkeeping. Pursuant to the closing agreement, the hospital paid substantial penalties;agreed to follow specific physician recruitment guidelines included as an attachment tothe closing agreement for ten years (and agreed the guidelines would be adopted by thehospital’s executive committee before signing the closing agreement and be ratified bythe hospital’s full board at its next meeting); agreed that physician service agreementsother than recruitment agreements would be reviewed and approved by the hospital’slegal counsel, vice president, medical director, CEO and, if involving more than$250,000 per year, the executive committee of the board; agreed to exercisereasonable good faith efforts to comply with all employment tax requirements; andagreed to make the closing agreement public. Among the requirements in the attachedphysician recruitment guidelines are: the recruitment incentives must be in writing,approved by the hospital board, and reviewed by hospital legal counsel or tax advisor;all incentives must be reported on Form W-2 or Form 1099; and specifieddocumentation and recordkeeping requirements.Finally, the IRS has focused on health care organizations in its efforts to encourageexempt organizations to adopt a conflict of interest policy. The IRS released its first197Rev. Rul. 97-21, 1997-1 C.B. 121.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 88