iProtean—Tax-Exempt Status & Community Benefit

The IRS will continue to monitor governance and tax-exempt organizations, and now has the data to support its work, according to a recent Practice Group update from the American Health Lawyers Association.


The context for this announcement revolves around the IRS’ increased efforts nearly three years ago to monitor governance and compliance with its regulations by hospitals and other charitable organizations . At the same time, it announced that it would gather information on the governance practices of tax-exempt organizations it was auditing for other reasons.


The results of that information gathering were made public last week. According to the IRS Exempt Organizations Director, the data confirm the IRS’ long-standing presumption that effective corporate governance practices enhance tax compliance. The IRS plans to expand its research to a broader, statistically significant group of exempt organizations to verify whether these results extend to the general population of exempt organizations. (From a speech by IRS Exempt Organizations Director Lois Lerner, April 19, 2012)


In the iProtean course Tax-Exempt Status & Community Benefit, Elizabeth Mills, Esq., Monte Dube, Esq., Robin Nagele, J.D. and Anne McGeorge discuss why not-for-profit hospitals receive tax-exempt status, what is meant by community benefit, the IRS Form 990, how health reform will affect the 990, executive compensation and the 990, and the 990 review process.


Robin Nagele, J.D., Post & Schell

It is important for board members to understand the standards they have to adhere to as an institution to maintain tax-exempt status.  What defines us as a charitable or a tax-exempt organization?  Those standards have actually changed significantly over time . . . The final step in this picture was the adoption in 2007 of the Form 990 developed by the IRS, which now requires hospitals to disclose a great deal of information about how they spend their money and also what kind of benefit they provide to the community.


Monte Dube, Esq., Proskauer

Community benefit is an essential element of tax exemption.  Your hospital is not just not-for-profit under state law.  It is also tax-exempt under federal law.  Tax exemption affords your hospital many benefits.  You are exempt from paying income taxes and property taxes and sales taxes.  Your for-profit competitors have to pay all of those taxes.  In addition, you are entitled to receive charitable donations from the public, which are tax deductible because of your tax exemption.  Similarly, you are entitled to issue tax-exempt bonds at a more favorable rate.  What the IRS increasingly is saying, what Congress is saying, is that in order to maintain the tax exemption that you were given years ago, you have to prove that you are entitled to it.


Elizabeth Mills, Esq., Proskauer

Community benefit is the standard for hospital tax exemption today.  This means you promote the health of the community in a charitable manner . . . When the community benefit standard was adopted about 40 years ago, it was shortly after Medicare and Medicaid were enacted and the perhaps naive expectation was, nobody is going to be uninsured anymore.  As you know from reading the newspapers, that is not the case, unfortunately, even today after the passage of healthcare reform.  So there is still great concern on the part of the public, community action groups, the IRS, name your interest group, to see that people who can’t afford healthcare do receive it, and that they are not harassed or pressed for payment when they can’t afford it.


Monte Dube, Esq., Proskauer

Just as you as an individual have to file your individual income tax return every year, your hospital organization needs to file an annual tax filing.  It’s called a Form 990 . . . The Form 990 has gotten much more detailed over the last few years but, again, gives hospitals the opportunity to tell the IRS and the public, which is entitled to access that tax filing, exactly how you are providing the kinds of benefits, services, programs and educational opportunities to your community.


It is a lengthy, comprehensive form in which you have to disclose both your financial and organizational operations.  You need to disclose as well the types of community benefits that you afford to the public.  As a hospital, in a separate schedule H to the Form 990, you need to disclose your charity care policies, whether in fact you have conflicts of interest on your board and, if so, whether you handle and manage them in an appropriate way.


Robin Nagele, J.D., Post & Schell

The new Form 990 requires very specific and in-depth reporting on a whole host of issues from governance to executive compensation to insider relationships and community benefit, and asks for all kinds of data from which the IRS will presumably review hospitals and other tax-exempt entities and make determinations as to whether they are meeting their obligations under the tax laws.


One of the questions that the IRS asks is, “How was this document reviewed and approved by the board members?”  And this is really the IRS’s way of bringing the accountability back home, directly into the boardroom.


Monte Dube, Esq., Proskauer

Boards need to review and approve the Form 990.  Just as the tax filing is a useful story to tell the public once it is released, it can be a very useful discussion topic within the board’s deliberations.  I find board review of Form 990s to be a wonderful opportunity for management to explain and for boards to learn more about the operations, organization, policies and community benefits afforded by the organization.  It is a great chance for dialogue, rather than being an obligation that management decides to cross off the list.  I would suggest having one special section of every board meeting every year devoted to the Form 990 to enable and allow for give and take between management and the board because it’s a great learning process.



Excerpt of Prepared Remarks of Lois Lerner, Director, Exempt Organizations (IRS)

“The analysis found a statistically significant correlation between questions related to some governance practices and tax compliance. What are they? Drum roll please!

  • Organizations with a written mission statement are more likely to be compliant.
  • Organizations that always use comparability data when making compensation decisions are more likely to be compliant.
  • Organizations with procedures in place for the proper use of charitable assets are more likely to be compliant.
  • Organizations where the 990 was reviewed by the entire board of directors are more likely to be compliant. This is an important point and one I’d like to highlight. It indicates that having your entire board engaged in what is being reported on the 990 is not only helpful, but it correlates to better compliance.


“On the flip side, among the organizations we examined, we saw that those that said control was concentrated in one individual, or in a small, select group of individuals,

were less likely to be tax compliant.”  (Prepared Remarks by IRS Exempt Organizations Director Lois Lerner, at Georgetown University Law School, April 19, 2012)


For a complete list of iProtean courses, click here.


iProtean Symposium & Workshop

Mark the Date!! October 10 – 12, 2012 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Barry Bader, Dan Grauman, Marian Jennings and Brian Wong, M.D. For more information, click here.


For more information about iProtean, click here.