Tax-exempt status key issue for P&P Board

Healthcare Financial Management, June, 2005

Challenges to tax-exempt status are a perennial issue for not-for-profit healthcare providers, but have taken on new urgency this past year as lawsuits and congressional hearings scrutinized the roles, obligations, and oversight of not-for profit entities. These challenges have raised confusion in the healthcare community and among the public about the purpose of, and conditions for, tax exemption for healthcare providers.

To provide some clarity on the topic, HFMA's Principles and Practices Board recently released an issue analysis on the charitable attributes that merit tax-exempt status and addressed how to effectively communicate those attributes to stakeholders. The monograph consolidates IRS positions on the role of community benefit in determining tax- exempt status, describes the wide array of charitable community benefits, and recommends practices on how to quantify and communicate those benefits.

IRS Guidance on Charitable Purposes

Hospitals may be exempted from taxes because they promote the health of residents in their communities. Such community benefit is deemed to be a charitable purpose. Tax exemption is often also considered as a subsidy for the costs the federal or local government would otherwise incur to provide important but costly health services. In 1969, IRS Revenue Ruling 69-545 affirmed that charity care is not the sole justification of tax exempt status for hospitals; the promotion of health care is in itself a charitable activity.

Attributes of Tax-Exempt Healthcare Providers

Tax-exempt healthcare organizations are formed to address the specific needs of their communities; therefore, the exempt organization's attributes that merit tax exemption are not standard across all institutions. In 1991, an HFMA Chairman's task force released a report identifying the major attributes of tax-exempt organizations. The P&P Board built on these attributes in light of the current environment. The attributes are:

* Mission to provide community benefit

* Use of financial surpluses

* Accountability

* Provision of charity care

* Reduction of government burden.

* Provision of essential healthcare services

* Provision of unprofitable services

* Public education

* Serving other unmet human needs, such as senior citizen education and outreach programs, care for "boarder" babies, or the operation of a meals-on-wheels program

* Goodwill

Communicating Community Benefit

Except for certain states, such as California where annual reporting is required, there are no appropriate standards for community benefit documentation and communication. The P&P Board recognizes Community Benefit Reporting: Guidelines and Standard Definitions for the Community Benefit Inventory for Social Accountability--developed by VHA Inc., the Catholic Health Association of the United States, and Lyon Software--as useful guidance for this process.

The issue of how to report community benefits and charity care is in flux as the current spate of tax-exemption challenges works its way through the legal system. One emerging practice is to mark charity care or community benefit footnotes as unaudited. This topic is currently under review by the American Institute of Certified Public Accountants. Another emerging practice is to disclose the information through 99[degrees] filings, particularly for Medicare and community benefits.

The P&P Board believes healthcare providers should identify, measure, and prominently disclose all the attributes of their organizations that warrant tax-exempt status. Many critics of tax exemption focus on only one attribute, ignoring the cumulative effect of activities that make tax exemption appropriate. Therefore, it is important that government officials, the media, community leaders, and the public understand all the reasons why an organization qualifies for tax exemption and the progress that is being made toward achieving its mission.

2005 P&P BOARD MEMBERS ARE:

Martin Arrick

Kelly A. Barnes, CPA

Terry W. Blackwood, FHFMA, CPA

Richard R. Corcoran, CPA

Christopher T. Hannon

Lawrence A. Laddaga, Esq., FHFMA

William J. Lammers, CPA

Peter K. Markell, CPA

Craig L. McKnight, CPA

Anthony R. Miranda

James S. Stewart

William R. Titera, CPA

For a copy of the P&P Board Issue Analysis 05-01: The Relationship of Community Benefit to Hospital Tax-Exempt Status, see HFMA's online store at www.hfma.org/ publications/store/ products/ppb.htm.