The Florida healthcare company that's been targeted by the Internal Revenue Service for revocation of its tax exemption unsuccessfully tried to get the records of the case sealed to the public.
Meanwhile, healthcare tax experts expressed surprise that the first victim of the IRS' celebrated audit program of tax-exempt organizations isn't a functioning hospital but rather a former hospital operator that alleg- edly misspent the money from the hospital's sale.
The revocation target is Miami-based LAC Facilities, which operated North Miami (Fla.) General Hospital for 23 years before it sold the facility to a for-profit hospital chain. The company, then called Modern Health Care Services, used the $57 million from the sale to develop a network of outpatient clinics.
After a short pilot phase, the IRS began its systematic audit program in October 1991. To date, 79 organizations have been selected for audits, including 34 hospitals or hospital systems, according to IRS officials.
About one dozen audits have been completed, including eight reviews of not-for-profit hospitals.
Since the audit program began, IRS officials have boasted about possible revocations of a number of hospitals' tax-exempt status.
For example, in September 1992, Fred Kluss, IRS industry specialist for exempt healthcare organizations, said the agency was working on revoking the tax exemptions of as many as five hospitals or hospital systems.
The agency let the threat float for almost two years until August, when Marcus Owens, director of the IRS exempt organizations technical division, said one "healthcare provider" would lose its exemption because of the audit program.
MODERN HEALTHCARE obtained the records of the case last month and disclosed the identity of the provider and the details of the agency's case against the company (Oct. 31, p. 2).
Several healthcare tax observers noted that the first victim of the audit program wasn't an operating hospital, and they suggested that going after a functioning hospital and perhaps shutting it down wouldn't be acceptable politically to other healthcare policymakers in Washington.
IRS officials have declined to comment on the case.
Lawyers for the American Hospital Association said they weren't surprised by the revocation effort, given the facts of the case. They said they didn't foresee a rash of revocations in the future, in large part because the case will send a strong warning to providers.
Others, though, say hospitals shouldn't take comfort in the fact that the first revocation proceedings passed them by.
"This case shows that the IRS is willing to use its authority to revoke the tax exemption of a healthcare provider," said Michael Peregrine, a healthcare tax attorney with Gardner, Carton & Douglas in Chicago. "It would be a mistake to presume that the IRS would not use that authority against an operating hospital."
Meanwhile, LAC Facilities attempted to seal the records of the case, including the so-called "technical advice memorandum" that details the IRS' allegations against the firm.
After the IRS notified the company that its tax-exempt status was being revoked, the company sued the IRS on Sept. 14 in the U.S. Court of Federal Claims in Washington. At that time it asked the court to seal the records.
However, on Oct. 19, Judge Kenneth Harkins denied the company's motion without comment.
A trial date in the case hasn't been set.