The Internal Revenue Service has fined Cape Coral (Fla.) Hospital $10 million for allegedly misspending an unspecified amount of tax-exempt bond proceeds.
The fine is the largest levied by the IRS against a not-for-profit hospital in recent memory, said several municipal bond experts. IRS officials were unavailable for comment.
In a report to Cape Coral, the IRS said its investigation determined that there was enough evidence to support a revocation of the hospital's federal tax exemption. But IRS officials said they would reject that harsh penalty if Cape Coral agreed to pay a fine and buy back more than $100 million worth of bonds originally sold as tax-exempt issues.
Health Management Associates, a Naples, Fla.-based for-profit chain that has agreed to acquire the not-for-profit hospital, said it will pay the fine. HMA said it expects to complete the purchase of Cape Coral later this year. Terms of the deal haven't been disclosed.
HMA officials said they are negotiating with the IRS on the fine, and government officials have said they may reduce it to $9 million if certain conditions are met. The IRS is requiring the hospital to buy back nearly $88 million in bonds sold in 1989 and 1991 and to defease another $41 million in bonds issued in 1987.
The IRS will require Cape Coral to tender an offer to bondholders by Nov. 1.
"Bondholders basically have two choices," said an analyst who asked not to be identified. "They take the tender offer by the hospital, or they hold the bonds and see what happens with the IRS."
If the bonds aren't sold, the IRS could declare the bonds taxable, which would require bondholders to pay back taxes. Under that scenario, bondholders could sue the hospital for violating bond agreements and to recoup lost money.
The eight-month probe was sparked when Cape Coral fired its top three executives last year and sued them for allegedly embezzling more than $1.2 million from 1987 to 1992 (June 20, 1994, p. 2).
The IRS said the three former Cape Coral administrators spent tax-exempt bond money for personal uses. For example, Jay Murphy, former chief financial officer, used some bond money to pay off the mortgage on his house, the IRS report said.
Murphy pleaded guilty to theft earlier this year and agreed to testify against the other two executives, J. Michael Ward, former chief executive officer, and Daniel Edgar, former chief operating officer, who have sued the hospital for breach of contract and back pay.