Methodist Hospital, Lubbock, Texas, said last week it will pay the Internal Revenue Service an undisclosed amount to settle a dispute threatening its tax-exempt status.
The settlement appears to be the last legal hurdle to Lubbock Meth-odist Hospital System's planned merger with 410-bed St. Mary of the Plains Hospital, also in Lubbock. The flagship of Lubbock Methodist is 699-bed Methodist.
Earlier, St. Mary agreed to loosen its ties to primary-care doctors in exchange for antitrust clearance of the merger from the Federal Trade Commission (July 7, p. 10). The agency investigated the transaction for nearly a year before cutting a private deal with the hospitals.
Methodist's squabble with the IRS centered on its lease of a medical office building to cardiac physicians and its purchase of a helicopter ambulance service.
"We bought an old building from (the physicians) and leased it back to them while their new heart center was finished," said Jim Garrett, senior vice president at Methodist. "The issue was the price of the lease."
Methodist actually built and paid for the cardiologists' new heart center, a 142,371-square-foot facility, but the IRS didn't question that transaction, Garrett said.
The physicians' lease on the previous facility expired in July 1994. The hospital now uses that building for an outpatient rehabilitation center and office space for support services.
The IRS also investigated Meth-odist's purchase of Aerocare, a Lubbock helicopter ambulance service, from Goldstar of Lubbock. Again, price was the issue. "They said we didn't pay enough for it," Garrett said.
According to federal tax codes, the earnings of a tax-exempt organization can't be used to enrich physicians or other private individuals.
The IRS uncovered the alleged violations at Methodist as part of its ongoing, routine audits of tax-exempt organizations.
Terms of the settlement, which is called a closing agreement, are confidential.
Methodist and St. Mary, Lubbock's two largest hospitals, now hope to complete their merger by year-end.