Hospital-owned health clubs that charge high dues and fees that limit public access may jeopardize their federal tax exemptions, according to the latest Internal Revenue Service training manual for agents and auditors.
The manual, IRS 2000 CPE Text on Exempt Organizations Technical Topics, included for the first time a section on health clubs owned by not-for-profit hospitals. That could portend greater IRS scrutiny of those clubs.
"Hospital officials will want to look at this article and review their operations to find ways to maintain tax-exempt status that won't result in reporting UBIT (unrelated business income tax)," said James McGovern, a healthcare tax lawyer with the Washington office of KPMG and a former IRS assistant commissioner for tax-exempt organizations.
Operators of private, for-profit health clubs have long complained that not-for-profit hospitals open competing clubs without paying federal or state income taxes or local property taxes, creating a competitive disadvantage for the for-profit clubs.
Hospitals argue that their health clubs, which they call health and fitness centers, relate to their charitable missions and often exceed typical health club services by including rehabilitation services.
Rep. Gerald Kleczka (D-Wis.) has introduced a bill that would treat the income of hospital health clubs as taxable unrelated business income.
Under heavy lobbying from the commercial health club industry, the Senate Committee on Appropriations, which funds the IRS, directed the IRS to establish standards to differentiate tax-exempt from commercial health club organizations.
As a result of that congressional directive, the 317-page manual, released late last week, included 20 pages on health clubs.
The IRS presented five possible scenarios in which a hospital's health and fitness center could earn or lose its tax-exempt status based on federal tax standards.
For example, a center would support the hospital's charitable mission if it waived or reduced fees for people who couldn't afford them or made the facility available to community organizations without charge.
According to the latest data from the American Hospital Association, 1,038 acute-care hospitals, or 24% of all acute-care facilities, have health and fitness centers.