A rural Kansas not-for-profit hospital management company is changing the way it operates in hopes of regaining its tax-exempt status from the Internal Revenue Service.
In the meantime, the company is paying federal income taxes while the appeal of its exemption revocation is pending before the U.S. Tax Court and negotiations continue for the reinstatement of its exemption, which it lost more than two years ago.
In March 1998, the IRS revoked the tax-exempt status of Phillipsburg, Kan.-based Great Plains Health Alliance, which manages or leases 26 rural hospitals in Nebraska and Kansas. The IRS said the alliance was purely a management services company and didn't do anything, such as own the hospitals or provide healthcare services, to deserve its exemption.
The alliance had argued that it qualified for an exemption because its hospitals were tax-exempt and it assisted those hospitals in furthering their charitable mission.
The revocation, which MODERN HEALTHCARE disclosed, marked the first action against a hospital or hospital system in decades (June 8, 1998, p. 2).
"We're in the process of working out a reorganization plan that we hope the IRS will approve," said Great Plains President and Chief Executive Officer Roger John.
John declined to disclose changes in the alliance's operations that it hopes will pass muster with the IRS.
But former IRS official Marcus Owens, now a tax attorney with the Washington law firm of Caplin & Drysdale, said Great Plains must prove it either owns the hospitals or provides management services in a way that justifies a federal tax exemption.
Owens said one way to do that is to provide services to the hospitals at substantially below cost or demonstrate that, without its management support, the hospitals wouldn't survive, depriving residents of needed healthcare services in geographically isolated markets.
While it's negotiating with the IRS on its revamped operations, Great Plains is continuing with its appeal of its revocation in tax court. Both sides have filed briefs in the appeal, but no trial date has been set.
Until the appeal is resolved or a settlement negotiated, Great Plains has been paying taxes on any profits it makes like any for-profit corporation.
Great Plains, which was founded by the American Lutheran Church in 1950 and granted tax-exempt status six years later, reported a $371,060 profit on revenue of $1.4 million in 1998, according to its latest annual filing, known as Form 990, with the IRS.