Merging hospital systems will have to seek new ways to consolidate their tax-exempt debt, at least in the near term.
An initial ruling from the Internal Revenue Service on acquisition financing probably won't be issued publicly until next fall, said Mark Scott, director of the IRS' tax-exempt bond unit. But with seven diverse financing deals under review, he said it could be years before all of the legal issues are resolved.
In an interview with MODERN HEALTHCARE, Scott acknowledged the frustration of hospitals, bankers and investors with the slowness of the process. The IRS launched its first look at acquisition financing in early 1999. With the debt consolidation alternative now in confusion, some merging hospital systems are considering more costly alternatives, such as tender offers (See related story, p. 50).
Speaking at an investor conference sponsored by J.P. Morgan in Chicago late last week, Scott identified four outstanding issues that he said he will refer to the IRS chief counsel's office for review. They involve as many as three areas of tax law: tax-exempt bonds, corporations and tax-exempt organizations, he said.
All of the deals under the microscope involve merging hospitals that consolidated their debt under rules known as acquisition financing. The IRS is looking at whether the deals constitute impermissible second-advance refundings, which could render interest on the bonds taxable.
Scott said one case will be referred to the IRS's chief counsel's office within two weeks, with the remainder being referred within four months, if IRS field staff and issuers can agree on the facts.
He said he expects the chief counsel's office to take four to six months to render an opinion, with another 90 days before it's disclosed publicly.
One of the systems, Columbia, Md.-based MedStar Health, announced in August that IRS field staff would refer its case to the chief counsel's office (Aug. 14, p. 6). Although declining to comment on MedStar specifically, Scott said "factual disputes" among field staff and issuers sometimes delay such referrals by several months.