Not-for-profit hospitals are not required to operate an emergency room to qualify as tax-exempt, provided the hospitals can demonstrate they benefit their community in other ways, according to the Internal Revenue Service's latest educational manual for IRS auditors.
Treating Medicare and Medicaid patients and using surplus revenue to improve facilities, for example, could represent sufficient community benefit to justify a tax exemption, according to the manual, which was released publicly last week.
The manual is issued annually to IRS auditors to help them review the tax implications of complex business arrangements entered into by tax-exempt organizations. This year's manual includes a 20-page section on tax issues facing not-for-profit healthcare organizations. The manual doesn't carry the legal weight of a statute or regulation but does offer legal guidance to healthcare organizations that want to know how the IRS will analyze their business operations.
Healthcare tax lawyers said the document does not represent a change in as much as a clarification of rules. "The IRS is trying to add clarity to a critical topic about which there was some confusion following the release of field service advice earlier this year," said Michael Peregrine, a healthcare tax lawyer with Gardner, Carton & Douglas in Chicago.
Peregrine referred to guidance the IRS issued in March that said merely having hospital policies on indigent care does not satisfy the charity-care component of the IRS' community benefit standard.
The standard was established in 1969 in a landmark IRS ruling that said tax-exempt healthcare organizations must demonstrate that they provide community benefits by maintaining an open medical staff, accepting Medicare and Medicaid patients and treating anyone who enters their emergency department regardless of ability to pay, for example.
In its manual, the IRS was making clear that hospitals can qualify for a tax exemption without meeting every component of the benefit standard, Peregrine said.
A hospital "must establish the presence of significant factors demonstrating that it promotes the health of a class of persons that is broad enough so that the community as a whole benefits," the manual said. "As long as a healthcare provider can establish the presence of these significant factors, it is not required that (the provider) establish the presence of all the factors."
A remaining issue "is exactly what level of charity care a provider needs to provide and under what circumstances," said Thomas Hyatt, a healthcare lawyer with Ober, Kaler, Grimes & Shriver in Washington.