Long-awaited tax guidance that could dictate the fate of billions of dollars in bonds used to meld large hospital system mergers could be released as soon as this week, an Internal Revenue Service official said.
"The regulations are basically done," Mark Scott, director of the IRS tax-exempt bond division, said during a speech to bond market participants in Chicago late last week.
In an interview, Scott said the guidance has been "signed at various levels" within the IRS and the U.S. Department of the Treasury. But as for an exact release date, he couldn't be pinned down. "It's out of my hands," he said.
Scott said the issue has diverted his staff from other pressing cases. He added, "It's been a long hard process, and I think it's worn people out."
Healthcare financial officers and lawyers aren't holding their breath. The so-called "acquisition financing" guidance was widely expected to be released in early January, and then again last month. Both times, those eager for answers were disappointed.
It's been nearly three years since the IRS began its first of seven ongoing examinations of bond issues used to merge hospitals and more than five years since the first deal under exam was consummated, in December 1996. The IRS is investigating whether acquisition financing, which combines the debt of two merging systems under a single organization, should be regarded as a "new money" issue, or as a refunding. If the bonds cannot be classified as new money, they could lose their tax-exempt status if they had been previously refinanced.
If bonds are declared taxable, issuers could be forced to cough up money to compensate the government for lost tax revenue.
The cases involve some of the nation's largest hospital systems, and the industry has been lobbying for a favorable outcome. Last March, the American Hospital Association and the Coalition for Nonprofit Health Care asked the Treasury Department for guidance on how not-for-profit hospitals should handle merger financing. The two provider organizations said pending examinations have created an "atmosphere of uncertainty" in the bond market that has limited hospitals' access to capital and increased financing costs. In November 2001, the groups followed up with a second letter, suggesting that the IRS' failure to close the audits hampered the industry's ability to invest in new technology and facilities. They said the systems with bonds under audit are composed of 150 hospitals in 17 states and the District of Columbia.
Scott denied there's been any foot-dragging on the government's part. "It's a difficult process (to formulate guidance) when you have open examinations. There's too much to juggle at one time," he said.
One government official last week pointed to "sensitivity" around the open cases, adding, "We're trying to review all of the issues carefully."
But Scott said he agrees with providers who say two or three years is too long to conclude an exam. He said his 2-year-old department, which has 43 agents, is trying to expedite its work.
"The system isn't working," Scott said. "I'm going to sit down and try to figure out where mistakes were made, even if that means pointing fingers at me."