In a 35-page response to briefs filed by Austin, Texas-based St. David's Healthcare System in a widely watched tax case, the U.S. Justice Department on April 1 defended the Internal Revenue Service's original decision to revoke the system's tax-exempt status, and said the control mechanisms St. David's claimed to exert over a partnership provide "at most, illusory power."
In 2000, the IRS revoked St. David's tax-exempt status and ordered the not-for-profit system to pay $1.2 million in taxes and interest, alleging St. David's no longer operated exclusively for charitable purposes after it merged its three hospitals with three hospitals owned by for-profit HCA, Nashville, to form a six-hospital partnership. The IRS also said St. David's surrendered control of the daily operations. The system appealed in 2001, and last June the Austin federal judge restored St. David's tax-exempt status and ordered the IRS to return the taxes the system had paid and to pay the system's legal fees. Last year the IRS appealed the ruling to the 5th U.S. Circuit Court of Appeals in New Orleans.
"I think the government did a solid job of refuting the arguments from St. David's," said Gerald Griffith, a healthcare tax lawyer with the Detroit law firm Honigman Miller Schwartz and Cohn. "It's probably enough to get a remand for a full trial, absent some unresolved factual dispute at any oral argument. If the appellate court agrees with the IRS on the law, a remand seems inevitable."
No dates have been set for oral arguments. -- by Mark Taylor