An appellate panel concluded that the Internal Revenue Service and U.S. Tax Court committed numerous errors in a 7-year-old tax case with implications for hospitals. The case involved Sta-Home Health Agency, a Jackson, Miss.-based company that converted to for-profit from not-for-profit status in 1995. The IRS contended that the owners of the company received a so-called "excess benefit transaction" of $18.5 million in the conversion, and the agency sought $256 million in excise taxes and penalties. U.S. Tax Court reduced the amount owed to $68 million on appeal but upheld the IRS finding that the conversion involved an excess benefit transaction. In a 42-page opinion, the three-judge panel from the 5th U.S. Circuit Court of Appeals, New Orleans, ruled in favor of the Sta-Home's owners and said the government used an incorrect method to assess the value of the firm's assets. The owners' valuation more closely reflected fair-market value, the panel said.
The decision is the first by an appellate court involving a healthcare company and an IRS rule known as Section 4958, which prohibits self-dealing between insiders at tax-exempt organizations. The panel's decision attacks the government's method of asset valuation and litigation analysis but doesn't strike down Section 4958, said Thomas Hyatt, a healthcare tax attorney in the Washington office of Ober Kaler. Read the decision. -- by Mark Taylor