The Internal Revenue Service has issued final regulations that clarify the relationship between the requirements for tax-exempt status and the sanctions the government imposes when tax-exempt organizations engage in what are called excess-benefit transactions.
Under Section 4958 added to the Internal Revenue Code in 1996, the IRS can levy penalty taxes on insiders, such as board members or executives, who approve transactions that convey greater value than the organization gets in return. The taxes provide a way for the government to police the activity short of revoking tax-exempt status, and without harming the organization.
But, said lawyer Michael Peregrine, There are circumstances under which, if you do this so much, or it is so bad, you could lose your tax exemption. The IRS solicited comments in September 2005 on proposed rules that sought to clarify those circumstances, and to further illustrate them the final rule offers new examples, which are generic and dont explicitly deal with hospitals. Hospital transactions that might be questioned by the IRS include executive compensation, joint ventures, leases and property sales.
Peregrine, a partner at McDermott Will & Emery who specializes in not-for-profit issues, said that the IRS signals in the final rule that it will look favorably upon organizations that make efforts to adopt and follow safeguards, even if theyve failed. Theyre really putting a premium on the boards attentiveness to this. -- by Gregg Blesch
What do you think? Post a comment on this article and share your opinion with other readers. Submit your letter to Modern Healthcare Online at [email protected]. Please be sure to include your hometown and state, along with your organization and title.