Friday, May 4, 2012
In a "deja vu all over again" case, the Pennsylvania Supreme Court just decided Mesivtah Eitz Chaim of Bobov, Inc v. Pike County Board of Assessment Appeals, that may open (or more appropriately, reopen) challenges by local taxing authorities to property tax exemptions for Pennsylvania charities.
There is a long history here that will provide some context. Back in 1985, the Pennsylvania Supreme Court's Hospital Untilization Project case (507 Pa. 1, 487 A.2d 1306) opened the door to a massive number of challenges to property tax exemption for nonprofit hospitals by holding that an exempt organization must meet a five-factor test, one of which was that the organization "must donate or render gratuitously a substantial portion of its services." Some commentators indicated that as a result of the HUP case, by 1996, local taxing authorities had challenged exemption for 175 of Pennsylvania's then-existing 220 nonprofit hospitals. See Alice A. Noble, Andrew L. Hymans and Nancy M. Kane, Charitable Hospital Accountability: A Review and Analysis of Legal and Policy Initiatives, 26 J. L. Med. & Ethics 116, 121 (1998) (this article is an excellent overall discussion of the HUP case and its impact on nonprofit hospitals in Pennsylvania).
As a result, the Pennsylvania legislature stepped in in 1997 and passed the Institutions of Purely Public Charity Act to "clarify" Pennsylvania state law with respect to tax exemptions, particularly in the case of nonprofit hospitals. Act 55, as it is officially known, essentially overturned the interpretation that substantial charity care was necessary for hospitals to be an "institution of purely public charity" eligible for property tax exemption.
And there things stood until the Pike County case noted above. In this case, the Pennsylvania Supreme Court said that Act 55 could not alter the underlying constitutional principles of tax exemption as set forth in the 1985 HUP case. Organizations claiming exemption must meet the baseline constitutional standards of HUP, regardless what Act 55 might say (this is not much different that the law in Illinois, where the Illinois Supreme Court has similarly held that the legislature cannot override constitutional doctrine regarding property tax exemptions).
Now the question will be whether this decision reopens the door to tax exemption challenges to nonprofit hospitals (and universities? I note that unlike many state constitutions, Pennsylvania's does not automatically grant exemption to "educational" institutions). I suspect there are a lot of very nervous hospital CEO's and university presidents in Pennsylvania these days . . .
Wednesday, May 2, 2012
I guess this is my week to comment on Catholic bishops and the rules regarding tax exemption (that I feel compelled to do so might make one wonder if the bishops are spending their time wisely, but that's a different issue that has nothing to do with tax exemption).
There's a controversy in Seattle among Catholics, but unlike Bishop Jenky in Peoria (see prior post here), this one doesn't involve a violation of the restrictions on political activity by exempt charities. In fact, contrasting what is going on in Seattle to Bishop Jenky's homily a couple of weeks ago is good instruction on the differences between issue advocacy by charities, which is given fairly wide latitude in 501(c)(3), and political campaign intervention, which is not given any latitude at all (in theory; IRS practice often results in a closing agreement with a first-time offender, rather than pulling exemption).
So here goes. In April, Archbishop Sartain of Seattle wrote a letter authorizing the local parishes (I might say "requesting the local parishes," but you can read the letter for yourself and see what you think) to gather signatures to place a referendum on the ballot in Washington called R-74, which would repeal the prior action by the state legislature and governor approving gay marriage.
So does this kind of activity violate any rules regarding tax-exempt charities under 501(c)(3)? Almost certainly not. Unlike Bishop Jenky, whose homily fairly clearly called for Catholics to vote against President Obama in the upcoming election, Bishop Sartain does no such thing. His letter isn't about voting for or against or supporting (or not) "any candidate for public office." It is solely about the issue of gay marriage and R-74.
Now, 501(c)(3) does say that "no substantial part" of the activities of an exempt charity can be "attempting to influence legislation." But note the difference: political campaign activity is absolutely prohibited by 501(c)(3); lobbying ("attempting to influence legislation") clearly is permitted, as long as the lobbying activity is not "a substantial part" of the activities of the exempt organization.
I've written before about the interpretation of the no-substantial-part rule in the context of the Mormon and Catholic church's efforts regarding Proposition 8 in California (see post here) and noted there why this kind of activity almost certainly is NOT "a substantial part" of the activities of the Church. I won't repeat that analysis here. Bottom line: Archbishop Sartain managed to stop before crossing the line; Bishop Jenky did not. Maybe Sartain has better lawyers . . .
Tuesday, May 1, 2012
In Denver and Louisville, potential mergers in which a Catholic hospital system would take over a formerly secular hospital have raised issues regarding how takeovers by Catholic health care systems alter services available to women, including abortion, contraception and tubal ligations. Catholic doctrine may also impact patient directives regarding end-of-life care. I have no quarrel with Catholic hospitals operating according to Catholic doctrine. I DO have a quarrel with the Catholic Bishops who on the one hand rail against the war on Catholicism being conducted by the U.S. government (see my earlier post about Bishop Jenky of Peoria) and on the other hand seem perfectly content to accept millions of dollars in government subsidies through property and income tax exemption.
So here's a thought. Since 1969, nonprofit hospitals have claimed exemption under what is now generally referred to as the "community benefit test." In Rev. Rul. 69-545, the IRS held that providing health care services for the general benefit of the community was charitable even if the hospital in question did not provide free care for the poor as long as the hospital provided such care in an emergency setting, had a community board, provided services to all patients who could pay (including via government programs such as Medicare and Medicaid) and did not unduly restrict its medical staff. Most states in administering their property tax exemption laws follow a similar doctrine (a very few, notably Illinois, have held that charity care is an essential element of tax exemption). The result is that even large nonprofit hospital chains, like Ascension Health - a Catholic system that in fiscal 2011 reported "an excess of revenues and gains over expenses and losses of $1.5 billion" (yes, that is "billion," with a "B") - get federal income tax exemption and state property tax exemptions, because they legitimately can claim to be providing health services for the general benefit of the community. At current corporate tax rates, if Ascension really did have profits of $1.5 billion, then its income tax exemption is worth roughly $500 million, give or take.
But when a Catholic hospital takes over a hospital and discontinues services because of Catholic doctrine, I would argue that the result is a net decrease in "community benefit." Services previously available are no longer available; rather than benefitting the community, one might argue that these transactions have harmed it (perhaps not if the target would have gone out of business without the Catholic white knight - more on this below). So I suggest a rule: in the context of an acquisition of a hospital, any discontinuance of services by the target for reasons other than financial necessity or sound medical practice within five years of the acquisition will be a per se violation of the community benefit doctrine, resulting in a withdrawal of tax exemption, unless the target would be exempt under other tests of charity (e.g., a teaching hospital would remain exempt as an educational organization; a hospital or clinic that served primarily the poor would still be exempt as a poor-relief charity).
Now I know there are a slew of problems with my proposal. First, it may be unconstitutional. My own view is that such a rule would not violate the Free Exercise Clause under existing caselaw, but I recognize that there is no Supreme Court precedent "right on point" and what case law there is that is relevant is getting long in the tooth. Maybe if the Supreme Court takes a case involving political campaign activity by a church, we'd get better clarity on this point.
Second, what about the case in which a target literally would go out of business but for a Catholic "white knight"? Would I really prefer no services at all to an elimination of certain services in order to preserve a majority of other services? No, I wouldn't. So perhaps I need an exception for cases that truly present no other option. And then I'd have to define the circumstances in which "no other option" exists.
Third, there are a host of definitional problems with phrases like "financial necessity" and "sound medical practices."
And finally, the real problem here is that most nonprofit hospitals aren't charities, and hence the real solution is to withdraw exemption from nonprofit hospitals completely (again, with the exception that hospitals could meet other tests of exemption - see my post from yesterday).
I get all this. It is likely that my idea may be completely impractical, though I'm going to spend some time thinking about it and maybe even writing a full-fledged article on it. But I am rapidly getting tired of the hypocrisy of the Catholic hierarchy, despite the fact that I am Catholic myself. If you don't want "government intervention," then don't take government handouts, either. If you're going to talk the talk, walk the walk.
Monday, April 30, 2012
In 2006, the Illinois Department of Revenue revoked property tax exemption from Provena-Covenant Hospital in Urbana, IL, a case that began in 2004 with a recommendation from the local county Board of Review that started with the attention garnered by articles (including one in the New York Times) about Provena's debt collection practices - using "body attachments" to have debtors thrown in jail. Now comes word from a report by Minnesota's Attorney General that Fairview Health Services in that state employed Accretive Health, a health-care oriented debt collection firm, and "embedded" debt collectors in Fairview's emergency rooms to pressure patients to pay for medical services ahead of time and collect past bills. An even better article is this article in Modern Healthcare but you'll need a subscription to view it. (I note that Fairview has since terminated its relationship with Accretive - nothing like getting caught red-handed to help ameliorate bad behavior; Provena also had a miraculous conversion to a "kinder and gentler" approach after losing its tax exemption).
Aside from the fact that it seems to me the Accretive tactics ought to violate I.R.C. Section 501(r)(6) (forbidding "extraordinary collection actions" by tax-exempt hospitals), the whole incident once again brings me back to the notion that it is time simply to end tax exemption for nonprofit hospitals who do not meet other tests of charitable status (e.g., teaching hospitals would continued to be exempt as educational institutions; hospitals or clinics whose primary patient base were the poor would be exempt as a classic poor-relief charity). Early in my career I took this view, then moderated somewhat based upon the work by Jill Horwitz at Michigan showing that nonprofit hospitals often provided services that for-profit hospitals did not. But over the past few years, I've come back to what I view as a central truth about nonprofit hospitals: they aren't charities in any sense of the word. They are huge businesses and they act like it. Did anyone in Fairview's management wake up one morning and say something like "My God, we can't do this; we're a CHARITY for cryin' out loud." Of course not; they quit the practice when they got caught (maybe they did not know what was going on, in which case they are guilty of simple incompetence rather than malevolence).
One of Accretive's biggest clients is Ascension Health, a Catholic health care network that is among the (if not THE) largest nonprofit health care provider in the United States (see story here about Ascension and Accretive). Is Ascension a charity or simply a big business? I know what I think: Ascension is as much a "charity" as Rush Limbaugh is a communist. Time for us as a society to recognize that many (most?) nonprofit hospitals are not charities in any practical sense of that word, and act accordingly. At the very least, we can then avoid being disappointed when they act like Repo Man.
Sunday, April 29, 2012
Earlier this month, Montana Attorney General announced that his office had reached a settled with the section 501(c)(3) Central Asia Institute and its founder, author Greg Mortenson, after allegations arose regarding the accuracy of reports regarding the Institute's work (see, e.g., the 60 Minutes segment reported on by the NY Times/AP). According the AG's announcement, he concluded "that CAI’s board of directors failed to fulfill some of their responsibilities as board members of a nonprofit charity. Further, Mortenson failed to fulfill some of his responsibilities as executive director and as an officer and director of the organization." In the settlement agreement, Mortenson, who co-authored "Three Cups of Tea" and "Stones into Schools" about the Institute's accomplishments, agreed to repay over $1 million to the Institute and not sit on the Institute's board as long as he remains an Institute employee. A new board of at least seven members will be appointed during a 12-month transition period.
In related news, the Christian Science Monitor reports that Mortenson and the Institute also face a civil lawsuit from four individuals claiming that they were mislead by allegedly false accounts in his books. The readers claim they bought the books and donated to the Institute based on the stories of the Institute's work related in the books.
In a final determination letter released earlier this month (201214035), the IRS ruled that a nonprofit organization did not qualify as a section 501(c)(4) social welfare organization because 80% of the organization's time would be spent supporting the political interests of a candidate in a foreign country. The letter is noteworthy because while it has long been thought that "intervention in political campaigns on behalf of or in opposition to any candidate for public office" (Reg. § 1.501(c)(4)-1(a)(ii)) extended to candidates for foreign public offices, to the best of my knowledge this is the first IRS ruling that expressly takes this position. Since the definition of political campaign intervention is generally the same under both section 501(c)(3) and section 501(c)(4), this (nonprecedential) letter indicates that the 501(c)(3) prohibition on such intervention also extends to candidates for foreign public offices.
AP reports that the U.S. Treasury Department has eased restrictions on financial transactions in support of groups working in areas such as democracy-building, health and education, sport and religious activities. This step is part of a larger lifting of sanctions by Western nations in light of recent elections that say sweeping opposition party victories in that country. A Reuters report quoted a senior Treasury Department official as stating "[w]e are taking this step today to support a broader range of not-for-profit activity in Burma by private U.S. organizations and individuals to promote increased cooperation between the Burmese and the American people." The actual language of the eased restrictions can be found in Office of Foriegn Assets Control General LIcense No. 14-C relating to Burma.
LHM & KWS
Hermes: Guide to the IRS Decision-Making Process Under § 501(c)(3) for Journalism and Publishing NPOs
Jeffrey P. Hermes (Harvard's Berkman Center for Internet & Society) has posted a Guide to the Internal Revenue Service Decision-Making Process Under Section 501(c)(3) for Journalism and Publishing and Non-Profit Organizations on SSRN. Here is the abstract:
Confusion about the IRS’s processes and standards has led to criticism of the IRS as being arbitrary in its decision-making process and adverse to the journalism industry. But while there have been controversial decisions by the IRS in particular cases, it is critical to understand that the IRS’s primary duty with respect to these applications is to protect the public fisc by ensuring that only organizations that meet criteria enacted by the United States Congress are granted a Section 501(c)(3) exemption. Although the IRS has some discretion in applying these criteria, it does not have the authority to recognize broad new categories of tax-exempt organizations, such as news outlets.
Until and unless there is action in Congress to facilitate tax exemptions for journalism non-profits, news organizations seeking 501(c)(3) status must learn how to structure their operations to meet the existing standards applied by the IRS. To that end, this guide is intended to provide practical information regarding the standards that the IRS applies in determining whether to grant federal tax-exempt status to a non-profit organization under Section 501(c)(3).
- Femida Handy, Jeffrey L. Brudney, and Lucas C.P.M. Meijs, From the Editors’ Desk
John Wilson, Volunteerism Research: A Review Essay
Leif Atle Beisland and Roy Mersland, An Analysis of the Drivers of Microfinance Rating Assessments
Thomas de Hoop, Luuk van Kempen, and Ricardo Fort, Do Cash Transfers Crowd Out Community Investment in Public Goods? Lessons from a Field Experiment on Health Education
Marie-Josée Fleury et al., Determinants of Referral to the Public Health care and Social Sector by Nonprofit Organizations: Clinical Profile and Interorganizational Characteristics
Kathrin Komp, Theo van Tilburg, and Marjolein Broese van Groenou, Age, Retirement, and Health as Factors in Volunteering in Later Life
Thad D. Calabrese, The Accumulation of Nonprofit Profits: A Dynamic Analysis
Tereza Pospíšilová, Nonprofit Management Education in the Czech Republic: The Struggle for Civil Society Versus the Struggle for Survival
Michele Hickey, Book Review: Transformational Philanthropy: Entrepreneurs and Nonprofits
Suzie S. Weng, Book Review: Social Services and the Ethnic Community: History and Analysis and The New Chinese America: Class, Economy, and Social Hierarchy
Lloyd Hitoshi Mayer, Book Review: Politics, Taxes, and the Pulpit: Provocative First Amendment Conflicts