IN THIS ISSUE FORM 990 DISCLOSURE - Home | Jones Day · 2009. 3. 10. · The IRS released a discussion draft of a revised Form 990 on June 24, 2007.3 In doing so, Kevin Brown, then

Volume 21, Number 3February 2009 continued on page 3

IN THIS ISSUEForm 990 Disclosure RequirementsChallenge Hospitals, ProvideOpportunities ..........................1

James R. King, Esq. Travis F. Jackson, Esq.Jones DayColumbus, OH

Gerald M. Griffith, Esq.Daniel J. Bacastow, Esq.Jones DayChicago, IL

For over twenty-five years, the InternalRevenue Service (“IRS”) Form 990 hasbeen primarily a numbers document, withvarious narrative disclosures tacked on overthe years as gap fillers. Now, with a runningtime start to finish that nearly matched the2008 Presidential campaign, the IRS largelysucceeded in developing a comprehensivenew Form 990 that includes a dizzying arrayof change to put disclosure first for exemptorganizations. Although the Form 990 stillincludes its fair share of pure financial data,it is more of a deliberate, substantive disclo-sure document arguably similar in level ofdetail to a bond prospectus, as is to beexpected for a significant sector of theeconomy with a significant tax subsidy. The Government Accountability Officerecently estimated that, as a whole, tax-exempt hospitals save $12.6 billion infederal, state and local taxes. 1

Many general counsel, executives andboard members at tax-exempt hospitals

also may think that the IRS shouldinclude a warning label on the redesignedForm 990 (which weighed in at nearly400 pages in the final draft form andinstructions). After all, considering thebreadth of its enhanced disclosure require-ments, completing the new Form 990 willcreate at least a few headaches, regardlessof the hospital’s size.

The Form 990 is the primary toolthat the IRS uses to oversee the activitiesof tax-exempt organizations and toenforce federal tax laws governing tax-exempt status. The redesigned Form 990now more effectively targets real (orperceived) abusive transactions amongofficers, key employees, board membersand hospitals. It also places a greaterburden on hospitals to justify the favor-able tax treatment that they receive. As apublicly available document, the Form990 makes any missteps by a hospitalreadily available to other federal regula-tory agencies, state attorneys general,media and others, who may not have thehospital’s best interests at heart.

Instead of reaching for a bottle ofaspirin, general counsel, executives andboard members should consider the newForm 990 as an opportunity for develop-ing highly focused, effective corporate

FORM 990 DISCLOSUREREQUIREMENTS CHALLENGEHOSPITALS, PROVIDEOPPORTUNITIES

The ABA Health Law SectionThe Health Lawyer

“This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database

or retrieval system without the express written consent of the American Bar Association.”

2

2009 promises to be an excitingtime to be a health lawyer. Likemany things in life, law is cyclical.Except for occasional statutory andregulatory changes, the area ofhealth law has been fairly static inthe last few years. However, itappears that 2009 is the time thathealth law issues may again be in the

forefront, and many of us in the industry are expectingsubstantial statutory changes, including efforts once again atmajor healthcare reform. These promise to be tumultuousbut exciting times for the industry. Change brings opportu-nity. I see lots of opportunity for lawyers in the area ofhealth law.

I was recently interviewed for an ABA publicationexploring “hot” areas of the law. This particular publicationwas geared towards law students. The interview caused meto focus on health law and to predict the opportunity forlaw students in this niche area of the law. It was this processwhich made me try to articulate how areas of the law arecyclical in nature and why I thought health law was onceagain going to become a very “hot” area of the law.

The bleak economic outlook has caused Americansto worry even more about securing and keeping appro-priate healthcare insurance and accessing healthcareservices. Congress and the Obama administration areassuring the American public that it is listening and willaddress their concerns by passing comprehensive health-care reform measures. All of this — the debates on theissues and the Congressional responses — will bringchanges and opportunity for healthcare lawyers.

One of the things I relish most about practicing in thisniche area is that a health lawyer’s practice usually encom-passes more than implementing certain statutes andregulations. The area of health law also includes under-standing a complex industry, grappling with anddetermining appropriate health policy, and formulatinggovernment strategy.

Updates on the upcoming debates and any legislativechanges, along with other emerging issues in the healthlaw area, will certainly be an integral part of the upcom-ing ABA Health Law Section Emerging IssuesConference (“EMI”) to be held on February 18 – 20, 2009at the lovely Disney Yacht Club Resort in Orlando,Florida. It is hard to believe that this will be the 10thanniversary of EMI.

Chair’s Corner

The Health Lawyer Volume 21, Number 3, February 2009

continued on page 41

The Health Lawyer (ISSN: 0736-3443) is published by the American Bar AssociationHealth Law Section, 321 N. Clark Street, Chicago, IL 60654-7598. Address correctionsshould be sent to the American Bar Association, c/o Member Records.

Manuscripts should be double-spaced on letter sized paper and submitted in a Worddocument to the editor. Requests for permission to reproduce any material from The HealthLawyer should be addressed in writing to the editor.

The opinions expressed are those of the authors and shall not be construed torepresent the policies or positions of the American Bar Association and the ABAHealth Law Section.

Copyright © 2009 American Bar Association.

2008-2009 Officers and Council of the ABA Health Law Section are as follows:

HEALTHLAWYERTH

E

ChairVickie Yates Brown

Frost Brown Todd LLCLouisville, KY 502/779-8189

[email protected]

Chair-ElectDavid W. Hilgers

Brown McCarroll, LLPAustin, TX

512/[email protected]

Vice ChairLinda A. Baumann

Arent Fox, LLC Washington, DC

202/857-6239 [email protected]

SecretaryDavid H. Johnson

Bannerman & Williams PA Albuquerque, NM


Finance OfficerDavid L. Douglass

Shook Hardy & BaconWashington, DC


Immediate Past ChairAndrew J. Demetriou

Fulbright & Jaworski, LLPLos Angeles, CA


Gregory L. PembertonIce Miller

Indianapolis, IN 317/236-2313

[email protected]

J. A. (Tony) Patterson, Jr.Fulbright & Jaworski, LLP

Houston, TX 214/855-8036

[email protected]

Young Lawyer DivisionChristi Braun

Ober Kaler Grimes & ShriverWashington, DC


Board of Governors LiaisonE. Paul Herrington III

Humana Inc.Louisville, KY502/580-3716

[email protected]

Publication ChairLisa L. Dahm

South Texas College of LawHouston, TX713/646-1873

[email protected]

The Health Lawyer EditorMarla Durben Hirsch

Potomac, Maryland 301/299-6155

[email protected]

Michael E. ClarkHamel Bowers & Clark, LLP

Houston, TX713/869-0557

[email protected]@hal-pc.org

Daniel A. CodyReed Smith LLP

San Francisco, CA 415/659-5909

[email protected]

Shelley K. HubnerSedgwick, Detert, Moran &

Arnold LLPSan Francisco, CAT: 415/627-1428

[email protected]

Alexandra Hien McCombsPinnacle Partners in Medicine

Dallas, TX 972/663-8552 amccombs@

pinnaclepartnersmed.com

Robert R. NelsonAvera Health

Sioux Falls, SD 605/322-4607

[email protected]

Kathleen Scully-HayesSocial Security Administration

Baltimore, [email protected]

Section Delegates to the House of Delegates

Council

THE ABA HEALTH LAW SECTION

Section DirectorJill C. Peña

American Bar Association321 N. Clark Street

Chicago, IL 60654-7598T: 312/988-5548 F: 312/988-9764

[email protected]

3Volume 21, Number 3, February 2009 The Health Lawyer

governance and articulating moreclearly the valuable benefits that theirhospital provides in exchange for tax-exempt status. Doing so will not onlysimplify the hospital’s compliance withthe new Form 990, but it will also assistthe hospital in protecting the financialbenefits derived from exempt status.

Time is growing short for hospitalsto prepare, given that the new Form 990is effective for tax years that began in2008. To assist in that process, this arti-cle focuses on: key disclosures forcorporate governance and insider finan-cial relationships (including how someof those disclosures might be affected bychanges in the governance structure);the heightened transparency surround-ing charity care and billing andcollection practices under Schedule H;continued scrutiny of tax-exempt bondarrangements in Schedule K; and theincreasingly challenging enforcementclimate for tax law violations, as aidedby recent enhancements to the tax lawwhistleblower rules.

Background InformationThe IRS overhauled the Form 990

because it was outdated and ineffective.The last comprehensive revision of theForm 990 took place in 1979. Since thattime, hospitals outpaced the disclosurerequirements of the Form 990 by develop-ing increasingly complex compensationarrangements for executives, implement-ing intricate corporate structures andemploying aggressive strategies forremaining financially viable.

The Form 990’s failure to portraythe activities of hospitals accurately,fueled by newspaper articles focusing onexcessive executive compensation,minimal charity care and draconiancollection efforts, convinced many(including key U.S. Senators) thathospital boards had neglected theiroversight responsibilities and that manyhospitals no longer deserved tax-exemptstatus.2

The IRS released a discussion draftof a revised Form 990 on June 24, 2007.3

In doing so, Kevin Brown, then ActingCommissioner of the IRS, acknowl-edged the failure of the Form 990 toreflect the activities and operations oftax-exempt organizations in the 21stcentury. Mr. Brown also recognized theneed for greater transparency amongthese organizations by stating, “The new990 aims to give both the IRS and thepublic an improved window into theway tax-exempt organizations go abouttheir vital mission.”4

General counsel, executives andboard members of tax-exempt hospitalsshould be concerned about what theIRS and others will see when they lookthrough the “improved window” thatthe Form 990 creates. Hospitals thathave not adequately controlled thegrowth or composition of their boards ofdirectors, failed to adopt and operate inaccordance with best practices for corpo-rate governance, or pursued businessstrategies without adequate thought ofcharity care and other community bene-fits will find that the redesigned Form 990and its final instructions (“Instructions”)flag these failures for further inquiry bythe IRS. Even the many hospitals thathave monitored governance closely andarticulated their charitable mission care-fully should use the new Form 990 toevaluate whether further changes togovernance structures or communitybenefit programs are desirable.

Focus on CorporateGovernance Generally

The Form 990 and its Instructionsemphasize the importance of effectivegovernance and ask questions reminis-cent of the IRS’s draft Good GovernancePractices for 501(c)(3) Organizations,which called on charities voluntarily toimplement “best practices” for corporategovernance.5 The “good governancepractices” that the IRS enumeratedincluded focusing on the organization’s

board size and composition, ensuringobedience by the organization’s directorsand officers to its charitable mission,developing effective whistleblower poli-cies, facilitating a “culture of compliance”through a code of ethics, and promotingtransparency by making significant finan-cial and other information readilyavailable to the public. These “goodgovernance practices” did not imposemandatory standards, but they reflectedthe practices that would make the IRScomfortable when it examines an organi-zation’s financial arrangements withinsiders for potential private inurement,private benefit and excess benefit.

The IRS credited its “good gover-nance practices,” in part, with facilitating“continued discussions within the sectorregarding the respective roles of the IRS,the states and the sector regardingnonprofit governance.”6 After it releasedthe new Form 990, the IRS issued anotice stating, “we have removed thepreviously posted preliminary staff discus-sion draft entitled Good GovernancePractices for 501(c)(3) Organizations fromour web site. Current IRS positions onnonprofit governance are best reflectedin the reporting required by the revisedForm 990 . . .”7 In its place, the IRSadded a revised version of the gover-nance document consistent with the newdisclosure requirements in Form 990.8

How a hospital responds to Part VI –the governance section of the Form 990– will likely indicate to the IRS andothers whether the organization ismanaged appropriately. For example, PartVI of the redesigned Form 990 seeksinformation about, among other things,the following policies and practices:

• Whether the directors reviewed theForm 990 before it was filed;

• Whether the organization has adopteda written conflicts of interest policy;

• Requirements under the conflicts ofinterest policy for officers, directorsand key employees to disclose annuallypotential conflicts of interests;

Form 990 Disclosure Requirements Challenge Hospitals, Provide Opportunities continued from page 1

continued on page 4


• How the organization monitors andenforces its conflicts of interest policy;

• Whether the organization has a writ-ten whistleblower policy and a writtendocument retention policy;

• The policies and procedures that theorganization employs in establishingcompensation for officers and keyemployees;

• The manner in which the organiza-tion makes its Form 990 publiclyavailable; and

• The way, if at all, that the organiza-tion makes its governing documents,conflict of interest policy and finan-cial statements available to the public.

The Form 990 itself recognizes thatmany of its questions concerning corpo-rate governance and management are“not required by the Internal RevenueCode.”9 This acknowledgment is not aninvitation for organizations to skirt thequestions asked in Part VI. Steve Miller,the IRS Commissioner for Tax-Exemptand Government Entities, has made itclear that the IRS deems these questionsto be relevant in that poorly managedorganizations pose a greater risk ofviolating federal tax laws. In fact, Mr.Miller said earlier this year, “We havebeen saying that good governance is aleading indicator of good tax compli-ance. In reply, some say: ‘Prove it.’ Weare going to try.”10 General counsel,executives and directors of hospitalsshould read this statement as a call toaction for examining their governancestructures and the policies and proce-dures that they have adopted to prevent,detect and correct any abusive transac-tions. The governance questions providea useful checklist for measuring currentpractices of an organization against whatthe IRS likely considers to be industry“best practices.”

Reconsidering and restructuring thesize and composition of a governingboard may be one way in which hospi-tals can enhance corporate governance

while streamlining compliance with theForm 990’s disclosure requirements.Board size and composition for hospitalsis particularly important because of thehighly technical and specialized natureof the healthcare industry. A board’sfailure to perform its responsibilities effi-ciently (either because of size ordisinterest) may be measured not only interms of reduced revenues, decliningprofit margins and weak oversight at thehospital, but also in poorer service qual-ity for the hospital’s community.

The IRS has expressed concernsregarding board size for hospitals andother tax-exempt organizations. TheIRS studied board size as part of its May2006 Hospital Compliance Project.11 Inreleasing its preliminary findings, theIRS noted that the average hospitalboard had 17 members.12 However,nearly a quarter of the hospitals that theIRS surveyed had at least 20 memberson its governing board. The IRS noted,“Hospital board size tended to increasewith hospital revenues ….”13 In fact, 49percent of hospitals with over $250million in total annual revenue hadboards comprised of 20 or moremembers.

The IRS did not offer any specificguidance on board size as part of itspreliminary report, but its “good gover-nance practices” expressed concern that“[s]mall boards generally do not repre-sent a public interest and large boardsmay be less attentive to oversightduties.”14 Similarly, the IRS has statedthat hospitals should be cognizant of thetalents that their board members makeavailable to the organization. The IRShas suggested that “[s]uccessful govern-ing boards include individuals who notonly are knowledgeable and engaged,but selected with the organization’sneeds in mind (e.g. accounting, finance,compensation, and ethics).”15

The administrative burden thatwould flow from the expanded Form 990disclosure requirements for current

board members also suggest that largeboards may not be the most desirable fora hospital, either in terms of effectivegovernance or Form 990 disclosurecompliance. The first chart below iden-tifies those Lines on the revised Form990 that solicit information relating inwhole or in part to a hospital’s govern-ing body. In reviewing it, imagine therecordkeeping process that a hospitalwith a large board would need todevelop and implement in order to trackthe information that the Form 990requests.

Financial Arrangementswith Insiders

Whether it intended to do so ornot, the IRS has imposed a significantburden on those organizations havinggoverning boards with more than 20members. The amount of due diligenceto identify, track and provide completeresponses to these disclosure require-ments is staggering. For example,hospitals that have begun to address thechanges wrought by the disclosure-firstapproach of the new Form 990 havefound that the length, if not thecomplexity, of their annual boardconflict questionnaires will need todouble to gather the necessary informa-tion. The Instructions for Form 990include virtual safe harbors for many ofthese questions that protect the organi-zation if it makes a “reasonable effort”to obtain the information from boardmembers and others through an annualquestionnaire that explains the infor-mation sought and the relevantdefinitions (e.g., family, business rela-tionships, interested persons).16 Many ofthose definitions, in turn, are expan-sive, vary based on the question beingasked, or have a variety of exceptionsthat may apply. At the same time, IRSofficials have commented informallythat with the implementation of thenew Form 990, it may be time to revisitand increase the penalties for filing an incomplete or inaccurate return.17


Volume 21, Number 3, February 2009 The Health Lawyer5

There have also been recent criminalprosecutions for failing to discloseinsider transactions on the old Form990.18

Rather than attempting thisprocess, hospitals and hospital affiliates(e.g., foundations and auxiliaries) withlarge boards may want to considerwhether now is the time to reduce boardmembership to those directors who are“knowledgeable and engaged, butselected with the organization’s needs in

mind (e.g. accounting, finance, compen-sation, and ethics).”19 Hospitals couldtransition the remaining directors intoan advisory capacity, potentially directlyrelated to the individual’s area of exper-tise. After all, for purposes of the Form990, “A member of an advisory boardthat does not exercise any governanceauthority over the organization is notconsidered a director or trustee.”20

Alternatively, advisory committeescould be established so that hospitals

can train potential board members andgauge their effectiveness.

The benefits that a hospital wouldreceive from a more centralized, focusedboard of directors carry over into Form990 compliance. As noted in the chartbelow, the Form 990 disclosure require-ments generally would not apply to adirector transitioned into an advisorycapacity. This is not to say that, by tran-sitioning to a smaller board, a hospitalwill avoid all reporting requirements.

Form 990 Section Form 990 DisclosureRequirementEffect of Disclosure Requirement on BoardMembers Transitioned to “Advisory Status”

Core Form, Part I, Line 3

Number of voting members ofthe governing body.

No disclosure required. The disclosure requirementseeks information about the voting members of thegoverning body as of the year end. If a director or trusteedoes not have voting rights as of the year end, the orga-nization does not need to identify the individual inresponse to the disclosure requirement.

Core Form, Part I, Line 4

Number of independent votingmembers of the governing body.

No disclosure required. The disclosure requirementseeks information about the independent votingmembers of the governing body as of the year end. If adirector or trustee does not have voting rights as of theyear end, the organization does not need to identify theindividual in response to the disclosure requirement.

Core Form, Part IV, Line 25a

Did the organization engage inan excess benefit transactionwith a disqualified person duringthe year? If “yes,” completeSchedule L, Part I.

Potential disclosure required. Disqualified personsinclude an individual who is, or during the previous fiveyears was, in a position to exercise substantial influenceover the affairs of the organization, including a votingtrustee or director as well as his or her family membersand 35 percent controlled entities of the individual orhis or her family members.

Core Form, Part IV, Line 25b

Did the organization becomeaware that it had engaged in anexcess benefit transaction with adisqualified person from a prioryear? If “yes,” complete ScheduleL, Part I.

Potential disclosure required. As noted above, disqual-ified persons would include former directors and trusteesduring a five-year “lookback” period. However, thedisclosure requirement does not necessarily limit itself tothe “lookback” period. Instead, it seeks informationregarding excess benefit transactions identified by theorganization from a “prior year.”

Core Form, Part IV, Line 26

Was a loan to or by a current orformer officer, director, trustee, keyemployee, highly compensatedemployee or disqualified personoutstanding as of the end of theorganization’s tax year? If “yes,”complete Schedule L, Part II.

Potential disclosure required. As noted above, thisdisclosure requirement is not triggered unless the loaninvolves a disqualified person (which would include an individual’s family members as well as 35 percentcontrolled entities of the individual or his or her familymembers).

continued on page 6

6The Health Lawyer Volume 21, Number 3, February 2009


Core Form, Part IV, Line 27

Did the organization provide agrant or other financial assis-tance to an officer, director, keyemployee or substantial contrib-utor, or to a person related tosuch an individual? If “yes,”complete Schedule L, Part III.

Potential disclosure required. The Instructions state thatprior directors or trustees (as well as their family membersand 35 percent controlled entities) may fall within thescope of individuals encompassed by this disclosurerequirement. The Instructions to Schedule L, however,generally require a prior trustee to be reported in Part VII,Section A before a disclosure requirement exists.

Core Form, Part IV,Lines 28a to 28c

During the tax year, did anyperson who is a current or formerofficer, director, trustee or keyemployee:

• have a direct business relation-ship with the organization(other than as an officer, direc-tor, trustee or employee) or anindirect business relationshipthrough ownership of morethan 35 percent in anotherentity (individually or collec-tively with other person(s)listed in Part VII, Section A)?

• have a family member whohad a direct or indirect busi-ness relationship with theorganization?

• serve as an officer, director,trustee, key employee, partneror member of an entity (orshareholder of a professionalcorporation) doing businesswith the organization?

If “yes,” complete Schedule L,Part IV.

Potential disclosure required. The Instructions toSchedule L again clarify that not all prior officers, direc-tors, trustees or key employees are considered formerofficers, directors, trustees or key employees for purposesof the disclosure requirement.

First, the officer, director, or key employee must bereported in Part VII, Schedule A. If the individual isidentified in Part VII, Schedule A, the disclosurerequirement will extend to such individual as well as hisor her family members and any 35percent controlledentity of such individual or his or her family members.

Second, the disclosure requirement also applies to enti-ties (other than a tax-exempt organization) of which anindividual listed in Form 990, Part VII, Section A wasserving at the time of the transaction as (1) an officer,(2) a director, (3) a trustee, (4) a key employee, (5) apartner or member with an ownership interest in excessof 5 percent if the entity is treated as a partnership, or(6) a shareholder with an ownership interest in excess of5 percent if the entity is a professional corporation.

Third, the disclosure requirement applies specifically to management organizations in which a former officer,director or key employee is a direct or indirect 35 percent owner, or an officer, director, trustee or key employee.

Core Form, Part VI, Section A, Line 1a

Enter the number of votingmembers of the governing body.




continued on page 8


Core Form, Part VI,Section A, Line 1b

Enter the number of votingmembers that are independent.


Core Form, Part VI,Section A, Line 2

Did any officer, director, trusteeor key employee have a familyrelationship or a business rela-tionship with any other officer,director, trustee or keyemployee?

Potential disclosure required. The Instructions statethat an organization must disclose information regardingfamily relationships or business relationships among offi-cers, directors, trustees or key employees. This disclosureobligation extends to any former directors or trusteesreported in response to Core Form, Part VII, Section A.

Core Form, Part VI,Section A, Line 4

Did the organization make anysignificant changes to the orga-nizational documents since theprior Form 990 was filed?

Disclosure required. The organization must report anychanges to the organization’s governing documents,including any changes to the composition and structureof its governing body.

Core Form, Part VI, Line 12a to 12c

Does the organization have awritten conflicts of interestpolicy? If “Yes”:

Are officers, directors or trustees,and key employees required todisclose annually interests thatcould give rise to conflicts?

Does the organization regularlyand consistently monitor andenforce compliance with thepolicy? If “Yes,” describe inSchedule O how this is done.

No disclosure required. The Instructions do notexpressly require an organization to solicit conflicts ofinterest statements from former directors or trustees.However, an organization may be well advised to havemembers of advisory committees disclose conflicts ofinterest, particularly those that may be affected by theiradvisory capacity (to protect against arguments that theadvisory group had de facto authority and should havemade disclosures).

Core Form, Part VII Compensation of officers, direc-tors, trustees, key employees, topfive highest compensated employ-ees and highest paid (top five forprofessional and top five for otherservices) independent contractors.

Potential disclosure required. As noted below, an orga-nization must report information about current officers,directors, trustees or key employees; former directors ortrustees; and former officers or key employees.

Core Form, Part VII,Section A, Line 1a

List all of the organization’sformer directors or trustees thatreceived, in the capacity as aformer director or trustee of theorganization, more than $10,000of reportable compensation fromthe organization and any relatedorganization.

Potential disclosure required. The organization mustreport information about former directors or trustees. Asnoted above, however, this obligation does not extend toall prior directors or trustees. Instead, an organization mustdisclose information in response to this requirement if (andonly if) the organization reported (or should have reported)the individual as a director or trustee on a Form 990 for oneof the five prior years and paid the individual reportablecompensation in excess of $10,000 during the calendaryear ending with or within the organization’s tax year forhis or her service as a former director or trustee.




Core Form, Part VII,Section A, Line 1a

List all of the organization’sformer officers, key employeesand highest compensatedemployees who received morethan $100,000 of reportablecompensation from the organiza-tion and any related organization.

Potential disclosure required. The organization mustreport information about former officers, key employeesand highest compensated employees. This obligationdoes not extend to all prior officers and key employees.Instead, an organization must disclose information onPart VII, Section A if (and only if) the organizationreported (or should have reported) the individual as anofficer or key employee on a Form 990 for one of thefive prior years and paid the individual reportablecompensation in excess of $10,000 during the calendaryear ending with or within the organization’s tax year.

Core Form, Part VII,Section A, Line 3

Did the organization list anyformer officer, director or trustee,key employee or highestcompensated employee on line1a? If “yes,” complete Schedule Jfor such individual.

Potential disclosure required. If an organization reportsa former officer, director or trustee, key employee orhighest compensated employee in Part VII, Section A,it must complete a Schedule J for such individual.

Core Form, Part VII,Section A, Line 5

Did any person listed on line 1areceive or accrue compensationfrom any unrelated organizationfor services rendered to the orga-nization? If “yes,” completeSchedule J for such person.

Potential disclosure required. The Instructions state –without distinguishing between current and formerdirectors, trustees, officers or key employees – that anorganization must complete Schedule J if the personreceives or accrues compensation from an unrelatedorganization for services rendered to the filing organiza-tion in the person’s capacity as an officer, director,trustee, or employee of the filing organization.

Schedule H, Part IV Management companies andjoint ventures with combinedofficer, director, trustee, keyemployee and staff or employedphysician ownership of morethan 10 percent of the equityinterest in the joint venture.

Potential disclosure required. Schedule H, Part IV(which is optional for 2008) requires each hospital tolist those management companies and joint ventures inwhich any officer, director or key employee own in theaggregate 10 percent of the entity’s interests and providemanagement services, medical care, equipment andother tangible or intangible personal property to thehospital. The Instructions state that this disclosurerequirement extends to anyone who served as a directorduring the tax year in question. The Instructions suggestthat, other than the year in which the director transi-tioned off the board, the organization would have noreporting obligation. However, other sections of Form990, particularly Schedule L, Part IV, may apply.




Schedule H, Part VI,Line 6

Provide any other informationimportant to describing how theorganization’s hospitals or otherhealthcare facilities further itsexempt purpose by promoting thehealth of the community (e.g.,open medical staff, communityboard, use of surplus funds, etc.).

Potential disclosure required. This disclosure require-ment pertains to mission effectiveness. An advisoryboard may be relevant in communicating how the orga-nization receives input on and adapts to changingcommunity needs to fulfill its mission (i.e., one form ofcommunity outreach).

Schedule J Provide any other informationimportant to describing how theorganization’s hospitals or otherhealthcare facilities further itsexempt purpose by promoting thehealth of the community (e.g.,open medical staff, communityboard, use of surplus funds, etc.).

Potential disclosure required. If an organization reportsa former officer, director or trustee, key employee orhighest compensated employee in Part VII, Section A,it must complete Schedule J for such individual.

Schedule J, Part I, Lines1a & 1b

Requires disclosure of certainbenefits that an individualreceives (such as first class travelaccommodations); health clubdues or fees; and spendingaccounts as well as informationregarding the organization’s poli-cies and procedures with respectto such benefits.

Potential disclosure required. This disclosure require-ment tracks the Core Form, Part VII, Section A, Line1a. Accordingly, former directors moved to an advisoryrole would need to be included in this disclosure for fiveyears if they received more than $10,000 in reportablecompensation from the organization and any relatedorganization.

Schedule J, Part I, Line 3 Requires a “check the box”disclosure of the process used bythe board or committee to estab-lish CEO compensation.

Potential disclosure required. The organization mustdescribe the processes that it undertakes to establishCEO compensation.

Schedule J, Part I, Lines 5-8

Requires disclosure of whetherany of the interested personswhose compensation is reportedin Form 990, Part VII, SectionA, Line 1a receives or is entitledto compensation contingentupon the revenues or net earn-ings of the organization or anyrelated organization, or any non-fixed (e.g., discretionary)payments, and whether they can rely on the initial contractexception to avoid excess benefit.21

Potential disclosure required. An organization thatbases compensation on revenues or net earnings orother factors would need to describe the compensationformula.




Schedule L, Part I Requires disclosure of certainbenefits that an individualreceives (such as first class travelaccommodations); health clubdues or fees; and spendingaccounts as well as informationregarding the organization’s poli-cies and procedures with respectto such benefits.

Potential disclosure required. Disqualified personsinclude an individual who is, or during the previous fiveyears was, in a position to exercise substantial influenceover the affairs of the organization, including a votingtrustee or director.

Schedule L, Part II Requires disclosure of whetherany of the interested personswhose compensation is reportedin Form 990, Part VII, Section A,Line 1a receives or is entitled tocompensation contingent uponthe revenues or net earnings ofthe organization or any relatedorganization, or any non-fixed(e.g., discretionary) payments,and whether they can rely on theinitial contract exception toavoid excess benefit.22

Potential disclosure required. To the extent that anorganization has participated in a loan with a disquali-fied person, such as a prior director or trustee, theorganization must complete Schedule L, Part II, if theloan remains outstanding as of the end of the organiza-tion’s tax year. The Instructions state that a “loan” forSchedule L purposes includes debt originally made by orto a third party that is transferred to the organization ordisqualified person.

Schedule L, Part III Requires the organization to:

• Identify the disqualifiedperson(s) that received anexcess benefit in the transaction;

• Identify the organizationmanager(s), if any, that partici-pated in the transaction,knowing that it was an excessbenefit transaction;

• Describe the transaction; and

State whether the transactionhas been corrected (which typi-cally would require repayment orreturn of property plus interest).23

Potential disclosure required. Schedule L, Part IIIrequires organizations to disclose information regarding,among others, former directors or trustees, their familymembers, and 35 percent controlled entities.




Schedule L, Part IV Requires the organization todisclose information on loans,including salary advances andother advances and receivables,that remain outstanding as of theend of the organization’s taxyear.

Potential disclosure required. The Instructions toSchedule L again clarify that not all prior officers, direc-tors, trustees or key employees are considered formerofficers, directors, trustees or key employees for purposesof the disclosure requirement.

Significantly, however, a further exception exists to thereporting requirement. An organization is not requiredto report transactions with an individual or organizationfor a dollar amount that did not exceed the greater of$10,000 or 1 percent of the organization’s total revenuefor the organization’s tax year. This exception is notavailable if total payments for all transactions betweenthe parties exceed $100,000 for the tax year or thetransaction was compensation to a family member of acurrent officer, director or key employee of the organiza-tion in excess of $10,000.

Form 990 Section Community Benefit Element Impact on Hospital Operations

Schedule H, Part I, Lines 1a and 1b(Optional for 2008)

Does the organization have acharity care policy? If “yes,” is ita written policy?

Nothing in the community benefit standard requires anorganization to have a charity care policy. This fact isnot lost on Senator Grassley and others critical of thecommunity benefit standard. For example, SenatorGrassley has noted, “Non-profit doesn’t necessarilymean pro-poor patient.”27

Hospitals who implement moreeffective governance through a reductionof “excess” board members should becognizant of potential state law fiduciaryobligations that may be imposed on advi-sory bodies. For example, many states,including Ohio, define a “fiduciary”broadly in such a manner as to imposeobligations on such persons when actingin the capacity as an advisor.24 Hospitalswould be well advised to consider theirrespective state laws and director andofficer insurance policies to determinewhether the advisory board would besubject to similar fiduciary duties prior torestructuring their governing boards.

Community BenefitHighlighted

Much of the criticism that membersof Congress, state attorneys general andothers have directed toward charitablehospitals involves why these organiza-tions deserve tax-exempt status. The IRSdeveloped the “community benefit stan-dard” in 1969 to distinguish betweenfor-profit and tax-exempt hospitals.While the Form 990 itself does notchange this standard for exemption, thefollowing chart, drawn from Schedule Hto the Form 990, indicates what factorsthe IRS will consider in determining

whether a hospital continues to qualifyfor exemption under the communitybenefit standard. In other words, theForm 990 does not make new law or addregulations, but it does reflect the indiciaof community benefit that the IRS islikely to look for under the existingexemption standards.25 An increasingnumber of states, such as California andIllinois, will require separate communitybenefit reports that do not necessarilyfollow the format or scope of the newSchedule H.26



Form 990 Section Community Benefit Element Impact on Hospital Operations

Schedule H, Part I, Lines 6a and 6b(Optional for 2008)

Does the organization prepare anannual community benefit report?If “yes,” does the organizationmake it available to the public?

The federal community benefit standard also does notrequire an organization to publish a community benefitreport.

Schedule H, Part II(Optional for 2008)

Community Building Activities The IRS recognizes that the scope of community benefitexceeds charity care alone. Part of the scope, at leastaccording to Schedule H, includes physical improve-ments and housing; economic development; communitysupport; environmental improvements; leadership devel-opment and training for community members; coalitionbuilding; community health improvement advocacy;workforce development; and similar activities.

Schedule H, Part III,Sections A, B and C(Optional for 2008)

Requires hospitals to providespecific information on bad debtexpense, Medicare receipts andcollection practices.

The primary burden of Schedule H, Part III will fall onthe hospital’s finance staff. However, the focus on collec-tion practices is likely to draw greater attention by statesattorneys general, media and others in light of recentefforts to closely regulate hospital billing practices.28

Schedule H, Part IV(Optional for 2008)

Requires hospitals to provideinformation regarding jointventures and management orga-nizations in which officers,directors and/or key employeesparticipate.

The Instructions provide examples of the types of jointventures that a hospital would need to report. Theseinclude “joint ventures formed by the organization andits officers or physicians to conduct an exempt or unre-lated business activity, a company owned by theorganization’s officers or physicians that owns and leasesto the organization a hospital or other medical carefacility, and a company that owns and leases to entitiesother than the organization diagnostic equipment orintellectual property used to provide medical care.”29


Schedule H, Part I, requires eachhospital to report whether it hasadopted a charity care policy, preparesannual reports regarding the commu-nity benefits that it provides and makessuch reports available to the public.Nothing in the community benefitstandard requires an organization tohave a charity care policy or to producean annual community benefit report.However, Schedule H leads off with thisseries of questions, from which it isfairly obvious that the IRS considerscharity care policies and communitybenefit reports as a significant, if notvital, condition of a hospital’s tax-exempt status. Part I also asks theorganization to identify by cost theamount that it spends in pursuit ofcharity care and other communitybenefits, such as research, education ofhealthcare professionals and delivery ofsubsidized healthcare services.

Schedule H, Part II provides anopportunity for organizations todemonstrate the “community buildingactivities” that their hospitals conduct.The final Instructions explain thatthese activities include those thatprotect or improve the community’shealth or safety and are not reportedelsewhere on Schedule H.30 Specificexamples of community building activi-ties listed in Schedule H, Part IIinclude physical improvements andhousing; economic development;community support; environmentalimprovements; leadership developmentand training for community members;coalition building; community healthimprovement advocacy; and workforcedevelopment.

Schedule H, Part III focuses on howa hospital reports “bad debt” expense;how it accounts for Medicare costs andreimbursements; and what billing andcollection practices it has adopted. Fordirectors and hospital executives notassigned to the CFO’s office, this lastitem is likely to be the most important.Hospital billing and collection practices

have an unwritten, emotional compo-nent that goes well beyond a patient’sfinancial information. Real (or evenperceived) abuses in billing and collec-tion activities by hospitals createdramatic newspaper headlines that canhave devastating consequences for anorganization’s reputation and itsfinances. For example, in April, TheWall Street Journal ran a front-page storyentitled “Cash Before Chemo” thatfocused on efforts by M.D. AndersonCancer Center to collect a $105,000 feebefore it would provide treatment to anunderinsured patient.31 The story notonly exposed M.D. Anderson and itsmanagement to widespread criticismregarding this alleged practice, but italso drew the attention of SenatorGrassley.

In July 2008, Senator Grassleysubmitted over 40 information requeststo M.D. Anderson on various mattersranging from its charity care policy to itscorporate governance policies.32 Uponreceiving M.D. Anderson’s responses,Grassley raised the possibility of furtherfederal regulation of governmentalhospitals. He said, “I hope the hospital’sresponse will provide useful informationto help guide Congress on the decisionof whether government hospitals shouldbe subject to the same standards as char-itable hospitals, since they receive thesame federal tax benefits.”33 Grassleywent on to reiterate his disdain for thecommunity benefit standard applicableto tax-exempt, non-governmentalhospitals. “Because it’s a governmententity, M.D. Anderson doesn’t have tosatisfy the weak community-benefitstandard that applies to private charita-ble hospitals,” he said.34

Schedule H, Parts IV and V requestdetailed information regarding theparticipation of the organization in jointventures with directors, key employeesand physicians and the activities thatoccur at each facility the organizationoperates. This information will not onlybe of interest to the IRS in assessing

compliance with federal tax laws, butwill also be of interest to federal agen-cies charged with administering themyriad of laws and regulations thatgovern financial relationships betweenhospitals and physicians.

Tax-Exempt BondsThe new reporting requirements of

Form 990 and Schedule K provide aneasy-to-follow path for the IRS to chal-lenge the tax-exempt status of theinterest on a particular bond issue andimpose significant reporting and infor-mation gathering burdens that did notpreviously exist in prior iterations ofForm 990. These burdens will nowinclude annual expenditures of time,organizational resources and funds thatpreviously only had to be expended atthe time the bonds were first issued.Some of these burdens are centered inareas that the IRS has identified asbeing target enforcement areas in its TaxExempt Bond Division’s annual workplans. Complying with these newannual disclosure requirements in somecases will require, as described below,the equivalent of an internal or externalaudit of the use of tax-exempt bondproceeds.

Any organization that reported anoutstanding tax-exempt bond issuewhich had both an outstanding princi-pal amount in excess of $100,000 as ofthe last day of the tax year and wasissued after December 31, 2002 mustanswer “Yes” to question 24a of Form990, Part IV, and complete Schedule K.While Schedule K is effective for taxyears that begin in 2008, only Part I isrequired to be completed for the 2008tax year. Parts II, III and IV are optionalfor 2008, but fully effective for 2009. Noreporting is required under the finalForm 990 and instructions for ScheduleK for bonds issued before 2003, exceptthat Bonds issued after December 31,2002, to refund bonds issued beforeJanuary 1, 2003 have special reportingrequirements in Schedule K.




Form 990 Section Form 990 DisclosureRequirement Impact on Operations

Schedule K, Part I Disclose the following informa-tion regarding each bondissuance:

• Issuer Name;

• Issuer EIN;

• CUSIP#;35

• Date Issued;

• Issue Price;

• Description of Purpose;

• Defeased? (yes or no); and

• On Behalf of Issuer? (yes or no).

Only Part I is required for 2008. Organizations shouldcomplete multiple Schedule K’s if necessary to accountfor all bond issues.

The IRS requires reporting on “outstanding” bond issueson Schedule K, even if previously defeased, if suchbonds were issued after December 31, 2002. This islikely to create a greater reporting burden over time asbonds issued after 2002 are refunded. If any of the bondproceeds were used to refund a prior issue, the date ofissue for each of the refunded issues must be reported. Ifan issue had multiple purposes, all purposes must bereported.

The Instructions for Part I note that the informationrequired to be reported in Part I, including issuer name,EIN, CUSIP#, issue date, issue price and purpose shouldbe “consistent” with the information included on Form8038 filed by the Issuer in connection with the bondissue.36 It can be expected that if the review of Part Kreveals that a Form 8038 was not filed as required, or ifPart I is inconsistent with the information reported onForm 8038, an IRS examination may be triggered.

It is likely that most organizations will not have bondswhich were issued by the organization “on behalf of astate or local governmental unit” (i.e., tax-exemptbonds issued under Revenue Ruling 63-20). Conduitbond issues that are issued directly by a state or localgovernmental unit are not issued under Revenue Ruling63-20, and almost all healthcare organizations willcheck “no” for this item regarding “On Behalf of Issuer”for each bond issue.37




Schedule K, Part II(Optional for 2008)

Seeks information regarding useof the bond proceeds, such as:

• Gross proceeds in reservefunds;

• Issuance costs;

• Working capital expenditures;

• Capital expenditures; and

• Information regarding whetherthe organization maintainsadequate books and records tosupport the final allocation ofbond proceeds.

After 2008, Part II will need to be completed for eachbond issue listed in Part I of Schedule K.

Form 8038 is a useful guideline for reporting certaininformation in Part II, including gross proceeds inreserve funds, issuance costs, working capital expendi-tures and capital expenditures, if Form 8038 wasproperly completed at the time of bond issuance.

Line 8 requires the organization to provide the year inwhich construction, acquisition or rehabilitation of thefinanced project was substantially completed. For multi-ple projects, the organization should provide the latestyear in which construction, acquisition or rehabilitationof each of the financed projects was substantiallycompleted. For example, if a bond issue financed theconstruction of three projects which were substantiallycompleted in 2003, 2004, and 2005, the latest year,2005, would be entered in response to this item for thatbond issue.

Line 11 requires the organization to indicate whether afinal allocation of bond proceeds has been made. Thisitem should be answered for most project issues onlyafter consultation with bond counsel, as the rulesregarding “final allocation” and when it occurs arecomplicated and present potential pitfalls.

An organization must maintain adequate records regard-ing the expenditure and allocation of bond proceedssufficient to survive an examination by the IRS, whichgenerally requires a detailed description of expendituresmade from bond proceeds, including specific projectsand lists of equipment acquired and their completiondates as well as reasonably expected economic lives.




Schedule K, Part III(Optional for 2008)

Seeks information regardingprivate business use, such as:

• Was the organization a partnerin a partnership, or a memberof an LLC, which owned prop-erty financed by tax-exemptbonds?

• Are there any management orservice contracts with respectto the financed property whichmay result in private businessuse?

• Does the organizationroutinely engage bond counselor other outside counsel toreview any management orservice contracts or researchagreements relating to thefinanced property?

• Amounts of private business usearising from non-governmentalorganizations that are not tax-exempt and from unrelatedbusiness income activities.

Optional for 2008, but a preview to what will berequired in future tax years and the work that would berequired now to survive an IRS examination of the useof tax-exempt bond proceeds. This is a road map for theIRS of potential examination/audit issues, and must becarefully and thoroughly analyzed and completed by theorganization.

Answering the questions in Part III regarding manage-ment and service contracts and research contracts thatmay result in private use is complicated by the fact thatthe instructions require that the organization answer“Yes” even if the organization has determined that themanagement, service or research contracts meet the safeharbors available under the applicable IRS RevenueProcedures governing such contracts.

The IRS asks in Line 3c of this Part whether the organi-zation routinely engages bond or other outside counselto review management, service and research contracts –a strong hint as to the level of review the IRS expects toensure compliance with private use rules.

Answering item 5 requires an organization to computethe average percentage of bond financed property foreach bond issue used in an unrelated trade or businessduring the relevant tax year, to the nearest tenth of apercent. For this purpose, management, service orresearch contracts which meet the safe harbors need notbe reported in the percentage of “private use.”Answering this question will likely require an internalor external private use audit of all reported bond issues,and that process is best initiated before Part III becomeseffective in order to create a template for developing theprivate use computation.

If the answer to question 7 (whether the organizationhas adopted management practices and procedures toensure post issuance compliance for its bonds) is “No,”the organization can expect its bond issues to be exam-ined by the IRS.


Whistleblower StatutesHighlight Need forGovernance andCommunity Benefit Review

Traditionally, policing responsibili-ties of tax-exempt organizations fell tothe IRS and state attorneys general.This enforcement environment ischanging dramatically thanks to twofactors – the significant disclosurerequirements of the Form 990 and thenewly created IRS WhistleblowerOffice. Congress amended the federaltax code in 2006 to increase the poten-tial reward for informants who bringviolations of tax laws to the attention ofthe IRS. These rewards may be 15 to 30percent of the proceeds that the IRScollects (including penalties, interest,

additions to tax, and additionalamounts) as a result of an action basedon information that the informantprovided.40 Presently, these enhancedwhistleblower provisions apply only todisputes involving more than $2 millionin tax, penalties, additions to tax andadditional amounts. The IRS may payreward up to a lower 10 percent maxi-mum if the whistleblower’s tip is basedon public information (e.g., from Form990 or other reports),41 and in smallercases (under $2 million) whistleblowersstill can recover up to a 15 percentbounty.42 Although tax law violationsare prosecuted exclusively by thegovernment, the IRS has discretion toenter into tax administration contractswith whistleblowers and their attorneysto share confidential return information

(e.g., tax returns of subsidiaries, directorsand officers and prior closing agree-ments) to allow the whistleblower toassist in the investigation.43 Thesedevelopments have established a cottageindustry of attorneys and others ready toreport tax-exempt organizations andtheir board members for violations ofvarious federal tax laws.

IRS Enforcement InitiativesFocused compliance initiatives are

gaining in popularity, and the IRS hasalready reached hundreds of nonprofithospitals with initiatives focused onexecutive compensation, insider loans,private use of bond financed facilitiesand community benefit activities. Thereare no signs of these focused reviews


Schedule K, Part IV(Optional for 2008)

Seeks information regardingarbitrage, such as the following:

• Whether a Form 8038-T hasbeen filed with respect to theissue;

• Whether the bond is a variablerate issue; and

• Whether any bonds wereinvested beyond an availabletemporary period.

Lines 3a, b and c relate to payments under qualifiedhedges/swaps; an area of focus for the IRS in its tax-exempt bond work plans and one where IRS officialshave noted some significant issues.38

Reporting of guaranteed investment contracts (“GICs”),another area of work plan focus of the IRS, is requiredhere.39 Each filing organization should confirm with itsbond counsel when bidding GICs that all applicablerequirements of the Code will be met, as compliancewith those requirements must now be certified on line4d.

Item 5 requires reporting of unspent bond proceedsbeyond any allowed “temporary period” during whichbond proceeds can be invested without regard to yield.For example, a typical project fund may be invested forthree years before yield restrictions apply (although arbi-trage rebate may apply from day one). If an organizationhas project funds that were not spent within three years,it should consult with bond counsel on how to addressunspent bond proceeds after the allowed temporaryperiod, and be prepared to explain to the IRS why it didnot meet the three year temporary period. The TaxExempt Bonds Division of IRS views arbitrage profits onunspent project fund proceeds as a target area for itsenforcement efforts, as disclosed in its recent work plansand as seen in recent examinations.


18

slowing down or stopping at a singlecontact per hospital. Rather, with theadded details that will be reported onthe Form 990, the IRS is likely toexpand the range of issues that itreviews through these compliancechecks and correspondence exams. Inthat regard, the most recent complianceinitiative involves a compliance checkof approximately 400 colleges anduniversities on a variety of issues,including unrelated business income.44

Given historic IRS skepticism on thelevel of compliance in reporting andproperly allocating revenues andexpenses from unrelated trade or busi-ness activities,45 it is reasonable toexpect that the unrelated businessincome portion of this latest initiativewill be carried over to the tax-exempthealthcare sector in the years to come.

ConclusionGeneral counsel, executives and

their boards should view the Form 990as an opportunity to enhance corporategovernance, potentially through thereduction in size of an organization’sboard and the adoption of procedures foraccurate Form 990 reporting. One help-ful method to ensure that the transitionto the revised Form 990 does notpresent board members with anysurprises is to conduct a mock auditbased on 2007 information. Doing sowill identify potential disclosure issuesand consequences when the new Form990 takes effect for the 2008 tax year.This exercise can be especially benefi-cial for Schedule H, most of which isoptional for 2008, and the various inter-twined disclosures regarding corporategovernance and executive compensa-tion. Organizations also should considerwhether to conduct this mock auditexercise under privilege to try to protectagainst discovery of the resultant workproduct by the IRS, state regulators,plaintiffs attorneys, unions or otherinterested adverse parties. In order toease the compliance pains under the

new Form 990, general counsel andgovernance specialists also shouldconsider reviewing the organization’scurrent governance policies andrevamping board education programs.The updated board education mayinclude a substantive review of the newreporting requirements in the Form 990,IRS views of governance best practices,the need for expanded annual question-naires, and the importance of fulldisclosure to protect the organizationand the board. By following these steps,hospitals will be better positioned torespond to these changes and to putdisclosure first in the new Form 990.

James R. King,member of thehealthcare and taxpractices of JonesDay, is resident inthe Columbus, Ohiooffice. He represents

tax-exempt organizations regarding IRSdisputes and other controversy mattersand counsels tax-exempt organizationson corporate governance and other taxcompliance and transactional matters.He may be reached at [email protected].

Travis F. Jackson,member of thehealthcare and taxpractices of JonesDay, is also residentin the Columbus,Ohio office. He

represents healthcare organizations withrespect to IRS audits and other compli-ance and transactional matters. He maybe reached at [email protected].

Gerald M. Griffith,member of thehealthcare and taxpractices of JonesDay, is resident in theChicago office. Herepresents healthcare

organizations with respect to major IRS

audits, unique IRS rulings and a varietyof other compliance, governance andtransactional matters. He may bereached at [email protected].

Daniel J. Bacastow,member of thehealthcare and taxpractices of JonesDay, is also residentin the Chicagooffice. He represents

issuers, underwriters and hospitals intax-exempt bond financings and relatedtax compliance matters. He may bereached at [email protected].

Endnotes1 U.S. Government Accountability Office,

Non-Profit Hospitals: Variation in Standardsand Guidance Limits Comparison of HowHospitals Meet Community BenefitRequirements (September 2008), at p. 1.

2 See, e.g., Press Release from Sen. Grassley,“GAO Report on Non-profit Hospitals”(Oct. 14, 2008), available online athttp://finance.senate.gov/press/Gpress/2008/prg101408.pdf; “Letters to Two Tax-exemptHospitals” (Sept. 2, 2008), available online athttp://finance.senate.gov/press/Gpress/2008/prg090208B.pdf; Remarks of Sen. ChuckGrassley at the Roundtable on Non-profitHospitals, Tuesday, Oct. 30, 2007, availableonline at http://finance.senate.gov/press/Gpress/2007/prg103007.pdf.

3 Chronological History: Redesign of the 2008Form 990 and Corresponding Instructions,available at http://www.irs.gov/charities/charitable/article/0,,id=185892,00.html.

4 IRS Releases Discussion Draft of RedesignedForm 990 for Tax-Exempt Organizations, I.R.2007-117, available at http://www.irs.gov/newsroom/article/0,,id=171329,00.html.

5 See, e.g., Good Governance Practices for501(c)(3) Organizations, EO Tax Journal (vol.12, no. 1, January/February 2007).

6 Governance of Charitable Organizations andRelated Topics, available at http://www.irs.gov/charities/article/0,,id=178221,00.html.

7 Id.

8 The revised governance guidelines document,Governance and Related Topics – 501(c)(3)Organizations (hereafter “GovernancePractices”), is available at http://www.irs.gov/pub/irs-tege/governance_practices.pdf.

9 Background Paper – Changes to April DraftInstructions (Aug. 19, 2008), at p. 10, avail-able at http://www.irs.gov/pub/irs-tege/changes_to_april_draft_instructions.pdf.



19

10 Remarks of Steven T. Miller, Commissioner,TEGE, Before the Georgetown Law CenterSeminar on Representing and Managing Tax-Exempt Organizations, at p. 4 (April 24,2008), available at http://www.irs.gov/pub/irs-tege/represent_manage_speech_042408.pdf.

11 The Hospital Compliance Project involvedthe distribution of a nine page compliancecheck questionnaire with eighty-one ques-tions focused primarily on nonprofit hospitalcommunity benefit activities and executivecompensation practices. Additional informa-tion on that project is available athttp://www.irs.gov/charities/charitable/article/0,,id=172267,00.html.

12 Hospital Compliance Project Interim Report(Summary of Reported Data), at p. 15, avail-able at http://www.irs.gov/pub/irs-tege/eo_interim_hospital_report_072007.pdf

13 Id.

14 Supra n. 5.

15 Governance Practices, supra n. 9.

16 See Form 990 Instructions (2008), Part VI,Lines 1b & 2, Part VII, Section A, andSchedule L, Parts III & IV.

17 See, D. Freda, “IRS Eyeing Revision ofPenalty Regime Following Debut ofRedesigned Form 990,” Daily Tax Report(BNA), p. G-6 (Oct. 16, 2008).

18 See, e.g., U.S. v. Madison, 99 AFTR 2d 2007-2252 (6th Cir. 2007); U.S. v. Fumo, 100AFTR 2d 2007-6902 (E.D. Pa. 2007).

19 See Governance Practices, supra n. 9, at p. 2.

20 Form 990 (2008), Glossary, definition of“director or trustee”.

21 See 26 C.F.R. § 53.4958-4(a)(3).

22 See 26 C.F.R. § 53.4958-4(a)(3).

23 See 26 C.F.R. § 53.4958-7.

24 See, e.g., Strock v. Pressnell, 38 Ohio St.3d207, 216 527 N.E. 2d 1235, 1243 (1988).

25 See, e.g., Rev. Rul. 69-545, 1969-2 C.B. 117.

26 See California Health & Safety Code§ 127350(d); 210 Ill. Comp. Stat. 76/20. TheIllinois legislation was enacted in 2003 andarguably marked the beginning of increasedstate legislative interest in community benefitreporting. Currently at least twenty-threestates have some specific community benefitreporting or standards in effect.

27 Kathleen Day, “Hospital Charity Care IsProbed: Investigators Find HospitalsOvercharge or Deny Services,” WashingtonPost (Sept. 13, 2006), at p. D02.

28 See, e.g., Illinois Fair Patient Billing Act, Pub.Act No. 094-0885 (effective Jan. 1, 2007).

29 Form 990 (2008), Instructions for ScheduleH, Part IV.

30 Id., Part II, Line 9.

31 Barbara Martinez, “Cash Before Chemo:Hospitals Get Tough,” Wall St. Journal (April28, 2008).

32 Todd Ackerman, M.D. Anderson Submits ItsRecords on Charity Care, Houston Chronicle(Oct. 9, 2008).

33 Id.

34 Id. (Emphasis added).

35 CUSIP stands for Committee on UniformSecurities Identification Procedures. ACUSIP number is a unique identifyingnumber for most issues of publicly traded secu-rities in the United States, includingtax-exempt municipal bonds. The CUSIPsystem—owned by the American BankersAssociation and operated by Standard &Poor’s—facilitates the clearing and settlementprocess of securities.

36 Each tax-exempt bond issue benefiting a501(c)(3) organization must be reported tothe IRS on an Information Return for Tax-Exempt Private Activity Bond Issues,Department of Treasury Form 8038. TheForm requires the reporting of informationincluding the name of the municipal issuer,the corporation borrowing the bond proceeds,the use of the bond proceeds, details on anybonds refunded and information on the saleprice and yield of the bonds issued.

37 Rev. Rul. 63-20, 1963-1 C.B. 24.

38 See T. Jaworski, “IRS Tracking of Private Useof Exempt Bond Financing at Colleges andUniversities,” Tax Notes Today, 2008 TNT223-4 (Nov. 18, 2008).

39 Guaranteed Investment Contracts or “GICs”are investment contracts that are similar tocertificates of deposit that can be purchased atbanks; however, they are typically sold byinsurance companies. Ranging from typicalterms of one to three years in most bondtransactions, they provide an investmentoption for project and construction funds inwhich a fixed rate of return is paid on the

investment under the contract. A maximum

number of withdrawals per month is typically

contained in the contract. Typically the

investment return is priced from a draw down

schedule that the borrower provides to the

insurance company in connection with the

bidding of the GIC. Despite the use of the

term “guaranteed” in their name, investments

in GICs are not guaranteed by the United

States of America or its agencies, and the

strength of the investment is determined by

the credit quality of the insurance company

providing the “guaranteed return.” If the

company providing the contract fails, the

borrower may loose most if not all of its prin-

cipal investment. Many GICs require

collateralization upon a rating downgrade

below certain levels, but the ability of an

investment provider to provide collateral in a

distress situation may be limited.

40 26 U.S.C. § 7623(b)(1).

41 26 U.S.C. § 7623(b)(2).

42 26 U.S.C. § 7623(a); 26 C.F.R. § 301.7623-1(c).

43 26 C.F.R. § 301.6103(n)-2T.

44 The college and university questionnaire,

related instructions and news release are

available at http://www.irs.gov/charities/

article/0,,id=186865,00.html. The IRS also

has made it clear that compliance checks are

now a key component of federal tax law

enforcement and compliance initiatives. See

EO Annual Report and FY 2009 Work Plan,

p. 19, available at http://www.irs.gov/pub/

irs-tege/finalannualrptworkplan11_25_08.pdf.

45 See, e.g., Testimony of Steven T. Miller,

Commissioner, TEGE, Before the Oversight

Subcommittee – House Ways and Means

Committee, On the Oversight of Tax-Exempt

Organizations (July 24, 2007), p. 9, available

at http://www.irs.gov/pub/irs-tege/miller_

testimony_7_24_07.pdf.

Volume 21, Number 3, February 2009 The Health Lawyer

REMINDER:

ABA Health Law Section members can access past issues of The Health Lawyer on

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Documents

IN THIS ISSUE FORM 990 DISCLOSURE - Home | Jones Day · 2009. 3. 10. · The IRS released a discussion draft of a revised Form 990 on June 24, 2007.3 In doing so, Kevin Brown, then