CPA Firm Seeks Exemption for Dual Status Entities From Additional Requirements for Tax-Exempt Hospitals

We appreciate this opportunity to comment on Notice 2010-39, Request for Comments Regarding Additional Requirements for Tax-Exempt Hospitals. BKD, LLP is a national CPA and consulting firm serving approximately 400 hospitals nationwide. Our comments are as follows:

Applicability of section 501(r) to certain governmental hospitals

Many of our hospital clients are legally organized as governmental entities. They are county hospitals, district hospitals, city hospitals, hospital authorities, components of public universities and others. These governmental hospitals are all exempt from federal taxes under IRC § 115 because they are instrumentalities of the states.

The specifics of organizational status vary from state to state in accordance with state law. Although we are a CPA firm, not a law firm, the following is an example of the many differences we have noted. Under Missouri law, county hospitals have a separately elected five member board and operate fairly autonomously from the county itself, except for certain matters including the incurrence of bonded debt and transactions such as sale of property. However, in Illinois, county hospitals are governed by a board comprised of a subset of the county commission and generally the hospital operations and other county functions are more integrated than is generally the case in Missouri. We find significant variation in the organizations' structures depending on the state in which the hospital is located and the section of state law under which it is organized, i.e. county hospital vs. district hospital.

For example, the Missouri county hospital law is included in the Missouri Revised Statutes Chapter 205, County Health and Welfare Programs, and the Hospital District Law is MoRS Chapter 206. These statues are available at: http://www.moga.mo.gov/STATUTES/STATUTES.HTM

These governmental hospitals generally have several commonalities:

• They are legally organized under authorizing statutes of their state

• Those statutes are rather specific about authorized activities; if an activity is not authorized by those state statutes, it may not be legally carried out by the governmental hospital

• They are generally governed by a board that is directly elected by the people, or appointed by elected officials

• They often have a reporting obligation to the state and are subject to audit by the state auditors office

• They operate solely for the benefit of the people that they serve

• Often they are prohibited from refusing service to anyone, including based on financial considerations, or adopt this as an operating policy

• Often they are required to carry out specific missions and goals

• Often they provide certain public health functions beyond the scope of typical hospital operations, such as community needs assessments and proactively meeting those needs, to the extent their operating budget will allow

• In metropolitan areas, they often serve as the public or safety net hospital for their area. In rural areas, they are often the only hospital serving their area

• Sometimes they receive tax support

• They are exempt from all state sales, use, property taxes and from federal taxes under IRC § 115 because they are instrumentalities of the states.

Ironically, many such hospitals don't recognize they have this dual status as that information was lost through the years as management and boards have turned over, and they are exempt from filing IRS form 990. In addition, as pension laws changed over the years, these entities could now have very similar if not identical plans to their current plans, without having 501(c)(3) status. Finally, we have an exemption letter for at least one such hospital that is not reflected in the IRS list of charities. Publication 78 so it appears IRS records may be questionable in this area, also.

We are very concerned the application of new section 501(r) to these dual status entities would be problematic. Problems include:

• The aforementioned failure to recognize the obligation to comply with section 50l(r), when they don't recognize they have 501(c)(3) status

• Possible conflicts between the new 501(r) and the long standing authorizing state statutes

• Possible redundant requirements between 501(r) and the authorizing state statutes resulting the waste of limited public resources to document compliance

• Reporting and enforcement of 501(r) when such hospitals are exempt from filing form 990

• There is no vehicle for such entities to resolve these issues themselves because there is no provision in the code or regulations for such a dual status hospital to voluntarily terminate its 501(c)(3) status

To resolve all of these concerns we respectfully request the IRS exempt such dual status hospitals from compliance with 501(r).