Public Hospitals Push to Voluntarily Relinquish Tax- Exempt Status, Avoid ACA

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By Diane Freda  

Dec. 10 --Public hospitals are hoping to convince the Internal Revenue Service that it should allow them to voluntarily give up their tax exemption, rather than having to meet new and onerous requirements of the Affordable Care Act.

In a letter to the IRS obtained by Bloomberg BNA Dec. 3, the East Alabama Healthcare Authority asked the IRS to adopt an administrative mechanism that would allow it and other public hospitals to avoid the requirements of new tax code Section 501(r), especially the requirement that the hospitals perform a community health needs assessment at least once every three years.

Under proposed rules (REG-106499-12) issued by IRS in April, the public hospitals would have to meet the same requirements as other exempt hospitals under tax code Section 501(c)(3) .

But because the hospitals already have a legitimate tax exemption because of their affiliation with the government, they should be allowed to rely solely on that exemption, the letter's author, T.J. Sullivan, partner with Drinker Biddle & Reath LLP, told Bloomberg BNA Dec. 10.

“To me, it seems only fair to allow public hospitals that always have been effectively exempt from federal income taxes and that chose years ago to seek recognition under Section 501(c)(3), long before the costs and burdens of Section 501(r) were known, to simply reverse course and go back to relying only on their governmental status now that those additional costs and burdens are known,” he said.

The problem is that currently there is no mechanism for voluntarily withdrawing tax-exempt status under that section, Sullivan said. The IRS has long had a policy that once an organization chooses to be exempt under Section 501(c)(3), it is to remain exempt unless it terminates and liquidates.

Although EAHA and other public hospitals already are effectively tax-exempt under the intergovernmental immunity doctrine, many of them previously sought dual status as also exempt under that section so the organization's employees could participate in Section 403(b) retirement plans, the letter said.

Relinquishment Process Offered

EAHA's letter offered three alternatives for voluntarily relinquishing exemption under 501(c)(3), preferring the first.

The preferred option is that the IRS could amend Part II of Form 8940, (Request for Miscellaneous Determination under Section 507, 509(a), 4940, 4942, 4950, and 6033 of the Internal Revenue Code), so that organizations could request a determination letter in accordance with Revenue Procedure 2013-4, by checking the applicable box on the revised Form 8940. The letter said that is the most efficient procedure and the one most likely to produce a timely result. Rev. Proc. 2013-4 was issued in January.

A second alternative proposed procedure is for the IRS to permit such organizations to submit a determination letter request pursuant to the current procedures provided in Rev. Proc. 2013-4, with some amendments. The third alternative proposed procedure is to permit such organizations to submit a determination letter request pursuant to the procedure provided in Rev. Proc. 2013-4.

Tax-exempt hospitals have complained of expensive and time-consuming requirements for maintaining exemption under the health care law. But of all the new requirements--which are related to billing, collection, financial assistance and the community health needs assessment--perhaps the most objectionable has been the health needs assessment and the implementation strategy related to it. The ACA added new Section 4959, which imposes an excise tax for failure to meet the requirements, and added reporting provisions related to it under Section 6033(b).


To contact the reporter on this story: Diane Freda in Washington at

To contact the editor responsible for this story: Cheryl Saenz at

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