25 July 2018 Dual-status hospital's 501(c)(3)-status revoked for failure to comply with 501(r) requirements In PLR 201829017, the IRS has determined that a "dual-status" hospital's Section 501(c)(3) status should be revoked for failure to comply with the Section 501(r) requirements. Section 501(r) and its accompanying regulations (see Tax Alert 2015-0029) impose a variety of requirements on Section 501(c)(3) hospitals, including: — Conducting a community health needs assessment (CHNA) at least once every three years Failure to comply with these requirements can result in revocation of a hospital's Section 501(c)(3) status, temporary taxation of the income from a hospital facility, and a $50,000 excise tax specific to CHNA failures. In determining whether to revoke Section 501(c)(3) status or impose tax, the IRS will consider all relevant facts and circumstances, including the significance of the failure, the reason for the failure, and any practices and procedures the organization had in place before the failure, or safeguards it implemented afterwards. The regulations and Revenue Procedure 2015-21 contain some provisions to mitigate these consequences (see Tax Alert 2015-0553). Minor errors or omissions are not treated as Section 501(r) failures if they are: (1) inadvertent or due to reasonable cause and (2) corrected. If an error or omission is more than minor, but not willful or egregious, it will be excused for purposes of revocation or facility taxation (but not the CHNA excise tax) if the hospital corrects it and discloses the issue on its annual information return (Form 990), in accordance with Revenue Procedure 2015-21. Some hospitals are exempt from taxation both because they are governmental and also because they have obtained separate Section 501(c)(3) tax-exempt status. These are referred to as "dual-status" hospitals, which must comply with the Section 501(c)(3) requirements, including Section 501(r), to maintain their Section 501(c)(3) status. However, they may not be required to file Form 990 under the provisions of Revenue Procedure 95-48. Dual-status hospitals, however, must still file Form 990-T, Exempt Organization Business Income Tax Return, when applicable. The revoked-status hospital was formed jointly by a city and county government and had also obtained recognition of tax-exempt status under Section 501(c)(3) (i.e., it was a dual-status hospital). The IRS selected the hospital for examination for possible failure to comply with the Section 501(r) requirements applicable to Section 501(c)(3) hospitals. As a governmental entity, the hospital was not required to file Form 990, Return of Information Exempt from Income Tax. To obtain the information otherwise reported on Form 990 Schedule H (Hospitals), the IRS relied on other sources, including the hospital's website. The IRS was unable, however, to locate information supporting compliance with Section 501(r). Specifically, the IRS noted that its preliminary review failed to locate: a CHNA, a CHNA implementation strategy, a financial assistance policy, an emergency medical care policy, and any billing and collection procedures. The IRS mailed information document requests to the hospital to obtain the missing information, and called the hospital when it received no response. The IRS ultimately connected with the hospital CEO and Director of Finance. The hospital contacts indicated that the hospital had completed a CHNA, but determined that it was already addressing the community needs identified. The hospital did not complete an implementation strategy, nor comply with other Section 501(r) requirements. Officials at the hospital stated that they were unaware of the hospital's Section 501(c)(3) status. The IRS explained to the hospital officials why some hospitals prefer to be dual-status hospitals. However, officials at the hospital determined that those reasons did not apply to the hospital, noting that: (1) they do not offer Section 403(b) plans because their employees are covered by the state's retirement plan, (2) they do not need sales and/or property tax exemption, and (3) they do not receive a discounted rate from the post office. At a scheduled board meeting, the hospital's board voted to relinquish the hospital's Section 501(c)(3) status. The determination was based on the fact that the hospital was established as a governmental hospital and operated as such, and the hospital's board was concerned about penalties for failure to comply with the Section 501(r) requirements. Hospital officials discussed with the IRS the best procedure to terminate Section 501(c)(3) status, and it was determined that the IRS would revoke the hospital's Section 501(c)(3) status. In its revocation, the IRS noted that, although the hospital did have a website, the website did not meet the requirements imposed by the regulations under Section 501(r). Apart from the completion of a CHNA, the IRS added, the hospital did not follow any of the other Section 501(r) requirements. The hospital agreed to the revocation, and it retained its status as a governmental hospital. The revocation was made effective for the first tax year for which a failure to comply with Section 501(r) was noted. Tax-exempt hospitals should be aware that the IRS continues to examine hospital facilities for compliance with Section 501(r). This revocation letter is a reminder that all Section 501(c)(3) hospitals, including dual-status hospitals, must comply with Section 501(r). In general, the IRS reviews a hospital's Form 990, Schedule H and public website to check compliance with the provisions of Section 501(r). As generally required by the Section 501(r) regulations, a Section 501(c)(3) tax-exempt hospital should periodically review its Section 501(r) compliance, including checking that its website(s) include: (1) its two most recent CHNA reports; (2) its Financial Assistance Policy (FAP), FAP application, and plain language summary, as well as translations of all three documents into the primary language of Limited English Proficiency populations within the area served; and (3) any other information required to be included in those policies or elsewhere on the website(s). These hospitals should also check that these documents contain all information required by the final Section 501(r) regulations and that required annual updates have been made (such as to the amount generally billed (AGB) percentage, if that AGB method is used). As dual-status hospitals do not file a Form 990, it is even more imperative that they publicize all required compliance on their website. In addition to complying with the reporting requirements of Section 501(r) for federal purposes, all tax-exempt hospitals, including governmental hospitals, should identify their respective state requirements to determine whether any particular state has adopted additional reporting requirements due to the federal enactment of Section 501(r). See, for example, Tax Alert 2017-0636. — For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg
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