Cleveland Clinic Health System Obligated Group - FMSbonds.com

exempt hospitals and health systems. The IRS’s interpretation of and position on these rules as they affect theorganization and operation of health care organizations (for example, with respect to providing charity care, jointventures, physician and executive compensation, physician recruitment and retention, etc.) is constantly evolving.The IRS reserves the power to, and in fact occasionally does, alter or reverse its positions concerning tax-exemptionissues, even concerning long-held positions upon which tax-exempt health care organizations have relied.In addition, the IRS has asserted that tax-exempt hospitals that are in violation of Medicare and Medicaidregulations regarding inducement for referrals may also be subject to revocation of their tax-exempt status. Becausea wide variety of hospital-physician transactions potentially violate these broadly stated prohibitions on inducementfor referrals, the IRS has broadened the range of activities that may directly affect tax exemption, without definingspecifically how those rules will be applied. As a result, tax-exempt hospitals, particularly those that have extensivetransactions with physicians, are currently subject to an increased degree of scrutiny and perhaps enforcement by theIRS. The IRS’s policy position is not necessarily indicative of a judicial adjudication of the applicable issues.For transactions occurring on or after September 14, 1995, Section 4958 of the Code imposes excise taxesof up to 200% on “disqualified persons” (such as officers, trustees and directors) who enter into “excess benefittransactions” with tax-exempt organizations such as the Obligated Issuers. No penalty excise tax applies to the taxexemptorganization itself. According to the legislative history and regulations associated with Section 4958, theseexcise taxes may be imposed by the IRS either in lieu of or in addition to revocation of exemption. The legislationis potentially favorable to taxpayers because it provides the IRS with a punitive option short of revocation of exemptstatus to deal with incidents of private inurement. However, the standards for tax exemption have not been changed,including the requirement that no part of the net earnings of an exempt entity inure to the benefit of any privateindividual. Consequently, although the IRS has only infrequently revoked the tax exemption of non-profit healthcare corporations in the past, the risk of revocation remains and there can be no assurance that the IRS will not directenforcement activities against any of the Obligated Issuers.In 1990, the Employee Plans and Exempt Organizations Division of the IRS expanded the CoordinatedExamination Program (referred to as “CEP”) of the IRS to tax-exempt health care organizations. CEP audits areconducted by teams of revenue agents. The CEP audit teams consider a wide range of possible issues, including thecommunity benefit standard, private inurement and private benefit, partnerships and joint ventures, retirement plansand employee benefits, employment taxes, tax-exempt bond financing, political contributions and unrelated businessincome.On August 10, 2004, the IRS announced an enforcement effort (referred to as the “Tax ExemptCompensation Enforcement Project”) to identify and curb abuses by charities that pay excessive compensation andbenefits to officers and other insiders. The IRS will implement this new effort by contacting nearly 2,000 charitiesabout their compensation practices and procedures. The project’s goals are to address the compensation of specificindividuals, influence how organizations set compensation, and learn about existing practices. The inquiry willinvolve both large and small charities, and will also investigate insider transactions, including loans, leases, andother transfers of income and assets to officers and insiders. As a result of such inquiry, the IRS could seek to usethe entire range of its enforcement activities, including penalties for filing incorrect information, intermediatesanctions, and revocation of the organization’s exempt status. It is possible that one or more of the Obligated Issuerswill be contacted by the IRS in connection with this project.On March 1, 2007, the IRS released its “Report on Exempt Organizations Executive CompensationCompliance Project – Parts I and II.” According to the Report, the Enforcement Project “uncovered significantreporting errors and omissions in specific compliance areas, particularly excess benefit transactions and transactionswith disqualified persons, as well as potential compliance issues related to loans made to officers.” The Reportcontains specific survey information of levels of compliance with various aspects of compensation by exemptorganizations. The Report found that significant reporting issues exist, but did not find evidence of other morewidespread concerns. Where compliance issues were found, significant penalties have been assessed. Further, due toconcern from information discovered during the Enforcement Project, the IRS has initiated Part III of theEnforcement Project, in which the IRS will perform an additional 200 compliance checks and 50 single-issueexaminations focusing on loans to executives.50