WASHINGTON - The Internal Revenue Service plans to issue guidance soon on the kinds of physician recruitment activities that could undermine the tax-exempt status of nonprofit hospitals and their bonds, an agency official said last week.

T.J. Sullivan, a special assistant for health care at the IRS, told lawyers meeting here for a course on tax-free charitable organizations that the agency is drafting a general counsel memorandum on physician recruitment. He said it will resemble a memorandum the agency issued last year on joint ventures between hospitals and doctors.

Last year's memorandum had called for revoking three IRS letter rulings that had allowed so-called 501 (c)(3) hospitals to enter into certain kinds of joint ventures.

These memorandums are the result of concerns by IRS officials that certain joint venture or recruiting arrangements might result in improper benefits to private doctors and might not further a nonprofit hospital's goal of benefiting the community.

Sullivan said the IRS is placing more reliance on a community benefit standard in looking at recruiting and joint venture arrangements.

"I think it's fair to say, in terms of recruiting, that you really need to be looking toward the ability to justify these kinds of arrangements based on community benefit," he said.

For example, he said the IRS may allow nonprofit hospitals more lee-way in their recruiting activities if they bring doctors into areas where they traditionally have not wanted to practice. The IRS also might be more lenient if a hospital is recruiting medical school graduates or doctors who are relocating rather than "the cardiologist from the hospital down the street because he or she happens to have a very lucrative practice," he said.

Sullivan said that having a non-profit hospital's board of trustees scrutinize recruiting activities "is likely to be crucial in establishing that [they are] being pursued with community benefit in mind."

He also advised that if an arrangement were "close to the line," the hospital might be able to demonstrate community benefit by requiring the physician to provide charity care of Medicare or Medicaid services that he or she might not already provide.

Sullivan said the IRS district director and examination agents in Pittsburgh have begun a pilot study of the recruitment activities of non-profit hospitals in the area. He said they are asking "whether the hospitals are appropriately reporting the financial value of any of the benefits provided" to the physicians, and "whether the physicians are reporting or reflecting the value of those benefits" on their tax forms.

Meanwhile, Sullivan told the group that there are some members of Congress and officials at the Treasury and IRS who believe alternative enforcement penalties to the loss of tax-exempt status are needed for nonprofit organizations that engage in activities that do not qualify for tax exemption.

One alternative might be modeled after private foundation excise taxes, he said. Under this approach, he explained, a tax-exempt organization engaging in "disqualifying activities" would be taxed. The organization would be given a period of time to rectify the situation, and taxed more heavily if it failed to do so.

Sullivan works with the IRS' employee benefits and exempt organizations division. The course on tax-exempt charitable organizations was sponsored by the American Law Institute and the American Bar Association.

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