Private inurement considerations in recruiting physicians at sec. 501(c) (3) hospitals.

• Author: Zarzar, Robert
• Position: Nonprofit hospitals and healthcare organizations

Many hospitals have difficulty recruiting qualified doctors in a variety of specialty areas. In addition, as managed healthcare reaches significant levels within the industry, hospitals and other healthcare organizations frequently must provide recruitment incentives to their networks of primary-care physicians. These recruitment activities have employed a variety of structures and forms, each matched to the needs of the hospital and physicians and to the bargaining power of the parties. However, in structuring physician recruitment packages, tax-exempt healthcare organizations must avoid entering into financial relationships that could result in "private inurement" or impermissible "private benefit."

Definition of "Insiders"

To be exempt from income tax under Sec. 501(c)(3), a nonprofit hospital or other healthcare organization must ensure that no part of its net earnings "inures to the benefit of any private shareholder or individual...." Inurement arises whenever "a financial benefit represents a transfer of the organization's financial resources to an individual solely by virtue of the individual's relationship with the organization and without regard to the accomplishment of exempt purposes" (GCM 38459). Private shareholders or individuals as described in Sec. 501(c)(3) (often referred to as "insiders") are persons with a personal or private interest in the activities of the organization or who are in a position to control or influence the organization.

However, private benefit can exist, regardless of whether the individual receiving the benefit is deemed an insider. Unlike private inurement, in which any amount can jeopardize an organization's tax-exempt status, private benefit may not be inconsistent with exempt status, as long as it is insubstantial when compared to the overall community benefit provided by the organization's exempt activities.

In 1986, the IRS took the position that insiders include a hospital's officers, directors and physicians. Hospitals and physicians have a unique relationship because a hospital relies on its physicians for patient referrals. In GCM 39498, the Service found that, as a result of a hospital's economic dependence on its physicians, the physicians were in a position to control and influence the hospital. Therefore, GCM 39498 advised that all physicians on a hospital's medical staff are insiders subject to the inurement proscription.

For Sec. 4958 intermediate sanction purposes, Congress did not...