FOR TAX-EXEMPT ENTITIES
Significant Implications of FIN 48

Now that FASB Interpretation No. 48 is in full effect, organizations operate under new standards for recognition of their tax positions in financial statements (accounting for uncertainties in income taxes). While the pronouncement applies to all organizations, these comments are directed at our nonprofit, tax-exempt organization clients. The standard applies for fiscal years beginning after December 15, 2006.

General Standard:
The substantive impact of the new standard derives from its requirements that financial statements reflect: (1) only those tax positions that are "more likely than not" to prevail upon final disposition (through settlement or court process), assuming that the position will be audited by the IRS; and (2) only the percentage of benefit that is "more likely than not" to prevail. These approaches suggest that if a material tax position is anything less than certain, the tax benefit should reflect a discount. Any difference between the position taken in a tax filing and shown in financial statements must be disclosed in a reconciliation footnote. The IRS will likely take a keen interest in that footnote.

Burdens for Tax-Exempt Entities:
The new standard has potential serious implications for tax-exempt entities:

There must be significantly heightened awareness of tax positions reflected in the financial statements. Historically, many exempt organizations have not documented their tax conclusions to the detail necessary to determine crisply, for example, "what percentage likelihood" applies to each of their unrelated business taxable income reporting positions, assuming those positions are audited and resolved through litigation or settlement. Consequently, it may be necessary for many organizations to conduct a pro forma tax audit to understand the full range of issues that must be considered in complying with the FIN 48 standards.

Examples of other areas that could warrant additional review might include the consequences of joint ventures with taxable organizations. At a minimum, it seems that an organization should conduct an inventory of its tax positions that could be affected by the new standard.

An organization should consider significantly enhancing its documentation with respect to its tax position conclusions. Compliance with the new approach seems clearly to require substantially more work in this area than is performed currently by at least many tax-exempt entities.

Regular monitoring of changes in law is necessary to determine whether recorded amounts should be changed from year to year. For many tax issues, certainty is unattainable. If material, each of these will require an assessment of the amount of tax benefit that can be recorded and any interest or penalty accrual that may be required under FIN 48.

Any organization which has not yet analyzed steps it must take to ensure FIN 48 compliance for its 2007 reporting should begin the analysis soon so that any necessary work can be accomplished before reporting obligations arise.

Our short summary of recommended actions is:

» Create inventory of material tax positions

» Assess the nature and quality of the evidence supporting the tax position in the entity's files and determine whether other work is necessary to document amounts recorded

» Adopt an updating discipline to determine whether any change in recognition is required from year to year.

IRS Report On Executive Compensation of Exempt Organizations

The IRS recently released the results of the information it obtained in response to the compliance check letters it sent in 2004 to thousands of exempt organizations. The IRS noted that the largest issue it identified was a failure to adequately report executive compensation on Forms 990. Although high executive compensation payments were found for many exempt organizations, the amounts were generally substantiated by appropriate data on comparability. In cases where problems were identified, however, the penalties assessed were in excess of $21 million. The IRS determined that additional education for agents and for exempt organizations was needed in the areas of reporting requirements and the "rebuttable presumption" procedures used to establish appropriate compensation.

FOR HOSPITALS
OIG Rejects Transportation Arrangement

In Advisory Opinion 07-02, the Department of Health and Human Services Office of Inspector General (OIG) found that a hospital's proposal to subsidize the costs of ambulance transportation for patients transported to the hospital from outside the hospital's local area could be prohibited under the Anti-kickback statute, and that the OIG could sanction such arrangements under the Anti-kickback statute and the federal statute prohibiting inducements to federal health care program beneficiaries.

The hospital had proposed subsidizing the costs of ambulance trips for patients who live outside the local area after the local Medicare carrier denied full payment for the ambulance trips. The hospital proposed to pay the ambulance supplier a negotiated rate and submit claims directly to third-party payers, including Medicare and Medicaid. The hospital would "absorb" any costs that third party payers did not pay. The OIG found that the hospital's "absorption" of the costs not paid by the third-party payer would constitute remuneration to the patient, and would likely influence the patients' initial and subsequent choice of the hospital for hospital services.

FOR PROVIDERS
Virginia Supreme Court Refuses to Enforce Noncompete in Physician Employment Agreement

The Virginia Supreme Court ruled that a Virginia healthcare corporation which is not licensed to practice medicine was not entitled to enforce a noncompete clause against a physician who terminated employment with the corporation and set up a practice within one mile of the corporation.

Parikh v. Family Care Ctr., No. 060934 (Va. Mar. 2, 2007). The corporation was originally licensed to practice medicine under Virginia law as a professional corporation. Upon the death of the sole physician shareholder, however, ownership of the professional corporation passed to his wife, who was not licensed to practice medicine. By operation of law, the professional corporation converted to a non-professional corporation. As such, the Virginia Supreme Court held that because the non-professional corporation did not have a license to practice medicine, it did not have a legitimate business interest in enforcing the noncompete clause.

False Claims Action Against Physician Dismissed.

The U.S. District Court for the District of Nevada dismissed a False Claims Act (FCA) action against a physician who allegedly improperly billed Medicare for care provided to dialysis patients in a hospital's emergency room. United States v. Ovuworie, No. 2:04-cv-0662-RLH-RJJ (D. Nev. Mar.1, 2007). The case arose out of the physician's billing Medicare for dialysis services for two patients who, because of their unstable and violent behavior, were refused care in the Medicare-certified outpatient facilities in the area. As a result, the physician agreed to provide them with care at UMC Valley Hospital's emergency room. The hospital told the physician to bill for the patients as inpatients.

The government claimed the use of inpatient codes was improper, and argued that the services should have been billed under outpatient codes for outpatient care and then appealed the subsequent denial for not including a code for a Medicare-certified facility. The court found that the alternative of inserting nonexistent codes for an uncertified outpatient would have required the physician to knowingly commit fraud and found that the physician's billing errors were mistakes and were not sufficient to sustain a claim under the FCA.

FOR PHARMACEUTICAL MANUFACTURERS
FDA Issues Drug Safety Guidance

The Food and Drug Administration (FDA) recently issued guidance on drug safety information, as part if its reexamination of its risk communication program, which addresses how and when the FDA communicates emerging drug safety information to the public. The guidance describes the FDA's policy on communicating information on important drug safety issues. The FDA defines an important drug safety issue as one that has the potential to alter the benefit/risk analysis for a drug in a way that may affect decisions about prescribing or taking the drug. The FDA discusses the means by which it will communicate information, including labeling, public health advisories, patient information sheets, healthcare professional sheets, and alerts on patient information and healthcare professional sheets. The guidance can be found at this web link.