IRS Provides Opportunity for Tax-Exempt ACOs

April 5, 2011

On March 31, alongside related proposed regulations and guidelines from several other federal regulatory agencies, the IRS issued Notice 2011-20 to solicit public commentary on the application of current law to tax-exempt organizations participating in the Medicare Shared Savings Program (MSSP) through accountable care organizations (ACOs). Rather than proposing new regulations, the IRS is soliciting comments from the public to assess the impact of ACO participation on tax-exempt status, private benefit and unrelated business income. In addition, the IRS is soliciting comments on whether additional guidance is needed for other types of shared savings arrangements with commercial payors (aside from the MSSP).

A few key observations can be made about the IRS’ initial comments on ACOs:

  1. No Private Inurement or Benefit in Certain Situations. Due to CMS oversight of the MSSP, participation in the MSSP through an ACO generally would not result in prohibited inurement or impermissible private benefit where:

    1. The terms of the tax-exempt organization’s participation (including its share of MSSP payments) are set forth in advance in writing and negotiated at arm’s length.
    2. CMS has accepted the ACO into the MSSP.
    3. The tax-exempt entity’s share of economic benefits from the ACO is proportional to the benefits or contributions provided to the ACO by the tax-exempt entity. If the tax exempt entity receives an ownership interest in the ACO, the amount of its capital contributions must be proportional and equal in value to its ownership interest and distributions must be made in proportion to ownership interests.
    4. The tax-exempt entity’s share of the ACO’s losses doesn’t exceed its share of the economic benefits.
    5. All transactions among the tax-exempt entity and the ACO (or its participants) must be fair market value.
  2. Unrelated Buisiness Income Tax. Absent any inurement or private benefit, participation in an ACO would be substantially related to the charitable purpose of “lessening the burdens of government,” so long as the ACO is satisfying CMS’ participation requirements. This is due in part to the fact that the MSSP was conceived as a way to help reduce governmental costs (and increase quality) associated with the Medicare program. As a result, ACO participation in the MSSP generally shouldn’t generate UBIT for its tax-exempt stakeholders.
  3. ACO Activities Unrelated to MSSP. The more difficult question involves ACO’s that conduct activities outside the context of the MSSP. The IRS seems to indicate that some of these activities will not be related to charitable activities (e.g., negotiating with private payors on behalf of unrelated parties). Other activities, such as participating in shared savings arrangements with Medicaid, could be determined to further or be substantially related to a charitable purpose. In this Notice, the IRS does not specifically identify which types of activities would or would not be deemed to further charitable purposes. As a result, it is still unclear as to which non-MSSP activities could result in threats to an organization’s tax exempt status or UBIT. The IRS is soliciting comments on this issue in particular. They have asked that comments address the following: (1) description of activities a tax-exempt entity might participate in through an ACO; (2) the rationale whereby participation in non-MSSP activities might further exempt purposes; (3) what criteria, requirements and safeguards would ensure furtherance of exempt purposes (given the absence of the types of safeguards that are present in MSSP, such as quality standards and oversight and monitoring).
  4. Charitable Purposes. While the IRS did not identify which activities would or would not be deemed to further charitable purposes, it did cite two important precedents that have guided IRS positions in the past. In Revenue Ruling 98-15, the IRS recognized that the activities of a limited liability company (LLC) are considered to be the activities of a nonprofit organization that is an owner of the LLC when evaluating whether the nonprofit organization is operated exclusively for tax-exempt purposes within the meaning of section 501(c)(3). Apparently, the IRS will review ACOs in the same manner. Similarly, the IRS cited Revenue Ruling 2004-51 for the proposition that the activities of an LLC treated as a partnership for federal tax purposes will be attributed to a tax-exempt entity for the purpose of determining whether the tax-exempt organization was engaged in an unrelated trade or business. Since these two revenue rulings were cited in the published Notice, it is a signal that the IRS may not be backing off of its general approach to joint ventures in the ACO context.