Read the letter ruling: PLR 201336020 [PDF 735 KB]
A section 501(c)(3) tax-exempt healthcare organization employed a full-time physician pursuant to a 36-month contract.
The physician’s principal duty was to provide medical services to the organization’s patients, while the organization provided necessary managerial and administrative services. The physician was paid pursuant to an arrangement that included minimum compensation, productivity payments, and additional payments for call coverage.
The physician demonstrated extremely high productivity during his initial term of employment, but failed to fulfill his contract when he did not return from an extended leave of absence and was subsequently fired for cause. Prior to the termination, the organization believed that the physician would return to work and continued to pay him, based on prior year compensation, resulting in compensation that was in excess of the amount he was entitled to receive based on the services actually provided. The organization was unable to recover the excess amounts paid.
Section 4958 provisions
Section 4958, through the imposition of an excise tax, generally prohibits a section 501(c)(3) public charity from providing a disqualified person with an economic benefit that exceeds the fair market value of the consideration the organization receives in return.
Transactions that implicate the intermediate sanctions rules of section 4958 may also threaten the tax-exempt status of the organization participating in the excess benefit transaction.
IRS letter ruling
The IRS ruled that, under the facts, the physician was not a disqualified person with respect to the organization within the meaning of section 4958(f)(1). Therefore, the excess benefit transaction rules of section 4958 did not apply.
Accordingly, the IRS did not address the issue of whether or not the organization took sufficient corrective actions to prevent the payments from adversely affecting the organization’s tax exempt status under section 501(c)(3). See Reg. section 1.501(c)(3)-1(f), which was not cited in the ruling.
For more information, contact:
Rick Speizman, Partner-in-Charge of KPMG's Washington National Tax Exempt Organizations Tax group
+1 (202) 533-3084