Did a nonprofit corporation operating indigent-care clinics qualify for a Florida Consumer's Certificate of Exemption as a charitable institution?

Subject

Reconsideration of Application for Consumer Certificate of Exemption

Plain-English summary

Florida concluded that the nonprofit qualified for a Consumer's Certificate of Exemption and directed that Form DR-14 be issued. The Department reversed two earlier denials that had incorrectly treated the applicant as merely a manager separate from its clinics.

The applicant and clinics were one legal entity: the clinics were not separately incorporated or separately identified for federal-employer purposes. Financial records showed that clinic operating expenses exceeded clinic revenue and that charity write-offs were 11.7% in 1992 and 23.0% through September 1993. Florida found a primary medical-services purpose and a reasonable percentage of care provided free or at substantially reduced cost to people unable to pay.

What this means for you

The ruling looked through organizational labels to the applicant's actual legal structure, operations, spending, and documented charity care. Federal nonprofit status alone was not the whole test.

Common questions

Were the clinics separate from the applicant? No. Florida treated them as constituent functions of the same nonprofit corporation.

Why were the earlier denials reversed? They rested on the incorrect premise that the applicant only managed separate clinics and did not directly provide medical services.

What eligibility elements did the ruling identify? Nonprofit organization, section 501(c)(3) status, a sole or primary medical-aid purpose, and a reasonable percentage of free or substantially reduced services for persons unable to pay.

Citations and references

• Fla. Stat. §§ 212.02(13), 212.08(7)(o), and 213.22
• Fla. Admin. Code r. 12A-1.001(3)(g)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94A-021

Original ruling text

Mar 15, 1994

Re: Technical Assistance Advisement 94A-021
Reconsideration of Application for Consumer Certificate of
Exemption
Taxpayer: XXX (herein the "Applicant")
XXX (herein "Clinic 1")
XXX (herein "Clinic 2")
XXX (herein "Clinic 3")
Taxpayer's Address: XXX
Federal Employer Identification Number: XX
Owners of Taxpayer: XXX (herein "A")
XXX (herein "B")
Other Interested Party: XXX (herein the "County")
Section 212.08(7)(o), F.S. and Rule 12A-1.001(3)(g), F.A.C.

Dear :

This response is in reply to your November 18, 1993, petition
for the Department's issuance of a Technical Assistance
Advisement ("TAA") pursuant to s. 213.22, F.S. Your petition
regards the referenced matter and party. The Department has
carefully examined your petition with supporting documents and
finds it to meet the criteria set forth in Chapter 12-11,
F.A.C., requisite to issuance of a TAA. Therefore, the
Department is by this response issuing the requested TAA.

DISCUSSION OF FACTS

Your petition and supporting documents impart the following
significant information regarding the issues under advisement
herein:

"We represent [the Applicant].... On or about November 23,
1992, [the Applicant] filed with the Department the
Department's Form DR-5, State of Florida Sales and Use Tax
Application for Consumer Certificate of Exemption.
Attached to that application were the required documents to
support [the Applicant's] claim for exemption. Such

exemption was ultimately denied by the Department on or
about July 26, 1993.

"Introduction, Corporate Formation and Structure

"On February 1, 1992, [the Applicant] was incorporated as a
not-for-profit corporation under the laws of the State of
Florida. (Copies of [the Applicant's Articles] of
Incorporation and Bylaws are not attached to this request
since the same were included in [the Applicant's]
application for exemption).... As reflected in [the
Applicant's] Articles of Incorporation, [the Applicant] was
organized exclusively for charitable, scientific or
educational purposes within the meaning of Section
501(c)(3) of the Internal Revenue Code of 1986. In
furtherance of that purpose, [the Applicant] was endowed
with power to operate public not-for-profit clinics,
hospitals, nursing homes, homes for the aged, diagnostic
and treatment facilities, and other similar facilities. As
further stated in the Articles of Incorporation, [the
Applicant] had, and still has, two members, [A], a Florida
not-for-profit corporation, and [B], also a Florida notfor-profit corporation. In other words, [A] owns' fifty (50%) percent of [the Applicant] and [B]owns' the other
fifty (50%) percent of [the Applicant]. Both [A] and [B]
are tax exempt organizations under Section 501(c)(3) of the
Internal Revenue Code and operate public not-for-profit
hospitals in [County], Florida.

"Corporate Mission

"[The Applicant's] organizational mission is to provide
quality medical/health care services primarily to indigent
residents of [County], Florida, through operation of public
not-for-profit clinics. To further that mission, [the
Applicant] opened three (3) clinics, [Clinic 1] and [Clinic
2] both located... [County], Florida, and [Clinic 3],
located in... [County], Florida. However, recently, [the
Applicant] transferred ownership and operation the [Clinic
3] to [A Affiliates] doing business as..., and [the
Applicant] is no longer associated with [Clinic 3].

([Clinic 3] for that time period as it was owned and
operated by [the Applicant], together with [Clinic 1] and
[Clinic 2] are hereinafter referred to as the `Clinics').
The Clinics operate under [the Applicant's] organizational
umbrella and do not have separate Federal Employer
Identification Numbers. Medical/health care services are
provided by [the Applicant] at its Clinics regardless of
race, creed, sex, national origin, handicap, age or ability
to pay.

"The primary area of medical/health care services provided
by [the Applicant] is in the area of ambulatory clinic
settings, including primary and urgent care medicine. In
addition, [the Applicant] operates urgent care, medical
care and specialty care clinics in geriatrics and surgery.
Approximately 17,296 patients were treated in 1992 at the
Clinics. It is projected 21,062 patients will be treated
in 1993, and 25,780 in 1994 at the Clinics. As is
discussed more fully later in this letter, a significant
portion of the services rendered at the Clinics is free of
charge to indigent individuals residing in [County],
Florida.

"IRS Determination of 501(c)(3) Status

"On January 12, 1993, the internal Revenue Service
determined that [the Applicant] was exempt from federal
income tax under Section 501(a) of the Internal Revenue
Code as an organization described in Section 501(c)(3) of
the Internal Revenue Code. A copy of the IRS' determination
that [the Applicant] is exempt from federal income taxation
is attached, for your ready reference, as Exhibit `A'.

"Charity Write-Off Policy

"[The Applicant] has a formal written charity write-off
policy regarding its patients. It is [the Applicant's]
policy to contribute toward the health care status of
individuals by providing economical health services with a
special concern for the poor. To effectuate this policy

[the Applicant] does not utilize `sliding scales' regarding
patient billing. Rather, all patients are charged
consistently for services rendered. (A copy of [the
Applicant's] then current catalog of charges was provided
to the Department on February 1, 1993 and is not being
resubmitted at this time.)

"[The Applicant] attempts to identify potential charity
accounts at the time of registration in accordance with the
following guidelines. Registration clerks identify
patients and obtain documentation necessary to determine
eligibility for charity. [The Applicant] recognizes that
there are circumstances which necessitate the
identification of charity patients following the rendering
of the services. Therefore, the Clinics' office[s] also
identity potentially eligible patients and assist in
obtaining required documentation after medical/health care
services have been rendered at the Clinics.

"After all possible sources of medical assistance programs,
including Medicaid, have been eliminated, the patient's
account is reviewed again for charity write-off status.
[The Applicant] utilizes current Federal Poverty Guidelines
(hereinafter `FPG') in making the determination of whether
a patient's account is eligible for a charity write-off.
According to [Applicant] policy, no patient may be approved
for charity care whose family income for the past twelve
months preceding the determination exceeds one hundred and
fifty (150%) percent of the current FPG unless the total
charge due from the patient exceeds twenty-five (25%)
percent of the annual family income. However, [the
Applicant] will not approve a patient for charity status if
the family income exceeds four (4) times the federal
poverty level for a family of four.

"[The Applicant], to effectuate and enforce the foregoing
policy, requires documentation from patients substantiating
the patient's income. Proper documentation includes the
following items:

*

W-2 withholding forms;

*

pay stubs;

*

income tax returns;

*

written verification of wage from employer;

*

written verification from HRS which can attest to
patient's income status for the proceeding 12
months;

*

medicaid remittance advise which reflects that
the patient's medical benefits for the fiscal
year have been exhausted; and

*

income certification statements signed by the
patient or patient's guarantor.

"Financial Information

"[The Applicant's] financial statements, including [the
Applicant's] balance sheet, statement of revenue and
expenses and statement of cash flows through March 31,
1992, were provided to the Department with [the
Applicant's] application for the Certificate. In 1992,
[the Applicant] received $XX in gross revenues from patient
services at the Clinics. Of the gross revenues received,
11.7% or XXX, of the patient revenues were written-off as
charitable services under [the Applicant's] charity policy.
In addition, from August 1992 (when patient services
commenced), through December 1992, the cost of all services
rendered by [the Applicant] totaled XXX. Of the total cost
of services rendered by [the Applicant] without charge as
charitable services. A copy of [the Applicant's] statement
of revenue and expenses for 1992 is attached as Exhibit
`B'.

"[The Applicant's] statement of revenue and expenses
through September 30, 1993, show[s] that [the Applicant]
has received XXX in gross revenue from patient services at
the Clinics. Of the gross revenues received, 23% percent or
XXX, of the patient revenues were written-off as charity
under [the Applicant's] charity policy. In addition,
through September 30, 1993, the cost of all services
rendered by [the Applicant] has totaled XXX. Of the total
cost of services rendered by [the Applicant] through

September 30, 1993, 23.3% or XXX, is attributable to costs
of services rendered by [the Applicant] without charge as
charitable services. A copy of [the Applicant's] 1993
financial statements through September 30, 1993, including
[the Applicant's] balance sheet, statement of revenue and
expenses, and statement of cash flows is attached as
Exhibit `C'.

"We would hasten to point out that [The Applicant's] 1994
budget projects that during 1994 [the Applicant] will
receive approximately XXX in gross revenues from patient
services at the Clinics. Of the gross revenues projected
to be received, 24% or XXX, of the patient revenues are
projected to be written-off as charity under [the
Applicant's] charity policy. In addition, the 1994 budget
projects that the cost of all services rendered by [the
Applicant] will total XXX. Of the projected total costs of
services rendered by [the Applicant], 23.6% or XXX, is
projected to be attributable to cost of services rendered
by [the Applicant] without charge as charity services. A
copy of [the Applicant's] projected 1994 budget, including
[the Applicant's] projected balance sheet, statement of
revenue and expenses and statement of cash flows is
attached as Exhibit `D'.

"As discussed later in this letter, [the Applicant] was
formed solely for the purpose of running the Clinics to
provide indigent care when the [County] closed [Hospital]
for lack of funding. To fully fund [the Applicant] for
losses it incurs every month, [B] and [A] must each
contribute XXX per month. In addition, [the County]
contributes XXX per month to lessen the financial strain on
[the Applicant] and also to satisfy its legal obligation to
provide indigent health care to its residents.

"The table below presents [the Applicant's] relevant data
for 1992, 1993, through September 30, 1993, and [the
Applicant's] 1994 projected budget.

1992

1993 YTD

1994

Gross Revenue from

thru 9-30-93

Budget

$540,912

$833,375

$1,237,143

Patient Services

Patient Revenues

$63,302

$193,942

$292,415

Written-off as
Charity

% of Total

11.7%

23.0%

24.0%

$873,863

$1,257,452

$1,616,369

$106,270

$292,632

$382,050

12.2%

23.3%

23.6%

Patient Revenues
Written-off as
Charity

Total Cost of
Services

Cost of Services
Written-off as

% of Total Costs
of Services
Written-off as
Charity

"[The Applicant] and its Clinics

"As previously stated, [the Applicant] currently carries
out its mission by operating two (2) clinics: [Clinic 1]
and [Clinic 2], both located in [County], Florida. The
Department, in reviewing [the Applicant's] request for a
Certificate, inquired of [the Applicant] whether [the
Applicant] acts `as only the management organization for
the three [Applicant] Clinics.' The Department was
informed that [the Applicant] is the owner and operator of
the Clinics and that [the Applicant] does not act solely as
the management organization for the Clinics. Subsequently,
but also during the Department's review of [the
Applicant's] application, the Department inquired whether
[the Applicant] acts as the management organization for
[The Applicant's] Clinics and asked which Clinic(s) provide

the direct services to the disadvantaged and indigent
patients. In addition, the Department inquired whether
[the Applicant's] Clinics possessed their own Federal
Identification Numbers. In response[,] the Department was
informed that [the Applicant] owns and operates the Clinics
and provides the equipment, personnel, supplies, management
and supervision of [the Applicant] support personnel and
administrative operations. The Department was informed that
each of [the Applicant's] Clinics provide services to the
disadvantaged and indigent individuals and that [the
Applicant's] Clinics do not possess their own separate
Federal Employer Identification Numbers. Rather, [the
Applicant's] Clinics are operated under the auspic[es] of
[the Applicant's] Federal Identification Number.

"In summation, [the Applicant] does not merely provide
administrative services to the Clinics. Instead, [the
Applicant] is `in fact' the Clinics. To understand the
relationship between [the Applicant] and its Clinics, the
Department must keep in mind that [the Applicant] was
formed solely for the purpose of running the Clinics to
provide indigent care when [County] closed [Hospital] for
lack of funding. [The Applicant] does not operate any
other facilities other than the Clinics. In fact, [the
Applicant] does not utilize any other facilities for
administration, management, or other support for its
Clinics other than the Clinics themselves. Nor does [the
Applicant] utilize its managerial resources other than to
manage the Clinics. Each clinic contains its own
administrative and support services. Likewise, the direct
medical treatment for patients is provided by physician[s],
employees and/or independent contractors of [the
Applicant]."

REQUESTED ADVISEMENT

You endeavor to elicit the following determination by the
Department:

"[The Applicant] would request the Department issue a [TAA]
setting forth the Department's position as to [the

Applicant's] entitlement to a Certificate."

DISCUSSION OF LAW

We consult the following pertinent statutory and administrative
law in addressing the matter under advisement herein:

Section 212.02(13), F.S.: "`Person' includes any
individual, firm, copartnership, joint adventure,
association, corporation, estate, trust, business trust,
receiver, syndicate, or other group or combination acting
as a unit and also includes any political subdivision,
municipality, state agency, bureau, or department and
includes the plural as well as the singular number."
(Emphasis Supplied)

Section 212.08(7)(o), F.S.: "(o) Religious, charitable,
scientific, educational, and veterans' institutions and
organizations.
"1. There are exempt from the tax imposed by this part
transactions involving:....
"b. Sales or leases to nonprofit religious, nonprofit
charitable, nonprofit scientific, or nonprofit educational
institutions when used in carrying on their customary
nonprofit religious, nonprofit charitable, nonprofit
scientific, or nonprofit educational activities....
"2. The provisions of this section authorizing exemptions
from tax shall be strictly defined, limited, and applied in
each category as follows:....
"b. `Charitable institutions' means only nonprofit
corporations qualified as nonprofit pursuant to s.
501(c)(3), United States Internal Revenue Code, 1954, as
amended, and other nonprofit entities, the sole or primary
function of which is to provide, or to raise funds for
organizations which provide, one or more of the following
services if a reasonable percentage of such service is
provided free of charge, or at a substantially reduced
cost, to persons, animals, or organizations that are unable
to pay for such service:
"(I) Medical aid for the relief of disease, injury, or
disability...." (Emphasis Supplied)

Rule 12A-1.001(3)(g), F.A.C.: "... 3.a. For the purpose of
this subsection the following terms and phrases shall have
the meaning ascribed to them except when the context
clearly indicates a different meaning:
"I. Persons unable to pay' means persons whose annual income is 150 percent or less of the current Federal Poverty Guidelines or whose uncompensated hospital charges exceed 25 percent of their annual family income for the preceding 12 months. A charity day shall be computed from the amount of uncompensated services to persons unable to pay. However, in no case shall any of the hospital's charges for an individual or family whose income exceeds four (4) times the Federal Poverty Level for a family of four be considered charity days.... "c.Substantially reduced cost' means the normal charge
diminished in an amount of considerable quantity.
"d. Sole or primary function' means that a charitable organization, excluding hospitals, must establish and support its function as providing or raising funds for services as outlined in subparagraphs 1. and 2. above, by expending in excess of 50.0 percent of the charitable organization's expenditures towards referenced charitable concerns, within the charitable organization's most recent fiscal year. "4.a. Areasonable percentage' of the charitable services
provided without cost to those unable to pay for
institutions, other than hospitals, will be determined by
the particular circumstances of each institution.
"b. For hospitals, meaning only those institutions as
defined in Part I, Chapter 395, F.S., and subject to the
licensing requirements of Part I, Chapter 395, F.S., a
reasonable percentage of charitable services provided
without cost to those unable to pay shall be computed by
the hospital, using one of the following methods:
"I. The ratio of uncompensated charity days and medicaid
days (numerator) compared to total acute care inpatient
days (denominator), should be greater than or equal to 2.5
percent.
"II. The ratio of uncompensated charity days and medicaid
days (numerator) compared to total acute care inpatient

days minus medicare days (denominator) shall be greater
than or equal to 5 percent. These figures used to compute
charity days, medicaid days, total acute care inpatient
days, and medicare days shall be those reported to and
accepted by the Health Care Cost Containment Board."

In construing the exemption provided for "charitable
institutions" in s. 212.08(7)(o), F.S., above, the Department
must adhere to and be guided by the long-standing and
fundamental precept of statutory construction, established by
the Florida Supreme Court, which mandates that exemptions from
or exceptions to taxing statutes must be strictly construed
against the taxpayer. See Asphalt Pavers v. Dept. of Revenue,
584 So.2d 57 (Fla. 1st DCA 1991); Dade Cty. Taxing Auth. v.
Cedars of Lebanon, 355 So.2d 1205 (Fla. 1978), reh. den. April
5, 1978; Williams v. Jones, 326 So.2d 425 (Fla. 1975), reh. den.
March 4, 1976; Straughn v. Camp, 293 So.2d 689 (Fla. 1974);
United States Gypsum Company v. Green, 110 So.2d 409 (Fla.
1959).

CONCLUSIONS OF LAW

First and foremost it is important to recognize that the
Applicant and Clinics are a single legal entity. The Applicant
is organized as a not-for-profit corporation pursuant to Chapter
617, F.S. The Clinics are simply constituent functions of the
Applicant in carrying out the purposes for which it was
organized. The Clinics in no way have any legal existence
separate and apart from the Applicant. The Clinics are the
Applicant and the Applicant is the Clinics. Therefore, any and
all medical services rendered by the Clinics are rendered by the
Applicant. This singleness of entity of the Applicant and its
Clinics is evidenced by the single corporate charter which
created the Applicant and authorized its creation of the
Clinics. The Clinics are not separately incorporated, but
instead enjoy existence solely and exclusively through the
Applicant's corporate charter. The fact that the Internal
Revenue Service has not required the issuance of separate FEI
numbers to the Clinics evidences the acknowledgement of that
federal agency that the Clinics are not separate taxpayer
entities apart from the Applicant.

Consequently, we find that the Department's Application
Acceptance Section has erred in its previous written
determinations of July 26, 1993, and September 27, 1993. As you
know, in those determinations the Applicant's application was
denied on the basis of the false premise that the Applicant and
the Clinics where not the same legal entity. This lead the
Application Acceptance Section to conclude (incorrectly), that
the Applicant was not directly providing medical services, but
instead was simply a managerial and/or administrative body. It
is now and irrefutably clear that the Applicant and the Clinics
are the same legal entity and that as such the medical services
rendered by the Clinics are rendered by the Applicant.

We turn our attention now to the financial documentation
submitted in support of the Applicant's claim for exemption.
First, the Statements of Revenue and Expense for year ended
December 31, 1992, and for the period from January 1, 1993,
through September 30, 1993, reflect that the Applicant's
operating expenses incurred through operation of the Clinics
substantially exceeded the revenues earned by the Clinics for
such periods. This serves to evidence the fact that the
Applicant spent more than 100% of its revenues from the Clinics
to operate the Clinics through which the Applicant's medical
services were delivered. Thus, there can be no measure of doubt
that the Applicant's primary purpose is the delivery of medical
services through its Clinics. We are further compelled to
conclude that the charity write-off of 11.7% during 1992 and
23.0% during the period through September 30, 1993, clearly
establish that a reasonable percentage of the Applicant's
medical services have been provided free of charge or at a
substantially reduced cost to persons unable to pay.

In summary, we have established from the instant facts that the
Applicant:

1. Is organized as a not-for-profit corporation under
   Chapter 617, F.S.;
2. Has been formally granted and holds an exemption from
   federal income tax under section 501(c)(3) of the
   Internal Revenue Code;

3. Has as its sole or primary purpose the delivery of
medical services; and

4. Has provided a reasonable percentage of its medical
   services free of charge or at a substantially reduced
   cost to persons unable to pay.

By reason of the foregoing facts, the Department is persuaded to
conclude that the Applicant by clear and cogent evidence has
satisfied each and every requirement of the governing statutory
and administrative law prerequisite to perfecting its
eligibility to be granted a Consumer's Certificate of Exemption
(Form DR-14). Therefore, the Department hereby affirms that the
Applicant is eligible to be granted a Consumer's Certificate of
Exemption. Accordingly, the Applicant's case file has been
remanded to the appropriate staff of the Application Acceptance
Section accompanied by a copy of this TAA with the order and
direction that a Consumer's Certificate of Exemption be issued
forthwith to the Applicant.

This response constitutes a Technical Assistance Advisement
under s. 213.22, F.S., which is binding on the Department only
under the facts and circumstances described in the request for
this advice as specified in s. 213.22, F.S. Our response is
predicated on those facts and the specific situation summarized
above. You are advised that subsequent statutory or
administrative rule changes or judicial interpretations of the
statutes or rules upon which this advice is based may subject
similar future transactions to a different treatment than
expressed in this response.

You are further advised that this response and your request are
public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of s. 213.22, F.S.
Your name, address, and any other details which might lead to
identification of the taxpayer must be deleted by the Department
before disclosure. In an effort to protect confidential
information, we request you notify the undersigned in writing
within 15 days of any deletions you wish made to the request or
this response.

Sincerely,

Daniel M. Wagner, Jr.
Tax Law Specialist

DW/
Control No. 12208