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