Accountable Care Organizations: Exempt Purpose and Private Business Use

Context:

The Patient Protection and Affordable Care Act, Pub. L. 111-148, 124 Stat. 119 (the “Affordable Care Act”) (signed into law on March 23, 2010) provides for the creation of Accountable Care Organizations (ACOs).  ACOs are intended to include participants such as governmental entities, section 501(c)(3) organizations and others.  The purpose of ACOs is to facilitate the coordination of providing Medicare services.  Several exempt organization and tax-exempt bond issues arise with respect to ACOs, certain of which are summarized or referenced in this post.

acasignedExempt Organization Concerns:

There are concerns that (1) the participation by a section 501(c)(3) organization in an ACO is not an exempt purpose under the operation rules in Treas. Reg. 1.501(c)(3)-1(c)(1), (2) such participation could give rise to prohibited private inurement to insiders or exceed the limit on private benefits to others and/or (3) give rise to difficulties in applying the unrelated trade or business rules.  See IRS Notice 2011-20 (March 31, 2011) for a good description of the issue and preliminary guidance.

Tax-Exempt Bond Concerns:

Apart from the concerns described above regarding the basic eligibility of a borrower for qualification under section 501(c)(3) of the Code, ACOs also give rise to problems under the private business use rules.   Specifically, one question is whether use of bond-financed facilities by an ACO gives rise to a “comparable arrangement” covered by the private business use rules in Treas. Reg. 1.141-3(b).  See the National Association of Bond Lawyers’ April 1, 2013 submission to the Treasury Department and Internal Revenue Service for a good description of the issue.

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