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Washington Law Review

Abstract

Not-for-profit health care providers are converting to for-profit status on an unprecedented scale. Directors and officers have too frequently taken advantage of the conversions to misappropriate the organizations' assets. Common law remedies have proven inadequate, and many states have no specific statutory remedies. The state statutory remedies that have been enacted range from fairly comprehensive to quite inadequate. Not-for-profit health providers are generally also subject to the federal tax rules governing tax-exempt organizations. Until recently, however, the only sanction available to the Internal Revenue Service (IRS) was to revoke the organization's tax-exempt status. The IRS rarely invoked this remedy both because it seemed drastic and because it punished the organization rather than those who had misappropriated the funds. In 1996, Congress enacted penalty taxes called intermediate sanctions, which come into play when an insider derives an "excess benefit" in a transaction with the organization. Intermediate sanctions range from twenty-five percent to two hundred percent of the excess benefit. If energetically enforced, intermediate sanctions will discourage abuse. It is unlikely, however, that the IRS will devote the resources necessary to enforce them adequately. This Article proposes permitting qui tam actions modeled after the Civil False Claims Act to be brought in the Tax Court to enforce intermediate sanctions. Private citizens or community groups acting as relators could sue on behalf of the United States to enforce intermediate sanctions. If successful, they would recover attorney's fees from the defendant as well as a share of the tax imposed. The threat of facing such an action should greatly deter insiders from abusing their positions during conversion transactions. The ability of the IRS to dismiss complaints that lack merit and defendants' abilities to recover attorney's fees from relators whose complaints are clearly frivolous or vexatious should provide considerable protection against the filing of qui tam intermediate sanction actions that lack merit.

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