The purpose of the conflicts of interest policy is to protect the Corporation’s interest when it is contemplating entering into a transaction or arrangement that might benefit the private interest of an officer or director of the Corporation. This policy is intended to supplement but not replace any applicable state laws governing conflicts of interest applicable to nonprofit and charitable corporations.
1. Interested Person
Any director, principal officer, or member of a committee with board delegated powers who has a direct or indirect financial interest, as defined below, is an interested person. If a person is an interested person with respect to any entity in the health care system of which the Corporation is a part, he or she is an interested person with respect to all entities in the health care system.
2. Financial Interest
A person has a financial interest if the person has, directly or indirectly, through business, investment or family —
a. an ownership or investment interest in any entity with which the Corporation has a transaction or arrangement, or
b. a compensation arrangement with the Corporation or with any entity or individual with which the Corporation has a transaction or arrangement, or
c. a potential ownership or investment interest in, or compensation arrangement with, any entity or individual with which the Corporation is negotiating a transaction or arrangement.
Compensation includes direct and indirect remuneration as well as gifts or favors that are substantial in nature.
A financial interest is not necessarily a conflict of interest. Under Article III, Section 2, a person who has a financial interest may have a conflict of interest only if the appropriate board or committee decides that a conflict of interest exists.
1. Duty to Disclose
In connection with any actual or possible conflicts of interest, an interested person must disclose the existence of his or her financial interest and must be given the opportunity to disclose all material facts to the directors and members of committees with board delegated powers considering the proposed transaction or arrangement.
2. Determining Whether a Conflict of Interest Exists
After disclosure of the financial interest and all material facts, and after any discussion with the interested person, he/she shall leave the board or committee meeting while the determination of a conflict of interest is discussed and voted upon. The remaining board or committee members shall decide if a conflict of interest exists.
3. Procedures for Addressing the Conflict of Interest
a. An interested person may make a presentation at the board or committee meeting, but after such presentation, he/she shall leave the meeting during the discussion of, and the vote on, the transaction or arrangement that results in the conflict of interest.
b. The chairperson of the board or committee shall, if appropriate, appoint a disinterested person or committee to investigate alternatives to the proposed transaction or arrangement.
c. After exercising due diligence, the board or committee shall determine whether the Corporation can obtain a more advantageous transaction or arrangement with reasonable efforts from a person or entity that would not give rise to a conflict of interest.
d. If a more advantageous transaction or arrangement is not reasonably attainable under circumstances that would not give rises to a conflict of interest, the board or committee shall determine by a majority vote of the disinterested directors whether the transaction or arrangement is in the Corporation’s best interest and for its own benefit and whether the transaction is fair and reasonable to the Corporation and shall make its decision as to whether to enter into the transaction or arrangement in conformity with such determination.
4. Violation of the Conflicts of Interest Policy
a. If the board or committee has reasonable cause to believe that a member has failed to disclose actual or possible conflicts of interest, it shall inform the member of the basis for such belief and afford the member an opportunity to explain the alleged failure to disclose.
b. If, after hearing the response of the member and making such further investigation as may be warranted in the circumstances, the board or committee determines that the member has in fact failed to disclose an actual or possible conflict of interest, it shall take appropriate disciplinary and corrective action.
Records of Proceedings
The minutes of the board and all committees with board-delegated powers shall contain
1. the names of the persons who disclosed or otherwise were found to have a financial interest in connection with an actual or possible conflict of interest, the nature of the financial interest, any action taken to determine whether a conflict of interest was present, and the board’s or committee’s decision as to whether a conflict of interest in fact existed.
2. the names of the persons who were present for discussions and votes relating to the transaction or arrangement, the content of the discussion, including any alternatives to the proposed transaction or arrangement, and a record of any votes taken in connection therewith.
1. A voting member of the board of directors who receives compensation, directly or indirectly, from the Corporation for services is precluded from voting on matters pertaining to that member’s compensation.
2. A physician who is a voting member of the board of directors and receives compensation, directly or indirectly, from the Corporation for services is precluded from discussing and voting on matters pertaining to that member’s or other physicians’ compensation. No physician or physician director, either individually or collectively, is prohibited from providing information to the board of directors regarding physician compensation.
3. A voting member of any committee whose jurisdiction includes compensation matters and who receives compensation, directly or indirectly, from the Corporation for services is precluded from voting on matters pertaining to that member’s compensation.
4. Physicians who receive compensation, directly or indirectly, from the Corporation, whether as employees or independent contractors, are precluded from membership on any committee whose jurisdiction includes compensation matters. No physician, either individually or collectively, is prohibited from providing information to any committee regarding physician compensation.
Each director, principal officer and member of a committee with board delegated powers shall annually sign a statement which affirms that such person —
a. has received a copy of the conflicts of interest policy,
b. has read and understands the policy,
c. has agreed to comply with the policy, and
d. understands that the Corporation is a charitable organization and that in order to maintain its federal tax exemption it must engage primarily in activities which accomplish one or more of its tax-exempt purposes.
To ensure that the Corporation operates in a manner consistent with its charitable purposes and that it does not engage in activities that could jeopardize its status as an organization exempt from federal income tax, periodic reviews shall be conducted. The periodic reviews shall, at a minimum include the following subjects:
a. Whether compensation arrangements and benefits are reasonable and are the result of arm’s-length bargaining.
b. Whether acquisitions of physician practices and other provider services result in inurement or impermissible private benefit.
c. Whether partnership and joint venture arrangements and arrangements with management service organizations and physician hospital organizations conform to written policies, are properly recorded, reflect reasonable payments for goods and services, further the Corporation’s charitable purposes and do not result in inurement or impermissible private benefit.
d. Whether agreements to provide health care and agreements with other health care providers, employees, and third party payors further the Corporation’s charitable purposes and do not result in inurement or impermissible private benefit.
Use of Outside Experts
In conducting the periodic reviews provided for in Article VII, the Corporation may, but need not, use outside advisors. If outside experts are used their use shall not relieve the board of its responsibility for ensuring that periodic reviews are conducted.
1. EOTR Weekly, Vol. 9, No. 13, march 30, 1998, page 1.
2. The following is a summary of the excise taxes on private foundations contained in the Internal Revenue Code:
§ 4940 — 2% tax on net investment income; this may be reduced to 1% if a sufficient amount is donated to qualified charities.
§ 4941 — 5% tax on any disqualified person participating in an act of self dealing; 2.5% on the foundation manager.
§4942 — 15% tax on undistributed income that should have been distributed during the year (must distribute 5% of FMV of assets).
§4943 — 5% excise tax on excess business holdings (20% – or 35% if the foundation does not control the entity, less the % held by a disqualified person).
§4944 — 5% excise tax on jeopardizing investments.
§4945 — 10% tax on foundation, 2.5% tax on foundation manager on amounts paid that are not in furtherance of the exempt purposes (taxable expenditures). Grants by private foundations to individuals (scholarships) must be awarded on an objective and nondiscriminatory basis, with the procedure approved beforehand by teh IRS, to avoid a taxable expenditure classification. See Rev. Proc. 76-47 (1976-2 C.B. 670).
3. Exempt Organization Tax Review, November, 2000, Vol 30, No. 2, p. 166-8.
4. Exempt Organization Tax Review, September, 2000, Volume 29, No. 3, p. 398-9.
5. Exempt Organization Tax Review, October, 2000, Volume 30, No. 1, p. 16.
6. Henry Haalilio Peters v. Comm’r, Tax Ct. Dkt. No. 8446-00, reported in Exempt Organization Tax Review, November, 2000, Volume 30, No. 2, p. 204.
7. Reg. § 53.4958-1T(d)(2)(i)(B).
8. Unless it is excludable as a de minimis fringe benefit, a payment of liability insurance premiums for or the payment or reimbursement by the organization will be included in compensation if said payment or reimbursement is: (i) of any penalty, tax or expense of correction owed as a result of an excess benefit payment, or (ii) is of unreasonable expenses incurred in a civil judicial or civil administrative proceeding arising out of the person’s performance of services on behalf of the exempt organization, or (iii) is an expense resulting from the person’s willful and unreasonable act or failure to act. Reg. § 53.4958-4T(b)(1)(ii)(B)(2).
9. Reg. Section 53.4958-5(a).
10. See EOTR, Vol. 27, No.2, February 2000, page 317 for complete list of these cases.
11. Exempt Organization Tax Review, November, 2000, Volume 30, No. 2, p. 126.
12. See discussion in EOTR Weekly, Vol. 10, No. 9, June 1, 1998, p. 1-2.
13. For an historical review of this area, see “Joint Ventures With For-Profits After Revenue Ruling 98-15”, by ___________________, EOTR, March, 2000, Volume 27, No. 3, p. 441, et. seq.
14. See EOTR, November, 2000, Vol 30, No.2, p. 164.
15. The Exempt Organization Tax Review, January 2000, Vol. 27, No. 1, p. 21.
16. EOTR Weekly, Vol. 20, No. 2, 10/9/00, p. 9.
18. WAC 230-12-110.
19. See also South End Italian Independent Club, Inc., v. IRC, 87 T.C. No. 11 (7/22/86) and Women of the Motion Picture Industry, et. al. v. IRC, T.C. Memo 1997-518.
21. EOTR Weekly, 11/6/00, Vol 20, No. 6, p. 36.
22. See Vol. 15, No. 3, EOTR p. 444 (December 1996)
23. See Volume 26, No. 3, The Exempt Organization Tax Review, page 367 (December, 1999)
24. See Volume 26, No. 3, The Exempt Organization Tax Review, page 362 (December, 1999).
25. EOTR Weekly, Vol. 16, No. 11, December 13, 1999, page 2.
26. Continuing Professional Education Exempt Organizations Technical Instruction Program for FY 2000
Copyright © 2009 Lisa A. Runquist, Attorney at Law