1 For a good overview, see Coddington, Dean ET AL., The Crisis in Health Care: Costs, Choices And Strategies 3-16 (1991)Google Scholar (noting that “[t]he prediction that policy pressures for change are once again about to collide with today’s market-driven health care environment should come as no surprise”). See also Dasco, Sheryl et al., New Forms of Hospital and Business Structures and Professional Arrangements as Influenced by Taxes, Competition, and Health Care Reform, (ALI- ABA Course of Study Feb. 10, 1994), available in Westlaw, C884 Ali-Aba 595, 597.Google Scholar

2 Cf. Choslovsky, Jonathan, Agency Review of Health Care Industry Mergers: Proper Procedure or Unnecessary Burden?, 10 Admin. L.J. Am. U. 291, 291-92 (1996)Google Scholar (stating that hospital providers are merging to become more efficient). Indeed, a major target of expense reduction has been hospi tals. See Kinney, Eleanor D. et al., The Merits of State Action Immunity to Promote Hospital Col laboration: Report of the Hospital Antitrust Task Force to the Indiana State Department of Health, 28 Ind. L. Rev. 1169, 1179-80 (1995).Google Scholar Payors have moved aggressively to increase the array of services required to be performed on an outpatient basis. See Mancino, Douglas M., Income Tax Exemption of the Contemporary Nonprofit Hospital, 32 St. Louis U. L.J. 1015, 1029-30 (1988)Google Scholar. The Joint Commission on Accreditation of Health Care Organizations estimated that by 1995, 65% of all surgical procedures would be performed outside the hospital. See George, Bonnie M., Health and Welfare; Health Care Services—Licensure of Outpatient Surgical Settings, 26 Pac. L.J. 616, 618 (1995)Google Scholar (citing U.S. Dep'T Of Health & Human Servs., Office Of The Inspector Gen., Pub. No. Oe1-07-91-10470, Surgery In Outpatient Settings: A Four State Study 1 (1991)).Google Scholar

3 A nonprofit corporation is an entity incorporated under state nonprofit corporation law that may not distribute any part of its income to its members, directors or officers. See Black’s Law Dictionary 1056 (6th ed. 1990). Tax exempt is a state or federal designation given on application by the entity, typically, a nonprofit corporation. See id. at 1461. To qualify for exemption from federal taxation, an entity must be organized and operated exclusively for one or more of the follow ing purposes: religious, charitable, scientific, testing for public safety, literary, educational, prevention of cruelty to children or animals or to foster national or international sports. See I.R.C. § 501(c) (West 1997) (listing exempt organizations); see also BLACK’S LAW DICTIONARY, supra, at 1056. For purposes of this Article, the term exempt shall be used to denote organizations that are both nonprofit and tax-exempt.

4 The largest internal capital expense of hospitals is management information systems and re lated bedside information technology. This technology is essential to control costs and track the patient through an integrated, multi-component health care delivery system. As more hospitals move into capitation, “information system[s] capable of integrating clinical and financial data will be the largest capital expenditure for . . . restructuring hospitals.” Moving Hospitals into Capitation Game Means Staff Cuts, IS Upgrade, Education, Physician Manager, Apr. 21 1995, available in LEXIS, Market Library, Iacnws File. Also, a recent survey reported that health care executives believe “that many hospitals, integrated [delivery] systems, and managed care organizations hope to as much as double spending on information systems in the next few years.” Information System Spending Ex pected to Jump, as Will Need for IS Leadership, Health Care Strategic Mgmt., June 1 , 1997Google Scholar, available in LEXIS, Market Library, Iacnws Library. External capital expenditures have been di rected toward acquiring competitors or components in the care continuum, such as medical groups. Purchases of physician groups have spawned an entirely new sector of the health care industry within the past five years, led by companies such as PhyCor and Medpartners. See Demetriou, Andrew J., Physician Practice Management Companies: Structures and Strategies, 741 PLI/COMM 605, 612 (Apr.-May 1996)Google Scholar, available in WESTLAW, PLI-COMM Database; see also Denn, James, Blues Put Stock in a Profit Plan, N.Y. Times-Union, Oct. 6, 1996Google Scholar, at Bl, available in 1996 WL 12035429.

5 In this Article, the term proprietary organization is used interchangeably with for-profit or ganization.

6 This Article focuses on hospital conversions to for-profit status. Although Blue Cross/Blue Shield plans and health maintenance organizations (HMOs) are converting to for-profit status in large numbers, and these conversions have attracted significant attention, the reasons behind these conversions and the structures used to effect them differ enough from hospital conversions to merit attention beyond the scope of this Article. For a discussion of HMO conversions, see McMahon, Therese, Fair Value? The Conversion of Nonprofit HMOs, 30 U.S.F. L. Rev. 355 (1996).Google Scholar

7 See Non-Profit Conversions: Republican Stark Asks GAO for Data on Non-Profit Hospital Conversions, Health Care Daily (BNA) d 10 (Oct. 22, 1996)Google Scholar, available in WESTLAW, BNA-HCD Database [hereinafter Data on Non-Profit Hospital Conversions].

8 See discussion infra note 16.

9 See Cal. health & Safety Code § 1399.72 (West Supp. 1997); Neb. rev. stat. § 71- 20,104 (1996); H.B. 5902, 180th Leg., Reg. Sess. (Mass. 1995), available in WESTLAW, MA- BILLS Database; H.B. 5908, 180th Leg., Reg. Sess. (Mass. 1995), available in WESTLAW, MA- BILLS Database; H.B. 5910, 180th Leg., Reg. Sess. (Mass. 1995), available in WESTLAW, MA- BILLS Database; H.B. 5911, 180th Leg., Reg. Sess. (Mass. 1995), available in WESTLAW, MA-BILLS Database; H.B. 5956, 180th Leg., Reg. Sess. (Mass. 1995), available in WESTLAW, MA- BILLS Database; H.B. 1421, Reg. Sess. (N.H. 1995), available in WESTLAW, BILLS-OLD Data base; S.B. 1550, 207th Leg., 1st Annual Sess. (N.J. 1996), available in WESTLAW, NJ-BILLS Da tabase; S.B. 1686, 207th Leg., 1st Annual Sess. (N.J. 1996), available in WESTLAW, NJ-BILLS Database; S.B. 2368, 207th Leg., 1st Annual Sess. (N.J. 1996), available in WESTLAW, NJ-BILLS Database; S.B. 2497, 207th Leg., 1st Annual Sess. (N.J. 1996), available in WESTLAW, NJ-B1LLS Database; S.B. 328, 121st Gen. Assembly, Reg. Sess. (Ohio 1995), available in WESTLAW, OH-BILLS Database; S.B. 3184, 99th Leg., 2d Sess. (Tenn. 1995), available in WESTLAW, BILLS-OLD Database.

10 A committee of law firms in Colorado, for example, is working on draft legislation designed to advocate consumer concerns in the conversion of nonprofit hospitals, HMOs and other health entities into for-profit organizations. See Non-Profit Conversions: Colorado Lawyers Drafting a Bill on Conversions for 1997 Assembly Session, Health Care Daily (BNA) d6 (Nov. 5, 1996)Google Scholar, available in WESTLAW, BNA-HCD Database. In July 1996, the National Association of Attorneys General and the National Association of State Charity Officials hosted a conference on nonprofit conver sions, with more than 50 regulators from 30 states exchanging information on conversions in Cali fornia, Colorado, Massachusetts, Michigan, New Hampshire, Ohio and Tennessee (which are experi encing the most activity related to conversion of nonprofit health care facilities to for-profit status). See Nonprofit Conversions: State AGs Share Data, Approaches to Charitable Assets Conversions, 5 Health Law Rep. (BNA) No. 38, at 1413, 1413 (Sept. 25, 1996)Google Scholar. The common goal, attorneys gen eral told the Bureau of National Affairs, “is to protect the public’s interests by ensuring the proper continued use of the charitable entities’ assets.” Id.

11 See, e.g., Cal. corp. code §§ 7820, 7913, 8018 (West 1990); Colo. rev. stat. ann. § 7- 22-102(c) (West 1986); 805 Ill. COMP. STAT. ANN. 105/103.15(c) (West 1993); Tenn. code ann. § 48-51-701 (1995); Tex. corps. & Ass'ns code ann. § 1396/2.03(3) (West 1997). States, by virtue of their oversight of charitable trusts and nonprofit corporations, are probably the most important watchdogs over these increasingly frequent transactions. See Scott, Austin W. & Fratcher, WIlliam, Scott On Trusts § 391 (4th ed. 1988)Google Scholar; see also Robert Boisture & Douglas Varley, State Attorneys General’s Legal Authority to Police the Sale of Nonprofit Hospitals and HMOs, 13 EXEMPT Org. tax rev. 227, 231 (1996). The attorney general’s office is usually the state agency with the authority to enforce nonprofit corporation acts. See SCOTT & FRATCHER, supra, § 391; Boisture & Varley, supra, at 231.

12 See, e.g., Van de Kamp v. Gumbiner, 270 Cal. Rptr. 907 (Ct. App. 1990); Attorney Gen. v. Hahnemann Hosp., 494 N.E.2d 1011 (Mass. 1986); Tennessee v. Nashville Mem'l Hosp., Inc., 914 S.W.2d 903 (Tenn. Ct. App. 1995). See generally Greater State Oversight of Hospital Conversions Is Recommended, Health Care Daily (BNA) d 10 (Sept. 26, 1995), available in WESTLAW, BNA- HCD Database.

13 Until recently, the Internal Revenue Service’s (IRS) only recourse to a transaction violative of federal tax-exempt law was to revoke the organization’s tax-exempt status, a penalty so severe that it is rarely used. See IRS Action Revoking Hospital’s Exemption, Health Law Update (McDermott, Will & Emery), Nov. 2, 1994, at 1 (noting the revocation of Modern Health Care Service’s federal tax exemption, the first and only time that a hospital corporation’s exempt status was revoked). With the passage of the Taxpayer Bill of Rights 2, in August 1996, the IRS can now impose excise taxes on individuals and organizations that violate tax-exemption laws, without im posing the ultimate penalty of revocation. Taxpayer Bill of Rights 2, Pub. L. No. 104-168, § 4958, 101 Stat. 1475 (1996). This sanctioning authority will likely enable the IRS to become more active in policing health care transactions. See, e.g., Mancino, Douglas M., New ‘Intermediate Sanctions’ May Cause Public Charities to Change the Way They Do Business, 85 J. Tax. 368, 373-74 (1996).Google Scholar

14 See McNulty, Lauren K., Conversions from Non-Profit to For-Profit Status and the Resulting Change in Use of Tax-Exempt Bond Financed Property, 12 Exempt Org. Tax Rev. 75, 75-76 (1995)Google Scholar (providing an overview of the tax-exempt bond rules implicated when a nonprofit organiza tion converts its assets to for-profit status). Although many jurisdictions continue to exempt § 501(c)(3) organizations from state and local sales, income and property taxes, some jurisdictions have curtailed or have begun programs of scrutinizing this favoritism, especially with respect to “charitable" not-for-profit institutions. See, e.g., Tex. tax CODE ANN. § 11.18(d) (West 1992) (enumerating the charitable functions, one or more of which a charitable organization must perform in order to receive a tax exemption); West Allegheny Hosp. v. Board of Property Assessment Appeals & Review, 455 A.2d 1170, 1171 (Pa. 1982) (holding that nonprofit hospitals are exempt from real estate taxes if they are “founded, endowed, and maintained" by public and private charity even if donations covered only a small part of the hospital’s capital acquisition and day-to-day operating expenses); School Dist. v. Hamot Med. Ctr. of Erie, 602 A.2d 407, 413-14 (Pa. Comraw. Ct. 1992) (holding that certain for-profit activities render a hospital ineligible for tax-exempt status despite the fact that the hospital provided emergency care to indigent patients); Hospital Utilization Project v. Pennsylvania, 461 A.2d 894, 895-96 (Pa. Commw. Ct. 1983) (holding that provider of statistical analysis to hospitals does not qualify for manufacturing operations tax exemption in cases where the provider charges a fee proportionate to the services rendered); Utah County v. Intermountain Healthcare, Inc., 709 P.2d 265, 269 (Utah 1985) (holding that nonprofit hospitals are not entitled to ad valorem property tax exemption if the property in question were not used exclusively for charitable purposes); see also Crimm, Nina J., Evolutionary Forces: Changes in For-Profit and Not-for-Proftt Health Care Delivery Structures; A Regeneration of Tax Exemption Standards, 37 B.C. L. Rev. 1, 103 (1995)Google Scholar (suggesting a new tax scheme that would grant some form of tax-favored treatment to both for-profit and not-for-profit health care organizations based on specific charitable activities); Baldwin, Mark F., Legislatures, Agencies Debating Whether Not-for-Prqfit Hospitals Deserve Their Tax-Exempt Status, Mod. Healthcare, May 22, 1987, at 34Google ScholarPubMed, 40 (discussing generally the increasing pressures on Congress and others to reassess the tax-exempt status of not-for-profit hospitals); Hyman, David A. & McCarthy, T.J., Property Tax Exemptions: Headed for Extinction?, Health Progress, Dec. 1988, at 32, 35-36Google ScholarPubMed (discussing the growing trend of taxing hospitals but arguing that hospitals’ tax-exempt status should be preserved based on community benefit justifications); Strapped Governments Eye Non-Proftt Hospitals, Med. & Health, Aug. 1 , 1993, at *6-11Google Scholar, available in WESTLAW, Hthnews Database; infra notes 190-99.

15 See supra note 1.

16 See Japsen, Bruce, Merger Forecast: No End in Sight for Manic Pace, Mod. Healthcare, Oct. 28 , 1996, at 5, 5.Google Scholar "The healthcare merger and acquisition market has broken records for three successive quarters. The volume of transactions reached its highest level ever, up 50% from a year ago.” Id. (quoting Steven Monroe, of Irving Levin Associates). The hospital sector continued to see the most action, with 62 deals, an increase of 44.2% from the second quarter’s 43 mergers and ac quisitions. See id.

17 These include newer competitors, such as Tenet Healthcare Corp. and Columbia/HCA.

18 See Hospital Poll: Leasing a Preferred Route to Major Capital Equipment Buys, 58 Health Industry Today, July 1, 1995, at *2Google Scholar, available in WESTLAW, Hthnews Database.

19 See Kauer, Robert T. et al., The Effect of Fixed Payment on Hospital Costs, 20 J. Health Pol. Pol'y & L. 303, 303-04 (1995)CrossRefGoogle ScholarPubMed (discussing the effects of the new form of capital reimburse ment). Medicare is a federal insurance program for individuals over age 65 or suffering from end stage renal disease. See 42 U.S.C. § 1395u (1994). DRGs are a method of prospective payment whereby a hospital is paid a predetermined amount for a particular course of treatment, irrespective of the cost of that treatment to the institution. See Kauer et al., supra, at 303. Hospitals are therefore incentivized to treat patients as efficiently as possible, so that they can generate revenue over their cost of care. See id. at 303-04.

20 The Hospital Survey and Construction Act, commonly known as the Hill-Burton Act, also served as a significant source of capital. Hospital Survey and Construction Act, 42 U.S.C. § 291 (1994). Qualified borrowers under the Hill-Burton program were generally only exempt or public hospitals. See id.

21 In the beginning, private financing, and later public financing, at favorable rates allowed steady capital expenditures. See Copeland, John & Rudney, Gabriel, Federal Tax Subsidies for Not- for-Profit Hospitals, Tax NOTES, Mar. 26 , 1990, at 1559, 1561Google Scholar. The federal government encouraged capital expansion by reimbursing hospitals for their capital needs via Medicare reimbursement. See infra discussion Part II.A. Tax savings also factored heavily into capital resources. See Copeland & Rudney, supra, at 1561. A 1990 study estimated the value of exemption from the corporate income tax for hospitals at $1.6 billion and the full federal subsidy at over $4 billion. See id. at 1565.

22 This was similar to HMOs and Blue Cross/Blue Shield plans early on: early HMOs were of ten organized as nonprofit, exempt organizations in order to benefit from federal legislation that encouraged HMO formation. See Starr, paul, The Social Transformation Of American Medicine 295-98 (1982).Google Scholar In 1973, a federal statute initially gave federally qualified HMOs sub stantial advantages over nonqualified HMOs, including access to federal grants, loans and loan guar antees. See 42 U.S.C. § 300e-4. Blue Cross/Blue Shield plans initially were organized as exempt organizations, due to their ancestry, as these plans were begun by exempt hospitals seeking an in surer to provide reimbursement for needed hospital services. See STARR, supra, at 295-98. As the plans developed, they were granted federal and state tax exemption, with the understanding that they would provide coverage to beneficiaries who might be denied insurance from commercial insurers. See id. at 295-310.

23 Interest rates are lower because interest paid to lenders is exempt from federal and state taxation. See Starr, supra note 22, at 298. Hence, lenders are willing to loan monies at a lower interest rate than that which they would offer to proprietary organizations, whose interest payments are subject to taxation. See id.

24 Tax Reform Act of 1986, Pub. L. No. 99-514, § 1012, 100 Stat. 2085. HMOs and Blue Cross/Blue Shield faced similar checks. In 1990, the IRS issued three rulings that challenged the ability of HMOs to maintain their exempt status. General Counsel Memoranda 39,828, 39,829 and 39,830 presented a series of factors that would be weighed to determine whether the HMO continued to operate for exempt purposes. See Gen. Couns. Mem. 39,828 (Sept. 30, 1987), reprinted in [1986- 1990 Transfer Binder] IRS Pos. (CCH) ¶ 2223, at 7619; Gen. Couns. Mem. 39,829 (Aug. 24, 1990), reprinted in [1986-1990 Transfer Binder] IRS Pos. (CCH) ¶ 2224, at 7629; Gen. Couns. Mem. 39,830 (Aug. 24, 1990), reprinted in [1986-1990 Transfer Binder] IRS Pos. (CCH) ¶ 2225, at 7643. Of particular import to these rulings was an evaluation of whether the HMO provided “commercial type" insurance as a substantial part of its activities. See Gen. Couns. Mem. 39,828, [1986-1990 Transfer Binder] IRS Pos. (CCH) ¶ 2223, at 7619, 7624. As a result of the Tax Reform Act of 1986, Blue Cross plans were stripped of their federal tax exemption, on the basis that the selling of insur ance was not a charitable activity under the Internal Revenue Code § 501(m). See id. at 7627-28. Even state tax exemption, which was relatively small when compared to the federal tax relief which had formerly been granted, was reduced in some states. See Hall, Mark A. & Columbo, John D., The Charitable Status of Nonprofit Hospitals: Toward a Donative Theory of Tax Exemption, 66 Wash. L. Rev. 307, 324-25 & nn.63-64 (1991)Google Scholar. This left Blue Cross plans without the ability to secure tax-exempt financing and yet unable to sell stock because of their nonprofit structure when first established under enabling legislation. See Hamburger, Eleanor et al., The Pot of Gold: Monitoring Health Care Conversions Can Yield Billions of Dollars for Health Care, 29 Clearinghouse Rev. 473,480(1995).Google Scholar

25 See I.R.C. § 145 (West 1997).

26 Adjustments to the use restriction effectively lowered it below five percent. See id. § 145(a)(2)(B).

27 See id. § 145(b)(2)(C); see also Bond, Jeanette, Tax-Exempt Qualified 501(c)(3) Bonds, 277 PLI/TAX 205, 218 (Mar. 1988)Google Scholar, available in WESTLAW, PLI/TAX Database.

28 See Gassel, Philip J. & Gerzog, Jay E., Conversions to Not-for-Profit Organizations Prolifer ate, N.Y. L.J., Aug. 26 , 1996, at 7, 8.Google Scholar

29 See Semple, David, From Ministry to Market: Catholic Health Care Can Survive in an Age of Commercialization, Health Progress, Sept.-Oct. 1996, at 19, 21.Google Scholar

30 See id.

31 For comparison to the insurance sector, consider the following rationale behind the Blue Cross of California conversion:

Hamburger et al., supra note 24, at 480.

32 This is a phenomenon tax-exempt Blue Cross/Blue Shield plans and HMOs have faced as well. See Pagano, Elizabeth, Watchdogs Dread Blues’ For-Profit Trend, Nashville Banner, Mar. 27 , 1996, at DlGoogle Scholar, available in WESTLAW, Nshvbnr Database. The tremendous growth in HMOs and other types of managed care plans has challenged Blue Cross/Blue Shield and independent HMOs to raise significant amounts of capital in order to develop the networks and infrastructure necessary to compete on a regional basis. Cf. id. (discussing the fact that many Blues plans have converted to for-profit status in order to raise sufficient capital to compete). For example, Neil Vannoy, execu tive vice president of Blue Cross and Blue Shield of Georgia, stated that the future of the company would have been “pretty bleak" had it not converted to for-profit status. See id. Vannoy said that the Georgia Blues were losing market share to national health care insurers and managed care plans. See id. "We probably had an erosion of as much as 10 percent of the total people served over about a 3-year period,” he explained. Id. "Our competitors had lots of money, and we didn't have any. We thought it would be appropriate to compete with them on a level playing field.” Id.

33 See Gassel & Gerzog, supra note 28, at 8.

34 See Meyer, Harris, The Lure, Hosps. & Health Networks, June 5, 1996, at 22, 22.Google Scholar

35 Markets are not always dominated by proprietary organizations. In Chicago, for example, Columbia/HCA has an insignificant presence in a market dominated by three large exempt health care systems. See, e.g., Morris, Steven, Hospital Group Growing Again: Columbia/HCA to Buy 3 Sites in Chicago Area, CHi. Trib., Jan. 11, 1995, § 3, at 1.Google Scholar

36 See, e.g., Pope, John, Done Deal: Tenet Buys Mercy+Baptist, Tlmes-Plcayune (New Or leans), Aug. 22 , 1995, at Bl.Google Scholar

37 See Columbia Overview (visited July 8, 1997) <http://www.columbia.net/overview/index.html>.

38 For an extensive look at the corporatization of teaching hospitals,see Bloche, M. Gregg, Corporate Takeover of Teaching Hospitals, 65 S. Cal. L. Rev. 1035 (1992).Google Scholar

39 See id. at 1043.

40 A 1991 study, for example, which classified the financial stability of Catholic hospitals from “consistently sound" to “adversely affected,” classified 16% of Catholic hospitals to be in the weak est category. See Semple, supra note 29, at 20.

41 See Singer, Lawrence E., Realigning Catholic Health Care: Bridging Legal and Church Control in a Consolidating Market, 72 Tul. L. Rev. (forthcoming Fall 1997)Google Scholar (manuscript at 2, on file with author).

42 See Tokarski, Cathy, As Catholic Hospitals Begin to Merge with For-Proflt Health Systems, Leaders of Both Are Wondering for Whom the Church Bell Tolls, H1osps. & Health Networks, Oct. 20, 1995, at 41, 42Google ScholarPubMed (noting that the Catholic Health Association’s concern that affiliations be tween for-profit and not-for-profit hospitals may jeopardize the not-for-profit’s mission-driven serv ice, as the interests and values of for-profit and not-for-profit entities are apt to diverge); see also Van Duch, Darryl, Church, Earthly Realms Clash On Hospitals: Catholic Hospitals Must Merge to Survive, but Critics Call Deals Bargains with the Devil, Nat'l L.J., May 20, 1996, at A12.Google Scholar

43 See Sisters of Charity, Columbia Announce Completion of Joint Venture Partnership, 4 Health Law Rep. (BNA) No. 44, at 1673, 1710 (Nov. 9, 1995)Google Scholar (describing the recent joint venture between Columbia/HCA and the CSA Health System, a four-hospital system sponsored by the Sisters of Charity of St. Augustine of Cleveland, Ohio).

44 See, e.g., Pope, supra note 36, at Bl.

45 See Robinson, Michele L., Labor Pains, Health Systems Rev., July/Aug. 1996, at 18, 19.Google ScholarPubMed

46 According to a study of 19 major U.S. cities by the Sachs Group, there were approximately twice as many staffed beds in 1994 as the current market demands. See Who Has Too Many Beds?, Hosps. & Health Networks, Jan. 5 ,1996, at 45,45.Google Scholar

47 See Meyer, supra note 34, at 22.

48 See Grayson, Mary, Editor’s Notes: Foundation Frankness, Hosps. & Health Networks, June 5, 1996, at 7, 7Google Scholar (urging that someone should oversee how health care foundations are “valued, established, governed, and used" because the present conversion of not-for-profit organizations to for-profit entities is this country’s “largest redeployment of charitable assets”).

49 Indeed, the need to study the impact of monetizing community assets is apparent. See Meyer, Harris, The Deal, Hosps. & Health Networks, June 5 , 1996, at 37, 37.Google ScholarPubMed

Id. Further, states have also expressed concern about these foundations. See id. at 40. One state, Virginia, went so far as to require that monies set aside as a result of the state Blue Cross plan’s conversion be paid to the state, rather than to a newly created foundation. See id. As a result, Trigon, Virginia’s Blue Cross plan, paid the state $175 million to fund a shortfall in the state’s education budget. See id. Allegedly this amount was determined independent of any valuation of Trigon’s conversion value. See Bell, Judith E., Saving Their Assets: How to Stop Plunder at Blue Cross and Other Nonprofits, AM. Prospect, May-June 1996, at 60, 66.Google Scholar

50 For example, Denver’s Rose Health Care System (originally established as a place for Jewish doctors to practice at a time when they were not allowed on staff at any other hospitals) was sold and its resulting Rose Foundation will focus on preserving Jewish identity, education, elderly issues, children, families and community health. See Meyer, supra note 34, at 28.

51 See id.

52 For example, the conversion of Health Net, a nonprofit HMO, into proprietary Health Sys tems International enabled 33 executives to purchase 20% of the proprietary’s stock for $1.5 million; four years later those shares were worth approximately $315 million. See Bell, supra note 49, at 62. Doug Mancino, who served as one of the attorneys on the 1992 HMO Health Net conversion, notes that the deal was the first to require that a “meaningful amount of equity" be held by the charitable foundation which was created as a result of the conversion. See Hudson, Terese, The Fear Factor, Hosps. & Health Networks, June 5 , 1996, at 42, 43.Google Scholar In that transaction, the foundation held 80% of the plan’s stock at the time of conversion. See id. Later the stock tripled in value, and foundation assets, originally $300 million, exceeded $1 billion. See id. One former co-chief executive officer of the nonprofit recognized a 10,000% gain on shares he acquired, paying $300,000 for stock now worth $31 million. See id.

53 State common law principles of fiduciary duty, and federal tax law prohibitions against pri vate benefit and private inurement are designed to thwart potential conflicts of interest, as discussed in infra Parts III and IV. Until recently, however, little attention was paid to sales and conversions of nonprofit organizations. Numerous anecdotes and scholarly reviews suggest that state and federal oversight of sales and conversions is inadequate. See Greater State Oversight of Nonprofit Hospital Conversions is Recommended, Health Care Daily (BNA) d 10 (Sept. 26, 1995)Google Scholar, available in WESTLAW, BNA-HCD Database. One article cited federal tax law prohibitions against private benefit and private inurement as an impetus to seeking for-profit status, arguing that these prohibi tions limited the flexibility of exempt organizations in negotiating employment agreements and affiliation arrangements with providers and payers. See Gassel & Gerzog, supra note 28, at 8.

54 See Governance Committee, The Rising Tide: Emergence Of A New Competitive Standard In Health Care (Advisory Bd. Co. 1996)Google Scholar (noting that average 1995 nonprofit hospital chief executive officer annual compensation was $186,000, while average at all hospitals was $217,000). The spread widened at for executives of multi-hospital systems—$400,000 at nonprofits versus a $550,000 average. See id. at 124.

55 See Gerlin, Andrea, Hospital in Florida Is Focus of Probes Tied to Scuttled Bids by Colum bia/HCA, Wall St. J., May 8 , 1996, at B10.Google Scholar

56 See Lutz, Sandy, How Much? Price Is Becoming a Contentious Issue in Sales of Not-for- Proflt Hospitals, as Communities Seek Fair Value and Challenge Secrecy, Mod. Healthcare, Feb. 12 , 1996, at 85, 86-87.Google ScholarPubMed

57 See Pham, Alex,New Orleans Battle Site of Hospital-Takeover War, Commercial Appeal (Memphis), Sept. 17 , 1995, at ClGoogle Scholar, available in WESTLAW, Comapl Database.

58 Recent articles have assailed payments made by for-profits for exempt hospital assets. See Lutz, supra note 56, at 85.

59 See Mancino, Douglas, Strange Bedfellows: Merger with and Conversion to For-Profit Organizations, in Conversions to and From Exempt Status, 12 Exempt Org. Tax Rev. 42, 43 (1995).Google Scholar

60 See Gassel & Gerzog, supra note 28, at 8; see also Silk, Thomas, Conversions of Tax-exempt Nonprofit Organizations: Federal Tax Law and State Charitable Law Issues, 13 Exempt Org. Tax Rev. 745, 745 (1996)Google Scholar. Silk refers to this as a “Type B conversion.” See id.

61 This is the term used by Douglas Mancino in his presentation Strange Bedfellows: Merger with and Conversion to For-Profit Organizations. See Mancino, supra note 59, at 43.

62 Those provisions modified include its statement of charitable purpose, provisions barring private benefit and private inurement and provisions promising adherence to federal tax-exemption law.

63 These provisions allow for issuance of shares, voting rights and so on.

64 These include California, Pennsylvania and Virginia.

65 The ownership interest of the not-for-profit in the joint venture will vary depending on the amount of capital/cash/assets contributed by the for-profit to the joint venture, and the amount of capital that the nonprofit keeps in the joint venture. One example of such conversion would be the proposed 50-50 joint venture between Columbia/HCA and Michigan Capital Healthcare. See Judge Voids Columbia Deal in Mich., Mod. Healthcare, Sept. 9 , 1996, at 2, 4.Google Scholar

66 See California Attorney General Opposes Sharp Hospital Deal with Columbia/HCA, 5 Health Law Rep. (BNA), No. 45, at 1668, 1669 (Nov. 14, 1996).Google Scholar

67 It is questionable whether community control will be retained, in practice, in this type of model. Community boards of directors may over time lose interest in the institution, enabling the proprietary partner, with staff paid to attend board meetings consistently, to effectively gain control of the institution. Further, the resulting for-profit hospital typically enters into a long-term man agement contract with the former exempt hospital, enabling the proprietary to extract an additional return on its investment. See id. at 1669. “Columbia would act as managing partner and would be able to offer doctors and other groups shares in the joint venture ....” Id.

68 Under Massachusetts law, for example, a charity that is planning to dispose of all or sub stantially all of its property and assets must give the attorney general not less than 30 days written notice of such disposition if a material change in the nature of the corporation’s activities will result. See Mass. gen. laws ch. 180, § 8A(c) (1994). California has recently passed a law (A.B. 3101), effective January 1, 1997, requiring “hospitals to notify the attorney general of any sale, lease or transfer of management responsibility" of any nonprofit hospital. California Attorney General Op poses Sharp Hospital Deal with Columbia/HCA, supra note 66, at 1669. The law also requires “the attorney general to hold a public meeting on the proposed transaction, and issue a written decision consenting to or objecting to the deal within 60 days.” Id. Because the notification requirement is intended to trigger policing of charitable assets under the attorney general’s traditional role as pro tector of charitable assets, it will discussed infra Part III.B.2.

69 The law was not always so straightforward. At one time courts debated whether directors of a nonprofit corporation should be held to a trustee standard of care, which involves a heightened fiduciary duty absolutely prohibiting transactions between the corporation and a director involving a conflict of interest. See generally Fishman, James, The Development of Nonprofit Corporation Law and an Agenda for Reform, 34 Emory l.j. 617, 648 (1985)Google Scholar. The Revised Model Nonprofit Corpo ration Act established a “corporate" fiduciary duty, enabling directors to engage in certain conflict of interest transactions so long as appropriate safeguards, such as notification and exclusion from vote, are followed. See Revised Model Nonprofit Corp. act § 8.30(e) commentary at 213 (1987).

70 See generally 1 Cox, James D. Et AL., Corporations §§ 11.1—.10 (1995)Google Scholar (describing fiduci ary duties in the corporate context).

71 See Revised Model Nonprofit Corp. act § 8.30(a).

72 See Boisture & Varley, supra note 11, at 230 & n.21 (citing Doyle v. Union Ins. Co., 277 N.W.2d 36, 41-44 (Neb. 1979)).

73 See Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985).

74 See id. at 872-73.

75 See id. at 872.

76 See, e.g., id. at 874.

77 See id. at 872-73.

78 See, e.g., Thompson’s Point, Inc. v. Safe Harbor Dev. Corp., 862 F. Supp. 594, 599 (D. Me. 1994) (finding corporate director’s conduct not protected by business judgment rule, and that it vio lated the duty of loyalty).

79 See infra notes 109-12 and accompanying text. Also, some states do not require notification to the attorney general or other state authorities in connection with the merger or consolidation of a charitable corporation. See DEL. Code Ann. tit. 8, § 254 (1996); KAN. Stat. ann. § 17-6705 (1995).

80 Scholars and enforcement officials have often noted the lack of supervision over nonprofit corporations. See O'Donnell v. Sardegna, 646 A.2d 398, 405 (Md. 1994).

81 See id. (citing Demott, supra note 80, § 2:04, at 22).

82 See id. at 411-12. Members of a nonprofit corporation are analogous to shareholders of a for-profit corporation, and may be vested with decision-making power by the corporation’s charter and bylaws. See Barry R. Furrow Et Al., health law § 5-11, at 294 (1995).

83 See, e.g., Stern v. Lucy Webb Hayes Nat'l Training School for Deaconesses & Missionaries, 367 F. Supp. 536, 540 (D.D.C.), supplemented by 381 F. Supp. 1003 (D.D.C. 1974); City of Paterson v. Paterson Gen. Hosp., 235 A.2d 487, 495 (N.J. 1967).

84 381 F. Supp. 1003. Another seminal health care case is Queen of Angels Hospital v. Younger, 136 Cal. Rptr. 36 (Ct. App. 1977), where the court found that the hospital board of direc tors had breached its fiduciary duty when it settled a $16 million claim by its Catholic sponsor for past uncompensated services. See id. at 42. The court found that the hospital did not have a legal obligation to pay for the services, so the settlement was inappropriate. See id. at 43.

85 See Stern, 381 F. Supp. at 537.

86 See id.

87 See id.

88 See id. at 540.

89 Interestingly, state attorneys general in Alaska, Arkansas, Florida, Iowa, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Ohio, South Carolina, Tennessee and Texas have issued opinions in response to inquiries over the sale of and/or asset conversion of public hospitals, but no opinions have been issued regarding the sale or conversion of private not-for-profit hospitals and distribution of their assets, apparently leaving the courts and specific state statutes as the only avenue for attor ney general intervention for these entities. For examples of such opinions, see 58 Op. Ark. Att'y Gen. 1, 1 (Apr. 30, 1990); 31 Op. Fia. Att'y Gen. 86, 86 (Apr. 17, 1985); 65 Op. Kan. Att'y Gen. 21, 21 (Apr. 20, 1979).

90 566 So. 2d 296 (Fla. Dist. Ct. App. 1990).

91 See id. at 297.

92 See id.

93 See id. In this case, the court struck the attorney general’s derivative action on behalf of the not-for-profit, holding that Florida law allowed only the corporation itself to file such a suit. See id. at 298. Because the derivative action was struck, the only remedy available to the attorney general under Florida law was an injunction to prevent the shell not-for-profit from violating its articles of incorporation and bylaws in the future. See id. at 299. Interestingly, the IRS had previously ap proved the terms of the sale in a private letter ruling. See id.

94 See California Attorney General Hits Sharp, Columbia/HCA Venture, Inside Health Care Reform, Nov. 18 , 1996Google Scholar, available in 1996 WL 14376014.

95 See id.

96 See id.

97 See Jaklevic, Mary Chris, New Hearing Set for Michigan Deal, Mod. Healthcare, Nov. 11 , 1996, at 17, 17Google Scholar (reporting that Columbia/HCA would have the opportunity to raise this matter again in a subsequent hearing).

98 See Columbia/HCA Healthcare, Select Fed. Filings Newswires, July 5 , 1996, at *4Google Scholar-5, available in WESTLAW, Hthnws Database.

99 Non-Profit Conversions: State AGs Share Data, Approaches to Charitable Assets, Conver sions, supra note 10, at 1413.

100 See Meyer, The Lure, supra note 34, at 22. This is unlike public hospitals, which often are subject to sunshine laws that require certain meetings be open to the public. See Segal, David, Hospital Venture Leaves Public in Dark, Wash. Post, Mar. 4 , 1996, Washington Business Section, at 5Google Scholar. For institutions where community members may readily become corporate members of the hospital, there might exist a right in the institution’s articles of incorporation, or more likely in the by laws, for members to be able to attend board meetings. See id.

101 See Segal, supra note 100, at 5.

102 See id.; see also Boisture & Varley, supra note 11, at 231.

103 See Segal, supra note 100, at 5.

104 See Furrow ET AL., supra note 82, § 5-14, at 297 (recognizing that some states still treat not-for-profit institutions as constructive trusts and their directors as trustees). Today many more states have rejected the notion that not-for-profit corporations are trusts. See id. These states have imposed the same fiduciary standards on not-for-profit directors as those imposed on directors in for-profit corporations. See id. In contrast to directors in for-profit corporations, states impose a duty of obedience on directors in not-for-profit corporations. See id. § 5-17, at 305. This duty is an extension of the obligation of charitable trustees to administer the wishes of the creator of the trust. See id.

105 See Fishman, supra note 69, at 650-51.

106 In Queen of Angels v. Younger, the court noted that nonprofit corporate assets are impressed with a charitable trust by virtue of the corporation’s purposes, as set forth in its articles of incorporation. See 136 Cal. Rptr. 36, 39 (Ct. App. 1977). Not all grants of federal tax exemption make the entity a charity. For example, grants under I.R.C. § 501(c)(4) are typically awarded to lobby groups, which themselves would not be considered public charities. See Hamburger et al., supra note 24, at 486. On the other hand, donations to § 501(c)(4) organizations do not afford the donor the charitable tax deduction which is given to donations to § 501(c)(3) organizations. See Silk, supra note 60, at 748.

107 Further evidence of the public charity identification given to organizations exempt under § 501(c)(3) is that contributions to these organizations are tax deductible. See I.R.C. § 170 (West 1997).

108 See Restatement (Second) of Trusts § 391, at 279 (1959)Google Scholar (stating that states’ attorneys general can bring suit to protect charitable trusts). The Restatement allows individuals with a real interest to bring suit to protect charitable trusts as well. See id. Nevertheless, some states only allow the attorney general to bring such an action. See Mcgovern, William JR. ET AL., Wills, Trusts & Estates § 8.6, at 329 (1988)Google Scholar.

109 See van de Kamp v. Gumbiner, 270 Cal. Rptr. 907, 919 (Ct. App. 1990).

110 See id. at 921-25.

111 See Butterworth v. Anclote Manor Hosp., 566 So. 2d 296, 298 (Fla. Dist. Ct. App. 1990), rev. denied, 576 So. 2d 291 (Fla. 1991).

112 See id. at 297.

113 Charitable trust law has been used once to estop a Columbia/HCA joint venture conversion. In Attorney General v. Michigan Affiliated Healthcare System, Inc., the Michigan Attorney General successfully argued that the hospital was prohibited from partnering with a proprietary organization and converting its assets because the partnership would allow generation of profits to Columbia/HCA from charitable assets. No. 96-83848-C2, 16 Exempt Org. Tax Rev. 343, 344 (1997) (Mich. Cir. Ct. Ingham County Sept. 5, 1996). The court specifically opened the door to outright sale of the institution to Columbia/HCA, however, implying that sale and establishment of an appropriately funded foundation would be allowed under Michigan’s charitable trust laws. See Jaklevic, supra note 97, at 17.

114 Restatement (Second) Of1 Trusts § 399 (1959). Strict construction of the cy pres doc trine, whereby a court may feel bound to require that the assets be dedicated to the same purpose for which they were originally intended, may be an area of the law needing reform. See id. In states whose courts follow a strict construction approach, conversion proceeds may be required to be dedi cated to the operation of a nonprofit hospital, the very entity whose sale, presumably because of a well thought out purpose or need, generated the proceeds. See Silk, supra note 60, at 747-48.

115 See generally Edited Transcript of the Sessions of the May 19, 1995 ABA EO Committee Meeting in Washington: Panel II, Conversions To and From Exempt Status, 12 Exempt Org. Tax Rev. 35, 42 (1995) (expressing concern for the direction of funds donated to charity).

116 Other negotiable points include continuing charitable care obligations and community rep resentation in hospital activities via board appointments. See McMahon, supra note 6, at 361-62.

117 See Tower, Eric, Directors’ Duty to Obtain a Fair Price in the Conversion of Nonprofit Hospitals, Annals Of Health Law (forthcoming 1997).Google Scholar

118 Lutz, supra note 56, at 85.

119 See id. at 94.

120 Federal tax laws prohibiting private benefit or inurement especially suggest such independ ence is necessary. See infra notes 175-77 and accompanying text.

121 See Meyer, supra note 49, at 40.

122 See Silk, supra note 60, at 746, 748; see also Meyer, supra note 49, at 40 (describing the experience in Massachusetts where the attorney general and the state courts have taken a supervisory role in the establishment of foundations). For a discussion of one possible mechanism to help assure “fairness" in the conversion transaction, see Bebchuk, Lucian Arye & Kalian, Marcel, Fairness Opin ions: How Fair Are They and What Can Be Done About It?, 1989 Duke Law J. 27CrossRefGoogle Scholar (using an invest ment bank to assess whether a proposed transaction is fair and adequate to assure fulfillment of fi duciary obligation, while cautioning that such opinions may be skewed by conflicts of interest or the alternative means of estimating fair price).

123 Michigan Attorney General Kelley’s defeat of a hospital’s conversion as part of a joint venture with Columbia/HCA illustrates the success of attorney general oversight. See supra note 113.

124 For example, Ohio’s proposed legislation provides that any organization which had ever been tax exempt as a charitable organization would be governed by the legislation, even if the or ganization was no longer tax exempt. This caveat is in response to Ohio Blue Cross and Blue Shield’s argument during its conversion attempt that it was no longer a charitable organization, and therefore not responsible for funding a charitable foundation on its conversion. See Ohio: Blue Cross Sale Spurs New Legislation, Health Line, Sept. 16 , 1996Google Scholar, available in LEXIS, News Library, Hltlne File.

125 See Neb. Rev. Stat. § 71-20,104 (1996).

126 S.B. 328, 121st Leg., Reg. Sess. § 1744.01(A) (Ohio 1995). Interestingly, no statute has been enacted that would reach beyond health care, to envelop conversions of other types of charita ble organizations. Most likely this is due to the heightened pace of conversions as well as the sig nificant dollars at stake in these conversions. See Data on Non-Profit Hospital Conversions, supra note 7, at d10.

127 See Neb. Rev. Stat. § 71-20,104.

128 See S.B. 328.

129 See Cal. Health & Safety Code § 1399.72 (West Supp. 1997).

130 See Neb. Rev. Stat. § 71-20,103(3).

131 S.B. 328 § 1744.01(B).

132 See id. § 1744.07(A).

133 See id. § 1744.02(C)(8).

134 See id. § 1744.05(E)(3).

135 See id. § 1744.06.

136 See id. § 1744.06(C). The statute leaves a large loophole for executives who may wind up in the employ of the proprietary purchaser, but at a different facility.

137 See id. § 1744.05(B)(2).

138 See id. § 1744.07(A).

139 See id. § 1744.05(B)(2), (C).

140 See Neb. Rev. Stat. § 71-20,102 (1996).

141 See Cal. Health & Safety Code § 1399.72 (West Supp. 1997).

142 See H.B. 5956, 180th Leg., Reg. Sess. (Mass. 1995).

143 See S.B. 1686, 207th Leg., 1st Annual Sess. (N.J. 1996), available in WESTLAW, NJ-BILLS Database; S.B. 2368, 207th Leg., 1st Annual Sess. (N.J. 1996), available in WESTLAW, NJ-BILLS Database; S.B. 2497, 207th Leg., 1st Annual Sess. (N.J. 1996), available in WESTLAW, NJ-BILLS Database.

144 See Cal. Health & Safety Code § 1399.72(c).

145 See id. § 1399.72.

146 See Neb. Rev. Stat. § 71-20,108 (1996).

147 See Cal. Health & Safety Code § 1399.73(c).

148 See Neb. Rev. Stat. § 71-20,108(5).

149 H.B. 5956, 180th Leg., Reg. Sess. § 1(d) (Mass. 1995).

150 See id. § 3.

151 Id.

152 See id. § 2(iv).

153 See id. § 1(d).

154 New Hampshire’s H.B. 1421, Reg. Sess. (1995), available in WESTLAW, BILLS-OLD Database, was defeated. This legislation would have required the director of charitable trusts to make a determination of community benefit before mergers of nonprofit HMOs, hospitals, and other nonprofit entities are formed. See id.

155 See West, Nancy, Probe of Hospital Deals Expanded, N.H. Sunday News, Dec. 24 , 1995, at Al.Google Scholar

156 S.B. 3184, 99th Gen. Assembly, 2d Sess. (Tenn. 1995), available in WESTLAW, BILLS- OLD Database.

157 See id.

158 See Graham, Patrick, Blue Cross Blue Shield Bill Stalls in Senate, but Sponsor Vows to Continue Fight, Memphis Business J., Apr. 15 , 1996, at 28, 28Google Scholar, available in WESTLAW, Allnews Database.

159 See N.Y. Pub. Health Law § 2801(a)(4) (McKinney 1993).

160 See id. §2801(a)(11).

161 See Fein, Esther B., A Move to Hospitals-for-Proflt Gaining Support in New York, N.Y. Times, July 5 , 1996Google Scholar, at Al (noting that publicly traded health care companies are “waiting in the wings . . . ready to step in if the laws change”). Interestingly, New York City has been hit with a wave of mergers and consolidations as institutions seek to position themselves for removal of the investor-owned ban.

162 H.B. 5910, 180th Leg., Reg. Sess. (Mass. 1995), available in WESTLAW, MA-BILLS Da tabase.

163 See Pham, Alex, Bill Filed to Ban Additional For-Prqfit Hospitals; HMOs, Boston Globe, Mar. 30 , 1996, at 63.Google Scholar

164 See Miller, Andy, Blue Cross Taxes an Issue for Consumer Groups, Atlanta Journal & Const., Dec. 29 , 1995, at 2B,Google Scholar available in WESTLAW, Atlntajc Database.

165 See id.

166 See id.

167 See Segal, supra note 100, at 5.

168 See id.; cf. supra notes 100-01 and accompanying text.

169 Other federal laws may also impact the conversion structure and process. For example, if the hospital is sold to a third party for a price exceeding its book value, Medicare recapture rules may dictate that the hospital refund to the Medicare program overpayment made by that program for the hospital’s depreciation expense. See 42 U.S.C. § 1395x(v)(1)(A)(ii) (1994). Nevertheless, fed eral tax law is the most important source of regulation for hospital conversions at the federal level. See Silk, supra note 60, at 747. In addition, hewing to state tax-exemption requirements is also important, although state tax-exemption law has not (yet) been used to challenge conversions. For an excellent discussion of state tax exemption, see generally Hall & Colombo, supra note 24 (articulating four criteria by which to evaluate the charitable tax exemption for nonprofit hospitals, refuting three conventional explanations for the exemption, and proposing a donative theory as an alternative rational for the charitable exemption).

170 I.R.C. § 501(a) (West 1997).

171 Id. § 501(c)(3) (emphasis added).

172 See H.R. Rep. no. 75-1860, at 19 (1938); Tariff Act of 1894, ch. 349, § 32, 28 Stat. 509, 556. Interestingly, charitable purpose, the primary requirement for tax exemption, is not defined by the Internal Revenue Code. In a 1969 ruling, the IRS defined the phrase in the hospital context as the provision of health care for the benefit of the community as a whole. See Rev. Rul. 69-545, 1969-2 C.B. 117. This ruling imposed a community benefit standard as the determinant of fulfilling a charitable purpose. For an excellent primer on federal tax exemption in the context of health care institutions, see Facilities & Transactions § 4.4.3 (Mark A. Hall & William S. Brewbaker III eds., 1996).

173 See Treas. Reg. § 1.501(c)(3)-l(d)(3) (1996).

174 See id.

175 See id. § 1.501(c)(4)-l(e)(1); see also Trinidad v. Sagrada Orden de Predicadores, 263 U.S. 578, 581 (1924). Two conjunctive tests are used to determine if benefit has been conferred more than incidentally. See Treas. Reg. § 1.501(c)(4)-l(e)(1). Under the qualitative test, any private benefit must be in furtherance of the organization’s tax-exempt purpose. See id. Under the quanti tative test, the private benefit must be quantitatively insubstantial when compared to the public benefit achieved. See Sagrada Orden, 263 U.S. at 581; see also Treas. Reg. § 1.501(c)(4)-l(e)(1) (stating that the tax exemption is. still allowed as long as the for-profit business or trade does not become the primary purpose of the charitable organization, i.e., is not a substantial amount of the organization’s business).

176 See Treas. Reg. § 1.501(c)(3)-l(c)(2). The IRS has interpreted the term insider broadly, even extending this designation to all physicians on a hospital’s medical staff. See Gen. Couns. Mem. 39,498 (Jan. 28, 1986), reprinted in [1986-1990 Transfer Binder] IRS Pos. (CCH) ¶ 1786, at 5968, 5972. Recently, the IRS may have stepped back from designating all medical staff members this way. See Taxpayer Bill of Rights 2, Pub. L. No. 104-168, § 4958(c)(2), 110 Stat. 1452 (1996).

177 See discussion supra Part 1I.D.

178 See Rev. Rul. 76-91, 1976-1 C.B. 149.

179 See Priv. Ltr. Rul. 83-12-125 (Dec. 23, 1982). For an excellent discussion on the tradi tional methods of valuation, see Tower, supra note 117.

180 See Tower, supra note 117.

181 See Kaiser, Charles F. & Sullivan, T.J., Integrated Delivery Systems and Health Care Up date, in 1995 (For FY 1996) Exempt Organizations Continuing Professional Education Technical Instruction Program Textbook 384, 384-403 (Internal Rev. Serv. ed., 1995)Google Scholar [hereinafter CPE Text].

182 For a criticism of the CPE TEXT approach, see Tower, supra note 117. See also CPE Text, supra note 181, at 393-94.

183 See CPE Text, supra note 181, at 394.

184 See id. at 396.

185 See id. at 394-96.

186 See Treas. Reg. § 1.501(c)(3)-l. For a discussion of the events leading up to the new sanc tions, see Mancino, supra note 13, at 368-69.

187 See Mancino, supra note 13, at 368-69.

188 For activities which lead to such sanctions, see, e.g., I.R.C. § 501(h) (West 1997) (for lob bying activities); id. § 511 (for conducting an unrelated trade or business); id. § 512 (for engaging in discriminatory practices); id. § 509 (for violating the private foundation provisions).

189 See id. § 150(b)(3)(B); see also Rev. Proc. 93-17, 1993-1 C.B. 507; Priv. Ltr. Rul. 95-350- 37 (June 2, 1995); Tax-Exempt Bonds: IRS Proposes Comprehensive Guidance on Private Activity Bond Restrictions, [Jan. 1995] Daily Tax Rep. (BNA) No. 5, at G-6 (Jan. 9, 1995).

190 Taxpayer Bill of Rights 2, Pub. L. No. 104-168, § 4958, 110 Stat. 1475 (1996).

191 See I.R.C. § 4958. Disqualified persons are recipients of inappropriate benefits, and or ganization managers are individuals in the organization who approve the benefits. See id. § 4958(f)(1)-(2).

192 For example, the sale of a parcel of real estate by a tax-exempt organization to a disquali fied person for an amount less than its fair market value would result in excess benefit taxes being levied on that disqualified person (and perhaps on the organization manager who approved the trans action). See Mancino, supra note 13, at 370.

193 See I.R.C. § 4958(a)(1).

194 See id. § 4958(b).

195 See id. § 4958(d)(2).

196 See Mancino, supra note 13, at 370.

197 See id. at 370-71.

198 See id. at 371.

199 See id.

200 Such recipients may include board members and others associated with the tax-exempt hospital prior to conversion, as well as those on the purchasing side. See id. at 372.

201 See supra note 10.

202 See supra notes 108-10 and accompanying text.

203 See Cal. Health & Safety Code § 1399.72 (West Supp. 1997); Neb. Rev. Stat. § 71- 20,102 (1996); H.B. 5902, 180th Leg., Reg. Sess. (Mass. 1995), available in WESTLAW, MA- BILLS Database; H.B. 5908, 180th Leg., Reg. Sess. (Mass. 1995), available in WESTLAW, MA- BILLS Database; H.B. 5910, 180th Leg., Reg. Sess. (Mass. 1995), available in WESTLAW, MA- BILLS Database; H.B. 5911, 180th Leg., Reg. Sess. (Mass. 1995), available in WESTLAW, MA- BILLS Database; H.B. 5956, 180th Leg., Reg. Sess. (Mass. 1995), available in WESTLAW, MA- BILLS Database; H.B. 1421, Reg. Sess. (N.H. 1995), available in WESTLAW, BILLS-OLD Data base; S.B. 1550, 207th Leg., 1st Annual Sess. (N.J. 1996), available in WESTLAW, NJ-BILLS Da tabase; S.B. 1686, 207th Leg., 1st Annual Sess. (N.J. 1996), available in WESTLAW, NJ-BILLS Database; S.B. 2368, 207th Leg., 1st Annual Sess. (N.J. 1996), available in WESTLAW, NJ-BILLS Database; S.B. 2497, 207th Leg., 1st Annual Sess. (N.J. 1996), available in WESTLAW, NJ-BILLS Database; S.B. 328, 121st Gen. Assembly, Reg. Sess. (Ohio 1995), available in WESTLAW, OH- BILLS Database; S.B. 3184, 99th Leg., 2d Sess. (Tenn. 1995), available in WESTLAW, BILLS- OLD Database.

204 See Cal. Health & Safety Code § 1399.72; Neb. Rev. Stat. § 71-20,102; Mass. H.B. 5902; Mass. H.B. 5908; Mass. H.B. 5910; Mass. H.B. 5911; Mass. H.B. 5956; N.J. S.B. 1550; N.J. S.B. 1686; N.J. S.B. 2368; N.J. S.B. 2497; Ohio S.B. 328; Tenn. S.B. 3184.

205 See Cal. corp. code §§ 7820, 8018 (West 1996).

206 See Neb. Rev. Stat. § 71-20,102.

207 See supra note 49.

208 See Tenn. S.B. 3184.

209 See Mass. H.B. 5902; Mass. H.B. 5908; Mass. H.B. 5910, Mass. H.B. 5911; Mass. H.B. 5956.

210 See supra notes 125-68 and accompanying text.

211 See I.R.C. § 4958 (West 1997).

212 See Mancino, supra note 13, at 369.

213 See supra notes 48-49.