This session will discuss the health system implications of the latest tangible property regulations, implementation of the medical device excise tax and ACT recommendations on Form 1023.

1. 22nd Annual Health Sciences
Tax Conference
Top-of-mind issues for tax-exempt providers
December 3, 2012

2. Disclaimer
► Any US tax advice contained herein was not intended or
written to be used, and cannot be used, for the purpose of
avoiding penalties that may be imposed under the Internal
Revenue Code or applicable state or local tax law
provisions.
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3. Disclaimer
Ernst & Young refers to the global organization of member firms of Ernst & Young Global
Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving
member firm of Ernst & Young Global Limited operating in the US. For more information
about our organization, please visit www.ey.com.
This presentation is © 2012 Ernst & Young LLP. All rights reserved. No part of this
document may be reproduced, transmitted or otherwise distributed in any form or by any
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recording, rekeying, or using any information storage and retrieval system, without written
permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this
form or any of the material herein is prohibited and is in violation of US and international
law. Ernst & Young LLP expressly disclaims any liability in connection with use of this
presentation or its contents by any third party.
Views expressed in this presentation are not necessarily those of Ernst & Young LLP.
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4. Presenters
► Tricia Johnson ► Felicia Tucker
Ernst & Young LLP Ernst & Young LLP
Cincinnati, OH Jericho, NY
+1 513 612 1850 +1 516 336 0362
tricia.johnson1@ey.com felicia.tucker@ey.com
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5. Topics
► “Follow the money” and political/lobbying activities
► Medical device excise tax
► Advisory Committee on Tax Exempt and Government
Entities (ACT) recommendations on Form 1023
► Internal Revenue Service (IRS) Master File considerations
► Tangible property regulations
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6. “Follow the money” and political/lobbying
activities

7. Political campaign activity
► Regarding a candidate
► Any activity that favors or opposes candidates for public
office, including:
► Endorsement of candidates
► Contributions
► To candidates
► To political action committees (PACs)
► Public statements for/against a particular candidate or favorable
activity toward or against a candidate
► Distributing materials prepared by oneself or others that favor or
oppose candidates
► All facts and circumstances will be considered
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8. Lobbying
► Attempting to influence a piece of legislation
► Direct lobbying
► Directly contacting members of a legislative body
► Encouraging the public to contact members of a legislative body
► Advocating a position on a public referendum
► Grassroots lobbying
► The amount spent to influence, or an attempt to affect, the
opinions of the general public or any part of the general public
about an issue
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9. General advocacy and educational activities
► Influence non-legislative governing bodies (e.g., the
executive branch or regulators)
► Encourage voter participation in a non-partisan manner
► Voter registration
► Get out the vote drives
► Voter guides
► Candidate debates
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10. 501(c)(3) organizations
► Political campaign activity
► Prohibited, and may cause a loss of exemption
► Schedule C (Form 990) does allow a reporting of a correction
► Lobbying
► Must be an insubstantial activity of the organization
► Facts and circumstances test, and “insubstantial” is not defined
► Safe harbor — Section 501(h) election
► Up to US$1,000,000 direct expenditures and US$250,000 grassroots;
based on total exempt-purpose expenditures
► Applied on an affiliated group basis
► Excise tax for excess lobbying
► General advocacy
► Permitted as an educational activity
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11. 501(c)(3) organizations — 501(h) election and
reporting requirements
► Safe harbor expenditure test
► Make election by filing Form 5768
► Affiliated group application
► Excise tax for exceeding non-taxable amount in any one year
► Loss of exemption if excessive over a four-year period
► May also un-elect
► Form 990, Part IV
► 3. Did the organization engage in direct or indirect political
campaign activities on behalf of or in opposition to candidates for
public office? If “Yes,” complete Schedule C, Part I.
► 4. Section 501(c)(3) organizations. Did the organization engage in
lobbying activities, or have a section 501(h) election in effect
during the tax year? If “Yes,” complete Schedule C, Part II.
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12. 501(c)(4), (c)(5) or (c)(6) organizations
► Political campaign activity
► Permitted so long as it does not constitute the organization’s
primary activity
► Lobbying
► Unlimited amount of lobbying in furtherance of its exempt
purpose permitted
► General advocacy
► Unlimited amount in furtherance of its exempt purpose permitted
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13. Medical device excise tax

14. Medical device excise tax (MDET) —
imposition of tax
► Internal Revenue Code (IRC) Section 4191 imposes a
2.3% excise tax on:
► The “sale” or rental (or other first use) in the US
► Of “taxable medical devices”
► By a “manufacturer” or “importer”
► Effective January 1, 2013
► Proposed regulations were issued February 3, 2012
► While the comment period ended May 7, 2012, the IRS has asked
for additional comments from interested parties.
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15. Which devices are taxable?
► Taxable medical devices are medical devices sold or used
in the United States and intended for use on humans.
► The Food and Drug Administration (FDA) listing includes
5,800+ separate devices.
► Manufacturers are required to list devices with the FDA.
► Hospitals may make some of the same items for internal use, but
are generally exempt from the FDA-listing requirements for those
items.
► To be taxable, medical devices must be:
► Listed with the FDA (i.e., have a three-letter FDA product code)
► Finished goods ready for the market
► Not otherwise qualified for an exemption
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16. Which devices are exempt?
► Items not listed with a 3-letter FDA product code under FDA 510(k)
requirements
► Exports
► Eyeglasses, hearing aids and contact lenses
► Specific custom-fit items
► Items sold for further manufacturing
► Certain medical devices sold at retail
► Items not required to be listed with the FDA because they are sold
exclusively for use in “research”
► Investigational device exemption (IDE) — a medical device not yet
required to be listed with the FDA because the FDA has not yet
approved it for marketing
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17. Determining the taxpayer
► MDET is imposed on the manufacturer, producer or importer of a taxable
article.
► For excise tax purposes, the term manufacturer includes a “producer” and
an “importer.”
► A manufacturer is a person who produces a taxable article by processing,
manipulating or changing the form of an article, or by combining or assembling two
or more articles.
► Because the MDET applies only to US sales of taxable medical devices, the
MDET is also imposed on importers in lieu of the
actual manufacturer.
► An “importer” of a taxable article is any person who brings an article into the US
from a source outside the US and is the beneficial owner.
► While the IRS has yet to issue any rulings on the medical device excise tax, they
have issued several rulings holding customers to be importers in situations where
taxable articles are imported directly from foreign manufacturers, even if there was
an agent or arranger of the sale involved.
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18. Tax compliance and paying the liability
► Due by the manufacturer or importer
► Tax returns will be filed quarterly on the Form 720
► Estimated tax payments are due biweekly (every two weeks)
► First payment of the medical device excise tax is due January 28, 2013, for activity January 1–14
► Exemption certificates will be available for exports and for
further manufacturing
► There are penalties associated with non-payment/under-payment of MDET;
estimated biweekly tax payments are required to sum to 95% of quarterly
liability
► Both failure-to-pay and failure-to-file penalties apply
► The manufacturer or importer may try to recover the tax paid by:
► Increasing the price of the medical device
or
► Adding to the invoice price the amount of the tax as a separate charge
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19. Provider implications — indirect tax liability
► Cost increases
► The vendor may increase the price or put additional charges on
the invoice, though they are not required to notify.
► For purchased convenience kits (aka custom packs), the tax will
apply to the value of the entire kit, even if there are otherwise non-
taxable items included.
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20. Provider implications — direct tax liability
► Importing
► Direct sourcing
► Via group purchasing organizations (GPOs) or other similar arrangements
► Kits assembled for internal use are likely not taxable to
hospitals, though this is not confirmed until the IRS
finalizes regulations:
► Hospitals are generally exempt from registration and listing requirements of the
FDA when making kits for internal usage. The same taxable kit made by a
manufacturer (using the MDET definition of a manufacturer) that is sold on a
commercial basis may also be made by a hospital; however, because hospitals are
exempt from registration and listing requirements of medical devices, they may not
be creating taxable kits for purposes of the MDET.
► Some hospitals, however, may create medical devices and sell them to other,
unrelated, hospitals or others. It is less clear whether these sales should not result
in an excise tax, and this may be dependent on whether the FDA registration and
listing requirements apply (such are not addressed here).
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21. Provider opportunities
► Contract review
► Understand where a vendor could change a behavior and cause a
hospital to have a direct liability
► Consider amending existing contracts to prevent the seller from
passing through the cost of this tax
► Kitting
► Restructure kits — focus on high value, high use
► Bring kitting in-house — consider cost/benefit analysis (assuming
the IRS concurs that hospitals will be exempt for internal-use
manufacturing)
► Implement exemption management process
► Leases
► Understand how tax applies to the manufacturer and ensure it is
not charged through on all lease payments
► Separate other economic transactions
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22. Provider opportunities (cont.)
► Central procurement — trigger all direct liability in one
entity
► Centralize knowledge regarding what items are taxable:
► Understand which items are taxable devices and which are not to
ensure vendors are not arbitrarily trying to charge through, such as
an across-the-board price increase
► Be able to identify items that may at first appear to have a direct
liability because they are imported, but really may qualify for one of
the exemptions
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23. ACT recommendations on Form 1023

24. ACT recommendations on Form 1023 —
updating for the future
► ACT report
► Project ASPIRE
► A — Alleviate backlog
► S — Streamline process
► P — Prioritize review
► I — Improve customer service
► R — Redirect resources
► E — Enhance quality control
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25. ACT recommendations on Form 1023 —
updating for the future (cont.)
► Specific recommendations
► Develop fully interactive Form 1023
► Develop fully e-fileable Form 1023
► Facilitate Form 1023 database
► Primary objectives of Form 1023
► To be effective in identifying whether the organization qualifies
► To be consistent with structure and definitions of Form 990
► To be simplified by using a short-form and supplemental
schedules
► To be educational by organizing questions
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26. ACT recommendations on Form 1023 —
updating for the future (cont.)
► IRS suggested next steps:
► Develop educational tools about substantive requirements
► Coordinate with the Treasury Department and Office of
Chief Counsel
► Examine recurring complaints and improve the filing process
► Expand the Review of Operations (ROO) program to follow up on
Section 501(c)(3) organizations whose exemption application
indicated potential future compliance issues
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27. IRS Master File considerations

28. IRS Master File considerations
The Exempt Organization Business Master File (EO BMF) contains all of
the applicable information that the IRS has on file for exempt
organizations.
► A name/Employer Identification Number (EIN) mismatch can cause a
delay in payment from Centers for Medicare and Medicaid Services
(CMS) and other payors.
► May include the group and subordinate designation structure within the
IRS system as well
► An incorrect address of record (AoR) can invalidate a power of
attorney.
► An incorrect year-end can cause late filing notices (this happens often
with large systems where entities have different year-ends).
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29. IRS Master File considerations (cont.)
► Incorrect public charity status on IRS BMF examples are as follows:
► A change in an organization’s public charity status is allowable on Form
990, Schedule A, but the IRS does not update its records from information
on the Form 990.
► Following the Pension Protection Act of 2006 (PPA), many organizations
updated their public charity status on Schedule A to avoid some of the
donor issues associated with the 509(a)(3) status, but did not request an
updated determination letter; therefore, the IRS still has the 509(a)(3)
status in the public record.
► There may be a public charity issue if the organization does not qualify for
the status claimed on Form 990.
► Form 8940 — an organization may submit, along with the applicable
user fee, a request for a letter confirming it qualifies for a new public
charity status.
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30. BMF vs Select Check
There are two ways to check the deductibility of an organization with the
IRS:
► EO Business Master File
► A state-by-state downloadable spreadsheet including organizations’
names, address, private foundation status, year-end, group exemption
number, most recent 990 statistics and more.
► Select Check
► This option can check if an organization is eligible for tax-deductible
contributions, was automatically revoked or if it filed a 990-N.
► Entities exempt under a Group Exemption Number (GEN) are not
currently found with Select Check, but should be in the BMF. We have
also found instances where organizations were not found in the state
download, but were found in the applicable region download.
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31. Tangible property regulations

32. Five things you need to know
Who is affected?
The regulations affect all taxpayers with tangible property:
► Taxable subsidiaries
► Form 990-T activity
► Partnerships/joint ventures
Why is there so much interest in these regulations?
► The regulations depart from previous law and the
proposed regulations.
What do they cover?
► The regulations contain many broad-reaching rules — not just repairs.
When do they go into effect?
► The regulations apply to the 2014 tax year (were just extended
from 2012).
How are the regulations going to affect your company?
► The regulations present new implementation issues.
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33. Key aspects
► What do the regulations cover?
1. Unit of property
2. Improvements
3. Materials and supplies
4. Acquisitions
5. Depreciation groupings and dispositions
► General changes for most taxpayers include:
► Method changes
► Compliance with Section 263A
► The regulations have broad applicability, with many
questions remaining.
► How to implement the regulations — do you have a plan?
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34. What do they cover?
Acquisition of Improvements Depreciation
Materials and Leased tangible to tangible and
supplies property property property dispositions
► Definition ► Lessee/lessor ► Acquisition ► Unit of ► General asset
► Rotable spare expenditures costs property elections
parts ► Leasehold ► De minimis ► Betterments ► Multiple asset
► Election to improvements rule ► Restorations groupings
capitalize and ► Transaction ► New or ► Dispositions
apply de and different use
minimis rule investigatory ► Safe harbor
costs for routine
maintenance
Treas. Reg. Treas. Reg. Treas. Reg. Treas. Reg. Treas. Regs.
§ 1.162-3T § 1.167(a)-4T § 1.263(a)-2T § 1.263(a)-3T § 1.168(i)-1T and
§ 1.168(i)-8T
Other regulation sections amended for consistency.
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35. Unit of property: buildings and building
systems
Heating, ventilation and air Fire protection and alarm system –
conditioning (HVAC) system – includes sprinklers, computer
includes motors, compressors, controls, fire doors/escapes, etc.
boilers, chillers, pipes, ducts, etc.
Security system – includes window
Plumbing system – includes pipes,
and door locks, security cameras,
drains, sinks, bathtubs, toilets, Building structure – all
security lighting, alarm system, etc.
water/sewer equipment, etc. other Section 1250
components, including
roof, walls, foundation,
Electrical system – includes wiring, finishes, windows,
outlets, junction boxes, lighting Elevator system – includes all
doors, etc. elevators in the building
fixtures, etc.
Gas distribution system – includes Escalator system – includes all
pipes and equipment used to escalators in the building
distribute gas, etc.
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36. Materials and supplies
► Definition: tangible property (not inventory) that is:
► A component acquired to maintain, repair or improve a unit of tangible property
or
► Fuel, lubricants, water and similar items that are reasonably expected to be
consumed in 12 months or less
or
► A unit of property with an economic useful life of 12 months or less
or
► A unit of property costing US$100 or less
or
► Identified as such in guidance
► The new definition may mean that some assets are depreciable property
rather than materials and supplies.
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37. Tangible property
De minimis rule — book conformity election
► De minimis rule to conform to book expense
► Must have applicable financial statements (AFS)
► Must expense amounts in its AFS consistent with written
capitalization procedures
► By taxable entity, aggregate amount less than ceiling of:
► 0.1% of the taxpayer’s tax gross receipts
or
► 2.0% of the taxpayer’s total book depreciation and amortization
► If an entity exceeds the ceiling, excess amount must be capitalized
► May choose which items to capitalize
► Exclusions
► Land
► Inventory
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38. The procedural guidance
► Roadmap for implementing the regulations, including:
► Two-year waiver of the scope limitations: provides taxpayers under
examination the ability to file method changes outside of window periods
without obtaining examination consent and waives the five-year limitation
► Specific guidance related to the applicability of statistical sampling for
computing Section 481(a) adjustments and tax-return positions
► Provisions indicating which method changes will have a full 481(a) adjustment
versus those made on a modified cut-off (based on the effective date of the
regulations)
► 19 new automatic changes
► Many of the new changes can be filed on a single Form 3115, although
multiple 3115s are likely
► Compliance with § 263A is generally required
► Self–constructed assets and inventory
► File in Ogden, UT, office in lieu of IRS National Office
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39. Notice 2012-73
Notice 2012-73 (issued 12/20/2012) announced:
► Temporary regulations (currently effective for tax years beginning on
or after 1/1/2012):
► Will be modified to be effective for tax years beginning on or after
1/1/2014
► May be optionally applied for tax years beginning on or after 1/1/2012
► Optional early application may be done piecemeal
► Final regulations:
► Are anticipated to be published in 2013
► Will be effective for tax years beginning on or after 1/1/2014
► May be optionally applied for tax years beginning on or after 1/1/2012
► Will include modifications to de minimis rule, dispositions rules, and the
routine maintenance safe harbor
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40. Thank you
for your participation and feedback!
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