Mississippi Health-Care Companies and Officers Contest IRS Penalties

Three family-operated health organizations in Mississippi are battling the Internal Revenue Service in U.S. Tax Court over the first major set of penalties issued under a 1996 law.

In eight lawsuits filed in the tax court, three health-care companies in Mississippi and their five officers say they should not have been penalized under the so-called intermediate-sanctions law. The three companies — Sta-Home Health Agencies of Carthage, Greenwood, and Jackson — purchased non-profit organizations started by the Caracci family, of Jackson, Miss., and converted them to for-profit status.

According to court documents, the I.R.S. levied fines against the companies and their officials in the cases because it believed the non-profit groups were undervalued when they were sold to the for-profit companies. The cases call the fines levied by the I.R.S., which range from $11.5-million to $40-million, “a mindboggling windfall” for the tax agency.

The lawsuits against the service seek to have the fines overturned, arguing that they are unjust and that the conversion transactions were fairly valued by a well-regarded certified public accountant. The documents also charge that the I.R.S.’s actions were motivated by a desire to retaliate against one of the officers of the companies, Victor Caracci, for complaints against the I.R.S. that he had lodged with Congress and the tax agency.

In two related lawsuits, non-profit organizations started by the Caracci family dispute additional actions taken by the I.R.S.: the retroactive revocation of their tax-exempt status.

Under the 1996 federal statute, influential “insiders” who get inappropriately high compensation can be forced to pay fines, called excise taxes, as can trustees who approve the arrangements. Companies that do business with charities and have significant influence with them can also be deemed to be insiders. The penalties can equal 25 per cent of the portion of the compensation or other benefits considered excessive. Insiders who fail to pay the penalties or return the portion of the compensation considered excessive can face fines of up to 200 per cent of the money they received improperly.

Marc Owens, director of the I.R.S.’s Exempt Organizations Division, referred to the intermediate-sanctions fines at a speech last month at a Washington seminar held by the American Bar Association and the American Law Institute, saying the penalties amounted to more than $83-million (The Chronicle, December 2). But under federal law the I.R.S. was not permitted to name the organizations or people fined.

More details on the court cases will appear in the January 13 issue of The Chronicle. That issue will be available on line on January 10.