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 healthcare system of which the Corporation is a part, he or she is an interested person with respect to all entities in the healthcare system.

2. Financial Interest

A person has 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 and nature of his or her financial interest and all material facts to the directors and members of the 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 or she shall leave the board or committee meeting while the financial 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.

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 persons who were present for discussion 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 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.

2. Physicians who receive compensation, directly or indirectly, from the Corporation, whether as employment 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 physical compensation.

Each director, principal officer and member of a committee with board delegated powers shall annually sigh 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 arrangement 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 arrangements to provide healthcare and agreements with other healthcare providers, employees, and third party payors further the Corporation’s charitable purposes and do not result in inurement or impermissible private benefit.

In early 1997 the IRS promulgated proposed regulations under §337(d) which, in general, require a for-profit corporation converting to a not-for-profit tax exempt entity to recognize gain on the deemed transfer of assets to the new tax exempt entity as if it had sold such assets. The regulations are applicable only to transfers of assets occurring 30 days after final regulations are promulgated. The tax treatment of a conversion prior to finalization of the regulations in unclear.

A recent IRS ruling discusses the various tax consequences of a conversion to not-for-profit status. In PLR 9801058, a not-for-profit tax-exempt holding corporation was the sole member of a tax-exempt hospital and owned all of the stock of a for profit corporation. The for profit corporation engaged in (1) the operation of two medical clinics for minor injuries and illnesses; (2) the sale and rental of durable medical equipment and related health care services; (3) home therapy medical services; (4) the operation of a retail pharmacy, and (5) a billing service. The corporation represented that it had operated in a manner similar to a tax-exempt entity. The corporation proposed to convert to a not-for-profit entity. Under applicable state law the conversion was to be consummated through an amendment to the existing articles of incorporation.

The IRS ruled that the new not-for-profit entity was entitled to tax-exempt status pursuant to §501(c)(3). The IRS also reviewed the various activities to be conducted by the new exempt entity and ruled that the activities of the walk-in clinic, the furnishing of occupational medical services, and the furnishing of inmate medical services at a local prison constituted the promotion of health and would not generate unrelated business income. The sale or rental of durable medical equipment and pharmaceutical products to inpatients or outpatients of the hospital was likewise classified as tax exempt. Billing services provided to the hospital and its related entities would not result in unrelated business income. However, sales or rentals of medical equipment, sales of pharmaceutical products and billing services rendered to non-patients will result in unrelated business income to the new entity.

Arthur W. Schmidt Jr. of GuideStar Philanthropic Research Inc., told the IRS and Treasury panel that his organization is "committed to making the actual images of all the Forms 990 available to the public via the Internet."

Former Assistant Commissioner for Exempt Organizations/Employee Plans James McGovern, testified that the IRS could relieve exempts of the burden of making forms 990, 1023, and 1024 widely available over the Internet if the Service used its Ogden, Utah, center (where the forms are filed) as a clearinghouse for putting them online.

The California Code contains an "interested person" standard at Section 5227. Their standard provides that no more than forty-nine percent (49%) of the directors serving on the board of a California nonprofit public benefit corporation (i.e., the standard form of charitable corporation under California law) may be "interested persons." An "interested person" is (i) any person currently being compensated by the corporation for services rendered to it within the previous twelve (12) months whether as a full-time or part-time employee, independent contractor, or otherwise, excluding any reasonable compensation paid to a Director as Director, and (ii) any brother, sister, ancestor, descendant, spouse, or in-law of any such person.

The California Corporations Code provides in Section 5233 that, with certain exceptions, a California nonprofit public corporation shall not enter into a transaction in which one or more of its directors has a material financial interest unless one of three standards are met.

The standards specified in Section 5233 include: (1) approval by the California Attorney General before or after the transaction is consummated, (2) approval by a majority of the directors then in office, not including the vote of the interested director, prior to entering into the transaction after full disclosure to the board of all material facts as to the proposed transaction and an investigation by the board as to alternative arrangements for the proposed transaction if any, and (3) interim approval by an authorized committee or person prior to entering into the transaction provided the board, after determining the good faith that the corporation entered into the transaction for its own benefit and that the transaction was fair and reasonable as to the corporation at the time it was entered into, ratifies the transaction by a vote of the majority of the directors then in office, without counting the vote of the interested director.

Note that only one of the three standards, i.e., approval by the California Attorney General, is available after the transaction has occurred. The other two standards require board-level action prior to the transaction.

It is also important to note that the California self-dealing rules apply to all California public benefit charitable entities. A somewhat similar federal rule with the same name applies to charities which are also classified as "private foundations" under federal tax law.

In order to assist nonprofit charitable boards in complying with both the interested person standards of Section 5227, and the self-dealing/interested director standard of Section 5233, we recommended that each California nonprofit public benefit corporation annually circulate a questionnaire to its board members to elicit pertinent information.

Directors sometimes question whether circulation of such a form is an invasion of their privacy. The answer is "Yes it is, but it is for the director’s won benefit." Specifically, if a director has made the appropriate disclosures on the form, it is much less likely that a self-dealing transaction will occur. The failure to recognize the self-dealing or interested director nature of a transaction may result in the Attorney General requiring that the transaction be rescinded. Particularly in a case where the transaction has worked out poorly from the perspective of the charity (e.g., the charity buys something from the director and the object declines in value) this could result in the director having to repurchase the object (for example, a used car) for the amount originally paid by the charity, plus interest, even though the object might now be worth considerably less. Thus, the circulation of a questionnaire will help alert both the director and the charity to the nature of a self-dealing transaction so that the statutory procedures can be scrupulously observed, and the potential for rescission avoided.

In summary, although it is acknowledged that compliance with the questionnaire involves an invasion of privacy of the individual director, such invasion of his or her privacy may well ultimately rebound to his or her own benefit. Moreover, the questionnaires, taken together, will immediately highlight a violation of the Section 5227 limitation that not more than 49% of the directors be "interested persons."

QUESTIONNAIRE FOR BOARD OF DIRECTORS (TRUSTEES)

OF

_______________________________________________

Name: _______________________________________________________

Address: _______________________________________________________

_______________________________________________________

Telephone

Number: _________________________________

(Area Code)

Occupation: ________________________________

Name of

Employer: ________________________________

Employer’s

Address: ______________________________________________________

______________________________________________________

1. Are you currently being compensated (excluding reasonable compensation paid to you as a director or trustee) by the corporation for services rendered to the corporation (whether as a part-time or full-time employee, independent contractor, consultant or otherwise) within the previous 12 months:

(Check One) _____ Yes _____ No

Additional Comments: __________________________________________

2. Do you anticipate the receipt of compensation from the corporation of the rendering of services as described in question 1 above during the upcoming 12 months?

(Check One) _____ Yes _____ No

Additional Comments: __________________________________________

3. If any person bearing any of the following relationships to you is currently being compensated by the corporation for services rendered to it as described in question 1 above within the previous 12 months, please list his or her name in the following space and indicate the person’s relationship to you by using the relationships designated below (if no such person is being compensated, please print the word "none" in the first space):

(Relationships: brother, sister, ancestor, decedent, spouse, brother-in-law, sister-in-law, son-in-law, daughter-in-law, father-in-law)

Name Relationship

_______________________________ ________________________

_______________________________ ________________________

Additional Comments: __________________________________________

4. If any person bearing any relationship to you as described in question 3 above anticipates the receipt of compensation from the corporation for the rendering of services to it as described in question 1 above within the next 12 months, please list his or her name in the following space and indicate that person’s relationship to you (if no such person anticipates receipt of such compensation, please print the word "none" in the first space):

Name Relationship

_______________________________ ________________________

_______________________________ ________________________

Additional Comments: __________________________________________

5. Are you a director, an officer, an employee or an owner in any business or entity (e.g., a bank, real estate brokerage firm, consulting firm, construction company, insurance brokerage firm, architectural firm, law firm, accounting firm, medical group, etc.) which has done business within the past 12 months with the corporation, or currently is or is contemplating doing business with the corporation?

(Check One) _____ Yes _____ No

If yes, please explain (type of business, type(s) of transaction(s), relationship):

__________________________________________________________________

__________________________________________________________________

Please explain your compensation or other financial arrangements, if any, with such business or entity concerning compensation received by you, directly or indirectly, from any such business transaction with the corporation:

__________________________________________________________________

__________________________________________________________________

Date: ____________, 199__

______________________________

(Signature)

______________________________

(Print name)

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