Ohio Supreme Court Rules that Nonprofit
Contracting with County is Not a “Public Office”
Subject to Ohio Public Records Act

On December 28, 2006, the Ohio Supreme Court issued a 4-3 opinion finding that a private, nonprofit corporation providing community mental health services via contract with a county agency is not a “public office” whose records are subject to disclosure under the Ohio Public Records Act. In State ex rel. Repository v. Nova Behavioral Health, Inc., 2006-Ohio-6713, Nova Behavioral Health, Inc., a private, non-profit corporation, contracted with the Stark County Mental Health Board (CMHB) to provide mental health services for county residents. Nova received about 92% of its total revenues from the Stark County CMHB, meaning that the money used to pay Nova’s contract came from state and local taxes or from federal subsidies.

A newspaper reporter with The Canton Repository made a public records request to review the personnel fi e of a Nova counselor who was accused of inappropriate sexual advances toward several of his clients. Nova refused to provide the records on the grounds that it was a private, non-profit corporation and therefore not subject to the Public Records Act. The Canton Repository filed an original action in mandamus asking the Supreme Court to compel Nova to produce the records requested.

In its decision, the Court concluded that although Nova provided community mental health services under contract with the CMHB, it was not a public office for purposes of the Public Records Act. To reach this conclusion, the Court applied the “functional equivalency” test it had established in a similar case a few months earlier. See State ex rel. Oriana House, Inc. v. Montgomery, 110 Ohio St. 3d 456, 2006 Ohio 4854, 854 N.E.2d 193 and the Bricker & Eckler article Ohio Supreme Court Sets New Test for Determining Whether a Private Entity is Subject to Public Records Laws.

In Oriana House, the Court adopted a four-part “functional equivalency” test for determining whether a private entity is a public office for purposes of the Public Records Act. Under that test, a court must analyze:

1. whether the entity performs a governmental function;

2. the level of government funding;

3. the extent of government involvement or regulation; and

4. whether the entity was created by the government or to avoid the requirements of the Public Records Act.

In Oriana House, a 4-3 majority found that Oriana House, a non-profit community-based correctional facility, performed a governmental function and was heavily funded by the county. But Oriana House was not regulated by the county nor created for the purpose of avoiding the Public Records Act. When all four factors of the test were weighed, the Court found that Oriana House was not a public office under the test, and could not be forced to turn over records under Ohio’s public records law.

In Nova Behavioral Health, the majority of the Court applied the same four factors and reached the same ultimate conclusion. However, the Court found that, unlike Oriana House, Nova did not perform a “governmental function.” In reaching this conclusion, the majority acknowledged that Nova was a community mental-health agency as defined in R.C. 5122.01(H). The Court also noted that Nova operated as a “safety net” to provide mental health care for residents who were not adequately covered by commercial insurance.

However, the Court concluded that the provision of mental health services is not uniquely a governmental function and has not historically been considered a governmental function. There is no enabling legislation or legal duty for the Stark County CMHB to provide community mental-health services. Thus Nova met only one of the four factors of the functional equivalency test (the level of governmental funding) and was found not to be the functional equivalent of a public office. Finally, the Court stressed, as it had in Oriana House, that by merely receiving “government funds the entity does not convert into a public office for purposes of the Public Records Act.”

New Mental Health Parity
Bill Impacts Tax-Exempts

Beginning in September 2007, Ohio will join roughly half of the states in mandating that health insurance policies provide “parity” for coverage for the diagnosis and treatment of certain mental health conditions. All individual and group health plans offered by HMOs (HICs) and health insurers in Ohio must cover mental illnesses on the same terms and conditions as provided under the policy or plan for the diagnosis and treatment of all other physical diseases and disorders.

This mandate will apply to private or public employer group self-funded plans if federal law does not supersede, preempt, prohibit or otherwise preclude its application to such plans. Generally, self-funded ERISA plans are exempt from all state benefit mandates, including this new mental health parity mandate. However, governmental plans and plans sponsored by church-related organizations likely will have to comply with the new mandate. Under the bill, only “biologically based mental illnesses” — such as schizophrenia, schizoaffective disorder, major depressive disorder, bipolar disorder, paranoia and other psychotic disorders, obsessivecompulsive disorder, and panic disorder – must be covered.

In an effort to guard against the possibility that this new mandate will result in significant cost increases, the bill provides that if a HIC or health insurer can demonstrate that the mandate results in a cost-increase of one percent or more for all of its policies, it is exempt from the mandate. Employers may also obtain an exemption from the Ohio Department of Insurance by demonstrating that its coverage costs increased by more than one percent.

Senate Bill 116 applies to policies, contracts and agreements issued or renewed in Ohio on or after September 26, 2007. It does not require any changes to coverage currently in effect.

U.S. House and Ohio Governor Approve
New Lobbying Rules; Tax-Exempts Impacted

As part of the transition in control of Congress and the Ohio governorship, both the House of Representatives and Governor Strickland have implemented new ethics rules.

The U.S. House approved new lobbying rules (H. Res. 6) on January 5, 2007 that prohibit travel by House members and staff that is paid for, planned, or requested by lobbyists or organizations that employ lobbyists. The new resolution limits the amount of travel that members may accept from tax-exempt organizations and charities to learn about their programs. One exception permits members and staff to participate in one-day events sponsored by higher-education institutions.

Governor Strickland also announced new ethics rules (Executive Order 2007-01S) on January 8, 2007. The new ethics rules, which do not change prior law prohibiting public officials from accepting gifts of "substantial value", now require contractors and grant recipients to certify their understanding and compliance of these rules to the State. For more information about these rules see our earlier article A Corporate Guide to Ohio Ethics Laws: Governor Strickland’s Executive Order.

IRS IRS Plans to Continue
Governmental Examinations in 2007

The Internal Revenue Service announced that its Federal, State and Local Governments unit plans to close 10 examinations of federal agencies and an additional 30 examinations of large, non-federal governmental entities in 2007. Large, non-federal governmental entities are those with annual payrolls in excess of $40 million. The examinations will focus on employment (Social Security and Medicare) taxes, including withholding and reporting, as well as abusive health reimbursement arrangements (HRAs).

2006 Form 990 Instructions Available "Soon";
Guidance Issued on 990 Reporting for PPA Changes

The Internal Revenue Service plans to release instructions for the 2006 Form 990 shortly. As many tax-exempts are aware, the 2005 revisions to Form 990 require significant disclosure about the compensation of executives, as well as disclosures about the relationships between executives and related entities. The IRS now concedes that the information requests may have been overbroad, requiring substantial disclosures by large organizations, such as hospitals. These requirements may be pared back in the revisions.

Until the 2005 Form 990 is changed, the IRS has provided instructions for tax-exempts on how to implement the new reporting requirements added by the Pension Protection Act of 2006 on their Forms 990. These instructions are available on the IRS website.

Tax-exempts should remember that the PPA extends the Form 990 filing requirement to all organizations beginning in 2008; formerly, only those organizations with gross receipts in excess of $25,000 were required to file.

IRS Loses Challenge in Conservation Easement Case

The Court of Appeals for the Sixth Circuit upheld a Tax Court decision concluding that contributions of conservation easements on undeveloped lakefront property to a nature conservancy were "qualified conservation easements" under section 170(h) of the Internal Revenue Code.

In the case, the taxpayers donated shoreline conservation easements on part of their Lake Michigan property, including an undeveloped bluff, to the Lake Traverse County Trust, a tax-exempt organization. The conservation easements did not restrict the taxpayer's use or enjoyment of the property or the buildings located on the property, either as a vacation home or permanent residence, nor did the easements prohibit the taxpayers from developing the unencumbered portion of their property. The easements did limit prohibit the taxpayer from developing the lakefront lots.

The Internal Revenue Service challenged the donations, arguing that the easements failed to accomplish their intended purpose, by permitting the taxpayers to retain too many rights and by failing to prohibit development on the taxpayer's adjoining, unencumbered property. The IRS further argued that the easements failed to protect a "significant" natural habitat.

The Sixth Circuit rejected the IRS' argument, holding that the protection of rare, endangered or threatened species of animals or plants are "significant". The Court further concluded that the easements were carefully drafted to prevent activity or use that would undermine their stated purpose.

The taxpayer victory in this case is welcome, particular as the IRS increasingly scrutinizes these donations. However, the case emphasizes the need for taxpayers who are considering donating conservation easements to consult with an attorney and ensure that the easement and other papers are carefully drafted.

Quick Hits

• The IRS is asking whether organizations formed by hospitals and healthcare entities to share patient records with physicians in the community are fulfilling an exempt purpose.

• The IRS indicated that it is reviewing websites to determine whether tax-exempts are engaging in prohibited political activity. The determination may be based on proximity or prominence of political websites.

• The IRS is offering an online version of its popular tax-exempt training program for small and mid-sized organizations. The program is available at www.stayexempt.org.

• The IRS has provided additional information about telephone excise tax refund procedures in Notice 2007-11, 2007-4 IRB ____.

• The IRS is publishing a list of tax-exempt organizations whose exemption has been revoked. The list is available on the IRS website.