Greenberg Traurig Alert
IRS Rules on Tax Return Disclosure
Hospital Joint Ventures Will Be Scrutinized
By Harry J. Friedman, Greenberg Traurig, Miami
View or download the PDF version of this Alert here.
Tax Return Disclosure
The Taxpayer Bill of Rights 2, enacted in 1996, imposed added public disclosure
requirements for all tax exempt organizations, other than private foundations. The new
requirements, mandating that documents be provided to persons requesting them, will become
effective on June 8, 1999. Prior law required tax exempt organizations to allow public
inspections of the organizations application for recognition of exemption and its
three most recent annual tax returns at the organizations offices. The 1996
amendments expanded the disclosure requirements substantially, requiring an exempt
organization to comply with requests made in either in person or in writing for copies of
the these documents. The law requires that the exempt organization fulfill requests
without charge to the person requesting the documents, other than a reasonable fee for
reproduction and postage. If the request is made in person, the organization must
generally produce the requested copies immediately. If in writing, the organization has
thirty days to provide the copies.
An organization is relieved of its obligation to provide copies of its application and
tax returns upon request if, in accordance with Treasury Regulations, the organization has
made the documents widely available or the organization has been determined to be subject
to a harassment campaign, such that waiver of the obligation to provide copies would be in
the public interest. The 1996 amendments were made effective on the date the IRS finalized
those Treasury Regulations.
Final Treasury Regulations have now been promulgated. The Treasury Regulations will
become effective on June 8, 1999. The requirement to make available copies of the
organizations application for exempt status and tax returns will become effective on
that date. The Treasury Regulations provide guidance on the place and time the documents
must be available, conditions an organization may place on requests for copies and the
amount, form and time of payment of fees. In addition, the Treasury Regulations address
how an organization can make its application for exemption and annual information returns
"widely available", avoiding the requirement to provide copies.
Treasury Regulations provide that the fee charged for copying will be reasonable if it
does not exceed the fees the IRS charges for copies of returns. This fee is currently a
dollar for the first page and 15 cents for each subsequent page. If payment by credit card
is permitted, the organization need not accept personal checks.
The statute requires organizations to make documents available for public inspection at
its principal office and certain regional or district offices. The Treasury Regulations
refine this concept. Sites where the services are provided are solely in furtherance of
the organizations exempt purposes, e.g., a clinic where healthcare services are
provided are excluded from the definition of a regional or district office. Only sites
where management staff are located, other than those involved solely in managing the
exempt function, will be treated as sites where applications and tax returns must be
The Treasury Regulations specify that an organization can make its application for
exemption and/or its tax return widely available by posting the documents on the
organizations Internet site. While the Treasury Regulations do not enumerate any
particular format for this purpose, they do require an exact reproduction of the documents
on the Internet site.
The Treasury Regulations provide guidance for determining whether an organization is
the subject of a harassment campaign. The Treasury Regulations contain examples of
particular situations that constitute harassment campaigns and whether there is a
reasonable basis for the organization to believe that a request for information is part of
The IRS determined that these Treasury Regulations would not apply to private
foundations, although recent legislation expanded the disclosure requirement to private
foundations. It has been reported that the IRS is currently working at issuing proposed
regulations affecting private foundations.
The easy accessibility of applications and tax returns, particularly for those
organizations that choose to post their application and tax returns on the World Wide Web,
mandates that organizations look more closely at the information contained in their tax
returns. The tax return may become a useful vehicle for explaining to the public the
benefits the organization provides to the community. Donors may use the return to see how
their contributions are utilized. In addition, information such as the compensation paid
to officers will become more widely available. The availability of this information will
be useful in comparability studies that many organizations will use to determine if their
compensation is reasonable.
Joint Venture With For-Profit Entities
Marcus Owens, Director of the Exempt Organization Division of the IRS, recently spoke
before the Exempt Organization Committee of the ABA Section of Taxation. He addressed a
number of issues of interest to the exempt organization community.
Notwithstanding the recent decision of the Tax Court in the Sierra Club case
(See, GT Alert, April 1999), the IRS is still actively
pursuing unrelated trade or business income tax issues in affinity credit card cases.
Cases involving Common Cause and Planned Parenthood are now pending. It clearly appears
that the IRS will not "throw in the towel" on its position that affinity credit
card deals may constitute sources of unrelated trade or business income to exempt
Mr. Owens also indicated that the IRS is now auditing compensation issues using the
authority granted the IRS under Intermediate Sanctions. (See, GT
Alert, October 1998, for a discussion of Proposed Treasury Regulations on this
Mr. Owens addressed the issue of joint ventures between exempt organizations and
forprofit entities. In Revenue Ruling 9815, the IRS explained the consequences of socalled
"whole hospital joint ventures", a partnership or limited liability company
formed by an exempt organization and a forprofit entity to operate a hospital previously
operated by an exempt organization. The Revenue Ruling contains two examples, a "good
example" where the exempt partner retained its exempt status because it controlled
the venture, and a "bad example" where the exempt organization did not control
the venture and lost its exempt status. Mr. Owens advised that the important distinction
between the two hypothetical situations was which party was in control. The IRS is
concerned about who will determine how the assets of a joint venture would be used, who
will make the day to day decisions and who will approve contractual obligations. He noted
that it would be a problem if a service provider is an affiliate of the forprofit entity.
Since the Revenue Ruling was issued, the IRS has not ruled favorably on any whole
hospital joint venture. Mr. Owens indicated that none of the ruling requests that had been
received by the IRS contained fact patterns that the IRS would find acceptable.
He also addressed the question of joint ventures involving ancillary health care
ventures such as ambulatory surgical centers. The IRS has received 20 ruling requests on
exempt organization/forprofit ventures, but they have not ruled favorably on any of them
to date. Mr. Owens stated that a few favorable rulings may be issued in the future. The
IRS is examining whether a refinement of the control requirement is necessary where the
issue is unrelated trade or business income, not exempt status.
The IRS position is in accord with its litigation position in a case in California
involving an exempt organization application by an organization whose sole purpose was to
act as a general partner of a forprofit partnership over which it did not have sole
control. The Tax Courts decision in this case is expected shortly. Mr. Owens also
noted that the IRS is actively examining exempt organization/forprofit joint ventures.
©1999 Greenberg Traurig
This GT ALERT is issued for informational purposes only and is not intended
to be construed or used as general legal advice. Greenberg Traurig attorneys provide
practical, result-oriented strategies and solutions tailored to meet our clients’
individual legal needs.