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IRS Rules on Tax Return Disclosure
Hospital Joint Ventures Will Be Scrutinized

May 1999
By Harry J. Friedman, Greenberg Traurig, Miami Office

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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 organization’s application for recognition of exemption and its three most recent annual tax returns at the organization’s 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 organization’s 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 organization’s 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 available.

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 organization’s 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 that campaign.

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 organizations.

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 subject.)

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 Court’s 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.