Greenberg Traurig Alert
Website Links May Create Tax For Exempt Organizations;
Return Disclosure Rules For Private Foundations;
By Harry J. Friedman, Greenberg Traurig, Miami
View or download the PDF version of this Alert here.
IRS officials have indicated informally that exempt organizations should closely
examine placing on their website links to sponsors or other for-profit parties.
Frequently, exempt organizations, particularly charities and trade associations,
maintain websites for members and the general public to obtain information concerning the
organization. Members of the organization may visit the website to learn about the
benefits of membership.
Exempt organizations are also engaging in more transactions with for-profit entities.
Exempt organizations often endorse products made by a particular company in exchange for a
payment to the organization. Large companies also frequently make sponsorship payments to
charities in connection with events, such as football bowl games or golf tournaments.
Businesses look for opportunities to inform exempt organization members of the goods and
services they offer, and at the same time create a relationship with the organization of
which the consumers are members.
In order to accomplish this, a for-profit corporation who makes payments for
endorsements and sponsorships frequently requests that the website contain a link to the
corporations website. Members who visit the organizations website then have
the opportunity to quickly move to the websites of entities which are supporting the
organization and its activities.
IRS officials have suggested that these links may constitute advertisements for the
business. Generally, revenues earned by an exempt organization for advertising constitute
unrelated trade or business income, subject to income taxation. Some commentators have
suggested that the link should be treated as merely an acknowledgement of the sponsor and
not advertising. Recent legislation provides that acknowledgements of sponsorship
activities does not constitute advertising for an exempt organization.
The IRS has not issued any guidance on the appropriate treatment of revenues earned
from placing links on an organizations website. If the organization intends to
provide a link as part of an endorsement or rental of a mailing list, both of which are
usually treated as royalty income and not taxable income, it may be advisable to enter
into a separate agreement with separate consideration for the link. While the IRS has not
ruled on separating component parts of an arrangement in this manner, it may be beneficial
if it is determined that links on websites constitute advertising.
The IRS is looking at various issues that arise from exempt organizations
internet activities. We expect further guidance on these issues in the future.
New Private Foundation Disclosure Rules
The IRS has issued Proposed Treasury Regulations containing requirements for the public
disclosure of tax returns and exemption applications of private foundations. The IRS
previously issued final Treasury Regulations detailing rules for the disclosure of tax
returns and exemption applications of exempt organizations other than private foundations.
(See GT Alert, May, 1999).
Legislation enacted in 1998 extended the disclosure rules applicable to other exempt
organizations to include private foundations. The Internal Revenue Code requires exempt
organizations to comply with requests for copies of their three most recent tax returns
and exemption application.
The Proposed Regulations generally extend the rules applicable to other exempt
organizations to private foundations and to nonexempt charitable trusts. One important
difference for private foundations is the requirement to disclose to the general public
the names of contributors. Public charities are not required to disclose this information.
The Proposed Regulations will become effective 60 days after they are published in the
Federal Register as final regulations. Until that time, the existing disclosure rules for
private foundations continue to be in effect.
IRS Ruling On Gainsharing Effectively Moot
The Department of Health and Human Services Office of Inspector General
("OIG") has issued a special advisory bulletin on "gainsharing
arrangements." The OIG concluded that gainsharing arrangements between hospitals and
physicians are prohibited by federal law and subject to civil money penalties. This action
by the OIG effectively moots a private letter ruling issued by the IRS approving
gainsharing programs. (See, GT Alert, March, 1999)
Under a gainsharing program, physicians are rewarded for providing cost-effective care.
The intent of gainsharing arrangements is to provide directly or indirectly financial
incentives to physicians to reduce costs for patients care. In most arrangements the
clinical care provided by the physician must not have been adversely effected as measured
by selected quality and performance measures. Many plans in addition require independent
consultants to determine that the payments to the physicians represent fair market value
for their efforts. The OIG noted that "since the institution of the Medicare Part A
DRG system of hospital reimbursement and the growth of managed care, hospitals experienced
significant financial pressures to reduce costs. However, because physicians are paid
separately under Medicare Plan B and Medicaid, the physicians do not have the same
incentive to save hospital costs. Gainsharing arrangements are designed to bridge this gap
by offering physicians a portion of the hospitals costs savings in exchange for
identifying and implementing cost saving strategies."
The OIG determined that the Social Security Act prohibits any hospital or critical
access hospital from knowingly making a payment directly or indirectly to a physician as
an inducement to reduce or limit services to Medicare or Medicaid beneficiaries under the
physicians care. The OIG concluded that the Act prohibited transactions such as
those proposed under gainsharing arrangements.
The OIG also noted that that individual gainsharing arrangements could be permitted
through the issuance of favorable advisory opinions. However, the OIG determined not to do
so. They based this on the fact that gainsharing arrangements would require on-going
oversight, both as to quality of care and fraud, that is not available through the
advisory opinion process. Further, the OIG observed that any performance measures would
require extensive verification through audits or review by an independent party on a
continuing basis. In conclusion, the OIG indicated that parties interested in pursuing
such arrangements should seek legislative relief with Congress.
Hospitals are permitted to align incentives for the physicians to achieve cost savings
by the payment of a fixed fee that is market value for services rendered by the physician,
rather than a percentage of cost savings. However, this would not likely result in the
implementation of savings in the manner desired by hospitals.
IRS officials have informally indicated that the IRS would be unlikely to issue any
additional rulings approving gainsharing arrangements. In addition, assuming that
gainsharing is deemed to be illegal by the OIG, participation in such an activity might
adversely effect the organizations exempt status, notwithstanding that it is not a
violation of IRS Regulations based on the IRS policy that illegal activities alone may
endanger an organizations exempt status.
© 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.