Greenberg Traurig Alert
IRS Issues CPE Text;
IRS Offers Insight Into 2000
By Harry J. Friedman, Greenberg
Traurig, Miami Office
View or download the PDF version of this Alert
The IRS recently issued the Fiscal Year 2000 Continuing Professional
Education Textbook ("CPE Text") for tax exempt organizations. The CPE Text
is an internal IRS document that is prepared for revenue agents and other
IRS personnel in order to update them on current issues affecting exempt
organizations and the IRSí positions in respect to those issues. Because
the CPE Text is an internal IRS document, the issue positions contained
in the CPE Text are not binding on the IRS. Nevertheless, the CPE Text is
important for tax-exempt practitioners and tax exempt organizations. The
CPE Text highlights those issues that are of particular importance to the
IRS and offers insight into the IRSí thinking on those issues. Moreover,
the IRS has in the past used the CPE Text to unofficially clarify its policies
or announce changes in policy.
The CPE Text consists of 19 chapters prepared by IRS employees on various
subjects. In addition, it contains a chapter on current developments since
the last CPE Text.
Several of the chapters in the CPE Text address issues of concern to
tax exempt health care providers. While none of the chapters addressing
health care issues contain any significant new IRS positions, the number
of chapters devoted to health care issues indicates that the IRS continues
to take an interest in tax exempt health care organizations. The contents
of the CPE Text evidences those areas of particular concern to the IRS.
Chapter C addresses incentive compensation for physicians. The chapter
sets forth 12 factors to be considered in determining whether or not physician
incentive compensation is reasonable and consistent with charitable purposes.
Each of these factors should be considered in any incentive compensation
plan. The chapter reviews prior IRS pronouncements on incentive compensation
Chapter D contains an update on joint venture arrangements between healthcare
organizations. It does not offer anything new with respect to
joint ventures with for-profit organizations. Further, the Chapter was drafted
prior to the tax court decision in Redlands Surgical Services, Inc. v Commissioner.
(See, GT Alert, July, 1999.) The chapter contains an examination of Revenue
Ruling 98-15, the recent ruling on whole hospital joint ventures. In addition,
the chapter analyzes a recent ruling allowing two exempt organizations to
form a limited liability company.
Chapter E contains an updated version of the form "conflicts of interest
policy" that the IRS first issued in 1997. The revisions corrected some
problems with the prior form. Adoption of a conflicts of interest policy
is a prerequisite to obtaining a determination letter for a tax exempt health
Chapter I explores in some detail the solicitation of contributions,
advertising and merchandising techniques in connection with the Internet.
The chapter discusses forms of acknowledgement if contributions are solicited
via the Internet. The chapter notes that the IRS has not yet answered many
of the questions raised by advertising on the Web as well as merchandising.
(See, GT Alert August, 1999 for discussion on advertising and the Web.)
Other chapters explore issues concerning (a) relationships between political,
lobbying and educational organizations, (b) unrelated trade or business
taxes in connection with the operation of exempt health clubs and health
clubs by larger exempt organizations, and (c) the availability of exempt
status for limited liability companies.
EP/EO 2000 Workplan
IRS officials have indicated that the current EP/EO Division, soon to
become the Tax Exempt and Government Entities Operating Division after the
IRSís restructuring program is put into place, have indicated the issues
that its 2000 Workplan will address. The Workplan will focus on such issues
as auto donation programs, disclosure issues related to IRS Form 990ís,
joint venture arrangements in healthcare areas, health management organizations,
large case examinations of trusts including those involving family
Proposed Changes to Section 512(b)(13)
The recently vetoed tax legislation included amendments to Section 512(b)(13).
However, this provision may be attached to other legislation. Revised Section
512(b)(13) has been advanced by the tax exempt community in order to refine
some of the problems in the current provision.
Prior to 1997, Section 512(b)(13) provided that interest income and other
passive income (other than dividends) paid by a for-profit corporation to
an exempt organization where more than 80% of the stock of the for-profit
subsidiary was owned by the exempt organization, would be treated as unrelated
trade or business income. Since the provision contained no related party
rule, this tax consequence was typically avoided by creating a second tier
subsidiary which then paid interest or rent to the tax exempt parent.
Because of concerns that this allowed a for-profit subsidiary to avoid
taxation on its income by making royalty payments or rent payments to its
ultimate tax exempt parent, the law was changed to provide that payments
from any entity more than 50% of whose voting stock was owned by a tax exempt
organization, directly or indirectly, would be treated as unrelated trade
or business income. This consequence ensued regardless of whether the payments
were actually fair market value.
Many commentators offered that this provision was unduly harsh, since
royalty payments from unrelated parties would not be treated as unrelated
trade or business income. Proposed legislation was introduced and included
in the recently vetoed bill that would limit the unrelated trade or business
income tax treatment to only those amounts that were in excess of fair market
value. If the passive income payments were the same as would be received
as from an unrelated party, unrelated trade or business income taxation
would not result.
It is unclear at present whether or not similar legislation will be enacted
© 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 clientsí
individual legal needs.