Greenberg Traurig Alert

IRS Issues CPE Text;
IRS Offers Insight Into 2000

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

  View or download the PDF version of this Alert here.

CPE Text

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 IRS’ 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 IRS’ 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 for physicians.

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 care provider.

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 IRS’s 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 990’s, 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 this year.

© 1999 Greenberg Traurig