Greenberg Traurig Alert

Website Links May Create Tax For Exempt Organizations;
Return Disclosure Rules For Private Foundations;
Gainsharing Arrangements

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

  View or download the PDF version of this Alert here.

Website Links

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 corporation’s website. Members who visit the organization’s 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 organization’s 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 hospital’s 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 physician’s 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 organization’s exempt status, notwithstanding that it is not a violation of IRS Regulations based on the IRS policy that illegal activities alone may endanger an organization’s exempt status.

© 1999 Greenberg Traurig