Not-For-Profit/Exempt Organizations Blog : Non-Profit Lawyers & Attorneys : Proskauer Rose Law Firm : Tax & Corporate Law for 501(c), 501(3) Organizations

A new provision which was slipped in to the annual announcement of procedures for exempt organization determinations and letter rulings provides a way for governmental entities to voluntarily terminate their Section 501(c)(3) status. This is important for governmental hospitals that otherwise could be faced with new exemption requirements and penalties.

In the past, many local governmental entities, such as hospital authorities or hospital districts, obtained determinations from the IRS that they were tax-exempt organizations described in Section 501(c)(3) of the Internal Revenue Code. A common reason for obtaining recognition of Section 501(c)(3) status (in addition to their sovereign immunity as governmental entities from federal income tax) was so that the governmental entity’s employees could take advantage of Section 403(b) tax-sheltered annuities.  (A government entity may not establish or maintain a Section 401(k) plan unless it adopted the plan before May 6, 1986.  While governmental entities are permitted to maintain Section 457(b) plans, which are defined contribution plans providing for employee contributions similar to Section 401(k) plans, Section 457(b) plans are subject to lower contribution limits than the overall contribution limits for Section 401(k) plans and Section 403(b) annuities).

Section 501(c)(3) governmental entities were relieved of the burden of having to file a Form 990, which at that time was really the only disadvantage to Section 501(c)(3) status. (Governmental educational institutions were already subject to unrelated business income tax on their income that would have been taxable had they not been governmental institutions.) When the “intermediate sanctions” applicable to transactions with public charities became effective in 2005, imposing potential excise taxes on persons involved in transactions with Section 501(c)(3) organizations that were not public charities, the implementing regulations specifically provided that governmental entities with Section 501(c)(3) recognitions were not covered. 

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Along with making significant changes to the rules for supporting organizations (“SOs”) and donor advised funds (“DAFs”) in the Pension Protection Act of 2006 (the “PPA”), Congress directed that Treasury conduct a study on the organization and operation of SOs and DAFs. Congress gave Treasury one year after the enactment of the PPA to submit a report on the study. On December 5th, more than four years past the prescribed deadline, Treasury finally released its long-awaited report to Congress. The report suggests that the current treatment of SOs and DAFs is appropriate and did not recommend any changes. While the report comes as good news to SOs and DAFs, some aren’t so keen. Senator Chuck Grassley (R–Iowa), denounced the study as disappointing, superficial, and a missed opportunity to “advance the ball in closing abusive loopholes.” For more, see his press release. Interested in whether SOs and DAFs should continue to be treated similarly to public charities, Congress asked Treasury to consider three specific questions regarding SOs and DAFs. A discussion of each question and Treasury’s response is discussed below.

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks
• Share Link

 As we have previously reported, the Affordable Care Act (the "Act") included additional requirements for tax-exempt hospitals to maintain their tax-exempt status; these changes are effective for tax years starting after March 23, 2010, the enactment date of the Act.  　

These additional requirements included Form 990 reporting obligations for hospitals, which required some adjustments to Form 990 and the corresponding instructions. Late yesterday, the IRS released the 2010 Schedule H and instructions. The IRS also announced  that hospitals should not file 2010 Forms 990 requiring Schedule H before July 1, 2011 and granted an automatic three-month extension to all such organizations whose Forms 990 would otherwise be due on or before August 15, 2011.　

This announcement does not affect the ultimate due date for such returns, but simply means that the three-month automatic extension will be granted without filing a request. Although the IRS has not yet issued guidance on the new hospital requirements, the new Schedule H and instructions will shed some light on their interpretations.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In Mayo Foundation for Medical Education and Research v. United States , the U.S. Supreme Court upheld the validity of a Treasury Regulation that states that the student exception from FICA (Social Security and Medicare) tax does not apply to medical residents because they work at least 40 hours per week. Applying the deferential two-part standard of review from Chevron  the Supreme Court concluded that the relevant statutory provision was ambiguous and the regulation was a permissible interpretation of the statute. 

For background on the medical resident FICA issue, click here.  

As we have previously reported, since the 1990’s many academic medical centers and individual medical residents have filed claims with the IRS seeking refunds of FICA taxes paid on medical resident salaries based on the argument that the residents are students and thus exempt from FICA. In March 2010, the IRS announced that it would concede and pay outstanding claims for periods before April 1, 2005. April 1, 2005 is the date the new FICA regulation precluding student status for full-time workers  went into effect. 

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Last week, the IRS and Treasury Department released their annual Priority Guidance Plan for the 2010-2011 federal fiscal year.  The 34-page plan is available here.  The IRS exempt organizations web page  identifies and lists eighteen items in the plan that affect exempt organizations.  Of the eighteen items, eleven were also included in last year’s plan - indicating that both plans are ambitious and that IRS and Treasury attention has been understandably diverted to health care reform and other new developments. 

Items listed in this year’s plan include: guidance on tax-exempt hospital requirements under the new Section 501(r) of the Internal Revenue Code; guidance on program-related investments under Section 4944 of the Internal Revenue Code (also on last year’s plan); finalizing proposed regulations on new requirements for supporting organizations (also on last year’s plan); regulations on donor-advised funds (also on last year’s plan); finalizing church audit procedural regulations; and developing regulations concerning the calculation of unrelated business taxable income for Section 501(c)(9) voluntary employees' beneficiary associations (to replace 1986 temporary regulations). 

As always, the IRS and Treasury are eager for substantive comments on their guidance projects.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

We have been closely following the medical resident FICA refund issue.  As we noted in our blog entry in March on the topic, the IRS conceded that refund claims for FICA taxes for medical residents for the periods before April 1, 2005 will be paid.  The IRS has now announced this month that it has begun sending letters to individual medical residents who filed individual claims for FICA refunds.  These letters ask the individuals to submit copies of their claims. 

Medical residents who filed a claim but did not receive a letter by August 16, 2010 should contact the IRS.  

The IRS has prepared FAQs for these refund claims that are available here.

For additional information on the medical resident FICA refund issue, please review our June 2, 2010 blog entry. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Many health care and medical education institutions have claims pending with the IRS for refunds of the FICA (Social Security and Medicare) tax paid on wages for employed medical residents.  The issue for these claims is whether the residents are “students,” and their wages accordingly exempt from FICA tax, for purposes of the student FICA exception in the Internal Revenue Code.

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks
• Share Link

On March 18, 2010, the Illinois Supreme Court denied property tax exemption to a not-for-profit hospital in the nationally watched Provena case.  The plurality's reasoning has implications for many nonprofits beyond hospitals. 

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks
• Share Link

U.S. taxpayers, including not-for-profit/exempt organizations, with a financial interest in or signatory authority over a foreign financial account are generally required to file the Report of Foreign Bank and Financial Accounts, Form TD F 90-22.1 (FBAR) with the Department of the Treasury each June 30 if the aggregate value of all of the U.S. person’s foreign financial accounts exceeds $10,000 at any time during the year.  Taxpayers must also report whether they have such interests on their tax returns (for example, Forms 1040, 1041, 1065, 1120, and 990).

Under new IRS guidance, persons who have only signatory authority over a foreign financial account for calendar year 2009 and previous years has been extended again to June 30, 2011.  In addition, owners of foreign hedge funds and private equity funds do not have to file FBARs for calendar year 2009 and previous years.  And, persons who are relieved of filing FBARs this year also do not have to report the interest on their own returns.  Holders of foreign mutual funds, however, will need to file FBARs by June 30, 2010 for calendar year 2009 and previous years.

The Treasury Department also published proposed regulations clarifying which taxpayers will be required to file FBARs and which accounts will be reportable.  The Notice and the proposed regulations add some clarity to FBAR requirements and delay some filing deadlines. 

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Since the 1990's, many academic medical centers have filed claims with the IRS seeking refunds of FICA (social security and Medicare) taxes paid on medical resident salaries on the basis that the residents are students and exempt from FICA.  For the most part, the government has come out on the losing side when this issue has been litigated. 

The IRS has now announced that it plans to concede this issue for periods before April 1, 2005, when new IRS regulations went into effect.  The IRS's brief announcement does not indicate the terms on which claims will be paid.  Still, the IRS notes that verification of the claim amount will be required and interest will be paid. 

Continue Reading...

• Email This
• Print
• Comments (7)
• Trackbacks
• Share Link