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§ 2.1 SOURCE OF TAX EXEMPTION
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An organization, to be tax-exempt as a charitable entity, must be organized and operated primarily for one or more of the permissible exempt purposes. This requirement has given rise to an organizational test and an operational test for charitable organizations. If an organization fails to meet either test, it cannot qualify for exemption from federal income taxation as a charitable entity. The organizational test requires the presence of certain provisions in an organization's articles of organization. The operational test requires that an organization be operated primarily in the conduct of activities that accomplish one or more of its exempt purposes.
(a) State Ad Valorem Tax (New)
Although a discussion of state tax law is outside of the scope of this book, it should be noted that an issue of ongoing debate and litigation is whether various healthcare providers, who otherwise qualify for income tax exemption as charities under federal law, can qualify for tax exemption from real property taxes (also known as "ad valorem" taxes) under state law. Many states have statutes that define the term charitable, for state property tax exemption purposes, in a much more restrictive fashion than thatapplied by the IRS in federal income taxation cases. Often, state statutes focus on the substantial provision of charity care as a sine qua non for granting property tax exemption. The following are some recent examples of this phenomenon:
In Ohio, a tax examiner recommended that a Cleveland Clinic outpatient facility be denied exemption from local property taxation because it gave only a nominal amount of charity care. The examiner based his recommendation on a recent Ohio Supreme Court ruling that a fitness facility owned by a nonprofit hospital was not entitled to property tax exemption because only a small number of people who used the facility did not have to pay membership dues.
In Wisconsin, a child care center that was maintained by St. Joseph's Hospital of Marshfield in a nearby separate building was exempt from state property tax for the portion of the building allocated to children of its own employees, but whether the same treatment applied to an adjacent clinic depended on whether the employees provided diagnosis, treatment, or care to hospital patients.
In Michigan, an appeals court held that McLaren Regional Medical Center and two independent physician groups were properly denied charitable exemptions under state law because they did not qualify as hospitals serving public health needs or charitable institutions that would be eligible for exemption from ad valorem property tax assessments. The court ruled that the mere acceptance of Medicare and Medicaid patients was insufficient to warrant treatment of the facilities as charitable institutions, and the facilities' provision of only a negligible amount of free care undermined their position that they were charitable institutions serving a public health purpose.
In Pennsylvania, a court ruled that the nonprofit Alliance Home of Carlisle, which operates a skilled nursing home, an assisted living compound, and independent living apartments on the same property, was not entitled to a real estate tax exemption for the portion of the property upon which the independent living apartments were located, notwithstanding the tax-exempt status of the portions on which the nursing home and assisted living facilities were located.
In Massachusetts, the Sturdy Memorial Foundation, a charitable foundation that leased property for use by a medical clinic, was not entitled to exemption from real estate taxes assessed by the town of North Attleborough. The appeals court took the position that the foundation failed to demonstrate that its property qualified for exemption under a state law that exempts real estate owned by a charitable organization and occupied by another charitable organization. The court concluded that the medical clinic was not a charitable organization, taking into account the clinic's physician compensation arrangements and whether it was operated as a public charity.
Excerpted from The Law of Tax-Exempt Healthcare Organizations by Thomas K. Hyatt Excerpted by permission.
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PART ONE: INTRODUCTION TO THE LAW OF TAX-EXEMPT HEALTHCARE ORGANIZATIONS.
Chapter 2: Advantages and Disadvantages of Tax Exemption.
*§ 2.1 Source of Tax Exemption.
Chapter 3: Criticisms of Tax Exemption.
§ 3.3 The Commerciality Doctrine.
PART TWO: FUNDAMENTAL EXEMPT ORGANIZATION PRINCIPLES APPLIED TO HEALTHCARE ORGANIZATIONS.
Chapter 4: Private Inurement and Private Benefit.
*§ 4.1 Essence of Private Inurement.
*§ 4.4 Private Inurement—Scope and Types.
§ 4.5 Private Inurement Per Se.
*§ 4.9 Excess Benefit Transactions.
Chapter 5: Public Charities and Private Foundations.
*§ 5.5 Supporting Organizations.
*Chapter 6: Community Benefit.
§ 6.3 The New Community Benefit Standard.
§ 6.4 Community Benefit and Board Governance.
Chapter 7: Lobbying and Political Activities.
*§ 7.4 The Political Activities Limitation.
§ 7.6 Internet Activities (New).
§ 7.7 Public Policy Advocacy Activities (New).
§ 7.8 Political Activities of Social Welfare Organizations (New).
PART THREE: TAX STATUS OF HEALTHCARE PROVIDER AND SUPPLIER ORGANIZATIONS.
Chapter 9: Managed Care Organizations.
§ 9.3 Recent Developments.
*§ 9.4 Commercial-type Insurance Providers.
Chapter 13: Other Provider and Supplier Organizations.
§ 13.1 Blue Cross and Blue Shield Associations.
PARTFOUR: TAX STATUS OF HEALTH-RELATED ORGANIZATIONS.
Chapter 16: For-Profit Subsidiaries.
*§ 16.2 Financial Considerations.
§ 16.3 Attribution of Subsidiary&'s Activities to Exempt Parent.
Chapter 17: Exempt and Nonexempt Cooperatives.
§ 17.1 Cooperative Hospital Service Organizations.
PART FIVE: ORGANIZATIONAL ISSUES.
Chapter 21: Mergers and Conversions.
§ 21.1 Mergers and Consolidations between Exempt Healthcare Organizations.
§ 21.2 Mergers and Consolidations between Exempt and Nonexempt Healthcare Organizations.
§ 21.3 Conversion from Exempt to Nonexempt Status.
Chapter 22: Partnerships and Joint Ventures.
§ 22.4 Limited Liability Companies as Exempt Organizations.
*§ 22.6 Joint Ventures.
*§ 22.9 Whole-Hospital Joint Ventures.
*§ 22.11 Ancillary Services Joint Ventures.
*§ 22.12 Single-Member Limited Liability Companies (New).
PART SIX: OPERATIONAL ISSUES.
Chapter 24: Tax Treatment of Unrelated Business Activities.
§ 24.2 Definition of Trade or Business.
§ 24.3 Definition of Regularly Carried On.
*§ 24.5 Application of Substantially Related Test to Healthcare Organizations.
*§ 24.14 Transactions between Related Organizations.
*§ 24.14A Other Organizations&' Exempt Functions.
§ 24.16 Corporate Sponsorships.
*§ 24.17 Other Exceptions to Unrelated Income Taxation.
§ 24.18 Internet Activities.
§ 24.23 The Commerciality Doctrine.
Chapter 25: Physician Recruitment and Retention.
§ 25.1 Introduction.
§ 25.5 Specific Recruitment and Retention Techniques.
§ 25.7 Physician Recruitment Revenue Ruling.
*Chapter 26: Charity Care.
§ 26.1 Introduction.
§ 26.3 The Community Benefit Standard.
Chapter 28: Executive Compensation and Employee Benefits.
§ 28.2 The Reasonable Compensation Standard.
*Chapter 29: Medicare and Medicaid Fraud and Abuse and Its Effect on Exemption.
§ 29.1 The Conflict and Confluence of Tax Policy and Health Policy.
Chapter 31: Fund-Raising Regulation.
§ 31.1 State Law Regulation.
§ 31.2 Federal Law Regulation.
PART SEVEN: OBTAINING AND MAINTAINING EXEMPT STATUS FOR HEALTHCARE ORGANIZATIONS.
Chapter 33: Exemption Recognition Process.
*§ 33.1 Exemption Recognition Process.
*§ 33.1A Application Disclosure Requirements (New).
Chapter 34: Maintenance of Tax-Exempt Status and Avoidance of Penalties.
*§ 34.3 Annual Reporting Requirements.
Chapter 35: IRS Audits of Healthcare Organizations.
*§ 35.1 The IRS Audit in General.
§ 35.2 The Hospital Audit Guidelines.
Appendix O: Annotated IRS Health Care Provider Legal Guide (New).
*Appendix P: IRS Revenue Ruling on Ancillary Service Provider Joint Ventures (New).
Table of Cases.
Table of IRS General Counsel Memoranda.
Table of IRS Technical Advice Memoranda and Private Letter Rulings.
Table of IRS Revenue Procedures.
Table of IRS Revenue Rulings.
Table of IRS Technical Advice Memoranda.