Tax Exempt Organizations

1. Tax Exempt Organizations Overview, Federal Form 990, and Community Benefit

2. Circular 230 Disclaimer • Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local law provisions.

3. Presenters • Terence Kennedy, Executive Director Cleveland, Ohio • Diane Bean, Senior Manager Columbus, Ohio

4. Agenda • Overview of Federal tax-exemption issues • Review of Federal Form 990 – Return of Organization Exempt From Tax • Community Benefit and Value of Tax Exemption

5. Key exempt provider tax issues • Unrelated business taxable income • Intermediate sanctions • Private inurement/private benefit • Joint ventures with non-exempt entities • Tax exempt bonds • Political/lobbying activities • Reportable/listed transactions

6. Private Inurement/Private Benefit • Private inurement - No part of an organization’s net earnings may inure in whole or in part to the benefit of any private shareholder or individual. • Applies to insiders. • Private benefit – Common law concept – applies to any person, not just insiders.

7. Intermediate Sanctions • Any transaction in which the economic benefit provided to a disqualified person exceeds the value of the consideration or services received by the organization. • Disqualified person – any person who was in a position to exercise substantial influence over the affairs of the organization. • Excise tax penalties on the disqualified person as well as the organization manager who knowingly approved the transaction. • Rebuttable presumption of reasonableness.

8. Unrelated business taxable income (UBTI) • Revenue from any trade or business regularly carried on that is not substantially related to the organization’s exempt purposes. • Unless one of the specific exceptions of §§512 or 513 applies, revenue from such an activity is generally taxable.

9. Joint ventures with non-exempt entities • Such arrangements may generate UBTI or result in loss of tax-exempt status for the exempt participant in the joint venture. • IRS generally focuses on who “controls” the activities or operations of the joint venture.

10. Tax exempt bonds • Private use – 5% limitation • Letter of Representations — IL002 – Health Care Supplement

11. Political/lobbying activities • Political activities: absolute prohibition against §501(c)(3) organizations engaging in political activities • Lobbying activities: a §501(c)(3) organization may engage in some lobbying activities (attempts to influence legislation) as long as the lobbying does not constitute a substantial part of the organization’s activities.

12. Reportable/listed transactions • Certain reporting requirements are imposed on organizations that participate in transactions deemed to be abusive by the IRS (e.g., prohibited tax shelter). • A tax-exempt entity that is a party to a prohibited tax shelter transaction may also be subject to excise taxes.

13. What does your IRS Form 990 say about the organization? 18 March 2011

14. Background on Redesign • No significant revisions since 1979. • Form failed to keep pace with changes in the law & increasing complexity of organizations. • Form did not address key IRS compliance interests in the exempt sector. • Form did not meet the need for transparency and accountability of states, general public or organizational constituencies.

15. Goals of Redesign • Enhance transparency • Increase tax compliance • Minimize burden on filing organizations.

16. Form 990 - format • Core form – 12 pages long, consisting of 12 parts • 16 Possible Schedules • Form 990T – unrelated business income

17. Part I: A Snapshot of the Organization • Mission & Activities • Governing body, employees & volunteers • Unrelated business income • Revenues • Contributions & grants • Program service revenue • Investment income • Expenses • Grants • Member benefits • Compensation & employee benefits • Professional fundraising

18. Part III: Statement of Program Service Accomplishments • Mission statement • What is your “story?” Top three achievements of the year

19. Part IV: Checklist of Required Schedules • Public charity status • Lobbying and political activity • Potentially abusive activities (e.g., credit counseling, conservation easements) • Nature and extent of foreign activities • Hospital activities • Nature and extent of tax-exempt borrowings • Relationships with disqualified persons • Relationships with other taxable, tax-exempt and disregarded entities.

20. Part V: Statements Regarding Other IRS Filings and Tax Compliance • Employment tax • Backup withholding • Gaming activities • Foreign bank accounts, transfers and investments • Reportable transactions & PTSTs • Unrelated business activity • Non-cash and non-deductible contributions

21. Part VI: Governance, Management and Disclosure • Composition, authority and independence of board • Relationships with “insiders” • Changes to governing documents • Documentation of board decisions • Adoption and implementation of policies: • Conflict of interest • Whistleblower • Document retention & destruction • Executive compensation • Joint ventures • Compliance with public disclosure requirements

22. Part VII: Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees and Independent Contractors • “Reportable Compensation” (from W-2 or 1099s) • Other compensation – deferred, benefits • Compensation from related organizations • Compensation of “formers” • Schedule J – also includes several questions about compensation practices • Independent contractors

23. Parts VIII and IX – Statements of Revenue and Expense • Complete breakdown of types of revenue and expense • Revenue – Related, Unrelated, Exclude • Expense – Program Service, Management & General, Fundraising

24. Parts X, IX, XII – Balance Sheet and Financial Statements Reporting • Balance sheet • Reconciliation of net assets • Information on Financial Statement Reporting

25. Schedule A – Public Charity Status • Focuses Solely on Public Charity Status

26. Schedule B – List of Contributors • Names, addresses, and amount of contributors of over $5,000 • Names and addresses - not open to public disclosure

27. Schedule C – Political and Lobbying Activity • To be completed by organizations that conduct lobbying or political activity • Political Activity – not allowed for public charities • Lobbying Activity – Ok as long as not excessive.

28. Schedule F: Statement of Activities Outside the US • Foreign activities by region. • Offices maintained. • Number of employees/agents. • Types of activities conducted. • Amount of expenditures. • Grants and assistance to foreign organizations, governments or individuals. • Purpose and amount of assistance. • Manner of cash disbursement. • Method of valuation for non-cash grants. • Whether organizations are charitable.

29. Schedule G: Fundraising and Gaming Activities • Types of charitable solicitation. • Relationships with paid fundraisers. • State charitable solicitation registration. • Revenues & expenses from special events. • Gaming activities.

30. Schedule H: Hospitals • Financial Assistance and Certain Other Community Benefits at Cost • “Community building” activities. • Bad debt, Medicare & collection practices. • Management companies & joint ventures.

31. Schedule K: Tax-Exempt Bonds. • Description of outstanding bond issues (2003 and later). • Use of proceeds. • Private business use. • Arbitrage.

32. Schedule L: Transactions with Interested Persons. • Excess Benefit transactions (§501(c)(3) and (c)(4) orgs.). • Loans. • Grants or other assistance. • Business transactions.

33. Schedule R: Transactions with Related Organizations • Disregarded entities • Related tax-exempt organizations • Related organizations taxable as partnerships • Related organizations taxable as corporations or trusts • Transfers

34. Community Benefit,Schedule H and Valueof Tax Exemption

35. Rev. Rul. 69-545: The “community benefit” standard • Governing body is composed of members of the community • Medical staff privileges are available to all qualified physicians in the area • Full time emergency room open to all regardless of ability to pay • Serves all those able to pay, including Medicare and Medicaid beneficiaries • The hospital’s excess funds are generally applied to expansion and replacement of existing facilities and equipment, amortization of indebtedness, improvement in patient care, and medical training, education, and research

36. Patient Protection and Affordable Care Act • Recent Healthcare Reform legislation added other requirements for tax-exempt hospitals • Community Needs Assessment every three years • Must adopt and publicize a financial assistance policy • Cannot bill individuals who qualify for financial assistance at a rate higher than that charged to individuals with insurance

37. 2010 Schedule H: Hospitals • Facility Information • Community Health Needs Assessment • Financial Assistance Policy • Billing and Collections • Policy Relating to Emergency Medical Care • Charges for Medical Care

38. Value of a hospital’s tax-exempt status • Federal income tax savings • State income tax savings • State & local property tax savings • Interest expense savings from tax-exempt bonds • State & local sales tax savings • Employment tax savings • Other non-tax (e.g., postal savings)

39. Economic contribution is also important • There are economic and fiscal benefits provided by a hospital to its community • Increased local jobs • Increased purchases from local suppliers • Resulting higher sales to employees, patients and their families • Additional sales property tax revenues

40. Questions?Thank you for your attention!