Tax News & Views: Health Care Edition

IRS rejects tax-exempt status of two Healthcare Organizations

In two separate private letter rulings, the Internal Revenue Service ruled that two organizations did not qualify for tax-exempt status under IRC Section 501(c)(3). In Private Letter Ruling 202126024, the IRS determined that an organization formed to amplify health using technology, education, and research was not organized or operated exclusively for a tax-exempt purpose. From an organizational standpoint, the organization did not include a purpose clause within its governing documents. The organization’s activities included engaging third parties in various services, which included software development, administrative tasks and medical professional consultations. The organization was expected to perform research initiatives to improve healthcare outcomes in low-resource areas and help educate the world’s network of physicians about how to improve healthcare. The software developed by the organization serviced all aspects of education and research, such as data collection, data quality controls, data management, statistical analysis, reporting and publication. Additionally, the software was made available for anyone, anywhere, for free, as long as the individuals acknowledged the user agreement. The organization also performed testing and research of drugs for pharmaceutical companies.

The IRS stated that the organization did not satisfy the organizational test, since the articles of incorporation did not limit the purpose of the organization to one or more exempt purposes. In addition, the IRS ruled that more than an insubstantial part of the organization’s activities were not in furtherance of a tax-exempt purpose. The activities that the IRS identified as prohibiting tax-exempt status included performing research services in a commercial manner; providing software to facilitate private practices of doctors, nurses, pharmacists; and creating education content under contract for a fee.

In Private Letter Ruling 202125020, the Internal Revenue Service denied an organization from qualification for exemption under IRC Section 501(c)(3). Regarding its organizing documents, the Articles of Incorporation of the organization did not limit its activities to tax-exempt activities and did not contain any provision on the disposition of assets upon dissolution. Regarding its activities, the organization’s purpose was to be a linkage to care and social support by offering technician services and screenings to the community at large. The organization was established to provide outpatients with select laboratory tests requested by patients or health care providers. The organization planned to be supported by the fees provided for its services, but also anticipated receiving grants from state and federal sources. The organization did have a program to provide services to at a reduced rate or free. However, the organization did not qualify for services such as Medicaid or Medicare and opted out of other plans under the Health Care Act.

The IRS determined that the organization was not operated or organized exclusively for a tax-exempt purpose. The IRS stated that the organization did not have a purpose that limited its activities to one or more exempt activities and the purpose of the organization was too broad. In addition, the organization did not contain the required dissolution clause within its articles of incorporation. The IRS determined that the laboratory testing services for providers and the public were primarily performed for a fee, and that this activity is a substantial non-exempt commercial purpose that would precludes exemption under IRC Section 501(c)(3). The IRS ruled that providing free or low-cost services to the public was not the organization’s primary purpose and denied tax-exemption to the organization.

Supreme Court Rules on Donor Disclosure Case

The Supreme Court of the United States ruled on the Americans for Prosperity Foundation v. Bonta, Attorney General of California on July 1, 2021. The California State Attorney General Office requires charitable organizations registered with the state to make annual filings with the Attorney General. As part of the annual filing with the California Attorney General, IRC Section 501(c)(3) organizations are required to include a copy of the Form 990, Schedule B, Schedule of Contributor, that was filed with the Internal Revenue Service. Since 2001, the two petitioners in the case, American for Prosperity Foundation and Thomas More Law Center, have filed annual returns with the Attorney General of California, but have redacted the donor information from Schedule B of the Form 990 in the copy that was filed with the Attorney General each year.

The petitioners alleged that the donor disclosure violated the First Amendment rights of the organization and the rights of the donors. The petitioner alleged that the disclosure of the donor information would likely contribute to and add risk of reprisal to the donor. The Supreme Court sided with the petitioners noting that the California Attorney General’s disclosure requirement is facially invalid because it violates the donor’s first amendment rights and it is not narrowly tailored to an important government interest.

Did you know?

TE/GE Memo Extends Modified Exam Procedures
The Tax Exempt and Government Entities department of the Internal Revenue Service released a memorandum that extends the modified exam activities due to COVID-19 to September 20, 2021. These procedures include conduction of activities virtually via teleconference, the procedures for scheduling in person meetings, and approvals for travel for agents.

Comments requested on Employee Retention Credit for Tax-Exempt Organizations
The Internal Revenue Service has requested comments on the Form 5884-D, Employee Retention Credit for Certain Tax-Exempt Organizations Affected by Qualified disasters. The comments should be received by the IRS by September 7, 2021 in order to be considered. The IRS is looking for comments in the following areas:

• Whether collection of information is necessary for the proper performance of the agency and if the information shall have practical utility;
  
• Accuracy of the agency’s estimate of burden of collection of the information;
• Ways to enhance the quality, utility and clarity of information collected;
• Ways to minimize the burden of the collection of the information from respondents, such as automated collection techniques; and
• Estimated of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.
  

Additional Resources

Deloitte Center for Health Solutions
The source for health care insights: The Deloitte Center for Health Solutions (DCHS) is the research division of Deloitte’s Life Sciences and Health Care practice. The goal of DCHS is to inform stakeholders across the health care system about emerging trends, challenges, and opportunities.

Health Forward blog
Connect to the forces of change across life sciences and health care today. Explore our latest leadership insights to stay ahead of industry trends and key issues on health care, medtech, and biopharma.

Related highlights

Global workforce culture in a digital age
When thinking about the future of work, many organizations state that maintaining workplace culture is top of mind. Remote work, hybrid work models, lack of travel, and reduced mobility assignments add to this challenge. How can organizations enhance the employee experience in today’s complex environment? Participants will consider company culture and explore digital tools and technology that can help weigh the balance between tax compliance risks and program flexibility.