Tax News & Views: Health Care Edition

Notice on LLC Qualifications as IRC Section 501(c)(3) organizations

The Internal Revenue Service released Notice 2021-56 that provides standards for a limited liability company to receive a determination letter as an IRC section 501(c)(3) organization. The Notice also requests comments from the public on specific issues of limited liability companies that apply for tax-exempt status under IRC section 501(c)(3).

The IRS provides within the Notice several required provisions for a limited liability company to receive a favorable determination when the organization submits a Form 1023, Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code. The Notice states that the following provisions are required within the limited liability company’s articles of organization and its operating agreements:

• Provisions that require that each member of the limited liability company is either IRC section 501(c)(3) organization exempt under IRC section 501(a) or a governmental unit described in IRC section 170(c)(1);
• Provides charitable purpose and charitable dissolution provisions under Treasury Regulation section 1.501(c)(3)- 1(b)(1) and (4);
• If the limited liability company is treated as private foundation, provides chapter 42 compliance provisions under IRC section 508(e)(1); and
• Provides an acceptable contingency plan if one or more of the members of the limited liability company ceases to be an IRC section 501(c)(3) organization.

In addition, the limited liability company must represent that all provisions of its articles of organization and operating agreement are consistent with state law. If state law does prohibit addition of certain provisions, the limited liability company may meet the requirements included above within its operating agreement as long as the articles of organization and operating agreement do not contain inconsistent provisions. The notice does not impact any current limited liability company that already has received tax-exempt status under IRC section 501(c)(3).

Dental Therapist Organization Denied Exempt Status

The Internal Revenue Service released Private Letter Ruling 202145028 where the IRS determined that an organization did not qualify for exemption under IRC section 501(c)(3). The organization was originally exempt under IRC section 501(c)(6), but the organization was automatically revoked on May 15, 2016 for failure to file the returns required for three consecutive years. The organization formed a new entity and filed Form 1023 requesting tax-exempt status under IRC section 501(c)(3) as a successor organization to the IRC section 501(c)(6) organization. This filing request was based on the belief that the organization’s activities focused on critical issues of oral health care and the advocacy of excellent oral health in the United States. The organization used the same EIN as the predecessor and elected a new board of directors after realization of the revocation of tax-exempt status.

The dissolution clause within the articles of organization also provides that upon dissolution all assets would be distributed to IRC section 501(c)(3) or 501(c)(6) organizations. The goals over the next five years for the organization were to advocate for people, underserved populations, and issues that are relevant to the organization; promote of relationship among dental therapists and other allies; and inform dental therapists, allies and policy makers. The activities were aimed to advance and protect the dental therapist profession and provide services that the organization’s members would value. The organization also planned to support certain legislation in various states. The organization believed that if it applied for IRC section 501(c)(3) status, the organization would be able to apply for grants and then later convert to an IRC section 501(c)(6) organization in the future.

The IRS ruled that the organization was not operating exclusively for a tax-exempt purpose under IRC section 501(c)(3). The operation of the organization was for the benefit of the private interest of its members and the dentist therapist industry as a whole. In addition, the IRS stated that the dissolution documents did not limit the disbursement of funds upon dissolution to only IRC section 501(c)(3) organizations. In addition, the articles of incorporation did not expressly limit the activities to exempt activities. Therefore, the IRS determined that the organization was not exempt under IRC section 501(c)(3). The IRS did not provide any determination on the ability of the organization to qualify as an IRC section 501(c)(6) organization.

Did you know?

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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.

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