Analysis

Tax News & Views: Health Care Edition

September 2017 | Vol. 12 No. 39

Tax News & Views: Health Care Edition is a timely news summary bulletin authored by the Health Care Industry Group, Deloitte Tax LLP. The newsletter contains highlights from the latest tax developments in health care on Capitol Hill, at the White House, at the Internal Revenue Service, at the Treasury Department and in the courts. It is a valuable resource for tax and other professionals involved in the tax-exempt health care providers and health plans sectors, helping them remain current on tax developments that stand to have an impact on their businesses.

IRS revokes hospitals exemption

In the recent Private Letter Ruling 201731014, the Internal Revenue Service (“IRS”) revoked the Internal Revenue Code Section (“IRC Sec.”) 501(c)(3) status of a hospital organization for failure to comply with the IRC Sec. 501(r) requirements to conduct a community health needs assessment (“CHNA”), adopt a Implementation Strategy and make these widely available to the public.

The hospital organization in question was a “dual status” hospital in that it was a county-operated hospital that had independent IRC Sec. 501(c)(3) status. The hospital organization’s executive team met with a consulting firm that recommended conducting a CHNA as part of complying with the Treasury Regulation Section (“Treas. Reg. Sec.”) 501(r)-3, but the CHNA project was not undertaken in an effort to comply with this regulation. However, the hospital organization did complete a CHNA to comply with certain Medicare requirements to maintain its “critical care access facility” designation. The hospital organization did not make its CHNA available to the public via a website. However, it did have a copy available if and when requested by the public.

While the hospital organization did act on many of the recommendations that arose from the Implementation Strategy Report issued as part of the CHNA, it did not draft or adopt a separate written Implementation Strategy.

The IRS ruled that the failure to adopt an Implementation Strategy and make its CHNA widely available to the public were egregious failures to comply with IRC Sec. 501(r) due to the hospital organization’s lack of intent to comply. Also, note that the hospital executive team did not appear to object to the revocation as the hospital had dual status as a government hospital as well.

Tax News & Views: Health Care Edition September 2017

Tax court denies a partnership’s $33 million charitable deduction

The Tax Court denied a partnership’s claim for a $33 million charitable contribution deduction based on its findings that the partnership failed to substantially comply with the reporting requirements.

A partnership purchased the remaining interest in a property for $2.95 million. Over a year later the partnership assigned the remainder interest in the property to a university. The partnership claimed a $33 million charitable contribution deduction.

The Tax Court found that the partnership failed to substantiate the amount of its deduction. The partnership’s Form 8283, Noncash Charitable Contributions, did not contain information on the “Donor’s cost or other adjusted basis”. The omission of the donor’s basis prevented the appraisal from achieving its intended purpose and could not be considered a “fully completed appraisal summary;” therefore, the partnership was not substantially in compliance with Treas. Reg. Sec. 1.170A-13(c)(4)(ii)(E).

Tax court finds tax-exempt country club’s non-member revenue lacked a profit motive

The Tax Court ruled that a tax-exempt country club is unable to offset non-member sales against investment income as the taxpayer lacked a profit motive for the non-member sales.

The Taxpayer is an IRC Sec. 501(c)(7) organization that operated a golf course, pool, tennis courts and dining facilities. Members paid through dues, assessments, food minimums and other miscellaneous fees. Non-members pay a surcharge to use the facility. The Taxpayer had been reporting fees from non-members as unrelated business income (“UBI”) and offsetting direct expenses (in the form of cost of goods sold) and allocating indirect expenses (such as salaries and wages, employee benefits, repairs and maintenance, depreciation and general and administrative expenses) based on the ratio of non-member sales to total sales.

Taxpayer amended its 2010 Form 990-T and originally filed its Forms 990-T for 2011 and 2012 offsetting investment income against non-member sale losses for UBI purposes consistent with Portland Gulf Club v. Commissioner, 497 U.S. 154 (1990), which allows for investment income to offset non-member losses as long as there is a profit motive related to the non-member sales.

Under Portland Gulf Club v. Commissioner expenses in excess of unrelated business income are only deductible to the extent the IRC Sec. 501(c)(7) organization has a motivation to profit from its non-member sales. The court goes on to say, profit motive can be proven by the excess of gross receipts over direct and indirect expenses. The Taxpayer was unable to establish a profit motive due to the fact that gross receipts were not in excess of the allocated direct and indirect expenses. The Tax Court found that the Taxpayer was unable to offset investment income against non-member sales due to this lack of profit motive.

The Tax Court also imposed IRC Sec. 6662 accuracy-related penalties for negligence against the Taxpayer finding a lack of due care in the preparation of these tax returns.

Did you know?

IRS Delays Section 385 Documentation Regulations
The Treasury has issued Notice 2017-36 which provides for a twelve month delay in the application of the documentation rules set forth in Treasury Regulation Section 1.385-2. Please see IRS Notice 2017-38.

IRS Extends Voluntary Reporting of Catastrophic Health Plans
The IRS has extended a voluntary reporting option through 2017, for health insurance providers offering high deductible plans through the health plan exchanges. There is currently no reporting requirement related to catastrophic health coverage until 2018. Please see IRS Notice 2017-41.

IRS Issues Final Regulations on Health Insurance Premium Tax Credit
Effective July 24, 2017, the IRS adopted the temporary regulations from July of 2014, with one technical correction as final. Please see the Final Regulations.

Did you know?

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 Care Current
Weekly insights to keep you informed and ahead. This weekly series explores breaking news and developments in the US health care industry, examines key issues facing life sciences and health care companies and provides updates and insights on policy, regulatory, and legislative changes.

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Jim Sowar 
Cincinnati
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John W. Sadoff, Jr
Atlanta
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