Joint Ventures Involving Tax-Exempt Organizations E-Book

Michael I. Sanders

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Nonprofit Authority
• Sprache: Englisch

Seitenzahl: 2856

Veröffentlichungsjahr: 2013

Beschreibung

A comprehensive, revised, and expanded guide covering tax-exempt organizations engaging in joint ventures Joint Ventures Involving Tax-Exempt Organizations, Fourth Edition examines the liability of, and consequences to, exempt organizations participating in joint ventures with for-profit and other tax-exempt entities. This authoritative guide provides unbridled access to relevant IRC provisions, Treasury regulations, IRS rulings, and pertinent judicial decisions and legislative developments that impact exempt organizations involved in joint ventures. * Features in depth analysis of the IRS's requirements for structuring joint ventures to protect a nonprofit's exemption as well as to minimize UBIT * Includes sample models, checklists, and numerous citations to Internal Revenue Code sections, Treasury Regulations, case law, and IRS rulings * Presents models, guidelines, and suggestions for structuring joint ventures and minimizing the risk of audit * Contains detailed coverage of: new Internal Revenue Code requirements impacting charitable hospitals including Section 501(r) and related provisions; university ventures, revised Form 990, with a focus on nonprofits engaged in joint ventures; the IRS's emphasis on good governance practices; international activities by nonprofits; and a comprehensive examination of the New Market Tax Credits and Low Income Housing Tax Credits arena Written by a noted expert in the field, Joint Ventures Involving Tax-Exempt Organizations, Fourth Edition is the most in-depth discussion of this critical topic.

Leseprobe

Table of Contents

Update Service

Title Page

Copyright

Dedication

Preface

Acknowledgments

About the Author

Chapter 1: Introduction: Joint Ventures Involving Exempt Organizations

1.1 Introduction

1.2 Joint Ventures in General

1.3 Healthcare Joint Ventures

1.4 University Joint Ventures

1.5 Low-Income Housing and New Market Tax Credit Joint Ventures

1.6 Conservation Joint Ventures

1.7 Joint Ventures as Accomodating Parties to Impermissible Tax Shelters

1.8 Rev. Rul. 98-15 and Joint Venture Structure

1.9 Form 990 and Good Governance

1.10 Ancillary Joint Ventures: Rev. Rul. 2004-51

1.11 Engaging in a Joint Venture: The Structural Choices and Role of the Charity

1.12 Partnerships with Other Exempt Organizations

1.13 Transfer of Control of Supporting Organization to Another Tax-Exempt Organization

1.14 The Exempt Organization as a Lender or Ground Lessor

1.15 Partnership Taxation

1.16 UBIT Implications from Partnership Activities

1.17 Use of a Subsidiary as Participant in a Joint Venture

1.18 Limitation on Preferred Returns

1.19 Sharing Staff and/or Facilities: Shared Services Agreement

1.20 “Intangibles” Licensed by Nonprofit to For-Profit Subsidiary or Joint Venture

1.21 Private Inurement and Private Benefit

1.22 Limitation on Private Foundation's Activities that Limit Excess Business Holdings

1.23 International Joint Ventures

1.24 Other Developments

Chapter 2: Taxation of Charitable Organizations

2.1 Introduction

2.2 Categories of Exempt Organizations

2.3 §501(c)(3) Organizations: Statutory Requirements

2.4 Charitable Organizations: General Requirements

2.5 Categories of Charitable Organizations

2.6 Application for Exemption

2.7 Governance

2.8 Form 990: Reporting and Disclosure Requirements

2.9 Redesigned Form 990

2.10 The IRS Audit

2.11 Charitable Contributions

2.12 State Laws

Chapter 3: Taxation of Partnerships and Joint Ventures

3.1 Scope of Chapter

3.2 Qualifying As a Partnership

3.3 Classification As a Partnership

3.4 Alternatives to Partnerships

3.5 Pass-Through Regime: The Conduit Concept

3.6 Allocation of Profits, Losses, and Credits

3.7 Formation of Partnership

3.8 Tax Basis in Partnership Interests

3.9 Partnership Operations

3.10 Partnership Distributions to Partners

3.11 Sale or Other Disposition of Assets or Interests

3.12 Other Tax Issues

3.13 Guarantees, Penalties, and Capital Calls

Chapter 4: Overview: Joint Ventures Involving Exempt Organizations

4.1 Introduction

4.2 Exempt Organization as General Partner: A Historical Perspective

4.3 Exempt Organizations as Limited Partner or LLC Nonmanaging Member

4.4 Joint Ventures with Other Exempt Organizations

4.5 New Scheme for Analyzing Joint Ventures

4.6 Revenue Ruling 2004-51 and Ancillary Joint Ventures

4.7 UBIT Implications From Joint Venture Activities

4.8 Good Governance and the IRS Audit

4.9 Conversions from Exempt to For-Profit and from For-Profit to Exempt Entities

Appendix 4A: Joint Venture Checklist

Appendix 4B: Model Joint Venture Participation Policy

Chapter 5: Private Benefit, Private Inurement, and Excess Benefit Transactions

5.1 What are Private Inurement and Private Benefit?

5.2 Transactions in Which Private Benefit or Inurement May Occur

5.3 Profit-Making Activities as Indicia of Nonexempt Purpose

5.4 Intermediate Sanctions

5.5 Case Law

5.6 Planning

5.7 State Activity with Respect to Insider Transactions

Chapter 6: Engaging in a Joint Venture: The Choices

6.1 Introduction

6.2 LLCs

6.3 Use of a For-Profit Subsidiary as Participant in a Joint Venture

6.4 Supporting Organizations

6.5 Private Foundations and Program-Related Investments

6.6 Nonprofits and Bonds

6.7 Exploring Alternative Structures

6.8 Other Approaches

Chapter 7: Exempt Organizations as Accommodating Parties in Tax Shelter Transactions

7.1 Introduction

7.2 Prevention of Abusive Tax Shelters

7.3 Excise Taxes and Penalties

7.4 Settlement Initiatives

7.5 Abusive Shelters and Tax Credit Programs

Chapter 8: The Unrelated Business Income Tax

8.1 Introduction

8.2 Historical and Legislative Background of UBIT

8.3 General Rule

8.4 Statutory Exceptions to UBIT

8.5 Modifications to UBIT

8.6 Income from Partnerships

8.7 Calculation of UBIT

8.8 Governmental Scrutiny

Chapter 9: Debt-Financed Income

9.1 Introduction

9.2 Debt-Financed Property

9.3 The §514(c)(9) Exception

9.4 Partnership Rules

9.5 The Fractions Rule

9.6 The Final Regulation

9.7 The Fractions Rule: A Trap for the Unwary

Chapter 10: Limitation on Excess Business Holdings

10.1 Introduction

10.2 Excess Business Holdings: General Rules

10.3 Tax Imposed

10.4 Exclusions

Chapter 11: Impact on Taxable Joint Ventures: Tax-Exempt Entity Leasing Rules

11.1 Introduction

11.2 Types of Transactions Covered By 1984 ACT Rules

11.3 Internal Revenue Code §168(h)

11.4 Tax-Exempt Use Property

11.5 Restrictions on Tax-Exempt Use Property

11.6 Partnership Rules

Chapter 12: Healthcare Entities in Joint Ventures

12.1 Overview

12.2 Classifications of Joint Ventures

12.3 Tax Analysis

12.4 Other Healthcare Industry Issues

12.5 Preserving the 50/50 Joint Venture

12.6 Valuation

12.7 Joint Operating Agreements

12.8 UBIT Implications of Hospital Joint Ventures

12.9 Government Scrutiny

12.10 Redesigned Form 990

12.11 The Patient Protection and Affordable Care Act of 2010: §501(r) and Other Statutory Changes Impacting Nonprofit Hospitals

12.12 The Patient Protection and Affordable Care Act of 2010: ACOs and CO-OPs: New Joint Venture Healthcare Entities

12.13 Precautionary Steps: A Road Map

12.14 Conclusion

Appendix 12A: Sample Conflicts of Interest Policy*

Appendix 12B: Model Joint Venture Participation Policy

Chapter 13: Low-Income Housing, New Markets, Rehabilitation, and Other Tax Credit Programs

13.1 Relationships between Nonprofits and For-Profits in Affordable Housing: A Basic Business Typology1

13.2 Nonprofit-Sponsored LIHTC Project

13.3 Low-Income Housing Tax Credit

13.4 Historic Investment Tax Credit

13.5 Empowerment Zone Tax Incentives

13.6 New Markets Tax Credits

13.8 Reportable LIHTC/NMTC Transactions

13.9 Gulf Zone Opportunity ACT of 2005

13.10 The Energy Tax Credits

Appendix 13A: New Markets Tax Credits Project Compliance/Qualification/Accounting Projections Checklist

Chapter 14: Joint Ventures with Universities

14.1 Introduction

14.2 Redesigned Form 990: Annual Information Reporting Requirements for Colleges and Universities

14.3 Colleges and Universities IRS Compliance Initiative

14.4 Research Joint Ventures

14.5 Faculty Participation in Research Joint Ventures

14.6 Nonresearch Joint Venture Arrangements

14.7 Modes of Participation by Universities in Joint Ventures

14.8 Incentives Available to Taxable Joint Venturers

14.9 Conclusion

Chapter 15: Business Leagues Engaged in Joint Ventures

15.1 Overview

15.2 The Five-Prong Test

15.3 Unrelated Business Income Tax

Chapter 16: Conservation Organizations in Joint Ventures

16.1 Overview

16.2 Conservation and Environmental Protection as a Charitable or Educational Purpose: Public and Private Benefit

16.3 Conservation Gifts and §170(h) Contributions

16.4 Unrelated Business Income Tax Issues

16.5 Joint Ventures Involving Conservation

16.6 Senate Finance Committee Investigation of The Nature Conservancy (TNC)58

16.7 Emerging Issues

16.8 Conclusion

Chapter 17: International Joint Ventures

17.1 Overview

17.2 Domestic Charities Expending Funds Abroad

17.3 Potential for Abuse: The Use of Charities as Accommodating Parties in International Terrorist Activities

17.4 Guidelines for U.S.-Based Charities Engaging in International Aid and International Charities

17.5 General Grantmaking Rules

17.6 Foreign Organizations Recognized by the IRS as §501(c)(3) Organizations

17.7 Public Charity Equivalency Test

17.8 Expenditure Responsibility

17.9 Domestic Charities Entering into Joint Ventures with Foreign Organizations

17.10 Application of Foreign Laws in Operating a Joint Venture in a Foreign Country

17.11 Application of Foreign Tax Treaties

17.12 Current Developments

17.14 Conclusions and Forecast

Chapter 18: The Exempt Organization as Lender or Ground Lessor

18.1 Overview

18.2 Participation as a Lender or Ground Lessor

18.3 Types of Real Estate Loans

18.4 Participating Loans

18.5 Ground Lease with Leasehold Mortgage

18.6 Sale of Undeveloped Land

18.7 Guarantees

18.8 Conclusion

Chapter 19: Debt Restructuring and Asset Protection Issues

19.1 Introduction

19.2 Overview of Bankruptcy

19.3 The Estate and the Automatic Stay

19.4 Case Administration

19.5 Chapter 11 Plan

19.6 Discharge

19.7 Special Issues: Consequences of Debt Reduction

Index

BECOME A SUBSCRIBER!

Did you purchase this product from a bookstore?

If you did, it's important for you to become a subscriber. John Wiley & Sons, Inc. may publish, on a periodic basis, supplements and new editions to reflect the latest changes in the subject matter that you need to know in order to stay competitive in this ever-changing industry. By contacting the Wiley office nearest you, you'll receive any current update at no additional charge. In addition, you'll receive future updates and revised or related volumes on a 30-day examination review.

If you purchased this product directly from John Wiley & Sons, Inc., we have already recorded your subscription for this update service.

To become a subscriber, please call 1-877-762-2974 or send your name, company name (if applicable), address, and the title of the product to:

Mailing Address:

Supplement Department

John Wiley & Sons, Inc.

One Wiley Drive

Somerset, NJ 08875

E-mail and Fax:

[email protected]

1-732-302-2300

For customers outside the United States, please contact the Wiley office nearest you:

Professional & Reference Division

John Wiley & Sons, Ltd.

John Wiley & Sons Canada, Ltd.

The Atrium

22 Worcester Road

Southern Gate, Chichester

Etobicoke, Ontario M9W 1 L1

West Sussex PO 19 8SQ

CANADA

ENGLAND

Phone: [phone]

Phone: [phone]

Phone: [phone]

Fax: [phone]

Fax: [phone]

E-mail:

[email protected]

E-mail:

[email protected]

John Wiley & Sons Australia, Ltd.

John Wiley & Sons (Asia) Pte., Ltd.

33 Park Road

2 Clementi Loop #02-01

P.O. Box 1226

SINGAPORE 129809

Milton, Queensland 4064

Phone: [phone]

AUSTRALIA

Fax: [phone]

Phone: [phone]

Customer Service: 65-64604280

Fax: [phone]

E-mail:

[email protected]

E-mail:

[email protected]

Copyright © 2013 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Third Edition published by Wiley. Copyright © 2007 John Wiley & Sons, Inc. All rights reserved.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone] or fax [phone].

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our website at www.wiley.com.

Library of Congress Cataloging-in-Publication Data:

Sanders, Michael I.

Joint ventures involving tax-exempt organizations / Michael I. Sanders. – Fourth Edition.

pages cm. – (Wiley nonprofit authority series)

Includes index.

ISBN 978-1-118-31711-2 (cloth); ISBN 978-1-118-41998-4 (ebk); ISBN 978-1-118-42168-0 (ebk) 1. Nonprofit organizations–Law and legislation–United States. 2. Joint ventures–Law and legislation–United States. 3. Partnership–United States. 4. Nonprofit organizations–Taxation–Law and legislation–United States. I. Title.

KF1388.S257 2013

343.7306′6–dc23

2013008462

To my wife, Judy, whose love, devotion and patience has made this book possible; and to David, Patty, Hayley, and Jacob; Noah, Brooke, and Emme;

Preface

There are approximately 1.6 million nonprofit organizations in the United States, with 960,000 of those being Internal Revenue Code §501(c)(3) charities. According to an August 2012 study by the Chronicle of Philanthropy, total contributions to those charities was $135.8 billion in 2008, the most recent year for which data were available. These organizations had $1.51 trillion in total revenues, $1.45 trillion in expenses, and more than $2.7 trillion in total assets, based on 2010 statistics.

While one would assume that these figures are indicative of a strong sector, it is actually quite vulnerable. In December 2012, the United States faced going over the so-called fiscal cliff, followed by the impact of sequestration and Federal budgetary concerns. As an aside, there have been numerous proposals to limit the charitable deduction. Newspapers across the country are featuring news articles and editorials debating the pros and cons of maintaining the status quo versus curtailing or even eliminating the deduction on grounds that true charitable spirit does not necessitate a financial reward.

Even if the charitable deduction is not modified in connection with the 2013 tax reform, it will remain a target, in the words of the Wall Street Journal, in future revisions of the Internal Revenue Code. At a time when the services of nonprofits are in greater demand, they are receiving less support from budget-constrained governmental agencies and contributions from the private sector. These stresses could worsen if future tax reform incorporates provisions that reduce incentives for charitable giving and participation in credit transactions by wealthy individuals.

Beyond this potential legislative change, nonprofit organizations face other challenges. Many charities “compete” for the same charitable dollars. For example, after Hurricane Sandy struck New York and New Jersey in October 2012, taxpayers were urged to make donations to numerous local and national organizations that were publicizing their ability to provide a variety of necessary services, although it actually took time for some organizations to provide emergency aid. In fact, Doctors Without Borders, a charity that usually operates internationally, provided medical services to hurricane victims in certain areas before other charities, such as the Red Cross, a high-profile disaster relief provider, began to do so.

Although the Internet has facilitated fund-raising in certain respects, such as allowing taxpayers to make donations by sending a cell-phone text message in connection with international natural disasters such as the 2004 tsunami in Asia, Hurricane Katrina, and the 2010 earthquake in Haiti, charities need to develop new avenues and partners to conduct their programs. In some cases, charities have joined forces to accomplish fund-raising or program-related goals. Increasingly, charities are forging partnerships with for-profit entities to access otherwise unavailable capabilities, e.g., low-income organizations using the low-income housing and New Markets Tax Credits programs with for-profit investors to subsidize development (Chapter 13), and universities partnering with for-profits to offer distance-learning programs.

Over the years, the IRS's position has evolved from opposition to joint ventures between non- and for-profit entities to acknowledging the their various bona fide purposes and establishing guidelines for nonprofits to protect their exempt status while engaged in such partnerships. Pursuant to these guidelines, charities will not jeopardize their exemption by participating in a joint venture so long as the charities have sufficient control to ensure that the venture will further the charity's exempt purposes and there will be no impermissible private benefit or inurement. There is no bright line test, although having at least 50 percent voting control of a venture in regard to matters that relate to its charitable goals is a positive factor. The IRS considers this to be a facts and circumstances determination and will not issue rulings except in connection with an application for exemption. It is therefore important to have a joint venture policy in place and to carefully structure ventures pursuant to these guidelines.

There is an impetus to establish new avenues to achieve fund-raising and charitable objectives, many of which involve some form of joint venture, with an ever-evolving combination of tax-exempts, governmental agencies, for-profit entities, and individual philanthropists seeking novel solutions to current crises. One example is (Red)©, an innovative worldwide fund-raising effort to eradicate the AIDS virus that was started by a celebrity from the world of rock music, Bono. Presidents Obama, Bush, and Clinton have demonstrated a continuing tradition of support for this project. An early example of a for-profit corporation seeking a “halo effect” was Ben and Jerry's, which widely advertised its “doing good” philosophy and approach to business. This has been labeled the double- or triple-bottom-line for-profit organization—one that directs a portion of its profits to achieve social goals while earning profits.

This trend is not limited to private-sector activity. In addition to the adoption of L3C statutes (a for-profit limited liability entity formed to engage in socially beneficial activity) in nine jurisdictions, several states have adopted legislation authorizing the creation of “social benefit corporations”—for-profit corporations that permit directors to consider socially responsible goals along with the obligation to generate profits when engaged in the corporate decision-making process. In effect, this legislation represents the legalization of the triple-bottom-line trend discussed above.

Another important area blending social need and tax-based incentives is the growth of the New Markets Tax Credits program by joint ventures consisting of community-based and for-profit organizations that establish charter schools and commercial development in low-income census tracts. Creating the vehicle for this to occur in today's environment is the challenge. One example of a successful venture in 2011 is the development by Robin Hood Foundation of a charter high school in the Bronx that leverages a grant from the Department of Education in New York City. Robin Hood is a nonprofit created to support schools in New York's poorest neighborhoods. In 2009 the charity formed a joint venture LLC to develop a charter school in the Crown Heights section of Brooklyn; a New Market Tax Credit transaction also provided a significant part of the funding for the project. In addition, the low-income housing tax credit not only should be retained, it should be expanded in light of the need to rebuild so many U.S. communities in the aftermath of recent hurricanes.

Because charities receive federal income tax exemption as well as state and local income and property tax exemptions, their activities come under scrutiny. Scandals involving excessive compensation paid to executives of nonprofits have made headlines, including The United Way, American University, and The Smithsonian Institution. To curb this type of excess, Congress enacted stricter rules regarding how public charities, which are charitable organizations with a public base of support, compensate their executives. Under the intermediate sanctions rules, organizations and their managers who approve compensation arrangements that do not comply with its guidelines are subject to penalties. The extent of their effectiveness remains to be seen. In an effort to obtain more information about the activities and income of nonprofits, and increase “transparency,” the IRS released a revised Form 990 in 2008, a form that requires a great deal more information, including details about partnerships and joint ventures that nonprofits engage in, as well as their governance practices, another focus of the IRS, which believes that “good governance” leads to compliance with the provisions of the Internal Revenue Code.

The two largest sectors in the nonprofit world, hospitals and universities, have been the subject of particular scrutiny. The IRS conducted a study of universities, issued an Interim Report, and subsequently initiated a university audit program, which is currently underway. Section 501(c)(3) hospitals have been a magnet of Congressional attention for many years, with the charitable care and community benefits offered by tax-exempt hospitals, as well as their compensation practices, a particular focus. As part of the Patient Protection and Affordable Care Act of 2008 (PPACA), Congress adopted a new regime of rules to be met by charitable hospitals, with the potential loss of exemption and/or imposition of stiff penalties for failure to comply. Hospitals must satisfy these new provisions in addition to the requirements of §501(c)(3), and, as discussed in Chapter 12, there are many outstanding questions in regard to the applicability of these rules to hospitals operated by joint ventures.

Chapter 12 also describes other changes in the health arena, including the IRS's issuance of exemption rulings to regional health information organizations (RHIOs) and health information exchanges (HIEs) requesting recognition of tax-exempt status under §501(c)(3). RHIOs and HIEs are the organizations and networks, respectively, through which doctors, pharmacies, and hospitals share electronic medical records. Some of these entities are structured as joint ventures. In addition, the PPACA also authorized the formation of new tax-exempt organizations. The first category is accountable care organizations (ACOs), wherein groups of service providers coordinate the care of Medicare beneficiaries with the goal of rendering more efficient services. Tax-exempt organizations such as hospitals and nursing homes will partner with other medical service providers to form ACOs, which in effect are joint venture entities, and share in the savings gained from coordinated efficiencies. The second category is health insurance exchanges or CO-OPs. Under new §501(c)(29), tax-exempt status will be available to a new type of health insurance issuers that offer affordable healthcare plans to small employers and individuals.

The bottom line: There is no longer one paradigm for joint ventures. Creativity, flexibility, and unique approaches are flourishing as individuals and businesses forge new paths in an effort to address world problems through outside-the-box solutions. For the nonprofit seeking to expand its activities and income stream to support those activities, properly structured joint ventures provide unlimited potential.

Acknowledgments

It seems like yesterday when I was first invited by John Wiley & Sons to prepare an outline for a new book on partnerships and joint ventures involving nonprofit entities, yet almost 20 years have passed and I have now completed the Fourth Edition of Joint Ventures Involving Tax-Exempt Organizations, a treatise that provides guidance and structure to an ever-growing, complex area, in order to enable tax-exempt organizations to meet critical economic, political, and social challenges. Since the first edition, charitable organizations have been using the joint venture structure to respond to international natural disasters such as the 2004 tsunami in Asia, the 2010 earthquake in Haiti, and national disasters such as Hurricane Katrina in Louisiana and the Gulf Coast and Hurricane Sandy in New Jersey and New York. In the Third Edition I acknowledged the many colleagues who have provided valuable, technical assistance over the years, having given freely of their time in the research and development of an emerging and dynamic subject matter. I incorporate the acknowledgment section in the prior edition by reference in this edition since their contribution has been so critical to the success of this book.

The Fourth Edition reflects a comprehensive set of revisions to the earlier three editions. Over the years the IRS position has evolved from initially opposing joint ventures between non- and for-profit organizations to acknowledging their various bona fide purposes and establishing guidelines for nonprofits in order to protect their exempt status while engaging in these ventures. Unfortunately the IRS is not willing to rule on the more complex structures. As a result, the chapters have been edited to discuss joint venture policy and enable the reader to structure ventures pursuant to these guidelines.

I'm especially grateful to Ronald Schultz, PricewaterhouseCooper, formerly Senior Technical Advisor to the Tax Exempt/Government Entities, Commissioner of the Internal Revenue Service, for his critical role in discussing the revised Form 990 and new IRC §501(r), as well as his insights on the developments regarding conservation organizations. His analysis continues to raise important questions regarding the structure and operation of joint ventures in regards to these topics. A special thanks to Ed Creskoff for his comprehensive review and update of the low-income housing and historic tax credit sections. I appreciate the dedication of Susan Leahy (unrelated business income tax, debt financing, excess business holdings, and business leagues); and Megan Christensen (taxation of partnerships and LLCs). I thank Marcie Seiler Landsburg and Michael Schaedle for their work on the debt restructuring discussion in Chapter 20. Thanks are of course due to our research assistants, Jorge Lopez and Micah Miller, for their contributions.

Most important, I am truly indebted to Gayle Forst, who has played an indispensable role in the research and drafting of a significant number of chapters; Gayle was the editor of the Second Edition and has played a more critical role in the drafting of the manuscript of the Fourth Edition. I also acknowledge Linda Schrader's unique and invaluable assistance in the preparation of the manuscript, as well as her coordination with the staff of John Wiley & Sons, which is critical to the entire process.

Finally, I would like to add a special note of appreciation to my colleague of more than 30 years, Susan Cobb, who passed away during 2012. Susan was intelligent, creative, and reserved, yet brilliant. She made innumerable contributions to this book and to my practice over the years.

Thank you to my colleagues at Blank Rome, LLP, who have given freely of their time in the research and review of this manuscript.

About the Author

Michael I. Sanders is the lead partner of the Washington office's tax group at Blank Rome LLP. He served with the U.S. Department of Justice (Attorney General's Honors Program 1967–1968; and attorney advisor to the Assistant Secretary for Tax Policy, Office of Tax Legislative Counsel, 1968–1970), and was formerly Chairman of the Exempt Organizations Committee, Tax Section of the American Bar Association, member of the Internal Revenue Service Commissioner's Exempt Organizations Advisory Group. He is a member of the American Institute of Certified Public Accountants.

Mr. Sanders is an adjunct professor of taxation at Georgetown University Law School, teaching tax treatment of charities and other nonprofit organizations and joint ventures between non-profits and for-profits and at George Washington University Law School, teaching income taxation of partnerships and subchapter S corporations. Mr. Sanders was honored in 2010 by The George Washington University School of Law for his 35 years of teaching at the law school.

Mr. Sanders has co-authored Private Foundations—Taxable Expenditures, Tax Management Portfolio, 293–3rd, and authored “Exploring the Role of the Tax Attorney,” Tax Settlements and Negotiations: Leading Lawyers on Issuing Tax Opinions, Managing Audit Situations, and Representing Clients before the IRS, 2006. Mr. Sanders was named by the Washington Business Journal as one of the City's Top Ten Lawyers and the City's Top Tax Lawyer in 2004. Mr. Sanders was selected for the 2010, 2009, 2007 and 2006 editions of Best Lawyers in America and has also been honored as one of “Washington D.C.'s Legal Elite” by Smart CEO Magazine for 2006 and 2007. In 2007 and 2010, Mr. Sanders was selected from a field of the nation's leading lawyers and judges as a finalist for the Lawdragon 500 based upon his current impact on the biggest issues and deals in the law. He was also recognized by Washingtonian magazine as “One of Washington's Top Lawyers” for 2007, 2008 and 2010. The American Registry has recognized Mr. Sanders as a Top Attorney in the DC Metro Area for years 2009 and 2010. Mr. Sanders has also been selected as a “Super Lawyer” in Tax for 2008, 2009 and 2010. And the Washington Post, in association with the LegalTimes, selected Mr. Sanders as one of Washington DC's Best Lawyers in Tax Law for 2009, 2011 and 2012. Mr. Sanders speaks at numerous conferences and forums around the country and regularly serves as an expert witness in complex cases involving federal income tax.

Mr. Sanders earned his LLB at New York University, and his LLM at Georgetown University.

Chapter 1

Introduction: Joint Ventures Involving Exempt Organizations

1.1 Introduction

1.2 Joint Ventures in General

1.3 Healthcare Joint Ventures

1.4 University Joint Ventures

1.5 Low-Income Housing and New Market Tax Credit Joint Ventures

1.6 Conservation Joint Ventures

1.7 Joint Ventures as Accomodating Parties to Impermissible Tax Shelters

1.8 Rev. Rul. 98-15 and Joint Venture Structure

1.9 Form 990 and Good Governance

1.10 Ancillary Joint Ventures: Rev. Rul. 2004-51

1.11 Engaging in a Joint Venture: The Structural Choices and Role of the Charity

1.12 Partnerships with Other Exempt Organizations

1.13 Transfer of Control of Supporting Organization to Another Tax-Exempt Organization

1.14 The Exempt Organization as a Lender or Ground Lessor

1.15 Partnership Taxation

(a) Overview

(b) Bargain Sale Including Like Kind” Exchange

1.16 UBIT Implications from Partnership Activities

1.17 Use of a Subsidiary as Participant in a Joint Venture

1.18 Limitation on Preferred Returns

(a) Debt-Financed Property

(b) The Fractions Rule

(c) Tax-Exempt Entity Leasing Rules

1.19 Sharing Staff and/or Facilities: Shared Services Agreement

1.20 Intangibles” Licensed by Nonprofit to For-Profit Subsidiary or Joint Venture

1.21 Private Inurement and Private Benefit

1.22 Limitation on Private Foundation's Activities that Limit Excess Business Holdings

1.23 International Joint Ventures

1.24 Other Developments

1.1 Introduction

The participation of tax-exempt organizations in partnerships and joint ventures with taxable entities and other nonprofits is an area of continuing growth and interest.1 Joint ventures allow nonprofits to utilize the resources of other organizations in the pursuit of their charitable goals.

While charitable giving rises at critical times, including natural disasters such as Hurricane Sandy, and tragedies such as occurred on September 11, 2001, nonprofit groups face steep competition for donor funds, particularly in the aftermath of the 2008 recession. In addition, there is increasing likelihood that the charitable deduction will be modified when the Internal Revenue Code is revised either in connection with a resolution of the so-called fiscal cliff or as part of a subsequent, comprehensive revision of the Code. As a result, charitable entities are looking to nontraditional means to attract donors, increase revenues from their mission-related activities, and make the contributions that they have received work more effectively.

Numerous legislative and economic factors in the United States have led to the growth of joint ventures. Changes in the healthcare field, including mergers between nonprofit hospitals and for-profit chains, have been driven by the growth of managed care along with the Medicare shift from a cost-based to a fixed fee per case” system. Ancillary joint ventures among healthcare organizations have also proliferated, particularly with the creation of accountable care organizations (ACOs) and Consumer Operated and Oriented Plans (CO-OPs), as well as the approval of regional health insurance exchanges (RHIOs) by the IRS. Nonprofit organizations devoted to the arts have been impacted by decreased government funding as well as by the record number of mergers of for-profit corporations. The successor entities often alter the charitable giving strategies of their predecessors, with decreased corporate support of the arts as an unfortunate by-product. In addition, stock market fluctuations have impacted the endowments of large nonprofit institutions such as colleges and universities.