Joint Ventures Involving Tax-Exempt Organizations

Preface xxv
Acknowledgments xxix
About the Author xxxi
Chapter 1: Introduction: Joint Ventures Involving Exempt Organizations 1
1.1 Introduction 1
1.2 Joint Ventures in General 3
1.3 Healthcare Joint Ventures 6
1.4 University Joint Ventures 8
1.5 Low-Income Housing and New Market Tax Credit Joint Ventures 11
1.6 Conservation Joint Ventures 14
1.7 Joint Ventures as Accomodating Parties to Impermissible Tax Shelters 15
1.8 Rev. Rul. 98-15 and Joint Venture Structure 16
1.9 Form 990 and Good Governance 20
1.10 Ancillary Joint Ventures: Rev. Rul. 2004-51 21
1.11 Engaging in a Joint Venture: The Structural Choices and Role of the Charity 21
1.12 Partnerships with Other Exempt Organizations 24
1.13 Transfer of Control of Supporting Organization to Another Tax-Exempt Organization 25
1.14 The Exempt Organization as a Lender or Ground Lessor 26
1.15 Partnership Taxation 28
1.16 UBIT Implications from Partnership Activities 31
1.17 Use of a Subsidiary as Participant in a Joint Venture 33
1.18 Limitation on Preferred Returns 35
1.19 Sharing Staff and/or Facilities: Shared Services Agreement 38
1.20 ''Intangibles'' Licensed by Nonprofit to For-Profit Subsidiary or Joint Venture 39
1.21 Private Inurement and Private Benefit 40
1.22 Limitation on Private Foundation's Activities that Limit Excess Business Holdings 44
1.23 International Joint Ventures 45
1.24 Other Developments 46
Chapter 2: Taxation of Charitable Organizations 49
2.1 Introduction 50
2.2 Categories of Exempt Organizations 52
2.3 §501(c)(3) Organizations: Statutory Requirements 54
2.4 Charitable Organizations: General Requirements 97
2.5 Categories of Charitable Organizations 100
2.6 Application for Exemption 118
2.7 Governance 124
2.8 Form 990: Reporting and Disclosure Requirements 132
2.9 Redesigned Form 990 138
2.10 The IRS Audit 178
2.11 Charitable Contributions 183
2.12 State Laws 190
Chapter 3: Taxation of Partnerships and Joint Ventures 193
3.1 Scope of Chapter 194
3.2 Qualifying As a Partnership 195
3.3 Classification As a Partnership 198
3.4 Alternatives to Partnerships 216
3.5 Pass-Through Regime: The Conduit Concept 219
3.6 Allocation of Profits, Losses, and Credits 220
3.7 Formation of Partnership 226
3.8 Tax Basis in Partnership Interests 233
3.9 Partnership Operations 242
3.10 Partnership Distributions to Partners 250
3.11 Sale or Other Disposition of Assets or Interests 255
3.12 Other Tax Issues 263
3.13 Guarantees, Penalties, and Capital Calls 280
Chapter 4: Overview: Joint Ventures Involving Exempt Organizations 291
4.1 Introduction 292
4.2 Exempt Organization as General Partner: A Historical Perspective 294
4.3 Exempt Organizations as Limited Partner or LLC Nonmanaging Member 366
4.4 Joint Ventures with Other Exempt Organizations 369
4.5 New Scheme for Analyzing Joint Ventures 371
4.6 Revenue Ruling 2004-51 and Ancillary Joint Ventures 374
4.7 UBIT Implications From Joint Venture Activities 388
4.8 Good Governance and the IRS Audit 391
4.9 Conversions from Exempt to For-Profit and from For-Profit to Exempt Entities 395
Appendix 4A: Joint Venture Checklist 398
Appendix 4B: Model Joint Venture Participation Policy 405
Chapter 5: Private Benefit, Private Inurement, and Excess Benefit Transactions 409
5.1 What are Private Inurement and Private Benefit? 409
5.2 Transactions in Which Private Benefit or Inurement May Occur 421
5.3 Profit-Making Activities as Indicia of Nonexempt Purpose 454
5.4 Intermediate Sanctions 458
5.5 Case Law 482
5.6 Planning 484
5.7 State Activity with Respect to Insider Transactions 487
Chapter 6: Engaging in a Joint Venture: The Choices 489
6.1 Introduction 490
6.2 LLCs 491
6.3 Use of a For-Profit Subsidiary as Participant in a Joint Venture 506
6.4 Supporting Organizations 528
6.5 Private Foundations and Program-Related Investments 535
6.6 Nonprofits and Bonds 545
6.7 Exploring Alternative Structures 546
6.8 Other Approaches 552
Chapter 7: Exempt Organizations as Accommodating Parties in Tax Shelter Transactions 561
7.1 Introduction 561
7.2 Prevention of Abusive Tax Shelters 562
7.3 Excise Taxes and Penalties 570
7.4 Settlement Initiatives 574
7.5 Abusive Shelters and Tax Credit Programs 575
Chapter 8: The Unrelated Business Income Tax 577
8.1 Introduction 578
8.2 Historical and Legislative Background of UBIT 579
8.3 General Rule 583
8.4 Statutory Exceptions to UBIT 603
8.5 Modifications to UBIT 615
8.6 Income from Partnerships 656
8.7 Calculation of UBIT 659
8.8 Governmental Scrutiny 663
Chapter 9: Debt-Financed Income 669
9.1 Introduction 669
9.2 Debt-Financed Property 670
9.3 The §514(c)(9) Exception 679
9.4 Partnership Rules 681
9.5 The Fractions Rule 682
9.6 The Final Regulation 682
9.7 The Fractions Rule: A Trap for the Unwary 695
Chapter 10: Limitation on Excess Business Holdings 697
10.1 Introduction 697
10.2 Excess Business Holdings: General Rules 698
10.3 Tax Imposed 705
10.4 Exclusions 706
Chapter 11: Impact on Taxable Joint Ventures: Tax-Exempt Entity Leasing Rules 709
11.1 Introduction 709
11.2 Types of Transactions Covered By 1984 ACT Rules 710
11.3 Internal Revenue Code §168(h) 712
11.4 Tax-Exempt Use Property 713
11.5 Restrictions on Tax-Exempt Use Property 715
11.6 Partnership Rules 719
Chapter 12: Healthcare Entities in Joint Ventures 729
12.1 Overview 730
12.2 Classifications of Joint Ventures 734
12.3 Tax Analysis 738
12.4 Other Healthcare Industry Issues 806
12.5 Preserving the 50/50 Joint Venture 851
12.6 Valuation 860
12.7 Joint Operating Agreements 868
12.8 UBIT Implications of Hospital Joint Ventures 876
12.9 Government Scrutiny 880
12.10 Redesigned Form 990 888
12.11 The Patient Protection and Affordable Care Act of 2010: §501(r) and Other Statutory Changes Impacting Nonprofit Hospitals 889
12.12 The Patient Protection and Affordable Care Act of 2010: ACOs and CO-OPs: New Joint Venture Healthcare Entities 914
12.13 Precautionary Steps: A Road Map 926
12.14 Conclusion 928
Appendix 12A: Sample Conflicts of Interest Policy 929
Appendix 12B: Model Joint Venture Participation Policy 934
Chapter 13: Low-Income Housing, New Markets, Rehabilitation, and Other Tax Credit Programs 939
13.1 Relationships between Nonprofits and For-Profits in Affordable Housing: A Basic Business Typology 941
13.2 Nonprofit-Sponsored LIHTC Project 943
13.3 Low-Income Housing Tax Credit 946
13.4 Historic Investment Tax Credit 1003
13.5 Empowerment Zone Tax Incentives 1012
13.6 New Markets Tax Credits 1020
13.7 Recent IRS Guidance Regarding Guarantees and Indemnifications 1075
13.8 Reportable LIHTC/NMTC Transactions 1088
13.9 Gulf Zone Opportunity ACT of 2005 1090
13.10 The Energy Tax Credits 1093
Appendix 13A: New Markets Tax Credits Project Compliance/Qualification/Accounting Projections Checklist 1098
Chapter 14: Joint Ventures with Universities 1101
14.1 Introduction 1101
14.2 Redesigned Form 990: Annual Information Reporting Requirements for Colleges and Universities 1111
14.3 Colleges and Universities IRS Compliance Initiative 1114
14.4 Research Joint Ventures 1119
14.5 Faculty Participation in Research Joint Ventures 1130
14.6 Nonresearch Joint Venture Arrangements 1133
14.7 Modes of Participation by Universities in Joint Ventures 1152
14.8 Incentives Available to Taxable Joint Venturers 1167
14.9 Conclusion 1168
Chapter 15: Business Leagues Engaged in Joint Ventures 1171
15.1 Overview 1171
15.2 The Five-Prong Test 1179
15.3 Unrelated Business Income Tax 1190
Chapter 16: Conservation Organizations in Joint Ventures 1199
16.1 Overview 1199
16.2 Conservation and Environmental Protection as a Charitable or Educational Purpose: Public and Private Benefit 1200
16.3 Conservation Gifts and §170(h) Contributions 1208
16.4 Unrelated Business Income Tax Issues 1223
16.5 Joint Ventures Involving Conservation 1226
16.6 Senate Finance Committee Investigation of The Nature Conservancy (TNC) 1228
16.7 Emerging Issues 1229
16.8 Conclusion 1233
Chapter 17: International Joint Ventures 1235
17.1 Overview 1236
17.2 Domestic Charities Expending Funds Abroad 1239
17.3 Potential for Abuse: The Use of Charities as Accommodating Parties in International Terrorist Activities 1244
17.4 Guidelines for U.S.-Based Charities Engaging in International Aid and International Charities 1256
17.5 General Grantmaking Rules 1259
17.6 Foreign Organizations Recognized by the IRS as §501(c)(3) Organizations 1263
17.7 Public Charity Equivalency Test 1266
17.8 Expenditure Responsibility 1267
17.9 Domestic Charities Entering into Joint Ventures with Foreign Organizations 1269
17.10 Application of Foreign Laws in Operating a Joint Venture in a Foreign Country 1275
17.11 Application of Foreign Tax Treaties 1276
17.12 Current Developments 1285
17.13 Conclusions and Forecast 1289
Chapter 18: The Exempt Organization as Lender or Ground Lessor 1291
18.1 Overview 1292
18.2 Participation as a Lender or Ground Lessor 1293
18.3 Types of Real Estate Loans 1296
18.4 Participating Loans 1299
18.5 Ground Lease with Leasehold Mortgage 1312
18.6 Sale of Undeveloped Land 1322
18.7 Guarantees 1330
18.8 Conclusion 1334
Chapter 19: Debt Restructuring and Asset Protection Issues 1335
19.1 Introduction 1336
19.2 Overview of Bankruptcy 1343
19.3 The Estate and the Automatic Stay 1358
19.4 Case Administration 1372
19.5 Chapter 11 Plan 1377
19.6 Discharge 1392
19.7 Special Issues: Consequences of Debt Reduction 1393
Business Debt 1397
Index 1399