Joint Ventures Involving Tax-Exempt Organizations

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.

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