1 / 37

Agenda

Tax Exemption Issues for CCRCs Sponsored by Long Term Care, Senior Housing, In-Home Care, and Rehabilitation Practice Group

gavivi
Download Presentation

Agenda

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Tax Exemption Issues for CCRCsSponsored byLong Term Care, Senior Housing, In-Home Care, and Rehabilitation Practice Group November 21, 2011Presenters: John Durso, Esquire, Ungaretti & Harris LLP, Chicago, IL, jdurso@uhlaw.comEdward Clancy, Esquire, Ungaretti & Harris LLP, Chicago, IL, eclancy@uhlaw.com 1

  2. John Durso is a partner and senior member of the Health Care Practice Group at Ungaretti & Harris. John has dedicated his 30-year legal career to serving health care providers, religious organizations, churches and other not-for-profit organizations in virtually every area of legal practice including: mergers; acquisitions; affiliations; joint ventures; corporate restructuring; tax; tax exemption; health care finance; public finance; financial restructurings; labor and employment; complex litigation; administrative and regulatory; reimbursement; fraud and abuse; survey and certification; alternative insurance and risk mechanisms (including captive insurance companies); and risk management. His clients include hospitals and health systems; integrated delivery networks; post acute long-term care facilities; CCRCs; SNFs; assisted living facilities; senior housing community based services and other providers of every type and size serving seniors; post acute care alliances; national and state trade associations; physician and physician groups; religious institutes; churches; educational institutions; social services agencies; other not-for-profit institutions; investment bankers, insurance companies, pension funds and other sources of capital to providers. John also serves as a volunteer director of many not-for-profit health care providers and educational institutions’ Board of Directors. • John is a frequent lecturer on legal issues and he also writes a legal update column for McKnights Long Term Care News and a legal column for Life Services Network of Illinois. He has also appeared on a number of other television shows and has testified before congressional committees on legal issues related to health care. • Distinctions • Chambers USA: America’s Leading Lawyers for Business (2009-2011) • Illinois Super Lawyers – Healthcare (2005-2010) • Best Lawyers in America directory (2005-2010) • Admissions • Illinois; U.S. Supreme Court; U.S. District Court for the Northern District of Illinois; U.S. District Court • Education • Loyola University of Chicago School of Law (J.D., cum laude, 1977) • Northern Illinois University (B.A., magna cum laude, 1974) 2

  3. Ed represents a variety of healthcare providers, including long-term care facilities, assisted-living facilities, supportive-living facilities, home health agencies, home dialysis providers, hospitals, retirement centers, and healthcare professionals. His practice involves representing and counseling healthcare facilities and professionals relative to health care transactions, administrative and regulatory (including Life Safety Code) compliance, survey and certification, certificates of need, acquisitions, tax exemption, fair housing, and reimbursement. • Before entering private practice, Ed worked in government at the Department of Health and Human Services, as a Special Assistant U.S. Attorney, and at the Illinois Department of Public Health, as a staff attorney. At IDPH, Ed prosecuted various IDPH licensees, assisted in the defense of administrative review actions and suits against the Department, advised staff of the Health Facilities and Services Review Board and other IDPH programs, and drafted and revised rules and regulations. • Distinctions • Leading Lawyers Network • Admissions • Illinois • Education • Chicago-Kent College of Law (J.D., with honors,1987) • University of Illinois (B.S., 1980) 3

  4. Agenda • Introduction/Goals of Presentation • IRS Exemptions and Oversight • §501(c)(3) • §509(a)(1) • §509(a)(2) • §509(a)(3) • IRS Revenue Rulings 72-124 and 79-18 • Form 990-Schedule H-”Community Benefit” • Executive Compensation

  5. Agenda • Charitable Use of Property • Historical Basis • Constitutional and Statutory Authority to Grant • Methodist Old Peoples Home Guidelines • Sources of Challenge • Government Shortfalls • County/Local Governments/AG • Congressional “Oversight” • Bloggers • Religious Use • Mission Ridge – IRS Audit

  6. Section 501(c)(3) Tax-Exempt Organizations • “Organization organized and operated for religious, charitable, . . . or educational purposes. . .” • Sample “Purposes” clause in by-laws: • The purposes of the Corporation are to operate exclusively for charitable, educational, and religious purposes, within the meaning of Section 501(c)(3) of the Internal Revenue Code of 1986, as may be amended from time to time, or any corresponding provision of any future U.S. Internal Revenue Law • Benefits: • Exempt from paying income taxes • Typically receives tax-deductible donations

  7. Section 509(a)- Public Charities IRS presumes 501(c)(3) organizations are private foundations, unless they meet requirements of Section 509(a) for public charities Section 509(a)(1) Organizations 1) A church or a convention or association of churches 2) An educational organization such as a school or college 3) A hospital or medical research organization operated in conjunction with a hospital 4) Endowment funds operated for the benefit of certain state and municipal colleges and universities 5) A governmental unit, and 6) A publicly supported organization Public Support: Organization is publicly supported if it normally receives a substantial part of its support from a governmental unit or the general public. Benefit: More favorable tax treatment than private foundation

  8. Public Charities–(continued) Section 509(a)(2) Organizations • Organization may also fit description of 509(a)(1) organization, but there are 2 basic differences: • Public Support: Includes support under Section 509(a)(1) and income from activities directly related to organizations exempt activities. • Income: Limits total gross investment income and unrelated business taxable income • Benefits: More favorable tax treatment than private foundation; qualifying tests allow more organizations to meet requirements of public charity as compared to 509(a)(1)

  9. Public Charities-(continued) Section 509(a)(3) Organizations • Organization must meet all of the 3 following requirements: • Organization must be organized and operated exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified organizations under sections 509(a)(1) or 509(a)(2). • Organization has one of three types of relationships with one or more organizations under sections 509(a)(1) or 509(a)(2). It must be: • Operating, supervised, or controlled by one or more section 509(a)(1) or 509(a)(2) organizations (Type I supporting organization)

  10. Public Charities-(continued) • Supervised or controlled in connection with one or more section 509(a)(1) or 509(a)(2) organizations (Type II supporting organization), or • Operated in connection with one or more section 509(a)(1) or 509(a)(2) organizations (Type III supporting organization). • The organization must not be controlled directly or indirectly by disqualified persons (defined later) other than foundation managers and other than one or more organizations described in section 509(a)(1) or 509(a)(2). • Benefits: More favorable tax treatment than private foundation; allows organization to receive exemptions for services they provide to other exempt entities

  11. CCRCs as Tax Exempt Organizations Rev. Ruling 72-124: Applies to Senior Residential Housing • Organization must operate to meet the 3 primary needs of aged persons: 1) housing 2) healthcare 3) financial security • Need for housing met if organization provides residential facilities specifically designed to meet physical, emotional, recreational, social, religious, and similar needs of aged. • Need for healthcare met if organization provides some form of health care or maintains some continuing arrangement with other facility or personnel to maintain the physical and mental well-being of its residents.

  12. CCRCs as Tax Exempt Organizations Need for financial security met if organization committed to maintaining in residence any resident who becomes unable to pay his or her regular charges, and operates to provide its services at the lowest feasible cost Rev. Ruling 79-18: Applies to rental properties for seniors

  13. Baucus, Grassley and the New Era in Washington • Senator Grassley & Tax-Exempt Hospitals • IRS Form 990 & Schedule H

  14. Senator Grassley & Tax-Exempt Hospitals “While the new IRS Form 990 will help, Congress may need to fill in the blanks since hospitals still get to choose how they calculate their costs. Just like tax-exempt colleges and universities, tax-exempt hospitals need to be accountable for rising costs and the benefits of their special tax status.”

  15. Senator Grassley & Tax-Exempt Hospitals • How much community benefit does Grassleybelieve is necessary? • A 2007 discussion paper released by Grassley argued that a nonprofit hospital should provide “community benefits” equal to at least 5% of revenue to justify its tax exemption • Should bad debt be included in charity care? • Grassley: “Bad debt isn’t necessarily a reflection of charitable care and community benefit – it clouds the picture” • AHA: Recommends including bad debt under the category of uncompensated care

  16. Charitable Use of Property Charitable Use of Property goes back hundreds of years English Statute of Charitable Uses Set aside property for, among other things, relief of the aged and poor, maintenance of the sick, scholars in universities, education of orphans U.S. Courts have adopted the statute and have recognized each of these uses as charitable.

  17. State Exemption Principles • The Illinois Constitution permits the legislature to enact laws providing property tax exemption but limited to … property used exclusively … for school, religious, cemetery and charitable purposes. Article IX of the Illinois Constitution does not mandate exemption, it grants to the legislature the right to make laws that exempt property from taxation, subject to the limits under the Illinois Constitution. • The Illinois Property Tax Code exempts charitable use of… property of a charitable organization when actually and exclusively used for charitable … purposes, and not leased or otherwise used with a view to profit • Ownership and Use Requirement • Charitable organization must own property • Organization must use property for charitable purposes

  18. Charity Defined The Illinois Supreme Court in Crerar v. Williams[1] defined charity as follows: “A charity…may be…defined as a gift…for the benefit of an indefinite number of persons, either by bringing their hearts under the influence of education [or] religion, by relieving their bodies from disease, suffering, or constraint, by assisting them to establish themselves for life, or by… otherwise lessening the burdens of government.” _______________ [1] 145 Ill. 625 (1883)

  19. Charity Defined Further defined in People ex rel. Hellyer v. Morton [1]: “Charity…is not confined to mere almsgiving or to the relief of poverty…It does not lose its charitable character…by reason of the fact that the recipients of some of its benefits who are able to pay are required to do so where no profit is made by the institution and the amounts so received are applied in furthering its charitable purposes. Another distinguishing feature upon which all exemptions in favor of charitable institutions are based is the benefits the public may receive from the institution and the consequent relief to some extent of the burden upon the State to render similar services to its citizens.” ______________ [1] 373 Ill. 72, 77 (1940 )

  20. Methodist Old Peoples Home Guidelines • In the 1968 Methodist Old Peoples Home v. Korzen[1] decision, the court reviewed exemption for a residential facility, with a large entrance fee and limited charity care, and set forth factors as guidelines for determining charitable activity: • Do the benefits derived from the property serve an indefinite number of persons? • Does the organization have shareholders or profits paid from the enterprise? • Are funds derived mainly from charity and held in trust for charitable purposes? • Does the organization dispense charity to all who need and apply for it? • Are obstacles placed in the way of those seeking charity from the organization? • Is the exclusive or primary use of the property for charitable purposes? • Does the organization benefit the public by lessening the burden of government? __________________ [1] 39 Ill.2d 149, (1968)

  21. Provena Covenant Medical Center v. Department of Revenue • In March 2012, the Illinois Supreme Court in Provena Covenant Medical Center v. Department of Revenue[1] applied the Methodist Old Peoples Home factors and affirmed the Director’s decision to deny exemption to Provena; finding that the Department’s decision was not clearly erroneous. • Provena had applied for exemption on 2 bases: that it used the property exclusively for both 1) charitable and 2) religious purposes. _______________ [1] 894 N.E.2d 452 (4th Dist., 2008)

  22. Narrow Holding 2 of 7 justices recused themselves 2 of 5 justices partially disseuteded on issue of charitable use Found that Hospital failed to introduce evidence that the owner of the property was a charitable institution. Hospital’s evidence limited to hospital on the property. However, the owner of the property operated other hospitals at other locations in addition to Hospital. Also found that Hospital similarly failed to introduce evidence that the owner of the property used the property exclusively for religious purposes.

  23. Narrow Holding (continued) • Though court reached no majority on the issue of charitable use, the plurality • noted Provena’s charitable care policy, but found that the hospital’s lack of advertising of the policy was a barrier to those seeking charity • rejected bad debt and unreimbursed Medicare and Medicaid costs as counting toward charity • measured the benefit of the hospital’s charity in lessening the burden on government against the amount of the tax benefit the hospital received, and • found community benefit outside hospital property irrelevant to determining the charitable use of its property.

  24. Response to Challenges of Your Tax-Exempt Status • Conduct an Audit of your “Charity” and Document Charity (see links on last page) • Sample Charitable Audit Checklist • Review articles of incorporation/bylaws/mission statements as well as written charity policies and procedures • Review other policies which evidence charitable purpose and activities (e.g., role of trustees/directors) • Document admissions policies that you do admit all regardless of race, religion, gender or ability to pay • Document determination of persons’ eligibility for charity care at time of admission

  25. Response to Challenges of Your Tax-Exempt Status • Document and value charity care, bad debt, program or service discounts, free care, (e.g., free services), (e.g., pastoral services), free products (e.g., medical supplies or drugs) • Document government reimbursement shortfalls • Document value of community educational activities, including professional education • Document value of community health screening or other outreach programs • Document value of volunteer services (from candy stripers to board of directors) • Document “sponsors” subsidy (e.g., reductions in management fee; leases or land use at below fair market value; interest-free loans; or other forms of direct or indirect subsidy)

  26. Response to Challenges of Your Tax-Exempt Status • Document the value of all donations and grants received for the year, other than donations or grants spent on depreciable capital items • Document the value of yearly income or capital appreciation derived from unspent donations or grants (some gifts require the principal to be preserved) • Document how you communicate charity policy to public and the needy (e.g., posters on hospital premises, advertising in newspapers, brochures, as well as information to referral sources) • Document communications of charity policy to medical staff, employees, and all other associated with health care provider. • Document the use of revenue to establish no private inurement

  27. Response to Challenges of Your Tax-Exempt Status • Document the purchase of goods and services as reasonable and services are being provided at low or lowest possible costs to patients • Document any other program operated at a loss which provides services • Document and value services or programs which are special, unique, or which government might otherwise have to provide (e.g., medical library) • Document historical gifts or grants from sponsor or other “public” sources • Document value of research in medical o behavioral science • Behavioral Hill Burton uncompensated care program and any other similar program • Document and value any other form of charity • Interest savings on tax-exempt bonds over non-tax-exempt bonds – form of government support

  28. Narrowed Definition of “Charitable” Exemption Expands Importance of “Religious Use” Exemption • Statutory basis of religious use: §15-40 of Property Tax Code • Provena case – inappropriate “rejection of religious use” • Fairview Haven v. Department of Revenue, Catholic Health Initiatives Colorado v. City of Pueblo, and other relevant cases • Expanded importance and viability of religious use exemption

  29. What is a “Religious” Purpose The highest Court ruled in New York State that the Church could be entitled to a real estate property tax exemption and further held: • In determining whether a particular ecclesiastical body claiming exemption from real property taxes has been organized and is conducted exclusively for religious purposes, the Courts may not inquire or classify the content of the doctrine, dogmas and teachings held by that body to be integral to its religion but must accept that body’s characterization of its own beliefs and activities and those of its adherents, as long as that characterization is made in good faith and is not a sham.

  30. Holy Spirit Association for the Unification of World Christianity v. Tax Commission of the City of New York • Organization operated out a motive to serve God and good faith held religious beliefs • Actions to bring person (patients, patients’ family, employees, administration, volunteers, and the faithful) to believe in or strengthen their faith • Organization which is used to obtain salvation nor grace through good works • Good faith held religious belief and motivation based on theology and historically documented must be deferred to by civil authority under first Amendment

  31. Fairview Haven v. Department of Revenue • The same analytical framework as is applied to charitable-use exemptions is applied in determining religious-use exemptions • It is not contested that Fairview operated as a not-for-profit business with a contract, requirements for residency, provisions for payment, and provisions for discharge • The corporate purpose included the care and keeping of the elderly • Fairview’s method of operation was businesslike • The Department’s determination based upon the actual method of operation that Fairview was not exempt for religious purposes was supported by the evidence.

  32. Catholic Health Initiatives Colorado v. City of Pueblo • Applying these principles, we conclude that Village Pueblo’s operation is a religious activity or function. The Pueblo code does not limit the term “in the conduct of their regular religious … functions and activities,” by use of terms like religious “worship,” “reflection,” or “proselytizing.” • Because the parties have stipulated to the specific facts of this case, any concern about weighing evidence, resolving conflicts, or determining credibility is absent, and any concern about excessive government entanglement is minimal. The parties stipulated that Catholic Health is a religious organization affiliated with the Catholic Church; that it operated at a loss from July 1, 1997 through May 31, 2004; that its activities are religiously motivated; that Catholic Health provides services consistent with its mission; that it makes a chaplain available seven days a week who provides a spiritual assessment for residents in the assisted living and skilled nursing units; and that Villa Pueblo has a chapel available for worship services and provides regular religious services.

  33. Catholic Health Initiatives Colorado v. City of Pueblo • The use to which the property is put is consistent with Catholic Health’s sincerely held religious belief. The parties stipulated that Catholic Health provides services and advocates for the elderly in accordance with its mission; that the use of the property for religious worship and reflection is integrated into Villa Pueblo’s daily activities; that its managers are trained regarding the religious mission and ministry; that its employees are instructed and required to support that mission and follow religious directives of the Catholic Church; and that Villa Pueblo holds itself out as a religious organization.

  34. IRS Audit of Mission Ridge Missions United operates Mission Ridge, a nonprofit CCRC in Montana Entrance fees are used as a form of collateral to bank bonds In March 2007, Mission Ridge was randomly selected for a bond audit Issue: Whether entrance fee payments a CCRC retains are replacement proceeds of tax exempt bonds and, therefore, “yield restricted” and generally subject to IRS rules regarding arbitrage IRS’ Arbitrage Rule: If the nonprofit makes more money in interest than it is due to pay on the bonds, then it should pay taxes on the profits from that interest IRS classified Mission Ridge entrance fees as replacement proceeds IRS concluded that its entrance fees do not constitute “replacement proceeds” and invested entrance fees may earn market return, without regard to Facility’s yield on its variable rate debt 34

  35. Hyatt Tax Case Vi (f/k/a Classic Residence by Hyatt), a national for profit retirement community operator Followed industry practice by treating the refundable portions of residents’ entrance fees as loans with obligations to repay In December 2009, IRS sent Vi a notice of deficiency for almost $129M for 2005 tax year Issue: Whether entrance fees qualify as taxable income (IRS) or interest-free loans (Vi) In July 2010, IRS withdrew tax challenge, admitting an error in increasing Vi’s taxable income and imposing a negligence penalty, but also stated that under other, unspecified circumstances, the entrance fees would be correctly considered income 35

  36. Other Links • Manual on Property Tax Exemption for Not-for-Profit Charities Serving the Elderly. http://www.aahsa.org/section.aspx?id=700 (Go to “Tax” heading click on “Manual on Property Tax Exemption for Not-for-profit Charities Serving the Elderly.”) • AAHSA Social Accountability http://www.aahsa.org/article.aspx?id=4790 • Catholic Health Association Community Benefits http://www.chausa.org/Pub/MainNav/ourcommitments/CommunityBenefits/

  37. 37

More Related