23 rd Annual Health Sciences Tax Conference

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1 23 rd Annual Health Sciences Tax Conference Everything you wanted to know about current tax topics but were afraid to ask December 9, 2013

2 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Ernst & Young LLP is a clientserving member firm of Ernst & Young Global Limited operating in the US. For more information about our organization, please visit ey.com. This presentation is 2013 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are not necessarily those of Ernst & Young LLP. Page 2

3 Non-reliance disclosure Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. These slides are for educational purposes only and are not intended, and should not be relied upon, as tax or accounting advice. Page 3

4 Presenters Katherine Kurtzman Ernst & Young LLP 155 North Wacker Drive Chicago, IL Melissa Mitchell Ernst & Young LLP 401 Congress Ave., Suite 1800 Austin, TX Tricia Johnson Ernst & Young LLP 312 Walnut Street Cincinnati, OH Page 4

5 Agenda Working with IRS TE/GE today Congressional scrutiny on exempt orgs Internal Revenue Service (IRS) exam updates Joint ventures and investments Tangible property regs Corporate philanthropy and social responsibility Items issued by IRS this year Page 5

6 Working with IRS Today Page 6

7 Organization of the IRS and its offices Last Reorganization of the Tax Exempt & Governmental Entities Division (TE/GE) was in 1999 As of summer 2013, there are discussions regarding another reorganization. Three units of TE/GE: Customer education and outreach Washington, DC Rulings and agreements Washington, DC Determinations Cincinnati Examinations Dallas Practical considerations now and impact of personnel changes on timing of IRS response and processing Page 7

8 Form 1023 Form 1023 Section 501(c)(3) Narrative regarding activities past, present and planned Board quals to serve, compensation of officers Financial projections Copies of contracts and agreements Form last updated June 2006 IRS will request items upon review that are not within the form itself; examples include: Hospitals 501(r) compliance questions (not in the form, but sent by IRS during its review) Charter schools Regional parents queries regarding the substance of their activities Page 8

9 Form 1024 Form 1024 Section 501(c)(4) and other 501(c)s Open-ended questions to describe activities and how they occur Community benefit is not specifically addressed/requested, though it is likely to be queried by reviewing agent. Question of interest is: Does the organization perform or plan to perform (for members, shareholders, or others) services, such as maintaining the common areas of a condominium; buying food or other items on a cooperative basis; or providing recreational facilities or transportation services, job placement, or other similar undertakings? Form last updated September 1998 Self-selection considerations Questionnaire and expect Form 1024 will be requested Page 9

10 Exempt Organization (EO) determinations office Cincinnati, Ohio and Covington, Kentucky Reviews applications for exemption Forms 1023 and 1024 Receives notifications of changes and updates organizational documents, activities, sources of support These must also be reported on Form 990. Processes reclassifications of status and other Form 8940 items Page 10

11 EO Determinations office Cincinnati, Ohio and Covington, Kentucky Application review Technical screening Special projects (e.g., credit unions) Merit close Those with minor needs Automatic agent assignment Refers certain applications to EO technical office (Washington, DC) Page 11

12 EO Technical office Washington, DC Referrals to EO Technical Mandatory referrals Health maintenance organizations and Section 501(m) commercial-type insurance Foreign health care services Discretionary referrals: Section 501(c)(4) with potential political activity Note: Recent referral letter with updated language: Application has been referred to the office of EO Technical for processing because it presents issues that are not entirely clear under established precedent. Page 12

13 IRS processing generally the same in Cincinnati and Washington, DC Manager assigns to a tax law specialist Processing rule: first-in, first-out Exception expedited handling, if approved: Higher priority for review Same exhaustive review process No assurance application will be approved Information (development) letters IRS may request additional facts, documents and/or explanation, and may send more than one letter Approval or denial (and appeal process) Page 13

14 Organization name changes Send to Ogden, UT if: Official Catholic Directory and group exemptions Corporation, limited liability company, etc. Send to Cincinnati TE/GE if: Stand-alone exemptions Information to include: Cover letter explain request, request expedited treatment Amended articles legal change documents Note: Centers for Medicare & Medicaid Services (CMS) and other health care payors require that legal name changes be recorded with the IRS within 120 days, or they may cease payment to the provider. Page 14

15 Continued Congressional scrutiny Page 15

16 Recent Congressional scrutiny toward exempt organizations September 2013 Sen. Thomas Coburn proposes legislation: Professional sports teams (with revenue >$10 million) would no longer qualify for exemption under section 501(c)(6) Spring and summer 2013 Sen. Grassley queries: Section 340B discount drug programs are intended for indigent drug coverage; in some hospitals and Walgreens, he notes that large executive bonuses were paid and scrutinizes Page 16

17 Diversion of assets A Washington Post article by Joe Stephans and Mary Pat Flaherty reported on November 1, 2013, that: Congress promises multiple investigations of possible wrongdoing at charities Federal and state officials, troubled that nonprofit organizations have quietly lost millions of dollars to financial wrongdoing, this week launched multiple investigations into whether the groups properly reported losses to authorities. Page 17

18 Diversion of assets Where is this question on the Form 990? It is on Part VI Governance, Management and Disclosure, Page 6. Did the organization become aware during the year of a significant diversion of the organization s assets? See page 21 of the instructions. Significant is defined as: 5% of the organization s gross receipts for its tax year 5% of the organization s total assets as of the end of its tax year $250,000 Page 18

19 Diversion of assets The Attorneys General are also very interested in diversions of assets. Types of diversions: Employee embezzlement Theft by investment advisors think Bernie Madoff Independent contractors, supplier theft Concerns underreported and, even if reported, the disclosures are not complete Page 19

20 IRS examination updates Page 20

21 IRS examination updates Internal Revenue Manual guidelines for private foundations Updated May 2013, after large foundation audit program Areas of interest: grant procedures, taxable expenditures, net investment income calculations Update to TE Bond exam guidelines in process Page 21

22 Spring College and University report update IRS success? 34 exams of 400 recipients of questionnaire opened due to responses Increases in Unrelated Business Income (UBI) Changes in 90%; UBI increased $90 million Reasons: lack of profit motive, incorrect expense allocation, lack of NOL substantiation, misclassification of activities as exempt Rebuttable presumption Not met in 20% of cases Employment tax examined in 11 of the 34 Fringe benefits not taxed $36 million in wage adjustments Retirement plans fewer issues noted Page 22

23 New IRS Information Document Request (IDR) response enforcement New directive was issued by Large Business Division (taxpayers with assets more than $10 million) effective for all IDRs issued after June 30, All IDRs must be issue focused and discussed with the taxpayer prior to issuance with a proper response deadline agreed to. Once an IDR is issued, a taxpayer cannot request additional time to respond. All IRS agents in Large Business Division completed training on new process by September 30, Page 23

24 New IRS IDR response enforcement Once an IDR is issued, it is tracked in a database and monitored by team and territory managers. New enforcement of delinquent responses is effective October 1, 2013 Step 1 Delinquency notice issued within 10 days, stating taxpayer must provide information within 15 days Step 2 Pre-summons letter issued if no response to the delinquency notice gives taxpayer 10 days to provided requested information Step 3 Formal summons that will be enforced Page 24

25 Joint ventures and investments with K-1s Page 25

26 Joint ventures and investments with K-1s What areas in our organizations does this impact? Operational joint ventures Endowment investments Pension trusts taxed as trusts Page 26

27 Flow-through investments what s on Schedule K-1? Schedule L your capital account balance Tax basis or book basis and why should I care? Schedule K your share of liabilities Am I really on the hook for all this debt? K-1s passing through losses Surprise: you may not be entitled to a tax deduction! K-1s marked final What you don t know could hurt you! Publicly traded partnerships (PTP) are subject to unique rules. Page 27

28 Case study Sample K-1s at your table Page 28

29 Tangible property regs Page 29

30 Tangible property regs Update on various health care system applications Taxable subs Partnerships UBI on 990T Effective January 1, 2014 Page 30

31 Overview and framework The regulations affect all taxpayers with tangible property and require compliance via Form 3115 or annual elections Generally effective for tax years beginning on or after 1 January 2014 (optional early adoption for 2012 and/or 2013 years) Materials and supplies (M&S) Acquisitions Improvements GAA and dispositions (Final) 1.263(a)-1 and -2 (Final) 1.263(a)-3 (Final) 1.168(i)-1, -8 (Prop.) Definition of M&S A unit of property $200 Used or consumed in 12 months or less Replacement parts Fuel, lubricants, etc. or Identified as M&S in other IRS guidance M&S Types and Timing Incidentals (no record of consumption or physical inventory) when acquired Non-incidentals (including emergency spare parts) when consumed Rotable and temporary spare part when disposed Limited annual election to capitalize M&S Interaction with de minimis safe harbor De minimis safe harbor annual election to follow book expense policy If have AFS, no more than $5,000 per invoice or item If no AFS, no more than $500 per invoice or item If written book policy in place at beginning of year Capitalize costs that facilitate acquisitions 11 inherently facilitative costs Safe harbor annual election to expense Employee compensation and overhead Investigatory costs for real property Unit of Property (UOP) definition functional interdependence property, except for Buildings Plant property Leased property Network assets Improvement defined Betterment Restoration New or different use Safe harbor to expense routine maintenance Buildings: if more than once over 10-year period Non-Buildings: if more than once over class life Annual election to follow book by capitalizing repairs General Asset Accounts (GAA) Establish GAAs with assets of similar depreciation methods Qualifying dispositions do not include partial dispositions (e.g., structural components of a building) Dispositions (not in GAA) Optional annual election to recognize partial dispositions (e.g., building structural components) Reasonable valuation method to determine disposition gain or loss Coordination of dispositions with IRS examination of repairs Page 31

32 Corporate philanthropy and social responsibility Page 32

33 Sample public rankings Newsweek Green Ranking 500 US and 500 Global Fortune Magazine Most Admired Companies CR (Corporate Responsibility) Magazine Best US Corporate Citizens SAM Ranking Sustainability Leaders Global100.org Clean Capitalism Page 33

34 What type of things are measured? May differ by ranking: Environmental impact, management and disclosure Innovation capacity Governance Philanthropy % taxes paid CEO to average worker Pay Pension fund status Safety performance Employee turnover Leadership diversity Page 34

35 Why talk about it? Form 990 Part III, Schedule H narrative opportunities Standards are currently voluntary in the US, but are being developed Sustainability Accounting Standards Board (sasb.org) August 2013 issued version 1.0 for health care delivery Intersections to Section 501(r) regarding access to care Page 35

36 Corporate philanthropy advantages Coordinate corporate philanthropy Good corporate citizen Centralizing the accountability of charitable giving for the corporation Supporting the community programs in the communities in which the corporation s employees and/or customers are located Facilitating employee assistance programs Sponsorships of events and campaigns Fosters employee relations Scholarship programs within limits Matching gifts Employee disaster assistance under Section 139 Page 36

37 Employee assistance funds/ disaster relief funds Background Generally, any payments from an employer to an employee will be subject to tax. Section 102 specifically limits an employer from making gifts to employees. Section 139 provides exceptions for Presidentially declared disasters, terrorist attacks and certain other situations. If structured correctly, grants made from an employee assistance fund, established as a tax-exempt organization, to an individual would not be subject to tax. In the case of certain federally declared emergencies, a donation of Paid Time Off (PTO) can be made on a pre-tax basis. Page 37

38 Interesting items from IRS this year Page 38

39 Items issued by IRS this year Mostly technical guidance (rather than rulings) this year Compliance = good governance, noted again in College and University report in April 2013 Community Health Needs Assessment (CHNA) proposed regs April 2013 Colleges with incorrect TINs on Forms 1098-T IRS is assessing penalties Focus of multiple announcements from IRS were focused on taxexempt bond issuers related to compliance and reporting obligations Page 39

40 IRS EO Division guidance projects New items: Guidance on when a Section 501(c)(4) social welfare exempt entity crosses the line to political/campaign activities direct result of the Congressional hearings on targeting of certain tax-exempt applicants Guidance addressing private foundations investments in partnerships when a disqualified person from the foundation is also a partner Guidance regarding return filing requirements for the excise tax on non-profit hospitals for community needs assessment failures Page 40

41 IRS EO Division guidance projects Items carried over from year: Rev. Proc. updating grantor and contributor reliance rules Updating Rev. Proc for EO Select Check Finalize regs. under Section 501(r) Guidance for supporting orgs and private foundations Finalize regs. under Section 4944 on program-related investments Guidance on excise tax on donor advised funds Guidance on returns for exempt organizations Finalize regs. on church tax inquiries and exams Page 41

42 Summary Page 42

43 Thank you For your participation and feedback! Page 43

44 Questions? Page 44

24 th Annual Health Sciences Tax Conference

24 th Annual Health Sciences Tax Conference Quantitative services amid corporate tax reform and heightened Internal Revenue Service controversy December 8, 2014 Disclaimer EY refers to the global organization,