GAO Critical of IRS's Administration of Community Benefit Standard

Date01 January 2021
Published date01 January 2021
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
gifts and the weak enforcement of the local historic
district preservation law. The public charity, by con-
trast, annually inspected the properties and monitored
changes to them. The parties stipulated that the ease-
ments qualified under the federal tax law rules. With
their value being the only issue, the court applied the
before-and-after valuation method.
In this valuation process, the court must take into
account any effects from historic preservation laws
that already restrict the property’s potential highest
and best use (Reg. § 1.170A-14(h)(3)(ii)). The govern-
ment’s expert witness testified that the easements did
not restrict the fair market value of the properties. The
donors claimed there are “numerous requirements”
imposed by the easements that are not imposed by
Buffalo law. The IRS attacked these alleged differ-
ences, labeling them “untrue or of no consequence”;
the court wrote that the IRS “has the better of [this]
Nonetheless, the donor won this case with the
argument that although Buffalo had preservation stand-
ards, “its economic problems made its monitoring and
enforcement of those standards ineffectual” and that
the easements “created a system of enforcement where
none in fact had existed” (great lawyering!) (Kissling v.
Commissioner (November 12)). The court thus upheld
the charitable deductions in an amount somewhat less
than the claimed amount (and ruled that no penalties
are applicable). [9.7]
The IRS is examining a charitable deduction claimed
for a gift of a conservation easement. As part of that
inquiry, the IRS issued a summons to a bank seeking
information about the value of the property involved.
The IRS, of course, has the authority to issue a third-party
summons (IRC § 7602(a)(2)). The US Supreme Court
articulated the analytical framework that governs these
types of enforcement efforts (United States v. Powell
(1964)). Applying the Powell factors, a federal district
court, by decision dated November 3, granted the IRS’s
motion to dismiss the donor’s petition to quash the sum-
mons (Gretsch Stone, LLC v. United States (M.D. Ga.)).
The court found that the IRS’s investigation is for a
proper tax law purpose, the information summoned is
relevant to the investigation’s purpose, the documents
sought are not already in the IRS’s possession, and the
IRS followed the requisite procedural requirements. The
court noted that the IRS first attempted to obtain the
information from the donor, which did not or could not
provide it.
The US Government Accountability Office issued a
report, made public on October 20, titled “Tax Admin-
istration: Opportunities Exist to Improve Oversight of
Hospitals’ Tax-Exempt Status” (GAO-20-679). The GAO
concluded that the law is unclear as to what community
benefit activities exempt hospitals should be engaged in
and the Form 990, Schedule H, inadequately presents
community benefit information. It also made recommen-
dations to Congress and the IRS for change.
Community Benefits
The GAO complained that the IRS does not define
specific types of community benefit services and activities
that nonprofit hospitals must undertake to qualify for tax
exemption. Instead, the GAO stated, the IRS only pro-
vides guidance in the form of examples. The GAO found
“[s]ome health care industry stakeholders” who told the
agency that the “IRS’s community benefit standard does
not ensure that the community benefits that tax-exempt
hospitals provide justify their tax exemptions.”
Issues that were identified are the ability of hospitals
to address some of the standard’s factors in ways that
do not benefit surrounding communities, the loss of
relevance of some of the factors, and the failure of the
standard to identify some factors that can demonstrate
substantial community benefit.
Other stakeholders, however, such as representatives
of tax-exempt hospitals, told the GAO that “current
law and the community benefit standard offer hospitals
needed flexibility in demonstrating community bene-
fits.” These individuals advised the GAO that “commu-
nity health needs vary substantially across the country,”
so that “community benefits can vary substantially from
place to place.”
The IRS stated to the GAO that it “reviews hospitals’
services and activities to ensure that they are providing
community benefits that justify their tax exemptions.”
The GAO, however, observed that the IRS could not
“identify” whether any exempt hospitals were referred
to its audit division during fiscal years 2015–19 for
potentially providing insufficient community benefits,
lamenting that the IRS does not track this information.
Schedule H
The GAO reported that Schedule H “solicits infor-
mation inconsistently, resulting in a lack of clarity about
the community benefits hospitals provide.” It criticized
the location of the questions and the nature of the
instructions. The Schedule H “reporting structure,” it is

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT