Status of Corporate Integration Proposal

• Date: 01 November 2016
• DOI: http://doi.org/10.1002/npc.30261
• Published date: 01 November 2016

Bruce R. Hopkins’ NONPROFIT COUNSEL

7

November 2016

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc

STATUS OF CORPORATE

INTEGRATION PROPOSAL

The September 23 issue of the Daily Tax Report

brought the news that the proposed legislation from

Senate Finance Committee Chairman Orrin G. Hatch

(R-UT) offering a corporate integration plan is “almost

ready” for public disclosure but may not be released

until after the November election. Being a shareholder-

level-only tax plan, the prospect of it is causing tax angst

in the exempt organizations community.

The Congressional Research Service’s report on

corporate integration and tax reform, dated September

16, explains that corporate integration “involves the

elimination or reduction of additional taxes on corporate

equity investment that arise because corporate income

is [generally] taxed twice, once at the corporate level

and once at the individual [or other type of shareholder]

level.” The report outlines several approaches to corpo-

rate integration.

This report states that about one-half of corporate

income is not taxed at the shareholder level because

it is held by tax-exempt entities, such as endowment

funds, private foundations, and pension funds. Under

some models, tax-exempt shareholders would not pay

any tax, other than on debt-financed income. (The CRS

report observes that this approach would cause a “sig-

nificant revenue loss,” but dividends and interest are

already generally exempt from federal income taxation.)

Another model, based on a 1992 Treasury study, would

require corporations to withhold the tax due, making it

nonrefundable to exempt shareholders.

Concerns of tax-exempt shareholders were expressed

at a Senate Finance Committee meeting in May. The

Daily Tax Report article states that an unnamed Senate

aide advised the reporters that “many” of these con-

cerns have been addressed in the pending draft bill but

they will not be made public until the plan is released in

its entirety. ◆

RECENT IRS PRIVATE LETTER

RULINGS

• A state enacted a statute to facilitate a hospital’s

continuance of its mission as a public hospital, with

an improved organizational and operational struc-

ture allowing for greater flexibility, responsiveness,

and innovation. This law authorizes a county board

of supervisors to pass an ordinance creating an

authority (Authority) and to transition the hospital’s

operations to the Authority. The law stipulates that

the Authority will be a public agency that is a local

unit of government. Hospital employees will become

employees of the county. The Authority’s govern-

ing board will consist of some ex officio positions

and appointees of the county board. The county

board will adopt the Authority’s bylaws and has the

power to approve or reject the Authority’s annual

budget. On dissolution, the Authority’s assets must

be transferred to the county or other public entity

in the state. The IRS ruled that promoting public

health is an essential government function and that

the Authority will be an instrumentality of the state

with its gross income excludable from taxation (IRC §

115) (Priv. Ltr. Rul. 201635004). [19.22(b)]

• The IRS revoked the exempt status of an organiza-

tion claiming to be operating an automobile dona-

tion program to fund its charitable grantmaking.

Apparently, this organization’s operations were too

closely related, from the IRS’s perspective, to those

of a used-car dealership. The formal reasons for

the revocation appears to be the organization’s

lack of adequate records (IRC § 6001) and viola-

tion of the doctrine of private benefit (Priv. Ltr. Rul.

201635006). [20.12(a), 28.20]

• The primary purpose of a public charity is to sup-

port a religious community and its religious, health,

social service, and educational institutions. This

charity maintains an endowment. The charity will

enter into a contract with a charitable remainder

unitrust, whereby the charity will become trustee of

the trust and will provide the trust with units in the

endowment in exchange for assets. This will enable

the trust to indirectly participate in the return on

the charity’s endowment. As it has many times in

connection with colleges and universities engaging

in these types of transactions, the IRS ruled that this

arrangement will not generate unrelated business

income to the charity (Priv. Ltr. Ruls. 201636042,

201636043). [24.2(b)]

• It’s Wendy Parker time again. A married couple

formed a nonprofit corporation to “assist adolescent

children and families in coping with undiagnosed

and/or debilitating diseases.” This entity is named

after their minor son, who suffers from an uniden-

tified illness. The organization’s activities consist

primarily of the conduct of fundraising events to

provide financial support to designated recipients.

Its fundraising material requests funds to help the

minor son. The IRS, of course, denied recognition

of exemption as a charitable (and social welfare)

organization on the grounds of private inurement

(Priv. Ltr. Rul. 201637017). Note: This entity has a

four-member board, three of whom have a family

relationship; this fact did not give rise to a separate

basis for denial of recognition. [6.3(a)]

• An organization provides substantial non-recre-

ational services to its members who privately own

cottages on its land. This entity maintains the road