Treasury, IRS Issue Final Regulations as to Charitable Hospital Rules

• DOI: http://doi.org/10.1002/npc.30041
• Published date: 01 March 2015
• Date: 01 March 2015

IRS ISSUES FINAL

REGULATIONS

CONCERNING RECEIPT

OF UBTI BY

REMAINDER TRUSTS

The IRS, on June 19, issued final regulations that provide guidance on the

tax effect of receipt of unrelated business taxable income (UBTI) by charitable

remainder trusts (T.D. 9403). The regulations, which affect remainder trusts that

have UBTI in tax years beginning after December 31, 2006, accompany the

change in the statutory law made by enactment of the Tax Relief and Health Care

Act of 2006 (see the February 2007 issue). A summary of the regulations in pro-

posed form is in the May 2008 issue.

Background

Prior to this law change, a charitable remainder trust could not be tax-exempt for

any year in which the trust had any UBTI. A trust in this circumstance was taxed on its

income, for each such year, under subchapter J as though it were a nonexempt, com-

plex trust. Today, however, charitable remainder trusts that have UBTI remain exempt

from federal income tax but are subject to a 100-percent excise tax on their UBTI.

Technicalities

This excise tax is imposed by IRC ß 664(c)(2)(A). The amount of UBTI is deter-

mined pursuant to IRC § 512; the modifications in IRC § 512(b) apply, including the

$1,000 specific deduction created by IRC § 512(b)(12). This excise tax is treated as

imposed under the excise tax rules that apply to private foundations and other tax-

exempt organizations (IRC chapter 42). Currently, the appropriate form to report

and pay the excise tax on charitable remainder trusts with UBTI is Form 4720.

Examples

For 2007, a charitable remainder annuity trust on the calendar year has

$60,000 of ordinary income, including $10,000 of gross income from a partnership

that constitutes unrelated business income to the trust. The trust does not have any

deductions that are directly connected with that incme. The trust has, for 2007,

administration expenses (deductible in computing taxable income) of $16,000,

resulting in net ordinary income of $44,000. The amount of UBTI is computed by

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Analysis of current developments in tax

and related law for nonprofit organiza-

tions and their professional advisors.

Volume 25 Number 8

August 2008

ALSO IN THIS ISSUE…

NYT Takes Measure

of Charitable Sector 2

IRS Rules Restructuring Plan

Will Eliminate Excess Business

Holdings 3

Churches and Politics:

New Developments 5

TIGTA Lightly Rebukes

TE/GE Division on PACI 5

Millionaires’ Amendment

Ruled Unconstitutional 7

Other Developments 7

Bruce R. Hopkins’

NONPROFITCOUNSEL

© 2008 Wiley Periodicals, Inc.

Published online in Wiley InterScience

(www.interscience.wiley.com).

DOI:10.1002/npc.20055

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

TREASURY, IRS ISSUE

FINAL REGULATIONS

AS TO CHARITABLE

HOSPITAL RULES

The Department of the Treasury and the IRS, on December 29, issued

final regulations providing guidance as to the requirements for charitable hospital

organizations imposed by the Patient Protection and Affordable Care Act (IRC §

501(r)) (T.D. 9708). The proposed regulations were issued in 2012 (summarized in

the August 2012 issue) and 2013 (summarized in the June 2013 issue).

The final regulations define the term hospital organization as an organization

recognized, or seeking to be recognized, as a tax-exempt entity described in IRC §

501(c)(3) that operates one or more hospital facilities. A hospital facility is a facil-

ity that is required by a state to be licensed, registered, or similarly recognized as

a hospital. Multiple buildings operated by a hospital organization under a single

state license constitute a single hospital facility. Hospital organizations include those

operated by a government (although there is a procedure by which government

hospital organizations can voluntarily terminate their IRC § 501(c)(3) recognition).

The final regulations require an omission or error to be minor in order to be cor-

rected and not considered a failure to satisfy these rules. The option for correction

without disclosure is available if the omission or error is minor and either inadvertent

or due to reasonable cause. Additional guidance is provided as to the factors to be

considered in making these determinations. Otherwise, correction and disclosure

of a failure is a factor tending to show that an error or omission was not willful.

The regulations provide that the IRS will consider all relevant facts and circum-

stances when determining whether revocation of tax-exempt charitable status

is warranted as a result of a failure to meet one or more of the IRC § 501(r)

requirements. These facts and circumstances include the size, scope, nature, and

significance of the organization’s failure, as well as the reason for the failure and

whether the same type of failure has previously occurred.

A facility-level tax is potentially applicable to a hospital organization operating

more than one hospital facility that fails to meet one or more of the IRC § 501(r)

requirements separately with respect to a hospital facility during a year. The final

Analysis of current developments in tax

and related law for nonprofit organiza-

tions and their professional advisors.

Volume 32 Number 3

March 2015

Also in This issue…

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DOI:10.1002/npc.20134

Easement Deduction Denial

Affirmed Because of Lack of

Mortgage Subordination 2

IRS Declines to Abate Intermediate

Sanctions Taxes, Finds Insufficient

Reliance on Legal Advice 4

Commerciality, Private Benefit

Preclude Exemption for

Charitable Giving Facilitator 4

Private Benefit Doctrine Dooms

Tax Exemption for Nonprofit

Time Bank Network 5

Nonprofit Organization Not

Exempt Because It Is Not Club 5

Online Marketplace/Charity

Ruled Commercial, Nonexempt 6

Exempt University’s For-Profit

Subsidiary’s Operations Held Not

Attributable for Tax Law Purposes 6

Final Exemption Procedure for

Exempt Health Insurance Issuers

Issued 7

House Adopts Dynamic Scoring

Methodology to Assess Major

Tax and Other Legislation 7

IRS Issues Procedural Rules

for 2015 8

Other Developments 8