Revocation of tax-exempt status,excise taxes,and other intermediate sanctions issues,plus income taxes: how the rules have changed after Caracci v. Commissioner

This Article discusses Caracci v. Commissioner, in which the Tax Court imposed intermediate sanctions based on its finding that insiders caused three applicable tax-exempt organizations to sell assets to three for-profit entities owned and controlled by those same insiders. It explores the standards enumerated in Caracci, hypothesizes as to the pending appeal, and examines the guidance given by the decision's clarification of the intermediate sanctions provisions of the Internal Revenue Code.     

Privacy Act of 1974; computer matching program--HCFA. Clarification--computer match between HCFA and the Internal Revenue Service (IRS)--notice published in the Federal Register on July 5, 1989

Pursuant to the Computer Matching and Privacy Protection Act of 1988, Public Law 100-503, October 18, 1988, and the Office of Management and Budget (OMB) Guidelines on the Conduct of Matching Programs, the IRS published a notice in the Federal Register (54 FR 28149; July 5, 1989) announcing their intention to conduct a match with a number of Federal and State agencies including HCFA. These matches, in accordance with various provisions of section 6103 of the Internal Revenue Code (IRC) of 1986, provide these agencies with tax information from IRS records to assist them in administering the programs and activities as described. The match with HCFA is pursuant to IRC 6103(1)(7). The IRS is required, upon written request, to disclose current information from returns with respect to unearned income to any Federal, State, or local agency administering certain federally approved programs to provide, among other things, medical assistance. HCFA is publishing this notice to ensure that the public is aware that it is participating in this match to verify Medicaid eligibility. The HHS Data Integrity Board has approved an Agreement between HCFA and the IRS on February 8, 1990, as required by the Computer Matching and Privacy Protection Act of 1988.     

Federal tax-exemption requirements for joint ventures between nonprofit hospital providers and for-profit entities: form over substance?

This article discusses the IRS rule on hospital joint ventures and related legal developments. The central thesis is that the IRS's emphasis on operational control is misplaced from both a legal and a policy perspective, and reflects a decidedly strong preference for the form of a joint venture's governance over the substance of its charitable and community service activities. More specifically, the article challenges the IRS position that the rule is a corollary of existing tax law principles. Additionally, social science research is presented to demonstrate that the rule is not likely to promote, and may in fact undermine, United States health policy objectives.     

Special report on taxation. New IRS revenue procedure clarifies tax classification of limited liability companies

Although its rules are complex, the publication of Revenue Procedure 95-10 will substantially facilitate the use of LLCs in those states with statutes that permit significant flexibility in the structuring of LLCs. Previously, the only way to assure that LLCs in those states would be classified as partnerships for income tax purposes was to obtain a private letter ruling from the IRS, often resulting in lengthy delays. The new revenue procedure should provide sufficient guidance in the vast majority of cases to allow tax counsel to determine the appropriate treatment for tax purposes without having to seek an IRS private letter ruling.     

Like bringing a knife to a gunfight: Why IRC Section 2036 is not the right weapon to combat abusive family limited partnerships

Family Limited Partnerships (“FLPs”), which were once a great estate planning technique, have now become victim to Section 2036 assertions made by the IRS. Over the years, the IRS has struggled to find a means to combat abusive FLPs until the courts began to embrace Section 2036 as a weapon for them to use. Different courts, however, have maintained different rules and have now subjected both abusive and non-abusive FLPs to inclusion of their assets into their gross estates. This has shed light onto the main issue, that is, that Section 2036 is not the appropriate tool to combat abusive FLPs.     

Physician recruitment after Hermann Hospital

The state of physician recruitment changed after the Internal Revenue Service required Hermann Hospital to publish its closing agreement with the IRS. The closing agreement released the long-awaited IRS "Hospital Physician Recruitment Guidelines." The IRS' recently proposed revenue ruling provides additional insight on acceptable physician recruitment practices as well.     

The Hermann Hospital closing agreement. Is informal guidance better than no guidance at all?

Creating barriers to communications between the IRS and the tax-exempt health care community is particularly troubling in this time of fundamental change. As exempt hospitals around the country gear up to provide service in a managed care environment, they are becoming involved in new forms of integrated delivery systems for which there is an utter lack of guidance. If the IRS is to formulate effective policy on questions involving the creation of these new health care entities, it needs to be aware of the dynamics and economic incentives at work in a managed care environment and how these incentives and dynamics differ from those in a fee-for-service context. The Hermann Hospital experience seems altogether contrary to these objectives.     

TBOR2 compliance plans: from rebuttable presumption to enforcement

This Article analyzes the implications and strategies of incorporating the Taxpayer Bill of Rights 2 ("TBOR2") into tax-exempt healthcare organizations' compliance plans. Beginning with a brief overview of TBOR2, the author examines the presumption of fair market value, how such organizations establish safe harbors, the current Internal Revenue Service (IRS or Service) position regarding enforcement of TBOR2, and the lurking potential for "whistleblowers" to start auditory procedures with an eye toward IRS bounties. Mr. Griffith concludes that the best advice for exempt organizations is to follow the rebuttable presumption procedure for all transactions involving potential disqualified persons, including staff and employed physicians, and seek to fit within the safe harbors for the less routine and larger of those transactions.     

Al Capone and the Internal Revenue Service: State-sanctioned criminology of organized crime

The story of Al Capone's rise and fall as a Chicago gangster has always depended upon selective dissemination of federal agency records, particularly records of the Internal Revenue Service. Capone history, therefore, is state-sanctioned history. The IRS view of the Capone organization, and of the tax evasion conviction, cannot be easily challenged without access to the corpus of the IRS records. Unfortunately, these records remain sealed from public access, despite the fact that selective releases were made prior to 1977 to journalists, popular authors, film producers and historians. Continued secrecy over the Capone records perpetuates a state-sanctioned criminology of organized crime. Calder v. Internal Revenue Service ¹ attempted without success to unlock the corpus of IRS-Capone records to investigate the state-sanctioned view.     

One for you and two for me: revenue sharing arrangements in charitable healthcare organizations

Charitable healthcare organizations have often borrowed from the methods of their for-profit counterparts in compensating physicians and other business partners. This is done in order to provide needed services to their communities, and to protect their charitable assets by sharing risk and preserving limited capital. One of the most controversial compensation methods in use by such organizations is the revenue sharing arrangement. In use for over thirty years, these arrangements have received close scrutiny and inconsistent treatment by the Internal Revenue Service (IRS) and have been the subject of critics' ire as an impermissible transgression of the fundamental line between charities and commercial enterprises. The author, however, concludes that revenue sharing arrangements serve an important purpose in enabling charitable healthcare organizations to fulfill their missions, that the IRS and the Treasury have now made clear that there is not a higher standard governing their use, and that these arrangements are consistent with charitable operation when an appropriate process and safeguards are in place to prevent payment of unreasonable compensation.     

HIPAA Mental Health Parity Act--IRS. Notice of proposed rulemaking by cross-reference to temporary regulations

Elsewhere in this issue of the Federal Register, the IRS is issuing temporary regulations relating to mental health parity requirements imposed on group health plans. These requirements were added to the Internal Revenue Code by section 1532 of the Taxpayer Relief Act of 1997. The IRS is issuing the temporary regulations at the same time that the Pension and Welfare Benefits Administration of the U.S. Department of Labor and the Health Care Financing Administration of the U.S. Department of Health and Human Services are issuing substantially similar interim final regulations relating to mental health parity requirements added by the Mental Health Parity Act of 1996 to the Employee Retirement Income Security Act of 1974 and the Public Health Service Act. The temporary regulations provide guidance to employers and group health plans relating to the new mental health parity requirements. The text of those temporary regulations also serves as the text of these proposed regulations.     

Health insurance portability for group health plans--IRS. Notice of proposed rulemaking by cross-reference to temporary regulations

Elsewhere in this issue of the Federal Register, the IRS is issuing temporary regulations relating to group health plan portability, access, and renewability requirements added to the Internal Revenue Code by section 401 of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). The IRS is issuing the temporary regulations at the same time that the Pension and Welfare Benefits Administration of the U.S. Department of Labor and the Health Care Financing Administration of the U.S. Department of Health and Human Services are issuing substantially similar interim final regulations relating to the group health plan portability, access, and renewability requirements added by HIPAA to the Employee Retirement Income Security Act of 1974 and the Public Health Service Act. The temporary regulations provide guidance to employers and group health plans relating to the obligation of plans to comply with new requirements relating to preexisting condition exclusions, discrimination based on health status, access to coverage, and other requirements. The text of those temporary regulations also serves as the text of these proposed regulations.     

HIPAA Newborns' and Mothers' Health Protection Act--IRS. Notice of proposed rulemaking by cross-reference to temporary regulations

Elsewhere in this issue of the Federal Register, the IRS is issuing temporary regulations relating to minimum hospital length-of-stay requirements imposed on group health plans with respect to mothers and newborns. The hospital length-of-stay requirements were added to the Internal Revenue Code by section 1531 of the Taxpayer Relief Act of 1997. The IRS is issuing the temporary regulations at the same time that the Pension and Welfare Benefits Administration of the U.S. Department of Labor and the Health Care Financing Administration of the U.S. Department of Health and Human Services are issuing substantially similar interim final regulations relating to hospital length-of-stay requirements added by the Newborns' and Mothers' Health Protection Act of 1996 to the Employee Retirement Income Security Act of 1974 and the Public Health Service Act. The temporary regulations provide guidance to employers and group health plans relating to the new hospital length-of-stay requirements. The text of those temporary regulations also serves as the text of these proposed regulations.     

America’s unreported economy: measuring the size, growth and determinants of income tax evasion in the U.S.

This study empirically investigates the extent of noncompliance with the tax code and examines the determinants of federal income tax evasion in the U.S. Employing a refined version of Feige’s (Staff Papers, International Monetary Fund 33(4):768–881, 1986, 1989) General Currency Ratio (GCR) model to estimate a time series of unreported income as our measure of tax evasion, we find that 18–23% of total reportable income may not properly be reported to the IRS. This gives rise to a 2009 “tax gap” in the range of $390–$390–540 billion. As regards the determinants of tax noncompliance, we find that federal income tax evasion is an increasing function of the average effective federal income tax rate, the unemployment rate, the nominal interest rate, and per capita real GDP, and a decreasing function of the IRS audit rate. Despite important refinements of the traditional currency ratio approach for estimating the aggregate size and growth of unreported economies, we conclude that the sensitivity of the results to different benchmarks, imperfect data sources and alternative specifying assumptions precludes obtaining results of sufficient accuracy and reliability to serve as effective policy guides.     

IRS focuses on employment status of hospital-based physicians

In view of these serious consequences and the IRS' renewed interest in hospital-based physicians, it is imperative that all hospitals examine their contractual relationships with physicians under the foregoing standards to ascertain whether any physicians are improperly being characterized as independent contractors. Of particular concern are arrangements with aspects similar to those in TAM 9443002. Hospitals operating in states that still prohibit the employment of physicians are not necessarily protected, as the IRS does not accept the corporate practice of medicine doctrine as a defense to characterization of physicians as employees for tax purposes. In those states, it is probably best to handle problematic situations through the use of professional corporations, as discussed above.     

IRS General Counsel Memorandum threatens some hospital-physician joint ventures

To defend against the heightened scrutiny of hospital-physician relations expected from the IRS, hospital management should closely examine any activities now conducted with physicians to determine whether each activity, as organized and operated, furthers the hospital's charitable mission of promoting the health of its community, rather than merely enhancing the financial health of the institution itself. Any arrangements that do not appear to satisfy the principles enunciated in GCM 39862 should be examined to see if they should be restructured or dissolved. In structuring new transactions and examining existing arrangements, the following principles should be kept in mind: 1. Transactions should not be premised upon increased utilization or physician referrals. Enhancing or protecting market share, even for the purpose of preserving an institution's presence in the community, will likely no longer be accepted as a justification for pursuing joint venture arrangements. In justifying such ventures, management must distinguish between benefit to the community and benefit to the institution. 2. Transactions whereby existing services or equipment are "spun off" to a hospital-physician joint venture run a serious risk of enhanced IRS scrutiny. 3. Transactions creating or providing new facilities or services should be more favorably perceived, particularly where participants other than the hospital take an active role in managing the venture. Where the hospital is the sole general partner and merely manages what it would have managed had there been no physician investors, the question of why physicians are involved will likely be of greater concern than it has been in the past.(ABSTRACT TRUNCATED AT 250 WORDS)     

New estimates of U.S. currency abroad,the domestic money supply and the unreported economy

Despite financial innovations that have created important new substitutes for cash usage, per capita holdings of U.S. currency amount to $2950. Yet American households and businesses admit to holding only 15% of the currency stock, leaving the whereabouts of 85% unknown. Some fraction of this unaccounted for currency is held abroad (the dollarization hypothesis) and some is held domestically undeclared, as a store of value and a medium of exchange for transactions involving the production and distribution of illegal goods and services, and for transactions earning income that is not reported to the IRS (the unreported economy hypothesis). We find that the percentage of U.S. currency currently held overseas is between 30 and 37% rather than the widely cited figure of 65%. This finding is based on the official Federal Reserve/Bureau of Economic Analysis data which is a proxy measure of the New York Federal Reserve’s (NYB) “confidential” data on wholesale currency shipments abroad. We recommend that the NYB data be aggregated so as to circumvent confidentiality concerns, and be made readily available to all researchers in order to shed greater light on the questions of how much U.S. currency is abroad and on the particular location of overseas U.S. dollars. The newly revised official estimates of overseas currency holdings are employed to determine the Federal Reserve’s seigniorage earnings from 1964–2010, which have provided a $2950. Yet American households and businesses admit to holding only 15% of the currency stock, leaving the whereabouts of 85% unknown. Some fraction of this unaccounted for currency is held abroad (the dollarization hypothesis) and some is held domestically undeclared, as a store of value and a medium of exchange for transactions involving the production and distribution of illegal goods and services, and for transactions earning income that is not reported to the IRS (the unreported economy hypothesis). We find that the percentage of U.S. currency currently held overseas is between 30 and 37% rather than the widely cited figure of 65%. This finding is based on the official Federal Reserve/Bureau of Economic Analysis data which is a proxy measure of the New York Federal Reserve’s (NYB) “confidential” data on wholesale currency shipments abroad. We recommend that the NYB data be aggregated so as to circumvent confidentiality concerns, and be made readily available to all researchers in order to shed greater light on the questions of how much U.S. currency is abroad and on the particular location of overseas U.S. dollars. The newly revised official estimates of overseas currency holdings are employed to determine the Federal Reserve’s seigniorage earnings from 1964–2010, which have provided a 287 billion windfall for U.S. taxpayers. Overseas currency stock data are also used to derive estimates of the domestically held stock of currency as well as narrow and broad measures of domestic monetary aggregates. These domestic monetary aggregates are believed to be better predictors of future economic activity than traditional monetary aggregates and are tested to determine their ability to predict fluctuations in real output and prices. Domestic cash holdings are finally used to estimate the size of the U.S. unreported economy as measured by the amount of income that is not properly reported to the IRS. By 2010, we estimate that legal and illegal source unreported income” is $1.9–$1.9–2.4 trillion, implying a “tax gap” in the range of $400–$400–540 billion. Currently, we estimate that 18–23% of total reportable income is not properly reported to the IRS.     

The Small-Case Procedure of the United States Tax Court: A Small Claims Court That Works

Professor Whitford finds that the small-case procedure of the United States Tax Court, unlike most other small claims courts, provides a meaningful avenue of redress for taxpayers contesting small amounts and appearing pro se. The success of this procedure is attributed to the unique dispute'posture" of the Tax Court petitioner and to the extensive resources assigned to the small-case procedure by both the Tax Court and the chief counsel to the IRS. This special Tax Court invention is not likely to be replicated in courts of more general jurisdiction. Lack of political support will prevent allocation of resources sufficient to make pro se litigation work. The expenditure of such resources in the Tax Court apparently reflects a felt need to legitimate the tax system by providing fair disputing procedures.     

Privacy Act of 1974; matching program--HCFA. Notice of a matching program--the Internal Revenue Service (IRS), the Social Security Administration (SSA), and HCFA--disclosure of IRS taxpayer identity and filing status information to be matched with SSA earned income information for Medicare beneficiaries and their spouses

As required by Section 6202 of the Omnibus Budget Reconciliation Act of 1989 (OBRA 1989), Public Law 101-239, the Department of Health and Human Services is providing public notice that the IRS and the SSA will disclose certain information regarding the taxpayer identification and filing status and the earned income of Medicare beneficiaries and their spouses for HCFA's use in identifying Medicare secondary payer (MSP) situations. This will enable HCFA to seek recovery of identified mistaken payments that were the liability of another primary insurer or other type of payer. The matching report set forth below is in compliance with the Computer Matching and Privacy Protection Act of 1988 (Pub. L. No. 100-503).     

Tax-deductible alcohol: an issue of public health policy and prevention strategy

In 1982 U.S. businesses will spend over $10 billion (12 percent of the total retail alcohol market) on alcoholic beverages which will be consumed by top executives, professionals, and other white-collar employees in a variety of business and personal settings. The Internal Revenue Service, through a series of vaguely defined tax deduction categories, permits these expenditures to be deducted from corporate and individual taxes as "ordinary and necessary" to the conduct of business, costing U.S. taxpayers between $3 and $5 billion annually in lost tax receipts. This article examines the scope and legal underpinnings of the IRS tax expenditure policy; its impact on drinking habits and drinking problems among the nation's business and professional elite; the arguments for permitting the subsidization of corporate drinking habits; reform measures that are available to policymakers; and the barriers to effective implementation.