Insights & News

Tax Insights, January 13, 2015
Tracking Tax News You Need to Know

January 13, 2015
Publications

IRS Issues Final Community Health Needs Assessment (CHNA) Regulations For 501(c)(3) Hospitals
Sec. 501(r) of the Internal Revenue Code requires hospitals exempt from tax as charitable (501(c)(3)) organizations to satisfy a number of requirements to maintain their exempt status. One requirement under Code Sec. 501(r)(3) requires charitable hospitals to conduct a CHNA at least once every three years for tax years beginning after March 23, 2012, and adopt an implementation strategy to satisfy the community health needs identified through the assessment. The final regulations provide guidance on the requirements described in Code Sec. 501(r), the entities required to satisfy the requirements, and the IRS Form 990 reporting obligations relating to these requirements. The final regulations also provide guidance on the consequences if a charitable hospital fails to satisfy the Code Sec. 501(r) requirements.

IRS Guidance on U.S. Trade or Business Activities – Disqualification of Fund From Safe Harbor
In Chief Counsel Advice 201501013, the IRS Office of Chief Counsel concluded that the lending and underwriting activities of a fund (a foreign partnership) conducted on behalf of its U.S. agent rose to the level of a U.S. trade or business and did not qualify for the Code Sec. 864(b)(2)(A) "trading in stocks and securities" exception. A fund manager conducted lending and stock distribution activities as an agent on behalf of the fund. The Chief Counsel Advice found that the extensive lending and securities underwriting activities caused the fund to be engaged in a U.S. trade or business; the fund's activities did not constitute "trading in stocks or securities" under the Code Sec. 864(b)(2)(A)(i) exception; and even if the fund's lending and underwriting had constituted "trading in stocks or securities," it was not eligible for the exception because the fund acted as a dealer and conducted its activities through a U.S.-resident agent.

Tax-Exempt Bonds and Reinstatement of Exemption
The IRS released Announcement 2015-2; 2015-3 IRB 1 creating a simplified process for a closing agreement on tax-exempt bonds. If a charity that has issued tax-exempt bonds has lost its tax-exempt status for non-filing of IRS Forms 990 for three consecutive years, it might qualify for reinstatement of its tax-exempt status under a simplified closing agreement. Generally, four requirements must be satisfied to qualify for the closing agreement: (i) the 501(c)(3) organization must have received a letter reinstating its exemption; (ii) it must not have previously had its tax exemption revoked since issuing the bonds; (iii) it must apply for the closing agreement within 12 months of receipt of the letter reinstating its exemption; and (iv) the bonds must not be under examination by the IRS. Announcement 2015-2 can be found here: http://www.irs.gov/pub/irs-drop/a-15-02.pdf.

Application of Self-Employment Tax Exemption Called Into Question for Limited Partners and LLC Members
A recently released IRS Internal Legal Memorandum (ILM) finds that hedge fund managers cannot avoid paying self-employment tax on their distributive shares of management fee income by relying on section Code Sec. 1402(a)(13) because they were not limited partners as defined under the exception. The ILM involves a hedge fund with a 2-20 structure, a separate management company and a general partner. The management company received fee income and the general partner received the carry allocation. The management company was an LLC (it previously had been an S corporation). Limited partners and S corporation shareholders many times take the position that their distributive shares of profits are not subject to self-employment tax. For S corporations, exemption from self-employment tax is moderated by the requirement that S corporation shareholders be paid reasonable compensation, which is subject to self-employment tax. The management company argued that the distributive share of the fee income should be excluded from self-employment tax under Code Sec. 1402(a)(13) exception and that it could continue to apply the same "reasonable compensation" wage rules applicable to corporations because the management company LLC had the same business as its predecessor S corporation. The IRS disagreed with both arguments. The guidance illustrates that the IRS is once again questioning limited partner (an LLC member) self-employment tax exemption claims under Code Sec. 1402(a)(13) – meaning that, in the view of the IRS, active limited partners (or LLC members) should pay self-employment tax on their distributive share of management fee income.

IRS Releases Updated Publication on and List of Original Issue Discount Instruments
The IRS has released an updated version of Publication 1212 (Guide to Original Issue Discount Instruments). The publication assists brokers and other middlemen identify publicly offered original issue discount (OID) debt instruments they may hold as nominees for the true owners, so they can file Forms 1099-OID or Forms 1099-INT as required. The publication also helps owners of publicly offered OID debt instruments determine how much OID to report on their income tax returns. IRS Publication 1212 and an updated list of OID instruments can be found at this link https://www.irs.gov/pub/irs-pdf/p1212.pdf.

Information contained in this publication should not be construed as legal advice or opinion or as a substitute for the advice of counsel. The articles by these authors may have first appeared in other publications. The content provided is for educational and informational purposes for the use of clients and others who may be interested in the subject matter. We recommend that readers seek specific advice from counsel about particular matters of interest.

Copyright © 2015 Stradley Ronon Stevens & Young, LLP. All rights reserved.

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