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Exempt Organizations

Exempt Organizations
July 2002

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Charity Fails to Provide Good Faith Estimate; Charitable Deduction Denied

Two recent cases indicate how a donor’s charitable contribution deduction is linked to the obligation of charities to disclose quid pro quo contributions.

In Weiner vs. Commissioner, T.C. Memo 2002-153 (6/18/02), the Tax Court held that a charity failed to provide a good faith estimate of the value of goods and services that an individual received in consideration of a contribution. As a result, it denied the individual’s charitable contribution deduction.

The transaction in question was a charitable split dollar arrangement involving a fund established by the donor with the National Heritage Foundation (NHF). The donor (through family trusts) entered into a split dollar life insurance arrangement with NHF. Under the arrangement, NHF agreed to pay the annual premiums and split the death benefit with trust beneficiaries.

The donor subsequently sent checks in 1995, 1996, 1997 and 1998 to NHF in the amount of the annual premiums ($93,000). Although NHF was not obligated to use the funds to pay the premiums, it was expected to do so. NHF provided a written acknowledgment to the donor in connection with the annual payments indicating that it “did not provide any goods or services to the donor in return for the contribution.”

The Court determined under §170(f)(8) and regulations that the expectation that the funds would be used to pay premiums was sufficient consideration to require a good faith estimate. The regulations provide that “ a donee organization provides goods or services in consideration for a taxpayer’s payment if, at the time the taxpayer makes the payment to the donee organization, the taxpayer receives or expects to receive goods or services in exchange for that payment.”

A similar result was reached by the Tax Court in Addis vs. Commissioner, 118 T.C. (2002).

As highlighted in the last newsletter, the disclosure requirements are summarized in the advanced text of IRS Publication 1771 which is available at

Taxpayer Victory in Joint Venture Case

Following the issuance by the IRS of Revenue Ruling 98-15 in 1998, Taxpayers and practitioners have attempted to determine how best to structure joint ventures between tax exempt and for-profit entities. Rev. Rul. 98-15 contained two examples at the extremes—an example of a “good” joint venture as well as a “bad” joint venture. Unfortunately, economic realities usually require an arrangement somewhere between the two extremes presented in Rev. Rul. 98-15.

A key issue has been whether 50-50 control of management between the exempt organization and for-profit is permissible, or whether greater percentage control by the exempt entity is required. The IRS has indicated that shared management may not be sufficient to satisfy the obligation to engage in activities that further exempt purposes. In St. David’s Health Care System, Inc. vs. US, (W.D. Tex, 6/7/02), however, the District Court concluded otherwise.

In St. David’s Health, the IRS had revoked the health system’s exempt status as a result of a limited partnership arrangement entered into by the health system. The joint venture had a board comprised of members of the community, half appointed by the exempt entity and half appointed by the for-profit.

The Court found that this board constituted a “community board” as generally required by the community benefit standard applicable to tax exempt hospitals. The Court concluded that “voting strength is more than just a numbers game,” citing several positive characteristics of the joint venture structure:

  • The partnership contract required all hospitals owned by the partnership to operate in accordance with the community benefit standard
  • St. David’s had the unilateral right to dissolve the partnership if its hospitals did not comply with a community benefit standard
  • The board chairmen was appointed by St. David’s
  • St. David’s had the power to unilaterally remove the CEO.

The Court also stated that “the government focused on majority control, but the law is more concerned with control, regardless of whether its control springs from a majority or from a corporate structure.” The focus by the Court on the overall facts and circumstances is a sensible approach to analyzing a joint venture arrangement and is consistent with positions that the IRS has taken in prior rulings.

Should you have any questions regarding the foregoing, please contact John Kikuchi at (925) 944-7666 or by email.

The information contained in this newsletter is general in nature and does not constitute tax advice or opinion. Applicability to specific situations should be determined through consultation with your tax advisor.

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