Warning Regarding Charitable Organizations

WASHINGTON - The Internal Revenue Service today warned against several potentially abusive transactions in which charitable organizations purchase or sell health care facilities financed with tax exempt bonds.

Transactions of this type may result in impermissible private benefit or private inurement and the loss of an organization's tax exempt status. If so, the interest paid on the bonds issued by the organization may be taxable. In some circumstances, the charitable organization may not be considered the true owner of the health care facility for tax purposes and the interest on the bonds used to finance the facility may be taxable. Because of these concerns the IRS said examiners will closely scrutinize these types of transactions.

The first transaction involves a charitable organization acquiring a nursing home or hospital with proceeds of tax exempt bonds. For example, a developer may acquire a nursing home and resell it at a substantial profit to a new or existing charity over which the developer exercises control or influence. The developer may also enter into an agreement with the charitable organization to rehabilitate, manage or operate the nursing home for an excessive fee.

A second transaction involves a charitable organization leasing or selling health care or similar facilities that it financed with proceeds of tax exempt bonds. The facilities are leased or sold to partnerships or other entities in which the physicians or medical staff of the charitable organization have a financial interest.

A third transaction involves a private health care corporation selling an unprofitable facility to a charitable organization. For example, a private corporation may set up a new charitable organization to issue tax exempt bonds and use the proceeds along with purchase money debt to purchase the facility from the private corporation at an inflated price.

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