The Law of Tax-Exempt Healthcare Organizations. Bruce R. Hopkins

IRS determined that the entity was not organized and operated exclusively for charitable purposes under the Code. To satisfy the organizational test, an organization must limit its purposes to those set forth in the Code for charitable organizations, and they must not expressly empower the organization to substantially engage in activities that are not in furtherance of those purposes. In applying the law, the IRS stated that the common law of trusts specifies that a charitable trust cannot be created for an illegal purpose and that like a trust, a charitable organization cannot be created for a purpose that is illegal.¹²⁵ Accordingly, because federal law prohibits the use of cannabis under these circumstances, the IRS determined that the organization does not satisfy the organizational test in that its purposes are illegal and contrary to public policy.

The IRS also concluded that the organization did not satisfy the operational test. Even though the organization was not directly providing THC‐ and CBD‐based medication to individuals and was not providing funding to directly pay for these substances, its payments were indirectly subsidizing cannabis users. In the IRS's view, this illustrates that the organization has a substantial nonexempt purpose in that its activities are enabling individuals to engage in an activity illegal under federal law. Moreover, the fact that the organization's state legalized distribution of cannabis under limited circumstances is not determinative because under federal law, distribution of cannabis is illegal. Because the organization advocated and engaged in activities that contravene federal law, the IRS determined that it served a substantial nonexempt purpose.

In another case, an organization planned to raise funds to donate to a dispensary charity care fund to assist individuals with demonstrated financial need to offset the cost associated with medical marijuana, including transportation expenses for travel to a local dispensary.¹²⁶ Individuals are required to apply for the assistance and to meet with the dispensary advocate. Once approved, recipients receive financial assistance to purchase from the dispensary one month's supply of medicinal marijuana per calendar year. No funds would be given directly to the recipients. The organization also planned to host educational events such as workshops and seminars, and to conduct community outreach and advocacy activities on a daily basis. Its events are free of charge and open to patients using medical marijuana and to the general public.

As in the prior case, the IRS determined that the organization did not qualify for tax exemption as a charitable organization. The IRS found that the organization did not satisfy the operational test because it was providing financial assistance to patients using medical marijuana even though federal law does not recognize the health benefits of marijuana and classifies it as a controlled substance. The fact that the organization's state legalized distribution of marijuana and cannabis to a limited extent was not determinative for the IRS because under federal law distribution of marijuana is illegal. As a result, because the organization advocates and engages in activities that contravene federal law, the IRS concluded that it serves a substantial nonexempt purpose.¹²⁷

NOTES

      1 79.1 80 Fed. Reg. 4791 (Jan. 29, 2015).

      2 79.2 IRC § 501(c)(29).

      3 79.3 Reg. § 1.501(c)(29)‐1(b).

      4 *79.4 Rev. Proc. 2019‐5, 2019‐1 I.R.B. 230 § 4.02(7)(a)(i).

      5 114 Priv. Ltr. Rul. 201615022.

      6 115 Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279, 283 (1945). See § 4.6, text accompanied by note 218.

      7 116 See Rev. Rul. 85‐2, 1985‐1 C.B. 178.

      8 117 See Reg. § 1.501(c)(3)–1(d)(2).

      9 118 See Institute for Healthcare Improvement Triple Aim Initiative, www.ihi.org/engage/initiatives/tripleaim.

      10 119 Rev. Rul. 86‐98, 1986‐2 C.B. 74.

      11 120 IRS Notice 2011‐20, 2011‐16 I.R.B. 652.

      12 121 See https://www.governing.com/gov-data/safety-justice/state-marijuana-laws-map-medical-recreational.html.

      13 122 21 U.S.C. § 812. Federal law prohibits the manufacture, distribution, possession, or dispensing of a controlled substance. 21 U.S.C. § 841(a). Congress has “made a determination that marijuana has no medical benefits worthy of an exception” to the general rule that the manufacture and distribution of cannabis is illegal. United States v. Oakland Cannabis Buyers' Co‐op., 532 U.S. 483, 493 (2001).

      14 123 THC is the acronym for tetrahydrocannabinol, the chief intoxicant in marijuana. CBD is the acronym for cannabidiol, a nonintoxicating cannabinoid found in cannabis and hemp.

      15 124 Priv. Ltr. Rul. 201917008.

      16 125 Rev. Rul. 75‐384, 1975‐2 C.B. 204; Mysteryboy, Inc. v. Comm'r, 99 T.C.M. 1057 (2010).

      17 126 Priv. Ltr. Rul.201940008.

      18 127 For a discussion of the unrelated business taxable income issues that arise in medical marijuana dispensary cases, see § 24.23 (c)(x).

CHAPTER SIXTEEN For‐Profit Subsidiaries

      1  § 16.3 Attribution of Subsidiary's Activities to Exempt Parent

§ 16.3 ATTRIBUTION OF SUBSIDIARY'S ACTIVITIES TO EXEMPT PARENT

       p. 367, note 81. Insert as third paragraph:

      Likewise, an organization was denied recognition of exemption as a charitable entity in part because it was found by the IRS to be “virtually indistinguishable” from a for‐profit company; the two entities were said to be marketing the same program, have similar names, and share a website (Priv. Ltr. Rul. 201714031).

       p. 387, second complete paragraph. Insert as last sentence:

To extrapolate from the higher education context, the IRS ruled that a tax‐exempt university did not have its for‐profit subsidiary's activities attributed to it, with the IRS stressing that the subsidiary was a “separate legal entity” with its own “activities and management”; the subsidiary