The Law of Tax-Exempt Healthcare Organizations 2017 Cumulative Supplement, Fourth Edition + website

CHAPTER TWENTY‐ONEMergers and Conversions

1. § 21.4 Conversion from Nonexempt to Exempt Status
   1. (b) Federal Tax Law

§ 21.4 CONVERSION FROM NONEXEMPT TO EXEMPT STATUS

(b) Federal Tax Law

p. 476. Insert as third complete paragraph, before heading:

The foregoing notwithstanding, recent IRS private letter rulings are evidencing significant hostility to these conversions. For example, the IRS ruled that a nonprofit organization cannot qualify as a tax‐exempt charitable and educational entity because it is a successor to a for‐profit entity, with that status considered a violation of principles of exempt organizations law, primarily the private inurement doctrine and the commerciality doctrine.^103.1

103.1. Priv. Ltr. Rul. 201540019. In another instance, the IRS ruled the same way (Priv. Ltr. Rul. 201540016); in this case, the IRS was correct, because the applicant's services were clearly nonexempt functions (boarding and veterinary care of dogs and cats). Echoing the IRS's theme, on October 23, 2015, seven U.S. senators wrote to the IRS and the Department of Education stating that the “conversion” of for‐profit schools to tax‐exempt schools is resulting in “sham nonprofits,” with one of them separately stating that these conversions are forms of tax fraud and tax evasion.