Housing Update: Affordable Housing, "Mark-To-Market," Public Housing and Low Income Housing Tax Credits
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Affordable housing operation and development in the nation will undergo further adjustment in 1999 as Mark-to-Market, new Section 8 subsidy terms and public housing reform and revitalization programs move forward at a quickened pace. We have provided below a summary of some issues we have found to be of interest to our clients and others in the affordable housing industry.
Mark-to-Market and Section 8. The permanent Mark-to-Market program, established by the Multifamily Assisted Housing Reform and Affordablity Act (MAHRAA), is being implemented, and many owners who had been able to ignore the "reengineering" process now find that decisions on their future housing activities must be made as notice deadlines approach. Draft final regulations are circulating at HUD and are expected to be published shortly. Although the final rules do not propose significant changes to the interim regulations, they do provide some additional guidance and revision to the current program. While HUD finalizes its permanent Mark-to-Market rules, industry and resident pressure has caused the Department to revise its policy concerning raising subsidy levels for projects receiving Section 8 rents at below market rates. On May 7, HUD issued guidance to field offices concerning short term HAP contract renewals for potential "mark up to market" properties, ELIHPA and LIHPRHA projects and others. (Please see Section I of this Housing Update, "Portfolio Reengineering.")
Public Housing Guidance. Public Housing Authorities (PHAs) have been enticed and overwhelmed by HOPE VI projects, newly implemented reporting requirements, program amendments and other development opportunities created under the Quality Housing and Work Responsibility Act of 1998 (QUAHWRA). HUD offered some public housing regulatory changes in its February 18, 1999 Federal Register releases. The February notices implement, on an interim basis, several of the provisions of QUAHWRA, and provide informative timetables and description of other programmatic changes. More recently, HUD released proposed rules for admission and occupancy for public housing and Section 8 residents and for the institution of non-competitive funding criteria under the Comprehensive Improvement Assistance Program (CIAP). (Please see Section II of this Housing Update, "Public Housing.")
Tax Credits and Tax-Exempt Bonds. Beyond HUD, tax credit and tax-exempt bond mechanisms for building affordable housing continue to strain against overwhelming demand. Legislative proposals to raise the Low Income Housing Tax Credit ceiling or accelerate the scheduled increase in the private activity bond cap have again been offered in Congress. In the meantime, competition for credits available for development is getting even tighter as some states add set asides or preferences for HOPE VI projects. (Please see Section III of this Housing Update, "Tax Credits.")
Nonprofits. Two developments concerning charitable organizations are of interest to nonprofit housing organizations and those that partner with or service tax-exempt entities. On August 4, 1998, the IRS published proposed guidelines for the imposition of excise taxes on nonprofit officers, directors, trustees, or others having "substantial influence," who receive excess benefit from transactions involving their tax-exempt organizations. Additionally, the U.S. Seventh Circuit's February 10, 1999 decision in the case of United Cancer Council, Inc. v. Commissioner of Internal Revenue has provided some guidance on who the Service may consider an insider for private inurement purposes. (Please see Section IV of this Housing Update, "Nonprofit Organizations.") ‚
I. PORTFOLIO REENGINEERING
The first "portfolio reengineering" demonstration was included as part of HUD appropriations legislation passed in April 1996. The program was modified and revised under succeeding legislation, while HUD struggled to implement and entice owners into an uncertain framework. Congress passed the final version of Mark-to-Market in October 1997 and HUD issued its interim regulations for the program a year later. HUD conducted three public forums on October 1, 1998 in New York, Chicago and San Francisco, where they gathered comment from industry participants for consideration in drafting final regulations for the program.
Final Regulations
Final regulations for Mark-to-Market are now making their way to the surface, and may be published prior to your receipt of the Housing Update. We have reviewed the draft final rules, and while the basic structure of the current program has not been changed, some revisions of interest have been made.
The terms for funding project rehabilitation under Mark-to-Market are clarified by the final rules. Each Mark-to-Market owner will be required to provide, from non-project funds, at least 20 percent of the funds necessary to complete needed rehabilitation work for their projects. The final rules require that a "reasonable proportion" of these non-project funds come from non-governmental resources. Generally, owners will be able to use grants and other federal, state or local money available to fulfill the non-project funding target, but will still have to obtain from private sources at least 3 percent (the "reasonable proportion" figure used by HUD) of the total costs for the rehab. There is an exception to this requirement for sales to priority purchasers.
In addition, the final rules clarify the method for calculating the comparable rent standard to determine project eligibility for Mark-to-Market. If gross potential rent revenue for project-based assisted units (assuming 100 percent occupancy) exceeds the gross potential rent for those same units using comparable market rents, the project is eligible for the program. Owners of Mark-to-Market eligible projects may still avoid the program by accepting renewed rents at lower comparable levels, but will now be required to give tenants notice of this choice if they intend to avoid a Mark-to-Market restructuring by accepting their Section 8 renewal at rent levels reduced to comparables.
Lenders are also granted some additional notice rights by the final rules. Prior to obtaining Mark-to-Market financing from an outside lender, owners will be required to contact their current mortgagees to confirm whether they are willing to consider modification of the project debt they currently hold.
Publication of the final regulations is expected to occur late this month.
Mark Up to Market
On April 29, Secretary Cuomo announced that HUD would begin to allow field offices to mark up to market and renew project-based Section 8 contracts at comparable market levels, even where this requires an increase in current subsidy payments. It had been the Department's policy to renew those expiring Section 8 contracts with rents below comparable levels at their current rents rather than at higher market rates. HUD has been reducing rents of highly subsidized projects to market level, while renewing contracts paying below market rents at current low subsidy rates. This situation, while financially advantageous to the Department, has added to the motivations of some owners to opt out of the Section 8 program and convert their projects to market rate properties.
The new policy was also noted on May 4 by Assistant Secretary William Apgar before the House Housing and Community Opportunity Subcommittee, where testimony was being offered concerning increasing opt outs by owners and the corresponding reduction in available affordable housing.
Private owners and other industry participants, though pleased with the new policy, must still await details. A May 7, 1999 memorandum to field offices noted that pending publication of notice establishing the mark up to market initiative, those projects that will be eligible for such treatment should receive a three-month HAP Contract extension at current rent levels. The memo appears to set preliminary criteria for mark up to market. Those projects which received a minimum REAC score of 60 and are located in an area where comparable rents are equal or greater than 110 percent of FMR may be eligible, if their owners are willing to accept a five-year agreement to accept annual renewals at comparable rents not to exceed 150 percent of FMR. HUD estimates that the final notice will be published sometime in May.
HUD's statutory authority to increase subsidized below-market rents to comparable market levels upon contract renewal will expire at the end of this fiscal year. It is expected that HUD will push for a legislative extension. Such Congressional action could supplant the provision of Rep. Rick Lazio's (R-NY) current bill (H.R. 1336) which calls for an increase in subsidy for projects with rents below 90 percent of comparable market rents to the 90 percent of market level as their HAP Contracts are renewed. H.R. 1336 would essentially set a 90 percent of comparable floor for most Section 8 projects. The HUD policy would raise this floor to 100 percent of comparables, and is intended to induce owners to keep their projects as affordable housing.
H.R.1336 is co-sponsored by House Banking Committee Chairman Rep. James Leach (R-Iowa) and House Appropriations Subcommittee Chairman Rep. James Walsh (R-NY), and would also provide enhanced Section 8 vouchers to tenants of subsidized projects with owners that opt out of Section 8 and raise rents to a level which cannot be paid under the regular voucher program.
Other Short-Term Renewals
The May 7, 1999 memorandum to field offices noted above also contained guidance concerning short-term HAP contract renewals for projects in several circumstances. The memo revises certain provisions of HUD Notice 98-34, issued October 16, 1998, which generally provides for Section 8 renewal and owner notice procedures.
a. Where an owner has submitted all documentation required by 98-34 within 90 days before contract expiration, but HUD has not yet completed its review; and
1. the project is not eligible for Mark-to-Market C HAP contract will be renewed for two months at current rents not to exceed 120 percent of FMR; or
2. the project is eligible for Mark-to-Market C HAP contract will be renewed for two months at current rents; or
3. where HUD has completed its review of an eligible project but differs with the owner's comparability study C HAP contract will be renewed for six months at current rents.
b. For projects restructured under ELIHPA or LIHPRHA and which now appear to be eligible for Mark-to-Market C HAP contract will be renewed for three months at current rents.
c. For mark up to market eligible properties (as described in the previous section of this Housing Update), with owners that have submitted or will submit a comparability study and all notices required by 98-34, have Section 8 contracts expiring on or before September 30, 1999, and are located in an area where comparable rents are above 110 percent of FMR - HAP contracts will be renewed for three months at current rents.
Additional Preservation Efforts
In addition to mark up to market proposals to promote preservation, the House is also considering H.R. 425, introduced by Rep. Bruce Vento (D-MN), which would establish a federal matching grant to be used for the acquisition, preservation incentives, operating costs and capital expenditures in privately owned affordable housing. In states that have developed and funded programs for preservation of such housing, the bill would contribute federal funds in an amount up to twice that provided by state and local governments for preservation purposes.
II. PUBLIC HOUSING
QUAHWRA, as included in the FY 1999 VA/HUD Appropriation Act, contained extensive changes to public housing and tenant-based subsidy program finance and operation. The legislation significantly amended the United States Housing Act of 1937 (the 1937 Housing Act). HUD has been busy publishing proposed rules and guidance in order to address the requirements of QUAHWRA. In February, HUD released interim rules for Housing Authority annual and five-year plans, and initial guidance explaining which statutory provisions of QUAHWRA are effective immediately, are retroactive or are not yet operative. More recently, in the April 30, 1999 Federal Register, HUD published its proposed rules for enacting QUAHWRA admission and occupancy requirements for public housing and Section 8 properties. Also on April 30, 1999, new guidance concerning non-competitive CIAP funding mechanisms was issued.
Pubic and Section 8 Housing Admission and Occupancy Requirements
QUAHWRA revised many terms of occupancy in public and Section 8 housing. The proposed rule restates some of the information contained in HUD's February 18, 1999 notices, contains revisions to 24 CFR parts 5, 960 and 982, and details changes for admission preferences and determination of income and rent for tenants. The proposed rule also includes guidance for the statute's choice of rent and community service provisions, and contains a useful chart showing which provisions of QUAHWRA apply to which housing programs, and which provisions are now effective.
Income Targeting. Income targeting for public and Section 8 housing was completely revised under QUAHWRA. The proposed rule lays out the new requirements with some additional detail. For Public Housing, not less than 40 percent of new admissions in any fiscal year must be tenants with incomes at or below 30 percent of area median income ("extremely low-income families"). For tenant-based Section 8 subsidy, a PHA must target 75 percent of new admissions to extremely low-income families. A PHA may, however, exceed the 75 percent extremely low-income target in its tenant-based Section 8 program, and may then credit these extra families, subject to certain limits, to its public housing program. This allows a PHA to increase the percentage of higher earning families in public housing and provide greater income mixing in these projects. Nevertheless, the PHA may not reduce its public housing percentage of extremely low-income families below 30 percent of all tenants, and may not concentrate extremely low-income tenants in one project or building.
For project-based Section 8 properties, extremely low-income families must make up at least 40 percent of new admissions in a given year. There is an exception to this limit, however, where project-based assistance is used to assist displaced families. Generally, both tenant-based and project-based targeting requirements will not apply to families displaced due to prepayment of FHA-insured mortgages.
Preferences. The rule confirms that federal preferences for elderly, disabled and displaced families over single tenants have been repealed, but requires PHAs that revise their selection preferences to also rearrange their current waiting lists. Of course PHAs may choose to keep the prior federally mandated preferences as part of their local preference policies.
Each PHA is to develop a residency plan which addresses the local needs and priorities of their community. The rule explicitly allows for local preferences for veterans and working families. The PHA preference plan is to be established and instituted in accordance with the PHA's annual and five year plan.
Income Determination. QUAHWRA revised HUD's method of determining adjusted income for subsidy and housing purposes. The proposed rule repeats the Act's revised list of deductions used to establish tenant adjusted income, which includes: $480 for each dependent; $400 for elderly or disabled families; unreimbursed medical expenses that exceed 3 percent of annual income; child care costs; and the income of minors.
Rent Determination. The proposed rule describes the minimum rent requirements of QUAHWRA without adding significantly more detail. Public Housing and Section 8 tenants may now pay a minimum amount towards rent without regard to income. For public housing and tenant-based Section 8 tenants, PHAs must establish a minimum rent between $0 and $50 per month. For project-based Section 8 tenants, the minimum rent is set at $25 per month. Exceptions to the minimum rent must be permitted to families under hardship, including those that have lost federal, state or local assistance (e.g., welfare expiration), lost employment, suffered a family death or experienced other misfortune.
The rule also describes QUAHWRA's provisions for limiting rental penalties to public housing residents with increased income earned through new employment. The PHA may not increase rent of a family during the first 12-month period beginning on the date of employment. During the second 12-month period of employment, rent may only be raised by 50 percent of what it would be increased by if the increase limitation were not in place. In lieu of this phase in, a tenant may select a savings account option, under which their rent increases would not be postponed, but the non-deferred rent increase portion would be deposited into a savings account, which may only be tapped for home purchase, or educational, moving and other PHA-selected expenses.
Rental Payment Choice. The rule does not greatly expand on the rental choice provisions of QUAHWRA. Public housing tenants may select the method of calculating their monthly rent. Once each year, each tenant must be given the choice between paying (i) a flat rent established by the PHA based upon rental value of the unit and in consideration of a policy of not creating disincentives for residents who have attained a level of economic self sufficiency, or (ii) an amount based upon family income (generally 30 percent of monthly income less permissible deductions).
Community Service. The proposed rule provides good detail of the QUAHWRA community service and self-sufficiency requirements, including eligible activities, oversight and exceptions, as well as administrative and funding issues. Generally, adult residents of public housing will be required to contribute eight hours per month of community service or participate in an economic self-sufficiency program. Those who are 62 years of age or older, vision impaired, employed full time or engaged in a welfare to work program are exempted. PHAs are required to provide notice, collect supporting documentation and perform annual reviews of compliance.
In addition to the above described matters, the proposed rule also addresses specifics concerning elderly and disabled preference application, occupancy by over-income families and lease and grievance procedures.
Over the next few months, additional guidance addressing provisions of QUAHWRA is expected. PHAs and others involved in public housing will continue to review recent regulatory and programmatic releases by HUD. Comments regarding HUD's February 18, 1999 interim rules for public housing agency plans were due on April 19, 1999. One public forum concerning the agency plan interim rule was held in Atlanta, Georgia on May 4. Two more are scheduled: (i) May 19 in Omaha, Nebraska; and (ii) June 28 in Syracuse, New York. Comments on the April 30 proposed rule for admissions and occupancy in public and Section 8 housing are due June 29, 1999.
Changes to Comprehensive Improvement Assistance Program (CIAP)
For Fiscal Year 1999, the final year of CIAP funding, CIAP funds will be distributed on a non-competitive basis to all eligible PHAs who respond to HUD notification of fund availability by the submission deadline. Distribution will be based on two equally weighted factors: the PHA's share of total CIAP units, and the PHA's share of total number of bedrooms in CIAP units (with studio units counted as one-bedroom units). HUD will provide additional funding to PHAs that have modernization capability and demonstrate that at least 25 percent of their units are vacant, substandard units (where vacancy is not due to insufficient demand). A PHA has modernization capability if they have previously received CIAP funds and meet the requirements of Modernization capability defined at 24 CFR 968.205. The proposed rule amending the regulations (24 CFR 968.110, 968.210) for CIAP was published on April 30, 1999.
CIAP currently provides modernization funds to PHAs that own or operate fewer than 250 units of public housing (similar to the Comprehensive Grant Program, or CGP, for larger PHAs). Modernization funds are allocated between CIAP and CGP based on backlog needs and accrual needs, which results in CIAP receiving about 12.5 percent of the modernization funds available ($364 million out of $2.895 billion). Previously, shares of CIAP funds were allocated to each field office and then distributed to PHAs under a competitive process, and not every acceptable application was funded.
Beginning in FY 2000, funding capital improvement needs for all PHAs will be allocated on a formula basis, which will be developed by HUD through negotiated rulemaking with housing industry and resident groups as well as representatives of PHAs. This new system of funding was authorized by Section 519 of QUAHWRA (as described in the January/February 1999 edition of the Housing Update). HUD is providing this year's CIAP transition period so that smaller PHAs can become familiar with a non-competitive funding process. ‚
III. TAX CREDITS AND TAX-EXEMPT BONDS
Last year, several bills were introduced to increase the Low Income Housing Tax Credit ceiling. Nevertheless, despite support from the administration, the affordable housing industry, and dozens of co-sponsors in Congress, no bill was attached to any proposed larger tax package, and the increase failed to move forward on its own.
Rep. Nancy Johnson (R-CT) has introduced H.R. 175. The bill currently has 255 co-sponsors and would increase the tax credit allocation of each state from the current $1.25 per person to $1.75 per state resident. The LIHTC cap would thereafter be adjusted for inflation annually. A Senate version of the bill (S. 1017), sponsored by Senators Connie Mack (R-FL) and Bob Graham (D-FL), would also raise the credit ceiling and index future adjustments to inflation.
The Senate and House also each have bills to increase the private activity bond cap. Last year's appropriation legislation (P.L. 105-277) included a phased increase in the bond cap, but that increase will not take effect until 2003 and then will be phased in over the succeeding four years. Both H.R. 864 and S. 459 would increase each state's current private activity allocation either from $50 to $75 or from $150 million to $225 million, whichever is greater, effective in FY 2000. Future increases would then be indexed to inflation.
The LIHTC increase is badly needed. Credit prices have continued to rise this year as demand from investors continues. Developers vie for what LIHTC allocations are available, but public housing HOPE VI projects, and other PHA mixed finance developments are putting greater demand on the credits now available. States faced with the need to revitalize public housing or protect and preserve affordable housing where owners might be tempted to turn their projects into market rate properties have for some time given additional weight to public housing and nonprofit tax credit applications. Kentucky and Massachusetts have recently created set-asides for HOPE VI projects in their tax credit allocations programs.
Non-HOPE VI mixed finance developments by smaller housing authorities also receive favorable consideration by tax credit issuing agencies. We have just recently closed a transaction in which our PHA client formed a subordinate nonprofit organization, and then acted as developer and manager for the project while the new nonprofit acted as general partner of the owner. With the benefit of other state financing programs, support from the housing authority (which may include project-based Section 8 assistance) and local government, and the nonprofit involvement, such projects compete well in the credit allocation process, even where HOPE VI funds are not involved.
IV. NONPROFIT ORGANIZATIONS
Current Mark-to-Market guidance and financing advantages continue to make nonprofits attractive to sellers of affordable housing. In addition, these charitable organizations often require services of private managers and other service providers, as well as investment partners. It is important that nonprofits and those with whom they transact business be aware of what guidance has been offered by the Treasury concerning permissible structures and possible penalties for engaging in transactions which lead to private inurement at the expense of charitable resources. One method created to address private inurement issues involves the relatively new and untested "intermediate sanctions."
Intermediate Sanctions
Traditionally, upon finding private benefit or private inurement at the expense of 501(c)(3) assets, the Service would simply terminate the tax-exempt status of the nonprofit organization, or determine that interest on tax-exempt financing utilized by the organization was now taxable.
"Intermediate sanctions" have provided an alternative. This mechanism provides for substantial penalties against the individuals responsible for allowing the nonprofit's assets to be used for private benefit, rather than destroying the tax-exempt status of an otherwise qualified charity. The intermediate sanctions were added as Section 4958 to the Internal Revenue Code in 1996 by the Taxpayer Bill of Rights 2 (P.L. 104-168). They apply to transactions in which a tax-exempt entity provides economic benefit to a person who exercises "substantial influence" over the affairs of the organization, and that benefit exceeds the value of the goods or services provided in return. Proposed guidelines for the imposition of excise taxes on nonprofit officers, directors, trustees or others who receive excess benefit from transactions involving their tax-exempt organization were published on August 4, 1998. Comments on the proposed regulations were due by November 2, 1998.
Three penalty taxes are available for excess benefit transactions under the proposed regulations and mandated by statute: (a) a tax of 25 percent of the excess benefit must be paid by the disqualified person receiving the excess benefit; (b) a tax of 200 percent of the excess benefit must be paid if the transaction is not corrected before the earlier of (i) the date a deficiency notice is mailed by the Service, or (ii) the date the 25 percent tax described above is assessed; and (c) a tax of 10 percent of the excess benefit must be paid by any of the nonprofit's officers, directors or trustees that knowingly, willfully and without reasonable cause participated in the excess benefit transaction. "Participation" for this last tax includes silence and inaction as well as affirmative acts where the individual is under a duty to speak or act otherwise.
Generally, intermediate sanction penalties may be applied where a transaction has resulted in an exempt organization providing economic benefit to, or for the use of, any "disqualified person," when such benefit exceeds the value of consideration received by the nonprofit in exchange. A disqualified person is any person or organization that, at any time during the five-year period prior to the questionable transaction, was in a position to exercise substantial influence over the affairs of the organization, and may include family members of a disqualified individual or any entity holding at least 35 percent control of the disqualified entity. Voting members of a nonprofit's board of directors, its president, treasurer and CFO are also presumed to be in a position to exercise substantial influence over the organization. Additionally, under the proposed rules, entities or individuals not necessarily a part of the formal management structure of the charitable organization may be deemed to have substantial control for excess benefit purposes. These parties may be subject to intermediate sanctions even where they engage in transactions which appear to be arm's length from the nonprofit.
For non-control and non-management individuals, including outside contractors and contributors, the Service will look to facts and circumstances to determine whether they have substantial influence over the nonprofit. Relevant facts and circumstance may include among other things: (i) whether the person was a founder of the organization; (ii) whether the person is a substantial contributor; (iii) whether the person's compensation is based on the organization's revenues; and (iv) whether the person has authority over the organization's capital expenditures.
The threshold question when determining whether intermediate sanctions are to be applied will be whether the charges for services or goods provided to the nonprofit were at a level that would ordinarily be paid by like enterprises under like circumstances. Transactions which may be reviewed also include employee compensation, revenue sharing arrangements and transfer or use of property. Where the organization's board, without any individuals having conflicts, has approved a transaction after reviewing appropriate comparability data and has documented this review, there is a presumption that no excess benefit was included in the given transaction. There are additional presumptions available to assist smaller nonprofits.
Of great concern to parties not affiliated with nonprofits, but which sell to, service or otherwise engage in transactions with charitable organizations, is the possibility that they might fall within the definition of disqualified persons under the intermediate sanctions rule. Once deemed a disqualified person, any transaction they may carry out with the nonprofit may be reviewed to determine if it produced excess benefit, and possibly be subject to intermediate sanctions.
United Cancer Council, Inc. v. Commissioner of Internal Revenue
The U.S. Seventh Circuit's February 10, 1999 decision in the case of United Cancer Council, Inc. v. Commissioner of Internal Revenue has provided some restrictions on who the Service may consider an insider for private inurement purposes, although the case does not involve intermediate sanctions. The Court found clear error on the part of the U.S. Tax Court and overturned a 1997 decision that an unaffiliated fundraising organization was an insider and that earnings of the nonprofit had inured to the benefit of the for-profit fundraiser.
The case stems from the 1990 revocation of the 501(c)(3) status of United Cancer Council, Inc. (UCC). UCC had engaged a private fundraiser, Watson & Hughey Company, under a five-year contract which granted a significant portion of the fundraising proceeds to Watson & Hughey, and provided Watson & Hughey other controls and restrictions concerning donor lists and distributions of fundraising proceeds. The Service revoked UCC's charitable status on the grounds that Watson & Hughey were substantively insiders of UCC, and that the contract terms were so beneficial to the fundraiser that they triggered private inurement provisions of the Internal Revenue Code. Before the Tax Court, the Service argued successfully that Watson & Hughey effectively exclusively controlled UCC's fundraising activities and maintained substantial control over UCC's finances.
The Seventh Circuit found that, although signing the contract may have been a bad business decision on the part of UCC, the Watson & Hughey contract was negotiated at arm's length, and that the Service had taken an overenthusiastic view of who can be considered an insider for private inurement purposes. The Court noted that there was no diversion of charitable revenue to an insider, and that nothing in the contract, though in many ways unfavorable to UCC, could be viewed as self-dealing, disloyalty or other misconduct of the type aimed at by laws forbidding diversion of charitable earnings to nonprofit insiders.
The Seventh Circuit, however, also noted that in addition to the prohibition on private inurement, which did not exist in the UCC case, there is an alternative basis for revoking a charity's tax-exempt status. The Internal Revenue Code requires that a charity be operated exclusively for charitable purposes. Where a contract or other business arrangement appears to provide undue private benefit to an unaffiliated private party, it can be argued that the charity is not operated "exclusively" for charitable purposes and that private interests are served more than incidentally by the business arrangement. Accordingly, the Seventh Circuit remanded this more properly reviewable issue back to the Tax Court for consideration.
Those who provide services to charitable organizations may consider the Seventh Circuit's decision favorably, especially in consideration of the magnitude of tax penalties that can be imposed on insiders under intermediate sanction rules. Nevertheless, the circumstances of the UCC case arose prior to passage of the intermediate sanctions statute, and these new sanctions were not specifically addressed by the decision. Additionally, the Court reminded all parties that arm's length service and other contracts with nonprofits, even where not providing private inurement to an insider, must still meet a private benefit test or they may put the tax-exempt status of a charity at risk. ‚
© 1999 Pepper Hamilton LLP