Hastings Business Law Journal


Kevin Leo


Joint ventures between tax-exempt hospitals and for-profit organizations have become a common mechanism for hospitals to acquire new sources of revenue and expand their health care services without completely relying on more traditional sources of funding. Joint ventures between tax-exempt organizations and for-profit entities can lead to unfavorable tax consequences for the exempt organization if the venture is not structured in accordance with the rules and regulations provided by the Internal Revenue Service. IRS Revenue Ruling 2004-51 held that an exempt organization would maintain its exempt status as long as it only contributed an insubstantial amount of its assets or activities to the venture. However, the ruling failed to state the point at which the amount of an exempt organization's activities would no longer be considered insubstantial. Thus, tax-exempt hospitals contemplating embarking on an ancillary joint venture cannot always be sure their exempt status will remain unharmed.

This note examines the current uncertainty regarding the definition of a substantial amount of an organization's assets or activities and argues that participation in an ancillary joint venture should not be considered substantial unless it markedly restricts the furtherance of an exempt hospital's charitable purposes.