Relinquish Control! Why the IRS Should Change its Stance on Exempt Organizations in Ancillary Joint Ventures

Abstract:     
In the midst of a national health care crisis involving over 43 million uninsured Americans and another 50 million underinsured, a national debate is waging over the creation of a national health insurance program and the provision of health care services in this country. In a sea of uninsured and underinsured patients along with constantly increasing costs for providing health care services, tax-exempt hospitals are compelled to look for alternative revenue sources to remain afloat. In the last two decades, these hospitals and other tax-exempt organizations have found an alternative revenue source - participation in joint ventures with for-profit entities. Yet participation in such ventures has been made more difficult because of a control standard currently imposed by the Internal Revenue Service on the tax-exempt participant.

This article contends that with respect to "ancillary" joint ventures (i.e., joint ventures where the exempt organization only contributes an insignificant portion of its assets) the control standard is overly intrusive and unrealistic in light of the current marketplace. This article attempts to provide a more tenable alternative to that standard. Specifically, it offers a two-prong approach to properly address a tax-exempt organization's participation in an ancillary joint venture, asserting that the Internal Revenue Service need only use existing resources, with certain suggested modifications, in a more effective manner. In light of current Congressional inquiry into the compensation practices of tax-exempt organizations, this article specifically advocates for greater use of the intermediate sanctions rules to ensure that such ventures do not confer too much financial benefit to their for-profit participants.

Keywords: tax exempt organizations, joint ventures, taxation, hospitals

JEL Classifications: K34

Accepted Paper Series