Joint Ventures Involving Tax-Exempt Organizations (Portfolio 478)

Tax Management Portfolio, Joint Ventures Involving Tax-Exempt Organizations, No. 478, analyzes the unique federal income tax issues affecting tax-exempt organizations involved in joint venture arrangements.

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Tax Management Portfolio, Joint Ventures Involving Tax-Exempt Organizations, No. 478, analyzes the unique federal income tax issues affecting tax-exempt organizations involved in joint venture arrangements. In particular, this Portfolio examines various types of joint venture arrangements from the more traditional partnership and the ever popular limited liability company, to more complex structures such as joint operating agreements. This Portfolio begins with a discussion of the criteria for tax exemption and a description of the various types of joint venture enterprises.
Joint ventures are particularly employed by nonprofit healthcare organizations, many of which the IRS has commented or ruled on, and the Portfolio includes many of these more creative structures. The issues addressed by the IRS in its rulings and guidance in connection with healthcare organizations should not necessarily be interpreted as applying only to tax-exempt healthcare organizations. The principles articulated by the IRS in its healthcare rulings and published memoranda and guidelines should be referred to whenever structuring joint ventures with other types of tax-exempt organizations. Joint ventures involving tax-exempt healthcare organizations also raise special “non-tax” issues under the federal fraud and abuse laws under the Medicare and Medicaid programs, which, if implicated, may not only result in significant sanctions, but also result in adverse tax consequences. This Portfolio generally discusses the federal fraud and abuse laws and their potential impact when structuring joint ventures with tax-exempt healthcare organizations.
Joint ventures between tax-exempt organizations and for-profit investors create special issues under the federal income tax laws and these issues are examined and analyzed throughout the discussion of various joint venture arrangements highlighted in this Portfolio.
This Portfolio also examines specific issues raised in connection with tax-exempt partners participating in real estate joint ventures, including low-income housing projects. Other joint ventures examined by this Portfolio include research arrangements and the commercialization of intellectual property.
Collateral issues related to the joint ventures discussed in this Portfolio include unrelated business income, private inurement/private benefit, intermediate sanctions, exempt financing, and the consequences created when a joint venture or agency relationship is created unintentionally. Finally, special issues when unwinding joint ventures are examined at the end of this Portfolio.
The Worksheets contain selected IRS rulings and other guidance related to current tax issues involving joint venture arrangements with tax-exempt organizations.
Some issues relating to joint ventures involving tax-exempt organizations are covered in greater detail in other Portfolios, to which reference has been made where appropriate.
This Portfolio may be cited as Washlick, 478 T.M., Joint Ventures Involving Tax-Exempt Organizations.

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John R. Washlick, B.S. University of Rhode Island (1978); J.D. Southwestern University School of Law (1986); LL.M. (Taxation) Georgetown University Law Center (1990); Adjunct Professor of Law, Widener University School of Law – Health Law Institute, Wilmington, Delaware; Adjunct Professor of Law, Villanova University School of Law (Masters in Taxation Program), Villanova, Pennsylvania; author, 873-2nd T.M., Nonprofit Healthcare Organizations: Federal Income Tax Issues; member, Pennsylvania and New Jersey Bar Associations; American Bar Association, Section of Taxation; member, American Health Lawyers Association, Chair of the Hospital and Health Systems Practice Group (2003–2006); member, Health Care Compliance Association; Certified Public Accountant (Pennsylvania) and contributor to various tax publications on issues affecting nonprofit healthcare organizations.


Detailed Analysis

I. Introduction

II. Fundamental Principles: Participation of Exempt Organizations in Joint Ventures

A. Private Inurement/Private Benefit Issues

1. Private Inurement

a. Net Earnings

b. Insider Relationships

2. Private Benefit

a. Concept of "Exclusively"

b. Incidental Benefit

c. The Distinction Between Private Inurement and Private Benefit

3. Intermediate Sanctions

a. Disqualified Persons

b. Organization Managers

(1) Definition of Participation

(2) Definition of Knowing

(3) Reasonable Cause Protection

c. Excess Benefit Transactions

d. Rebuttable Presumption

e. Excise Taxes

f. Interaction of § § 4958 and 501(c)(3)

B. Former Per Se Position

C. IRS's Current Position

1. Close Scrutiny Standard

2. Joint Ventures with For-Profit Investors - An Issue of Control

3. IRS Guidance

D. Unrelated Business Income Tax

E. Agency Relationships

F. Reporting Requirements

G. IRS Audit and Examination Issues

III. Choice of Entity: Types of Joint Ventures

A. General

B. Choice of Entity

1. Corporations

a. Formation

b. Tax Status: C Corporation Versus S Corporation

2. Partnership

a. General Principles of Partnerships and Partners

b. General Partnership

c. Limited Partnership

d. Joint Ventures

3. Limited Liability Company (LLC)

a. General Attributes

b. Single-Member LLC

4. Joint Operating Agreements

IV. Agency Relationships

A. Attribution

B. The NCAA Case

C. Creating Agency Relationships

1. Common Law Analysis

2. IRS Analysis: Facts and Circumstances

D. Potential Consequences of Unintended Agency Relationships

1. Tax Exemption


V. Joint Ventures Between Tax-Exempt Organizations and For-Profit Investors

A. Background

1. Early Hospital Joint Ventures

2. Emergence of Whole-Hospital Joint Ventures

B. The Importance of Control

1. Rev. Rul. 98-15

2. The Redlands Case

3. St. David's Case

C. IRS-Favored Characteristics

D. IRS Joint Venture Checklist

E. Other IRS Guidance

F. Ancillary Joint Ventures Between Exempt and For-Profit Organizations

1. Characteristics

2. Potential Impact on Continuing Tax Exemption

G. Tax-Exempt Bond Issues

H. Suggested Contract Language to Preserve Tax Exemption

1. Recitals

2. Purpose

3. Reserved Powers of Exempt Class Member (Partner)

4. Compliance with Tax-Exempt Status Requirements

VI. Unrelated Business Income Tax

A. General

B. Impact on Tax Exemption

C. Statutory Structure of UBIT

1. Statutory Framework

2. "Trade or Business"

3. "Regularly Carried On"

4. "Substantially Related"

5. Deductions and Allocations

6. Exceptions and Modifications

7. Losses and Net Operating Losses

8. Tax on UBTI; Filing Requirements

a. Tax Rates

b. Form 990-T

D. Special Rules for Partnerships

1. Look-Through Treatment

2. Publicly Traded Partnerships

3. Investing Activities

4. Limited Partnership Interest

5. Ancillary Joint Ventures

6. Subchapter S Corporations

7. Sale of Partnership Interest

E. Unrelated Debt-Financed Income

1. Purpose

2. Statutory Framework

3. Definition and Exceptions

a. "Debt-Financed Property"

(1) 85% Use for Related Purposes

(2) Property Producing Income Taxable Under § § 511-513

(3) Property Producing Research Income Described in § 512(b)(7), (8) or (9)

(4) Income Excluded from Definition of "Unrelated Trade or Business"

(5) Related Use

b. Acquisition Indebtedness

c. Average Acquisition Indebtedness

d. Average Adjusted Basis

e. Deductions

4. Computation of Debt-Financed Income

F. Controlled Organizations

VII. Joint Operating Agreements

A. General

B. Structural Issues

1. Tax Exemption

2. Unrelated Business Income Tax

3. Impact on Tax-Exempt Bonds

C. IRS CPE Textbook

1. Background

2. Facts and Circumstances Considered by IRS

D. Private Letter Rulings

E. JOA Impact on Tax-Exempt Bonds

VIII. Low-Income Housing Partnerships

A. Background

B. Exemption for Low-Income Housing

1. General Principles

2. Charitable Purpose

3. Safe Harbor - Relieving the Poor and Distressed

4. Other Exempt Purposes

C. Low-Income Housing Joint Ventures

1. Impact of Tax Exemption Generally

2. Private Benefit Analysis

a. Close Scrutiny Test

b. The Housing Pioneers Case

3. Control

4. Other Representations to Support Tax Exemption Request

D. Low-Income Housing Tax Credit

1. General

2. Requirements

a. Claiming the Credit

b. Recapture of LIHTC

E. Unrelated Business Income Tax Issues

1. Unrelated Business Taxable Income

2. Debt-Financed Income

F. Low-Income Housing Joint Venture Models

1. Typical Models

a. Limited Partnership Model

b. Limited Liability Company Model

2. Structural Issues

IX. Real Estate Joint Ventures

A. Background

B. Sale of Land: UBIT Issues

1. Statutory Framework

2. Dealer Status

a. Judicial and IRS Interpretations

b. IRS Facts and Circumstances Test: Application of the Adam Factors

(1) Purpose for Which the Property Was Acquired

(2) Frequency, Continuity and Size of Sales

(3) The Extent of Improvements to the Property

(4) Activities of Owner in Improving and Disposing of the Property

(5) Purpose for Which Property Is Held

(6) Proximity of Purchase and Sale


D. Debt-Financed Income - Real Estate Exemption

1. General

2. Qualified Organizations

3. Real Estate Exception

a. Fixed Price Restriction

b. Participating Loan Restrictions

c. Sale and Leaseback Restriction

d. Sale and Leaseback Restrictions: Pension Plans

e. Seller Financing

f. Additional Rules Applicable to Partnerships

(1) General

(2) Qualified Allocations

(3) Application of § 514(c)(9)(E)

(a) Substantial Economic Effect

(b) Fractions Rule

E. Sale of Partnership Interest with Debt-Financed Property

X. Healthcare Joint Ventures

A. Tax Exemption Issues

1. Community Benefit

2. Private Inurement

3. Intermediate Sanctions

4. Joint Ventures with For-Profit Investors

5. Common Tax-Favored Models

a. Joint Venture Controlled by Tax-Exempt Participant

b. 50/50 Ownership

c. Less Than 50% Ownership Interest by Tax-Exempt Participant

6. Other IRS-Favored Features

B. Federal Fraud and Abuse Rules

1. Background

2. Stark Anti-Referral Statute

3. Anti-Kickback Statute

C. Special Joint Venture Issues Under the Anti-Kickback Statute

1. General

2. Safe Harbor Regulations - Small Investment Interests

3. Investment in Ambulatory Surgical Center Safe Harbor

a. Hospital Influence on Referrals

b. Eligible Physician Investors - Who May Invest

(1) Surgeons/Proceduralists Not Satisfying the One-Third Income Test

(2) Anesthesiologists

(3) Referring Physicians

(4) Group Investors

c. Allocation of Member Units

d. Monitoring Compliance with the Anti-Kickback Statute

4. Joint Venture Investment in Imaging Center

5. Contractual Joint Ventures

6. Special Fraud Alerts

a. Suspect Joint Venture Arrangements

b. Suspect Lease Arrangements

7. Gainsharing and Cost Sharing Arrangements

a. Benefits and Limitations

b. Federal Income Tax Analysis

c. Fraud and Abuse Issues

XI. Research and Commercialization of Intellectual Property

A. Research Activities

1. Scientific

2. Educational

3. Technology Transfer Activities

B. Unrelated Business Taxable Income (UBTI) Issues - Research Activities

C. Intellectual Property and Technology Transfers

1. Federal Income Tax Issues

2. Government Funding Requirements

a. Bayh-Dole Act

b. National Institutes of Health Guidelines

D. Tax-Exempt Bond Issues

1. Corporate-Sponsored Research

2. Cooperative Research Agreements

E. Structuring Considerations

XII. Special Issues When Unwinding Joint Ventures

A. Background

B. Practical Issues

1. Contract Issues

2. Private Inurement and Private Benefit Scrutiny

3. Valuation Issues


Working Papers

Table of Worksheets

Worksheet 1 Model Single Member Limited Liability Company Operating Agreement

Worksheet 2 Department of the Treasury: Memorandum for Manager, EO Determinations Re: Low Income Housing Tax Credit Limited Partnerships

Worksheet 3 OIG Special Advisory Bulletin on Contractual Joint Ventures, April 2003

Worksheet 4 OIG Fraud Alert - Joint Venture Arrangements (April 1989, reissued December 1994)



Federal Statutes:

Legislative History:

Treasury Rulings:



Periodicals and Publications: