A federal judge issued a summary judgment ordering the Internal Revenue Service to reinstate the tax-exempt status of St. David's Health Care System, Austin, Texas., which had lost its tax-exemption because of a partnership with HCA.
The case was widely watched by healthcare tax attorneys because it was on its way to becoming an important court test of IRS revenue ruling 9815 on whole-hospital joint ventures. A trial had been scheduled to begin today
Revenue ruling 9815 states that not-for-profit healthcare organizations in joint ventures with for-profit organizations must control a majority stake of the partnership in order to maintain tax-exempt status.
Not-for-profit St. David's and for-profit HCA, Nashville, formed a joint venture in 1996 called St. David's HealthCare Partnership, which now operates six hospitals. Although HCA owns a 54.1% interest in the partnership, board membership is split evenly between the organizations and St. David's names the board chairman.
After a two-year-long investigation, the IRS revoked St. David's 501C3 tax-exempt status in late 2000, contending that St. David's no longer engaged in activities furthering its charitable purpose and that the joint venture mainly benefited HCA and its for-profit subsidiaries.
Late Friday U.S. District Judge James Nowlin in Austin affirmed St. David's charitable purpose in a summary judgment and called the government's argument "mildly disingenuous." Despite the unequal ownership, the partnership agreement and voting rights of St. David's prevents "any usurpation of that (charitable) purpose by HCA," Nowlin said in his 14-page opinion.
The U.S. Justice Department has 60 days to appeal the ruling. At deadline, it had not announced its decision.
St. David's paid 1996 taxes of $1.2 million under protest, which the system expects to receive back with interest. The system did not pay taxes in subsequent years because both sides agreed to settle the matter in court.
The IRS came out ahead in its last court fight with a hospital over tax-exempt status. In that case--which ended in early 2001 after five years in dispute--the 9th U.S. Circuit Court of Appeals in San Francisco ultimately denied tax-exempt status to a California surgery center co-owned by Redlands (Calif.) Health Systems and for-profit Surgical Care Affiliates of Nashville. The court said the IRS had correctly asserted that for-profit interests controlled too much of the joint venture for it to merit tax-exempt status.