Tax-exempt hospitals may be allowed greater flexibility to create ancillary joint ventures with for-profit partners thanks to a new Internal Revenue Service decision, healthcare tax attorneys say.
The IRS approved a tax exemption it previously had rejected for the John Gabriel Ryan Association, a not-for-profit corporation sponsored by the 16-hospital, Roman Catholic-owned Providence Health System in Seattle. The U.S. Tax Court still must approve the agreement and is expected to make its decision later this month.
The case is one of the few 50-50 joint ventures the IRS has approved that lacked majority board control by the tax-exempt partner and could affect numerous current and pending joint ventures.
The association was established in 1985 and applied for tax-exempt status in 1998. It owns and operates five ancillary joint venture medical office buildings and imaging centers in partnerships with Providence and affiliated physicians and other partners in four states. In two of the joint ventures the association is a partner with for-profit organizations. Four of the ventures are fully controlled by not-for-profits, while in the fifth, board governance is split equally between the for-profit and not-for-profit owners.
In October 2002 the IRS rejected the association's application. In November 2002 the association appealed the case to the tax court. The John Gabriel Ryan Association received its tax exemption June 30, weeks before attorneys on both sides were to present their argument briefs.
"I think this means that the (IRS) is becoming a little more realistic," said T.J. Sullivan, a healthcare tax attorney with the Washington office of Gardner, Carton & Douglas, which represented the association.
Sullivan said the association has paid taxes all along and now will file for a refund, which he would describe only as "a significant sum."