An Internal Revenue Service ruling involving an unnamed university has implications for hospital-physician joint ventures, possibly removing one barrier to such deals, healthcare tax lawyers said. The five-page revenue ruling offers a template for how not-for-profit hospitals can protect their tax-exempt status and avoid paying unrelated-business income taxes in joint ventures with physicians or for-profit companies. The ruling "clarifies what has been a difficult area for all of us to work within," said lawyer Elizabeth Mills of McDermott, Will & Emery. The tax-exempt university asked for IRS guidance on its plan to offer training programs for elementary and secondary schoolteachers. The university would team up with a for-profit, interactive-video company in a 50-50 joint venture, with each partner naming three directors to the board. The governance agreement would prohibit activities contrary to the university's tax-exempt status, require the university to remain at arm's length in negotiations for contracts and other transactions, and establish fair-market value as a benchmark for prices.
The IRS said those stipulations would protect the university's tax-exempt status, and there would be no unrelated-business income taxes because the venture was an extension of the university's educational mission and insubstantial compared with its overall activity. For hospitals, the ruling "shows that if you have ground-level input into how the joint venture is structured, and the program is set up to be substantially related to your charitable purposes, it's possible to establish ancillary joint ventures without paying (unrelated-business income taxes)," said lawyer Gerald Griffith of the Detroit office of Honigman, Miller, Schwartz & Cohn. Read the revenue ruling. -- by Mark Taylor