How IRS Will Decide on Hospital Partnerships

The Internal Revenue Service, in a new ruling, has spelled out how it plans to evaluate joint ventures between non-profit hospitals and for-profit corporations.

In such an arrangement, a non-profit hospital creates a limited-liability company with a for-profit corporation and then transfers all of its assets to the new, taxable partnership organization. The partnership oversees the management of the hospital and gives the non-profit organization some of the earnings from its operations to distribute as charitable grants.

Following are some of the factors that the service said it would use to determine whether the non-profit organization involved in a partnership can keep its tax-exempt status:

Signs that a hospital deserves to keep its non-profit status

* The hospital appoints a majority of members to the partnership’s board.

* The partnership’s board authorizes the distribution of all of its earnings.

* The partnership’s governing documents explicitly state that the facilities the partnership oversees are operated “in a manner that furthers charitable purposes.” They also state that the goal to provide “community benefit” must override the desire to maximize profits whenever the two conflict.

* The partnership’s facilities are managed by a company with no ties to the participating charity or company. The partnership board has the power to renew or terminate management agreements.

* None of the officers, directors, or key employees of the charity involved in the deal stand to benefit financially or in other ways from the partnership. The non-profit hospital’s employees have no prior ties to the company involved in the partnership.

Signs that a hospital in a joint venture does not deserve to keep its non-profit status

* The hospital and company each appoint half of the members to the partnership’s board.

* The partnership’s board approves payouts made from earnings by the hospitals in the partnership only when they exceed a minimum level; smaller payments are made by a for-profit management company without board approval.

* The partnership’s governing documents make no mention of serving a “charitable purpose.”

* The partnership is managed by a wholly owned subsidiary of the company that helped create the partnership. The subsidiary receives a fee based on the partnership’s gross revenue and has the power to renew the management agreement. The partnership may terminate the agreement only if problems arise.

* The partnership’s chief executive and financial officers are former employees of the for-profit company that helped create the partnership.