Tax-exempt entities frequently enter into joint ventures ("JVs") with for-profit entities to further their exempt purposes or enhance their economic performance. Such ventures involve important issues regarding the entity’s ability to retain its tax-exempt status and to avoid being taxed on the income derived from the venture.

The Internal Revenue Service ("IRS") recently issued Revenue Ruling 2004-51, its first published guidance on "ancillary" JVs. The ruling indicates that, under certain circumstances, an exempt organization that contributes a portion of its assets to, and conducts a portion of its activities through, a JV formed with a for-profit company can both (1) retain its tax-exempt status and (2) avoid being subject to unrelated business income tax ("UBIT") on its share of the income derived from the venture. While the ruling did not involve a health care JV, IRS personnel have indicated that its principles apply to such arrangements.

In Revenue Ruling 98-15, the IRS previously addressed the "whole hospital" JV arrangement (i.e., JVs where an exempt hospital contributed all of its assets and operations to the JV). The "good facts" example in that ruling required the tax-exempt participant to retain effective control over the use of its assets through contractual arrangements with its for-profit partner. Subsequently, while the IRS was litigating the Redlands Surgical Services and St. David’s Healthcare System cases, it was unwilling to publish guidance in this area. Accordingly, even exempt organizations that chose to proceed with an "ancillary" JV (i.e., JVs between an exempt organization and a for-profit company in which the JV’s activities represent only a portion the total activities of the exempt participant) felt constrained to organize the JV within the constraints of Revenue Ruling 98-15. Revenue Ruling 2004-51 should permit ancillary JVs to be formed on terms that are considerably less restrictive to the for-profit participant, without jeopardizing tax-exempt status or subjecting the tax-exempt participant to UBIT.

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