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St. David’s Case—Worthy Destination, but Road Under Construction
Janet James Mahon*
*Deputy General Counsel, District of Columbia Office of Tax and Revenue; Pennsylvania State University, B.S. 1991; Boston College Law School, J.D. 1994; Georgetown University Law Center, LL.M. 2003. The author would like to thank the Honorable Judge John O. Colvin, John L. Buckley, Michael I. Sanders, Gordon D. Mahon, Sarah Spooner, Mark Poindexter, and Lisa Tavares for their encouragement and thoughtful comments.
Joint ventures between non-profit organizations and for-profit organizations, particularly in the health care area, is a growing phenomenon. Initially born from the need of non-profits to obtain additional funding for charitable ventures, these ventures have proven to be financially lucrative for all entities involved. As the tax status of non-profit organizations is generally based on wealth of giving rather than wealth of economy, it is critical that all entities involved in these joint ventures strive to structure the venture in a manner that does not jeopardize the non-profit's exempt status. Unfortunately, organizations currently participating in, or contemplating the formation of a joint venture, often lack definitive guidance as to how to structure the joint venture in order to withstand scrutiny by the Service and the courts. Most organizations find it difficult to reconcile the complexities of the guidance provided in the cases and revenue rulings in the area of joint ventures between non-profit and for-profit organizations, specifically, Revenue Ruling 1998-15, Redlands Surgical Center v. Commissioner ( "Redlands"), and most recently, St. David's Health Care System v. United States of America ( "St. David's").
St. David's can be classified as a small step for whole hospital joint ventures and a giant leap for the advancement of charitable care in the United States, and illustrates how organizations providing that valued service to the community are treated by the Service. The June 2002 St. David's decision, in which the court ruled that a non-profit hospital that entered into a joint venture with a for-profit hospital was exempt from taxation even though it did not conform to the Service's traditional view of the community benefit standard, gave renewed energy to proponents of a modern-day community benefit standard. Moreover, the decision surprised many traditionalists who believe that there is an inherent conflict between for-profit and non-profit organizations, and as a result, every such venture should be given heightened scrutiny. In light of St. David's, organizations that were hesitant to consider joint ventures because of the decision in Redlands can proceed, albeit cautiously, with the knowledge that courts may be sympathetic to the changing nature of charity care in the health care industry. Likewise, organizations already engaged in joint ventures arguably have more flexibility in streamlining current management functions. Such organizations should, however, review both the organizational structure and their actual operations in light of St. David's, focusing on the tangible community benefits achieved by the organization.
Through the lens of St. David's, as well as all joint venture cases of significance in the past 20 years, this paper offers guidance to organizations currently participating in, or contemplating the formation of, a joint venture. Part II of this paper provides a brief summary of the tax treatment of exempt organizations. Part III discusses the evolution of the law relating to charitable care provided by joint ventures. Part IV offers an analysis of St. David's from the perspective of both the Service and the District Court. Finally, Part V concludes with recommendations for redefining the community benefit standard. In this latter respect, the charitable exemption was created to offer assistance to organizations that provide a specified benefit to the community. While other organizations may provide similar services to the community, the non-profit is distinguished by its mission to value community benefit over for-profit motives. Accordingly, the courts, in applying the community benefit standard, must not get lost in the complexity of the joint venture, neglecting the charitable commitment and the tangible charitable services that it actually provides. A modern-day community benefit standard looks at the totality of the circumstances and considers both the social and economic realities that warranted the structure of the joint venture, as well as the actual benefits provided to the community.