Ancillary Joint Ventures and the Unanswered Questions after Revenue Ruling 2004-51
Ever since the Internal Revenue Service (the "Service") issued Revenue Ruling 98-15… in which it emphasized "control" as a critical factor in determining whether a tax-exempt hospital that enters into a whole-hospital joint venture with a for-profit entity would continue to maintain its tax-exemption, practitioners and scholars alike have sought guidance from the Service regarding whether such "control" would also be required of an exempt organization that enters into an "ancillary joint venture" with a for-profit entity. In response, the Service issued Revenue Ruling 2004-51 on May 6, 2004.
… In Revenue Ruling 2004-51, the Service enunciated that a tax-exempt university that formed a joint venture with a for-profit entity by contributing a portion of its assets to, and conducting a portion of its activities through, the joint venture would neither lose its tax exemption nor be subject to unrelated business income tax (UBIT) on its share of income from the joint venture because (the facts state that) the tax-exempt university's activities conducted through the joint venture are "not a substantial part of … [the tax-exempt university's] activities within the meaning of § 501(c)(3) and § 1.501(c)(3)-1(c)(1) …" and the activities of the joint venture are substantially related to the university's exempt purpose.
… Regrettably, however, the Service failed to provide any guidance on how it determined that the assets and activities of the exempt university conducted through the joint venture are not a substantial part of the exempt university's activities.
… Such a conclusive disposition of a key element of determining tax exemption within the ancillary joint venture context is puzzling, and fans the embers of ambiguity, because it fails to provide any quantitative or qualitative guidance, or safe harbor tests, for determining when the assets and activities of a tax-exempt organization that are transferred to, and conducted through, a joint venture are considered "not a substantial part of" the exempt organization's activities within the meaning of I.R.C. §501(c)(3) and Treas. Reg. §1.501(c)(3)-1(c)(1) so as not to jeopardize the organization's continued tax exemption…
… Moreover, the Service's conclusion that "based on all the facts and circumstances," the tax-exempt university's participation in the joint venture "taken alone," will not affect its continued qualification for tax exemption is not unequivocal in many respects. … The phrase "taken alone" could be interpreted as suggesting that ancillary joint venture activities of an exempt organization which may not ordinarily result in the loss of tax exemption (because such activities are not considered a substantial part of the organization's activities when viewed separately) may indeed impair tax exemption if, in the aggregate, such activities constitute a substantial part of the exempt organization's activities.
… To provide clarity to the rules of federal tax exemption within the context of ancillary joint ventures, the Service needs to issue a new ruling clarifying revenue ruling 2004-51 and establishing safe harbor provisions for determining when the assets transferred to, and activities conducted through, a joint venture by a tax-exempt organization would be presumed "not a substantial part of" the exempt organization's assets and activities so as not to jeopardize its tax exemption within the meaning of I.R.C. §501(c)(3) and Treas. Reg. § 1.501(c)(3)-1(c)(1).
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Date of this Version
Gabriel O. Aitsebaomo, "Ancillary Joint Ventures and the Unanswered Questions after Revenue Ruling 2004-51" (September 22, 2004). bepress Legal Series. bepress Legal Series.Working Paper 394.