HEALTH LAW

Health Law

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[Name of the institution]

Health Law

The Joint ventures between tax-exempt and “For-Profit” organization are called Commercial Co-Venture (“CCV”). It is an agreement between a commercial body and a charity under which the for profit business promotes in a marketing or sales operation that the use or acquisition of its services or goods will profit a charitable purpose or charity. The joint venture should further the charitable purposes of the exempt partner. Thus the focus of the nonprofit partner should be on its exempt status and not on profit maximization. (Sanders, 2011) (Newton, 2007).

Joint ventures like between “What, Me Worryo Medical Center”(WMWMC) and “Your Pain is our Gain” (YPoG) have become more commonplace in the health care industry. Most common among the joint ventures are ambulatory (referred to by the IRS as "ancillary") joint ventures to create health care units such as endoscopy, magnetic resonance imaging and surgical centers to respond to the growing need for specialized outpatient services. In recent years, the IRS position regarding the tax implications to tax-exempt hospitals created uncertainty and slowed the number of joint ventures with physician groups. That is, until the IRS released Revenue Ruling 2004-51, which is widely viewed as providing more flexibility in structuring joint venture arrangements of this type. (Arrington, 2009) (Newton, 2007).

The implication to the physicians was that they were deemed to be "insiders" with substantial influence over the affairs of the non-profit (such as a key staff member, medical director or a physician or physician group responsible for substantial admissions to the hospital). An imbalance in the valuation of the venture could result in private inurement of the hospital's assets to the benefit of the physicians. The physician insiders may become subject to penalty taxes based upon the excess benefit that they were deemed to have received. Where intermediate sanctions penalties are imposed, they would result in a penalty tax to the physicians equal to 25 percent of the excess benefit and the physicians would be required to return the excess benefit to the hospital. If an insider failed to return the excess benefit, the IRS could impose a 200 percent excise tax of the excess benefit!

For some time both the courts and the IRS have struggled with the proper test to apply in determining the amount and manner of control that an exempt organization must maintain over the venture. Prior to Revenue Ruling 2004-51, the IRS had consistently maintained that if a tax-exempt hospital entered into a joint venture with a for-profit physician group and failed to exercise control over the venture, the revenue from the activity will be unrelated taxable income and, more importantly, the exempt organization's exempt status can be revoked. The IRS continued to take the position that a 50 percent or less ownership interest does not assure the charity of control; it merely permits the charity to exercise a veto power. As a result, the IRS concluded that the charity might not be able to act in a manner consistent with its charitable purpose...