Tax-exempt health care systems facing growing operating costs and falling revenues frequently explore creation of ancillary joint ventures (AJVs) as vehicles to raise capital, share risk, expand coverage, and provide care more efficiently, while preserving exempt status and avoiding unrelated business income tax (UBIT). Joint venture activity among tax-exempt entities is robust. However, tax-exempt systems typically are frustrated in their attempts to partner with taxable organizations because of the inadequate current state of guidance from the Internal Revenue Service (IRS) regarding tax-exempt/taxable combinations.

The IRS has not issued sufficiently clear statements of policy or principles to provide the legal guidance that tax-exempt health care systems’ managers and governing body members, and their lawyers, require to proceed prudently with development of such ventures. Consequently, tax-exempt systems face uncertainty regarding whether participation in an AJV will negatively impact their exempt status or lead to UBIT. Tax-exempt systems therefore have had no alternative but to assume they are obligated to require supermajority rights and place limitations on AJV scope that can be unattractive to potential taxable partners and not appropriately meet the needs of either party and the purposes of the AJV. These are constraints that AJVs between tax-exempt entities do not face.

Originally Published in AHLA Connections in November 2014.