Análisis de sensibilidad

The IRS, through the widely read General Counsel Memorandum (“GCM”) 39,862,7 several private letter rulings, certain CPE promulgations, and a tax commissioner ruling

related to Redlands Surgical Services and Revenue Ruling 98-158, has provided extensive guidance relative to joint ventures. From this guidance, many helpful principles can be gleaned. The IRS, however, has not yet ruled on certain situations which attempt to provide a negotiated middle balance between the IRS’s rejected and accepted factual situations.

The table on the following page outlines in basic terms IRS preferred situations, IRS rejected situations and situations in which the IRS has not provided clear guidance. The table provides an overview of factors raised and discussed in IRS joint venture guidance. Most factors are not in and of themselves individually dispositive. For example, a venture may include minority ownership for the tax-exempt entity but enough control may be provided to the tax-exempt entity to survive IRS scrutiny. Moreover, a venture may not create a new service or provider but may serve sufficient community needs and purposes so as to not produce UBIT or cause tax-exempt concerns.

IRS Preference

IRS Rejected

Unclear

Majority ownership Minority ownership with

little control Minority ownership with reserve rights to tax-exempt entity

Charitable purposes trump profits language

No reference Qualified but not categorical; reference to charitable purpose Clear and full reserve rights

to tax-exempt entity

State law reserve rights Qualified reserve rights Sharing of all debt and

liability in proportion to ownership

Disproportionate liability

for tax-exempt entity Payment to tax-exempt entity for debt guarantee Tax-exempt entity lends money to venture Clear cataloging of benefits Joint venture without clarity

as to community benefits other than profit retention

Money gained from sale of venture interests used for specified health care purposes

Tax-exempt serves as general partner but minimal debt recourse and liability and full control

General partner but no

control General partner with control and some added liability Mutual agreement on key

executives and manager – significant control over manager

Partner serves as long term manager. But see PLR94 07 022

Mutual agreement on long term manager

New service and provider clear need demonstrated by Certificate of Need or clear need study

Joint venture through revenue stream or joint venture of existing business entity benefits

Joint venture existing entity certain benefits articulated

Open medical staff Closed staff All Medical and indigent

patients to be served No language; minimal record of treatment Qualified requirements to treat ─ comparable to hospital

1. Private Letter Rulings

This section discusses three ambulatory joint venture ("PLRs"). These include PLR 97 09 014,9 PLR 94 07 022110 and PLR 96 45 018.11 Two of these PLRs involve ASCs and one involves an end stage renal dialysis facility. These provide a helpful understanding of fact patterns the IRS finds acceptable.

(a) PLR 97 09 014. Here, the IRS permits the 40% general partnership interest held by a for-profit subsidiary of a tax-exempt entity to be transferred from the for-profit subsidiary to the tax-exempt entity. The ruling, by allowing the transfer to the tax-exempt entity, indicates approval of the operation and structure of the joint venture.12

Key Factors

 Sixty percent. The tax-exempt entity's for-profit subsidiary holds another 20%. Thus, the tax-exempt entity indirectly holds or controls 60% of the venture.13

 Certificate of Need. The ASC received a CON from the State Department of Health to establish and operate the freestanding ambulatory surgical center. The ASC has its own provider number. The CON helps show community need.14

 Conditions to Issuance. The Certificate of Need is subject to certain conditions including; (1) access to ambulatory surgery services by the medically indigent cannot be diminished by relocation of this hospital service to the freestanding ambulatory surgical center; (2) care must be provided at the freestanding ambulatory surgical center on a free or partial pay basis to Medicaid eligible or medically indigent persons; (3) indigent patients shall not be charge additional fees; (4) charges to hospital inpatients shall not increase as a result of relocation of this hospital service to the freestanding ambulatory surgical center; (5) surpluses generated must be dedicated to support directly the freestanding ambulatory surgical center or the tax-exempt entity.15

9 _{Priv. Ltr. Rul. 97 09 014 (Feb. 28,1997).} 10 _{Priv. Ltr. Rul. 94 07 022 (Feb. 18,1994).} 11 _{Priv. Ltr. Rul. 96 45 018 (Nov. 8, 1996).} 12 _{Priv. Ltr. Rul. 97 09 014 (Feb. 28,1997).} 13 _Id.

14 _Id. 15 _Id.

 Medicaid and Indigent Ratios. The patient mix at the freestanding ASC consists of Medicaid patients (1.5%), Medicare patients (22%) and private pay patients (76.5%). Patients are not discriminated against according to their ability to pay. Charity care patients are accepted.16

 Open Staff. Access is not limited to physician investors of the partnership. Any physician can use the facility as long as the physician meets the ASC's credentialing standards and approval process.17

 Tax-exempt Control. Under the partnership agreement, management rests exclusively with the tax-exempt entity. Thus, the tax-exempt entity can ensure that the ASC is operated in a manner consistent with tax- exempt purpose.18

 Proportionate Profits and Losses. Profits and losses will be allocated among all partners in proportion to their respective capital account balances.19

 Non Recourse Debts. The tax-exempt entity, by serving as the general partner, will not put its assets at risk in that the majority of the liabilities are in the form of a non recourse mortgage collateralized by the ambulatory facility.20

Based on these factors, the IRS reasoned:

Participation by a Section 501 (c)(3) organization in a partnership arrangement with for-profit partners does not per se endanger the organization's tax-exempt status. However, it is necessary to assure that the obligations of the tax-exempt organization as a partner do not conflict with its ability to pursue its charitable goals. Thus, in all partnership cases, the initial focus should be on whether the tax-exempt organization is serving a charitable purpose. Once charitability has been established, the partnership arrangement itself should be examined to see whether it permits the exempt organization to act exclusively in furtherance of the purposes for which exemption may be granted and not for the benefit of the for- profit partners.

[T]he information submitted indicates that your proposed control over the management of the limited partnership, along with the requirements of the Certificate of Need, will promote the health of the citizens in your area by ensuring that the existing freestanding ambulatory surgical center will be operated 16 _Id. 17 _Id. 18 _Id. 19 _Id. 20 _Id.

in a manner consistent with your tax-exempt purpose. Further, the health care resources of the community will be enhanced by your ability to operate this facility and the ambulatory surgery center in your hospital in the most efficient and cost effective manner.

. . . [T]he information submitted further indicates that your proposed participation in the limited partnership would permit you to act exclusively in furtherance of your exempt purposes and not for the benefit of your for-profit partners. In that regard, the partnership agreement will provide that management and control of the partnership rests exclusively with you as sole general partner, and that profits and losses of the partnership will be allocated among all partners in proportion to their respective capital account balances. Further, the CON provides that any surpluses generated from the operation of the freestanding ambulatory surgical center and payable to C must be dedicated to support directly the freestanding ambulatory surgical center or B. Finally, since the majority of D's liabilities are in the form of a nonrecourse mortgage collateralized by the freestanding ambulatory surgical center, as sole general partner, you will not be putting your assets at risk with regard to the debts of D. All of the above factors ensure that the partnership will not be used exclusively for the benefit of your for-profit partners.21

(b) PLR 94 07 022. The IRS, in PLR 94 07 022,22 approved the addition to an existing hospital owned ASC of physician partners. Of import, physician ownership was contemplated from the initial development of the ASC.23 Kev Factors

 Need for ASC. Because the city and surrounding area badly needed the surgery center, the hospital and physicians agreed that the tax- exempt entity (W) would construct the surgery center ASC without the initial ownership participation of the physicians. A CON for a free standing multi-specialty ambulatory surgical facility with four operating rooms was issued.24

 Option to Purchase: 50/50 Partnership. The physicians (through entity X) were given an option to purchase one half of the surgery center for a two year period beginning on the date the ASC opens. The agreement also provided that the hospital and the physicians would be equal partners.25

21 _Id.

22 _{Priv. Ltr. Rul. 94 07 022 (Feb. 18,1994).} 23 _Id.

24 _Id. 25 _Id.

 Affiliated Services Group Concern. After receipt of a favorable ruling on affiliated service group issues under Section 414(m) of the Code, X elected to exercise its option to purchase one half of the surgery center.26  Purchase Amount Allocated to Clear Need; Cardiac Need Fully

Detailed. The proceeds from the sale of one half of the surgery center to X would yield approximately $2.7 million to W. W intends to use proceeds to directly expand cardiac surgery and related services to meet current service needs. Demand for these services has proven to be great. W has been unable to expand the cardiology services to meet existing needs.27

The PLR further articulated that the above cardiac expenditures will only meet W's current cardiac service needs.

“It is anticipated that in order to meet community needs in two to three years, it will be necessary to build a four story addition to W to house a cardiovascular surgical unit. . . An expenditure of this magnitude would come at the expense of providing other health care ser- vices unless a funding source becomes available.”28

 Purchase Price Formula. The actual purchase price of the surgery center was calculated using an actual cost based formula that is designed to approximate the fair market value of the facility. In general, the formula price is equal to one half of the cost to W to build the surgery center plus a 10% interest cost that accrues from the date W incurred the specific cost until the closing date.29

 Management. Management would be vested in part with the physicians.30 Based on these factors, the IRS held:

The joint venture to be formed under the option agreement will allow W to raise additional capital which will be used by W to expand its healthcare resources. The option agreement had contractually obligated W to restore X to the position it would have been in prior to the conflict caused by the affiliated service group issue. The option agreement was entered into because you believe that operating the ambulatory outpatient surgery facility through a partnership allowed you to obtain the capital and expertise of the participating partners of X. You believe that by allowing management control of the surgery center by X, the 26 _Id. 27 _Id. 28 _Id. 29 _Id. 30 _Id.

surgery center will be more efficiently operated since X will have an ownership interest in the surgery center. Due to this fact you expect a more highly motivated and innovative staff resulting in improvement of treatment at the surgery center and a more efficiently managed facility resulting in a reduction in costs to patients.-Thus, W's participation in the proposed transactions based on its obligation under the option agreement allowed it to expand the provision of healthcare services to the community and therefore furthers its charitable purpose. In addition, you have stated that the proposed transactions will not cause W to violate any federal or state laws.

. . . [I]n this case, W's participation in the joint venture arrangement honors its contractual obligation under the option agreement which was entered into to obtain the capital and expertise of the participating partners of X. This allowed you to expand your provision of healthcare services to the community and furthers your exempt charitable purposes to advance the health of the community. The sale of one half of the surgery center will also contribute to increased availability of medical services because the proceeds of the sale will be devoted to expanding W's capacity to provide cardiac care.31

(c) PLR 96 45 018. This PLR examined the joint venture of a dialysis facility.32 Key Factors

 Independence of the Physicians. Three nephrologists (the "Physicians"), who owned 100% of an LLC, will own in the aggregate 37.5% of the LLC if the requesting entity and Healthcare System exercise options to acquire partial ownership of the LLC.-The Physicians are not officers or board members of either exempt entity.33

 Hospital Facility Is Out of Date. “[T]he Hospital Dialysis Facility is antiquated and unable to satisfy the need for such services in your area.”34  Governing Board Determined Need Independent of Nephrologists.

The hospital's “governing board began investigating the need for a new outpatient dialysis facility several years ago.”35

31 _Id.

32 _{Priv. Ltr. Rul. 96 45 018 (Nov. 8, 1996).} 33 _Id.

34 _Id. 35 _Id.

 Flexibility to Pursue Hospital's Perceived Needs. The hospital began to negotiate with the Physicians to acquire a part ownership in the LLC with the flexibility to also construct a new dialysis facility on its own campus, if space is available.36

 Clear Community Need. To meet community needs, the Hospital plans to create its own facility. It also will invest in the LLC joint venture. Once both dialysis facilities are completed, the total outpatient dialysis stations in the area will be increased from twenty to twenty four. The hospital projects that there will be a community need for twenty four to thirty such stations in the future.37

 Arm's Length; Physicians Moving Forward; Hospital Services Are Not Gifts of Goods or Services. The Physicians will continue with plans regardless of whether the Healthcare System becomes an owner. "The Physicians contributed $25,000 each as their initial capital contribution.”38 The LLC borrowed monies needed to construct the lessee improvements from a commercial lender (the “Bank”). “In addition, LLC made arrangements with the Bank for a line of credit and a loan to finance the equipment needed in the LLC Dialysis Center: all of the loans were negotiated at arm's length between independent parties. Each of the Physicians has personally guaranteed the loans up to a set amount.”39 The exercise price for hospital purchase is set forth in the Agreement. The price is the same rate and terms as was acquired by the Physicians, “less all distributions and payments (exclusive of any salaries or fees, unless such amounts of salaries and fees are in excess of $180,000 per year) made to the Physicians and their affiliates, plus interest.”40 Upon purchasing a membership interest in the LLC, all parties will assume a pro rata share of any guarantees to the Bank. If additional loans are needed by the LLC to fund its activities, the parties will share proportionately in the debt. “Any additional capital contributions to LLC by all owners will be in proportion to their ownership interests. Any allocation of profit and losses or distributions of cash flow will also be in proportion to ownership interest.”41

 Patient Choice; Projections. Patients may elect to receive treatment at either facility. Projections anticipate that “approximately 50% of the existing hemodialysis patients will elect to be treated at the LLC Dialysis Center during the first year since it will be a state of the art facility and 36 _Id. 37 _Id. 38 _Id. 39 _Id. 40 _Id. 41 _Id.

will be located adjacent to the offices of the Physicians with easy access to parking.”42

 Noncompetition.

The Agreement provides that during its terms and for a period of two years thereafter, the parties to the Agreement agree not to: (1) engage in the ownership, operation, management or control of any outpatient dialysis center or related facility within a radius of 40 miles of the LLC Dialysis Center or any other dialysis facility owned by LLC, (2) influence or attempt to influence LLC Dialysis Center patients to transfer their patron- age from LLC to any other business which is competitive with LLC and, (3) hire or attempt to hire or solicit LLC employees or other party's employees who provide dialysis or other related services to LLC.43

 Tax-Exempt Reserve Powers. The Operating Agreement authorizes the tax-exempt entity to approve:

(1) any proposed amendment to LLC's Articles of Organization and the Operating Agreement of LLC, (2) the dissolution or merger of LLC, (3) the sale of all or a substantial portion of the assets of LLC and, (4) whether a member of the Board of Managers and LLC may engage in a transaction involving an actual or potential conflict of interest.44

 Certain Powers Prior to Tax-Exempt Ownership. During the first two years of operations, the Operating Agreement requires that LLC must obtain the consent of at least one of the members of the Board of Managers elected by the tax-exempt entity prior to “(1) borrowing money or incurring other debts or obligations in excess of $100,000 in the aggregate in any 12 month period; (2) making any capital expenditure in excess of $100,000 in the first 12 month period; (3) in- creasing the number of dialysis stations at the LLC Dialysis Center; and, (4) authorizing the sale of additional membership interest in LLC.45 Thereafter, the tax-exempt entity or entities will control the Board.46

 No Physician Management Company. Management and employees “serve at the pleasure of the LLC Board of Managers. There will be no

42 _Id. 43 _Id. 44 _Id. 45 _Id. 46 _Id.

management company controlled by the Physicians involved in the management of the LLC Dialysis Center.”47

 Open Staff; Indigents. “[A]ll nephrologists in the LLC Dialysis Center's service area will be allowed to admit patients and provide services at the LLC Dialysis Center. [The LLC Dialysis Center] will provide services to Medicare and Medicaid beneficiaries on a nondiscrirninatory basis.”48 Based on these factors, the IRS reasoned:

The control you and Healthcare Systems will exercise by electing the majority of the members of the Board of Managers of LLC will ensure that exempt organizations retain control of the LLC

Dialysis Center's operations and will ensure that medical services will be available to anyone in the community who needs them, regardless of ability to pay. Thus, your ownership interest in LLC will enable you to promote health in a charitable manner. Since your involvement in the pro- posed joint venture will further your charitable purpose, your involvement is “related” to your exempt purposes, under section 513(a) of the Code.49

2. General Counsel Memorandum 39,862