Last year Tax Exempt Hospitals engaged in joint ventures with For Profit entities breathed a sigh of relief as a Federal District Court in Texas granted Summary Judgment to St. David's Health System of Austin, Texas in their Joint Venture with Columbia HCA on St. David's suit for the recovery of taxes paid because of an IRS determination that they were no longer tax exempt.
The Joint venture arose out of HCA's interest in penetrating the inner city of Austin market and St. David's need for cash. Attorneys for both groups carefully crafted a joint venture in which each side had a fifty/fifty interest and the venture, a combination of St. David's with HCA's suburban Austin hospitals, turned over management of the venture to a subsidiary of HCA.
St. David's retained a veto at the board level. It retained the right to dissolve the venture at any time. It retained the right to specificly enforce the terms of the management agreement where its tax exempt purpose might be put in jeopardy.
The Fifth Circuit Court of appeals agreed with the government that there existed a material issue of fact as to whether St. David's retained sufficient control over the venture to assure that no substantial purpose of the venture was for the benefit of HCA. The court noted that the presence of a single [non exempt] purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly tax exempt purposes.
It is of course axiomatic that if an organization like HCA joins a joint venture with a non-profit hospital system there is a significant benefit to the for profit. Despite this obvious an inherent contradiction the Court indicated that if in fact the non-profit maintains control of the venture "we presume that the non-profit's activities via the partnership primarily further exempt purposes. Therefore, we can conclude that the no-profit organization should retain tax-exempt status."
The Court was clearly uncomfortable that St. David's did in fact retain control. The management company handling day to day operations was not an independent entity and did not follow the written obligation that it provide regular reports to the Board concerning its charitable activities. St. David's right to terminate the joint venture was largely ephemeral because there was a non-compete provision which would serve as a death warrant for St. David's in the event they terminated the venture.
Finally, the Court was concerned over the difference in bargaining power between the two entities because of their "starkly different financial positions." "St. David 'needed' this partnership more than HCA." On remand St. David's will have to prove that in fact it retained control over the venture. See St. David's Health Care System v. United States, 2003WL 22416061 (5th Cir. Texas, Nov. 7, 2003)
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