Hospital’s joint venture with for-profit leads to loss of tax-exempt status

The Internal Revenue Service (IRS) recently revoked the tax-exempt status of a general acute care hospital. Although most of the hospital’s identifiers were redacted from the IRS’s adverse determination letter, it remains evident that the hospital entered into a lease agreement with a for-profit entity in a manner that violated its exempt status.

According to the IRS, the hospital agreed to lease its land, property, and equipment to the for-profit under the condition that the for-profit continued to provide charity care at a level that was consistent with the hospital’s history of practice. 

The IRS states that for an organization like a hospital to be tax exempt, it must be organized and operated exclusively for one or more exempt purposes. If it fails to meet either an organizational or operational test, it does not qualify. In this case, the for-profit’s lease agreement with the hospital gave it a private benefit that was inconsistent with tax exemption. In providing such private benefits, the hospital was ceasing control over a portion of its own operations.

Source: The National Law Review