BusinessVentures:
FactorsImpac3ngLegalRisks
•  Degreeofopera3onalintegra3on
•  Degreeofclinicalintegra3on
•  Degreepar3cipantssharefinancialrisk
•  Ownership,distribu3onofearnings
andcontrol
InternalRevenueCode§501(c)(3)
1)  Organizedandoperatedtoservea“charitable”
purpose[orreligious,scien3ficoreduca3onal
purpose]
2)  Nopartofitsnetearningsmayinuretothe
benefitofanyprivateshareholderorindividual;
3)  Nosubstan3alpartofitsac3vi3esmayconsist
ofcertainac3vi3esaimedatinfluencing
legisla3on;and
4)  Itmaynotpar3cipateorinterveneinany
poli3calcampaignonbehalfofanycandidate
forpublicoffice.
BusinessDealsandTax-ExemptEn33es
Isen3tyorganizedandoperatedprimarilyforcharitable
purpose(s)?Doanynetearningsinuretothebenefitofothers?
Isotheren3ty/individual
an“insider”?
Doesac3vityfurther
en3ty’sexempt
purposes?
Yes
No
No
Yes
Ispaymentreasonable?
Ifno,istheac3vity
aninsubstan3alpart
ofen3ty’sac3vi3es?
Yes
No
Revenuesfrom
ac3vitysubjectto
UBIT
Substan3al
PrivateBenefit
Prohibi3on
PrivateInurement
Prohibi3on
PrimaryPurpose
Requirement
Yes
Tax-exempt
statusat-risk
No
Isprivatebenefit
necessarytoachievea
publicbenefit?
Yes
No
Isamountofprivate
benefit“insubstan3al”
comparedtopublic
benefit?
Yes
No
Privatebenefitpermieed
En3tyat-riskfor
immediatesanc3onsor
revoca3onoftax
exemp3on.
DoesAc(vityFurtherEn(ty’s
ExemptPurpose?
1)  Whatistheventure’spurpose?(GCM39862)
–  Promo3onofHealth=charitablepurpose
•
•
•
•
Expansionofhealthcareresources
Establishingnewservice/provider-en3ty
Improvingtreatmentmodali3es
Preservingservice/provideren3ty
–  Non-charitablepurposes
•  Capturingreferrals/increasingrevenues
•  Deterringcompe3ngventures
•  Promo3ngcost-consciousbehavioramongMDs(?)
2)  Isventurestructuredtoallowtax-exempten(tytofurtheritscharitablepurpose?
(Rev.Ruling98-15)
•  Keyissue=howmuchcontrolexempten3tyhasoverventure
•  Factors
o  Governingdocumentsofnewventure
o  Composi3onandpowersofboard
–  Vo3ngcontrol
–  Enumeratedpowers
o  Managementcontract
o  Keyexecu3ves
ConsequencesofProblema3cVenture/Ac3vity
1)  Revoca(onoftax-exemptstatus:En3tynotprimarilyorganizedand
operatedforcharitablepurpose
–  Test:Whetherunrelatedbusinessandac3vitycollec3velyareasubstan3alpor3onof
totalopera3ons
2)  Incomefrom“unrelatedtradeorbusiness”subjecttoUBTI:En3tyisprimarily
organizedandoperatedforcharitablepurpose
Whatac(vi(esareconsideredan“unrelatedtradeandbusiness”?
–  “Unrelatedtradeandbusiness”ifnotsubstan3allyrelatedtocharitablepurpose
–  Examples“related”
•  Ventureorganizedandoperatedforcharitablepurpose
•  Lineofbusinesscontributestocomfortandconvenienceofhospital’spa3entsand
staff
–  E.g.,parkinggarageathospital,hospitalcafeteria
–  Examples“unrelated”
•  Venturedoesnotservecharitablepurpose;hospitallackssufficientcontrolover
venture
•  Lineofbusinessdoesnotcontributetocomfortandconvenienceofhospital’s
pa3entsandstafforotherwisepromotethecommunity’shealth
–  E.g.,linenserviceforunaffiliatednursinghome
PrivateInurementandBenefit
•  Prohibi(onAgainstPrivateInurement
–  Appliestodealswith“insiders”
–  Test:Isbenefittoinsiderincidentaltocharitable
purpose,andiscompensa3onreasonable/fairmarket
value
•  Prohibi(onAgainstPrivateBenefit
–  Appliestodealswith“outsiders”
–  Test:Isprivatebenefitincidentaltocharitable
purpose,andisprivatebenefit<publicbenefit
ExcessBenefitTransac3ons
“Disqualifiedpersons”whoengageinan“excessbenefit
transac(on”aresubjecttoanexcisetax
•  “ExcessBenefitTransac(on”:benefittodisqualifiedperson>
whattax-exemptorganiza3onreceives
•  “Disqualifiedpersons”:
1)  Inposi3onsubstan3allyinfluenceorganiza3onatany3meduring
prior5years
2)  Familymemberof#1
3)  En3tyinwhich#1or#2hasa35%vo3ngshare(corpora3on),
partnershipinterest(partnership),orbeneficialinterest(trustor
estate)
•
Penal(es
–
–
Disqualifiedperson:25%taxonexcessbenefit+add’ltax(upto
200%)ifnocorrec3veac3on
Organiza3onalmanagers:10%taxundercertaincircumstances