Physician-hospital joint venture: commentary on IRS' PLR

On June 9, the IRS issued Private Letter Ruling 200436002, which generally approved of a proposed physician-hospital joint venture. The ruling is described and analyzed by Don Stuart in a commentary in the Oct. 18 on-line issue of HealthLeaders. Stuart's description of the deal is more succinct than the Service's:

[A] nonprofit, tax-exempt hospital proposed to form a new joint venture
structured as a limited partnership to own and operate a freestanding diagnostic
imaging center. Units in the limited partnership will be offered to physician
investors and related physician groups. If the offering becomes fully
subscribed, the joint venture will be structured so that a LLC wholly owned by
the nonprofit hospital will serve as general partner and own 1 percent, the
nonprofit hospital as a limited partner will own 54 percent, the physician
investors will own 40 percent and an independent management company will own 5
percent of the limited partnership.

Key factors in securing the IRS' blessings track the considerations set forth in Revenue Ruling 98-15 (courtesy of TaxLinks), including the following:

• The hospital's wholly owned LLC, acting as general partner, will have effective control over major decisions of the joint venture which will ensure that the imaging center will be operated in a charitable manner (i.e., promoting health for a broad cross section of the community) regardless of ability to pay. (The LLC's board members are elected by the hospital. No management rights were given to any other parties.)
  
• The partnership agreement specifically provides that the duty of the general partner is to operate the partnership in a manner that furthers charitable purposes and overrides any duty to operate the partnership for the financial benefit of anyone else. (The general partner LLC could only be removed by the limited partners holding more than 80 percent of the sharing ratios of all partners.)
  
• The imaging center will have an open medical staff and utilize the charity care policy of the hospital. (Physician privileges were not dependent on owning an interest in the joint venture. The charity care policy will be advertised to patients and the center's radiologists are required to treat all members of the community, including Medicare, Medicaid and indigent patients.)
  
• The LLC's board members will be representative of the community. (The board was made up of community leaders with experience in health care matters, including officers and board members of hospital.)
  
• Contributions to the partnership and allocations of profits, losses, and distributions from it will be in proportion to the interests of the partners. (No special allocations of income or loss were permitted.)
  
• The management agreement will require the manager to operate the center for charitable purposes, with charitable purposes taking precedence over any profit motive. All fees paid are subject to a ceiling amount that will not exceed fair market value. (The IRS did not have any objection to the management fee that was based on a percentage of funds collected in payment of patient services. The term of the management agreement was for two years and renewable for one additional two year term. A "for cause" termination provision was also included.)