Risky Ventures: The Impact of IRS Health Care Joint Venture Policy

IRS oversight of joint ventures between exempt and for-profit organizations has undergone substantial change over the past thirty years. This change has important consequences for the health care industry, where joint ventures have grown increasingly common. In the face of unclear guidance and aggressive enforcement of exemption-policing tools such as the private benefit doctrine and the control test, a hospital risks revocation of its tax-exempt status, or liability for unrelated business income tax, when it engages in a joint venture directly. It may be able to eliminate this risk by operating the same joint venture through a for-profit subsidiary; however, such a structure may be less constrained to serve a charitable mission. Thus, the Service’s approach to policing tax-exempt status creates incentives to structure joint ventures in a way that may ultimately reduce charitable care. This Note argues that such incentives are undesirable and avoidable, and proposes several reforms that would help to eliminate them.