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Revenue Ruling 98-15

1998-1 C.B. 718 (1998)

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Revenue Ruling 98-15

Internal Revenue Service
1998-1 C.B. 718 (1998)

Facts

The Internal Revenue Service (IRS) sought to clarify when a joint venture between a tax-exempt entity and a nontax-exempt entity could itself enjoy tax-exempt status. The IRS considered two situations in which a tax-exempt hospital contributed all its assets to a limited-liability company (LLC) in which a for-profit hospital company also contributed substantial assets. In both situations, the nonprofit partner in the LLC used substantially all its income from the LLC to fund charitable grants to help the community. The two situations differed in the organizational structure of the LLCs. In the first situation, (1) the nonprofit partner had the power to appoint the majority of the board of directors, who had to be community leaders without independent business ties to the hospital; (2) the LLC was legally bound to prioritize furthering its charitable purpose over profit maximizing; and (3) the LLC was operated by a management company unrelated to either partner. In the second situation, (1) the nonprofit and for-profit partners had equal numbers of appointees on the board, (2) the LLC was not legally bound to prioritize furthering its charitable purpose over profit maximizing, and (3) the LLC’s management company was a subsidiary of the for-profit partner.

Rule of Law

Issue

Holding and Reasoning ()

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Casebooks

Taxation of Nonprofit and Exempt Organizations

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