AHLA's Speaking of Health Law
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AHLA's Speaking of Health Law
Tax Considerations and Implications of Health Care Joint Ventures Between For-Profit and Tax-Exempt Entities
In the current health care landscape, joint ventures between for-profit and tax-exempt entities may trigger tax or other reporting consequences that should be considered and addressed at the outset. Jennifer Noel, Corporate Director of Tax, Christiana Care Health System, Robert Friz, Partner, PricewaterhouseCoopers, and Gerald Griffith, Partner, Jones Day, discuss why it’s important for a nonprofit to consider IRS guidance and the various tax implications before entering into a joint venture, the types of issues a nonprofit might encounter, and the types of transactions currently taking place. Jennifer, Robert, and Gerald are speaking at AHLA’s upcoming 2023 Tax Issues for Health Care Organizations program in Washington, DC.
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Speaker 2:This episode of A H L A speaking of health law is brought to you by A H L A members and donors like you. For more information, visit american health law.org.
Speaker 3:So, gentlemen, it's good to talk to both of you today. I am looking forward to our presentation on the tax considerations and implications of healthcare joint ventures between for-profit and tax exempt entities, which will be at the A H L A Tax Issues for Healthcare Organizations Conference in Washington, DC on October 23rd and 24th. Let's give our listeners a little bit of information about what our session will cover, provide some background and explain why this topic is so timely right now and what we are seeing in the healthcare community. But first, let's do some quick introductions. My name is Jennifer Noel, and I am the Corporate Director of Tax at Christiana Care Health System in Wilmington, Delaware, where I've been for almost a year and a half. Prior to this role, I was the director of the Delaware Division of Revenue for about five years, and a Deputy Attorney General with the Delaware Department of Justice, representing the Delaware Division of Revenue for about five years prior to my appointment as director, I have my l l M in techs from Georgetown, and I've been involved in techs for many years, although I'm relatively new to the healthcare world. Rob, would you be able to tell us a little bit more about your background, please?
Speaker 4:Sure. Thanks Jen and I too, am looking forward to our , uh, session and to presenting with , uh, you and, and Jerry . Uh, I'm Rob Riz . I'm a , uh, partner at , uh, PricewaterhouseCoopers, where I lead our national tax services, exempt organizations healthcare practice and focus on providing advice , uh, with respect to , uh, tax and business issues, planning and compliance requirements , uh, associated with tax exempt , uh, healthcare providers and payers, including corporate and joint venture entities. Um, I've also been involved with A H L A for many years, including , uh, serving on the planning committee for the A H L A tax Issues for Healthcare Organizations program.
Speaker 3:Thank you so much, Rob. Um, Jerry , could you introduce yourself to our listeners as well?
Speaker 5:Sure. Thank you, Jen. I'm looking forward to seeing everyone in person in dc It's nice to be back out on the road again after the Covid hiccup. Uh , I am a partner in the tax and healthcare practice groups at Jones Day in the Detroit and Chicago offices. I've been practicing healthcare law primarily with nonprofit organizations for over 35 years with a mix of tax transactional and regulatory work, including over two dozen i r s audits and more m and a transactions than , than I can count involving non-profit and for-profit , uh, organizations. And , um, looking forward to giving you a little preview of what we're gonna cover in dc .
Speaker 3:Fantastic. So our upcoming session is going to address the various tax implications of joint ventures that may be contemplated between non-profit and for-profit organizations in the healthcare world. The I R SS started looking at transactions and joint ventures involving for-profit and nonprofit organizations some time ago, and over time has issued guidance indicating what they wanna see , uh, or that they wanna see certain characteristics when they're evaluating a joint venture. Uh, we anticipate that this session will be an advanced session, so we won't be going through the underlying laws that might affect relationships of this nature, but we can provide some background here in this podcast. So, Rob , uh, and Jerry , can you tell us why it's so important for a nonprofit to consider the i r s guidance and the various tax implications before entering into a joint venture and what types of issues a nonprofit might encounter in that type of transaction?
Speaker 4:Sure, Jen. Um, I'm happy to start, you know, looking at some of the, the key , uh, risk areas and, and there are a number of , you know, very important considerations with respect to , uh, exempt organizations, tax exempt healthcare organizations going into , uh, joint ventures. And as you indicated, we're gonna be, you know, really focusing on those types of joint ventures with , uh, for-profit non-exempt organizations. And certainly, you know, top of the list is the, the tax exempt organization's continued qualification for , uh, tax exempt status. And that really, you know, goes back to , uh, some of the concepts and we'll primarily be focusing on , uh, the 5 0 1 C three , uh, healthcare organizations and continuing , uh, to, to meet the , the operational test chief among them , uh, could potentially going into the joint venture cause concern with respect to private environment and private benefit, which can have an impact on their taxes . M 5 0 1 C three , uh, status, you know , what types of activities will be going on at the joint venture that again, could, could impact that , uh, the extent the joint venture may involve a, a hospital facility. There's a number of, you know, very specific rules and requirements there , uh, that would need to be, be looked at. And the i r s , you know, has set forth , um, you know, some guidance with respect to, you know, key factors that are looked at , um, around , uh, e exempt status. Also, I would say that the other, you know, really, you know, big picture item is the characterization of the exempt organization's revenues as either exempt function income or unrelated business taxable income. And, you know, more and more, we'll see, we've seen what we refer to as, you know, ancillary joint ventures, which it really may be a more, you know, insubstantial activity that the hospital or or other tax exempt healthcare organization is entering into. And a real, you know, question is whether or not, you know, the revenue , uh, it's being, you know , eligible or, or , or generated from the joint venture that , um, is being , uh, eligible to the exempt organization , uh, constitutes exempt , uh, function income or , uh, whether it would be viewed as , uh, unrelated business taxable income. So that's certainly, you know, an important area that, that we will be , um, you know, focused on is, is as well. Uh, you know, Jerry , I'll, I'll, you know, turn it to you for , uh, some of your thoughts on that also.
Speaker 5:Thanks . Thanks, Rob. Well, I'd, I'd like to focus a little bit on why our clients care as a business matter and , and why we as tax advisors are likely to be called on more and more to address these issues. I think there are, there are three reasons. First, given the state of the economy in healthcare, it's creating challenges and opportunities for our clients. Margins have been hit hard coming out of covid, and the pressure is going to be immense to both grow the top line and contain expenses. Joint ventures can spread the capital burden and tend to have a lower buy-in than an outright acquisition as a means of , of fostering growth for the organization. Second, more and more payers health plans are looking to contain their costs and improve member care. And to do that, they've been focusing more and more on partnering with hospitals and physicians in value-based care models where both sides have skin in the game, which is really the, the essence of a joint venture. And third, as government scrutiny of private equity transactions increases, including from the antitrust agencies, there may be opportunities to pick off some ancillary facilities and practices that , uh, these companies end up shedding as a result of that added scrutiny and, and regulatory challenges.
Speaker 3:Thank you, Jerry . Um, so that's very interesting that, you know , we have obviously the different regulatory impacts that may affect the company as well as the perspective coming from the business side of things. Um, can you each provide a little bit of background to our listeners about the different types of transactions we might talk about?
Speaker 4:You know, there , there's, as Jerry mentioned, and I , Jerry , I think that's a great overview with respect to the business considerations that are driving so many of these, these joint ventures that we're , you know , seeing , uh, you know, currently in, in the market. I think, you know, why we see a lot of different, you know, types of, of joint ventures. The ones, the types that will really be, you know, primarily focusing on are, are ones that we're generally seeing through , uh, flow through entities are partnerships, limited liabilities , companies that are, that are taxed is , is partnerships. And, you know, certainly, you know, ones we're seeing , um, you know, consistent with, with Jerry , some of the, you know , rationales around the, the general business conditions are, you know, joint ventures that that could involve , uh, physicians , uh, joint ventures that involve, you know, other , uh, for-profit healthcare organizations that, you know, bring, you know, specific expertise, for example , uh, to a specific , uh, service line area. Um, we're also seeing, you know, as , as Jerry was mentioning , um, with the payer relationships more , uh, what I'll refer to as value-based arrangements or arrangements in, in the likes of, of accountable care organizations that are involving the tax exempt healthcare organizations as well as , uh, for-profit organizations and, and other parties . So, and , and also I would just say more pure, you know, investor types of, of transactions also that are occurring. Um, you know, as I mentioned, primarily, you know, we're seeing through limited liability companies, but will certainly be, you know , addressing , uh, those types of transactions that may occur through other vehicles such as a, a, a corporate , uh, structure as well. Uh , Jerry , I'll I'll turn it to you as well for your thoughts.
Speaker 5:Yeah, I, I think , uh, a good way to look at the joint venture area and transaction structures is through a couple of different themes. First of all, re regardless of the structure that you are looking at, you can't do indirectly what you cannot do directly. So for example , um, political activity or, or paying excessive compensation or , uh, defectively structured compensation where people are getting a share of the bottom line of the organization. And if you have tax exempt bonds , uh, hospital joint venture could raise private use concerns there. So, we'll , we'll talk about those big joint ventures. We'll talk about some of the ancillary joint ventures , uh, that may not be substantial. They raise a different set of tax exempt concerns more on unrelated business income and , uh, keeping keeping those broad principles in mind. Uh , we'll talk about the trade-offs that are involved because that's what it often comes down to in the joint venture analysis. For example, if you have a mix of related and unrelated activities, you drop them into a joint venture, maybe with a blocker holding your interest, you might be protecting exemption. And that's usually a good thing, certainly a good thing, but you're also effectively paying tax then on all of the joint venture revenue. Uh, whereas if you're taking a little more risk and doing it through an L L C that's not treated as a corporation, no blocker, some of that revenue may be exempt. So you might have a lower tax bill as long as you don't get too close to the line to risk exemption. Uh, another example, we'll talk about 5 0 1 R and how that intersects with joint ventures. That's another tradeoff. If you have a hospital joint venture where the nonprofit is in control, you are reducing the exemption and U b I risk, but the joint venture hospital then has to follow 5 0 1 R . So that's a trade-off. And it , it's also a question of risk tolerance and we'll touch on that as well. There's , uh, a fair amount of guidance out there from about 20 years ago now , uh, some, a little more recent, but it is a no rule area for the i r s at the moment. So it , a lot of these structures involve sort of an extension of the existing guidance and trying to apply them to particular joint ventures that the i r s hasn't really addressed head on . And there are, there are workarounds to that. You could go for a 10 23, for example, but most folks don't have the, the time and patience to try to do that, to set up a new entity to participate in the joint venture and go through the extensive backlog right now to get a 10 23 through. So we'll talk about how you, you gauge that level of risk, applying the existing guidance to , uh, some of the models that, that Rob alluded to.
Speaker 3:Well, thank you. It sounds like it's gonna be a very interesting , uh, discussion on, on both days actually, of the , uh, the conference. Are there, it , it sounds like there are a number of things that any exempt organization is gonna have to consider, and there are obviously drawbacks and, and , um, trade offs as , as you just said, Jerry . Um, are there takeaways and insights that we hope that we can , um, give to people who , um, attend our session at the conference?
Speaker 5:I'll , I'll start off here and then let Rob take us home. I, I think , uh, as I just said, it's, it's a question of how you recognize and quantify the risks, how you navigate these challenges. That's the big question that we're going to dive into, including , uh, a, a run through some of the common joint venture model diagrams and , uh, discussion about how the joint venture rules apply, including , uh, kicking around some ideas on alternative ways to avoid unrelated business income based on the guidance that's, that's out there in the joint venture area will kick around , uh, some options to protect exemption, including the use of blockers and what that means and how to take advantage of some of the U B I exclusions that might be available . And we'll also , uh, go into the other aspect of nonprofit structural considerations around , uh, where our friends in the state and attorneys general offices are at and , uh, the sorts of transactions that they're looking at and the concerns, considerations they may have in reviewing joint ventures. As more and more states get into a formalized process for review of healthcare transactions such as the new law in Illinois, that takes effect on January 1st. Rob thoughts?
Speaker 4:Yeah, thanks Jerry . And, and just, you know, consistent with, with what you indicated, you know, really looking to provide insight, you know, going into these types of arrangements of , you know, what can trigger the , the , the tax or other reporting consequences to really be considered, you know , at, at the outset. And then also, you know, thinking about, you know, as Jerry was mentioning, you know, those, those insights and, and action steps for addressing those issues in negotiations , um, around the arrangement, which could include, you know, specific deal considerations around the tax exemption issues around looking to , uh, preserve income streams as exempt function income. You know, as Jerry mentioned, certainly, you know, looking at potential options around the , uh, the , the , the block or entities . Um, you know , we're also seeing with respect to a lot of these, you know, joint venture arrangements , uh, various, you know, types of, of revenue streams, for example. Um, are there maybe , you know, certain licensing arrangements that are, that are provided and there are, you know, certain exclusions and exceptions that can apply to the unrelated income tax for royalties, for example. And you know, how that comes into play. Um, you know, how potentially, you know, those income streams can be preserved as excludable around the entire joint venture and some of the transfer pricing considerations that may come into play for, for looking at that as well. You know , also considering , um, the impact and, and being aware of , uh, some of the , uh, rules regarding , uh, partnership audits and, and some key things that , uh, tax exempt , uh, partners should be aware of , uh, with respect to , uh, audit , uh, risk and, and the partnership audit , uh, procedures. And then also , um, you know, touching on and just, just highlighting and being aware of, you know, what could be , uh, some of the, you know, credit incentive opportunities that, that may be , um, available through some of these , uh, joint ventures to keep in mind , uh, that are go , uh, when going into the , uh, arrangement.
Speaker 3:Thank you , uh, for highlighting all those different topics and, and the different takeaways and insights that we hope to impart as part of this session. I will say that from my perspective in healthcare , um, and in an exempt organization, it's been very helpful to me to see some of the , uh, summaries that have we've developed , um, about the different deal considerations from an exempt organization's perspective when negotiating a transaction, which I think you touched on briefly, Rob. Um, and I think that that's a very valuable piece as well. Again, we invite you to join us at the A H L A tax issues for healthcare Organizations conference that's gonna be held in Washington DC on October 23rd and 24th to learn more about the tax issues that might come up in the course of negotiating and implementing a joint venture. And I know that there are a lot of other panels that have a lot of broad interest as well. Um, and we all look forward to seeing you there.
Speaker 2:Thank you for listening. If you enjoyed this episode, be sure to subscribe to a H L A speaking of health law wherever you get your podcasts. To learn more about a H L A and the educational resources available to the health law community, visit American health law.org.