For decades, non-profit organizations have been looking for ways to increase revenue in order to better achieve their charitable (or exempt) purpose. One way they have found to do this is by entering into a joint venture arrangement with a for-profit entity. The joint venture arrangement provides details on the creation of a partnership of limited liability company (LLC) that is owned by a non-profit organization and a for-profit entity. The revenue earned by the non-profit organization from the joint venture would be tax exempt if the joint venture arrangement follows the guidelines set in Revenue Ruling 98-15.
The Revenue Ruling 98-15 guidelines are summarized as follows:
- The joint venture member’s participation must further a charitable (or exempt) purpose.
- The joint venture agreement explicitly provides for the furtherance of the charitable purpose and only incidentally for the benefit of the for-profit owners.
Several important points under Revenue Ruling 98-15 are:
- The non-profit organization must have control (in substance as well as form) of the partnership or joint venture.
- Benefit to the community (or the non-profit’s charitable purpose) must explicitly be put ahead of the partnership’s profitability.
- Although the ruling specifically deals with hospital joint ventures, it is not limited to the hospital sector and is presumably applicable to any joint venture involving a non-profit entity as a general partner.
- Revenue Ruling 98-15 does not apply when an exempt entity is a limited partner rather than a general partner because the organization is merely a passive investor at that point.
- Since a joint venture can also be a partnership, an entity’s exempt status may be jeopardized by the activities of the partnership since the activities of a partnership are attributed to its partners.
- The facts and circumstances of each joint venture or partnership arrangement will be analyzed to determine whether the preceding guidelines are satisfied.
According to various court cases, the proper question is simply who has effective control, regardless of whether it is based on a majority of the governing body or on powers granted in the partnership agreement. Before entering into a joint venture (or general partnership or limited liability company) arrangement as a general partner with taxable partners, an exempt organization should consult a tax professional to help determine if the joint venture satisfies the requirements of Revenue Ruling 98-15. The non-profit partner will lose its exemption if a private party can control or use the non-profit’s activities or assets for the benefit of the private party, unless the benefit is incidental to the accomplishment of exempt purposes.