WASHINGTON — The Internal Revenue Service has determined that bonds issued by a university medical school to finance or refinance items used by a nonprofit hospital are considered obligations of a state governmental unit and therefore tax-exempt, the IRS said in a private-letter ruling released this week.
According to the ruling, which was dated July 13 but only recently released, the bonds qualify as tax-exempt because the hospital’s activities are treated as carried out by the university, which stated that the proceeds would not be used in any trade or business unrelated to the university or hospital.
Neither the university medical school nor hospital were identified in the ruling.
The key question for the IRS was whether the activities of the hospital could be considered those of the university, which, as a qualified educational organization, is a state governmental unit and capable of issuing tax-exempt debt. The agency pointed to several facts as evidence that the hospital is controlled by the university.
The university created the hospital as a 501(c)(3) nonprofit hospital and, under the articles of incorporation drafted for the hospital, stated that its activities at all times would be consistent with the obligation and mission of the university with respect to education, research, public service, and patient care.
Furthermore, the business and affairs of the hospital are managed by its board of directors, two-thirds of which are appointed by members of the university’s board of trustees. The board includes the chair of a clinical department of the medical school. The individual serving as president and chief executive officer of the hospital is an ex-officio director of the board, but the board also reserves the right to expand the number of directors in the future. The university can remove any board member it appointed at any time.
Since the university retains oversight over a controlling portion of the board, the IRS concluded it was proper to treat the hospital’s activities as those of the university.
Private-letter rulings are supposed to be applicable only to the issuers who request them and their particular facts and circumstances. The IRS explicitly stated in the ruling that it should not be cited or used as precedent in other tax matters.
Nevertheless, the rulings are believed to provide insights into the agency’s thinking, particularly on tax matters where little guidance exists or market participants have questions.
