For the second time in two months, the Internal Revenue Service has released a private-letter ruling that finds a joint operating agreement entered into by 501(c)(3) organizations does not constitute private business use and would not jeopardize the tax-exempt status of bonds issued to finance a project operated by one of the organizations.
The determination is consistent with over half a dozen letter rulings issued by the IRS in recent years and reinforces the IRS' position of looking at what makes up the partnership rather than the partnership itself.
"I think that issuers and bond counsel can take comfort that the IRS has for a period of years applied or adopted the aggregate approach for joint ventures among 501(c)(3) entities in conjunction with the use of bond-financed property," said Edwin Oswald, a tax partner with Orrick Herrington & Sutcliffe here.
In the March 5 private-letter ruling released yesterday, the IRS addressed a situation in which several 501(c)(3) organizations entered into a joint operating agreement that created shared management of health care services and facilities owned by two not-for-profit hospitals. Under the agreement, another 501(c)(3) was to manage the facilities and services.
The issuer argued to the IRS that the agreement does not create a partnership and therefore does not qualify as a private business use for bonds issued to finance additions to a hospital operated by one of the exempt organizations.
"In this case, we do not need to determine whether the partners would be a 501(c)(3) partnership," the IRS responded in the ruling. Even if the agreement resulted in a partnership, the fact that all of the partners would be 501(c)(3) organizations would further support the charitable purposes of the bonds, it added.
The ruling will help future partnerships with 501(c)(3) organizations, said David Caprera, a tax partner with Kutak Rock in Denver. "It's a continuation of what we have seen, but it probably is of some importance because it is the clearest and cleanest ruling so far that says if there is a 501(c)(3) organization we don't even care if it's a partnership," Caprera said.
In the most recent related ruling, the IRS in December determined that a limited partnership and a general partnership created by two 501(c)(3) organizations to manage and operate their hospital could lease the parking garage of one of the hospitals without making the bonds that financed it taxable.
Although private-letter rulings cannot be used as precedent, they can sometimes give issuers an idea of how the IRS might respond to similar deals.
But now that the IRS has released so many letter rulings with the same conclusion, the matter of 501(c)(3)s may be resolved, Caprera said. "We probably won't see many more of these rulings. This is now our informal authority which practitioners will rely on," he said.
But Oswald disagreed. "I don't see this as being the end of this line of rulings," he said. "It's just really a matter of legal judgement as to whether counsel will take comfort from the more than half a dozen rulings out there or will they simply go for a private-letter ruling based on their own facts and circumstances."
