IRS Publishes Ancillary Joint Venture Revenue Ruling

Tax-exempt entities frequently enter into joint ventures ("JVs") with for-profit entities to further their exempt purposes or enhance their economic performance. Such ventures involve important issues regarding the entity’s ability to retain its tax-exempt status and to avoid being taxed on the income derived from the venture.

The Internal Revenue Service ("IRS") recently issued Revenue Ruling 2004-51, its first published guidance on "ancillary" JVs. The ruling indicates that, under certain circumstances, an exempt organization that contributes a portion of its assets to, and conducts a portion of its activities through, a JV formed with a for-profit company can both (1) retain its tax-exempt status and (2) avoid being subject to unrelated business income tax ("UBIT") on its share of the income derived from the venture. While the ruling did not involve a health care JV, IRS personnel have indicated that its principles apply to such arrangements.