Charitable Hospital Ancillary Joint Ventures

Recent IRS examinations and increased ancillary joint venture (JV) activity heading into 2026 heighten the urgency for hospital organizations to review JVs and confirm which ventures constitute “hospital facilities” subject to Section 501(r). Enacted as part of the Affordable Care Act, Section 501(r) imposes facility-by-facility requirements on tax-exempt hospital organizations, including conducting triennial community health needs assessments, adopting and publicizing financial assistance and emergency care policies, limiting charges for financial assistance-eligible patients, and restricting extraordinary collection actions.

Revenue Ruling 98-15 and Revenue Ruling 2004-51, along with existing case law (including Redlands Surgical Services v. Commissioner and St. David’s Health Care System v. United States), provide foundational guardrails for structuring hospital JVs to further charitable purposes while involving for-profit partners and managing unrelated business income (UBI) risk. These authorities frame when a JV’s governance, operations, and revenue sharing remain consistent with Section 501(c)(3) and hospital-specific requirements. Even when a venture is not a “hospital facility” for Section 501(r) purposes, exemption and UBI risks remain and should be addressed through governance and documented community benefit obligations.

Background

The relevant authorities emphasize that a Section 501(c)(3) organization must retain the real ability to ensure its activities advance charitable purposes and avoid inurement and private benefit. Revenue Ruling 98-15 set the control and community-benefit framework. Revenue Ruling 2004-51, though not about a hospital, applied those principles to ancillary JVs by concluding that a charity may participate in a JV with a for-profit partner – even as a minority owner – as long as the venture is structured to further charitable purposes, the exempt organization retains sufficient control or protective rights to prevent activities inconsistent with its exempt mission, and the arrangement is negotiated at arm’s length without impermissible private benefit. Hospitals routinely rely on Revenue Ruling 2004-51 by analogy when structuring ancillary JVs to preserve exemption while managing UBI exposure.

Redlands and St. David’s provide the framework ancillary JVs use to navigate the control, community benefit, and private benefit guardrails applied today to service-line JVs. Ancillary JVs can be consistent with exemption when the exempt hospital retains the ability to direct the venture to operate for community benefit, avoids inurement, and embeds enforceable charitable guardrails in governing documents and operational practices.

Under the Section 501(r) regulations, a hospital “operates” a facility held through a JV when its control is sufficient that its share of JV income is not UBI. That same level of control carries with it responsibility for Section 501(r) compliance. Less than 50% owners still might have sufficient governance and operating control to support relatedness and, if the facility is licensed as a hospital, to trigger Section 501(r). Whether a JV is a “hospital” for Section 501(r) purposes generally turns on state hospital licensure requirements. Charitable hospital systems forming or managing ancillary JVs with for‑profit partners should be evaluated for exemption and UBI considerations and, if the facility is licensed as a hospital, Section 501(r) obligations. JV governing documents should embed community benefit obligations, financial terms must not confer excessive private benefit, and operations must meet hospital‑specific rules, including Section 501(r) when applicable.

Crowe observation

Ongoing margin pressure and renewed Section 501(r) audit activity elevate compliance risk; missteps can trigger Section 501(r) penalties, UBI, or – at worst – exemption exposure.

Assessing JV compliance

A tax-exempt hospital should consider the following to evaluate their ancillary JV arrangements (the first two considerations applicable to JVs licensed as a hospital, and the remaining considerations applicable to all JVs):

1. Whether the JV is a Section 501(r) hospital facility. If an ambulatory surgery center or other service-line entity is licensed as a hospital under state law, Section 501(r) could apply. If the exempt hospital’s control is sufficient such that its distributive share of JV income is not UBI, it is treated as operating the facility under the Section 501(r) regulations and must ensure facility-level compliance.
2. Exempt hospital is responsible for Section 501(r) compliance. When the JV is a licensed hospital, the JV governing documents should incorporate Section 501(r) requirements, and it should oversee, monitor, and periodically validate Section 501(r) compliance.
3. Structural exemption safeguards. The exempt hospital must ensure the JV agreement preserves its charitable control and limits private benefit.
4. UBI analysis. The exempt hospital should document how the JV’s activities further its exempt purposes and support relatedness. The exempt hospital must report any unrelated business income.
5. Form 990 reporting alignment. The exempt hospital remains responsible for accurate Form 990, “Return of Organization Exempt From Income Tax,” reporting. Schedule R disclosure of controlled JVs as related organizations often is addressed appropriately. However, issues more commonly arise in Schedule H facility reporting (for example, the exempt hospital might not include its proportionate share of the JV’s community benefit activities in Schedule H totals).
6. Community benefit commitment. Although Section 501(r) does not apply to nonhospital JVs, Section 501(c)(3) operational standards continue to govern. To support exemption and mitigate private benefit concerns, an exempt hospital should consider implementing a charity-access policy – distinct from a hospital financial assistance policy (FAP) – that outlines eligibility criteria, discount protocols, Medicaid participation, and reporting mechanisms demonstrating community benefit consistent with exempt purposes.
7. Exam‑ready files. Exempt hospitals should maintain a defensible, exam-ready compliance file, including governing agreement provisions showing evidence of retained control, board minutes reflecting periodic JV oversight, documentation of FAP or charity-access implementation, Medicaid participation reports, fair-market value support documentation, and annual UBI and relatedness memoranda.

Looking ahead

Exempt hospital systems should expect continued growth in ancillary JVs. For these systems, Section 501(r) compliance and exemption oversight will remain a primary consideration. Taxpayers should consult their tax advisers to evaluate how these rules apply to specific arrangements.