## Facts

- Redlands Surgical Services (RSS) was a California nonprofit public benefit corporation and a wholly owned subsidiary of an exempt health system parent; RSS’s sole activity was participation in a partnership structure operating an ambulatory surgery center.
- A for-profit corporation, Redlands–SCA Surgery Centers, Inc. (SCA Centers), and the exempt health system formed a general partnership that acquired a majority interest in an outpatient surgery center near the affiliated hospital.
- That general partnership served as the sole general partner of a limited partnership that owned and operated the surgery center.
- RSS later replaced the exempt parent as the nonprofit co-general partner in the general partnership, making RSS’s operations entirely defined by the joint venture.
- Governance and operational arrangements gave the for-profit partner and related entities substantial authority over key aspects of the surgery center’s business.
- The IRS issued an adverse determination denying RSS initial recognition of exemption under I.R.C. § 501(c)(3).
- RSS sought declaratory judgment in the U.S. Tax Court under I.R.C. § 7428; the case was submitted on a fully stipulated record.
- The Tax Court ruled against RSS, and the Ninth Circuit affirmed per curiam by adopting the Tax Court’s reasoning.

## Issues

1. Whether RSS was “operated exclusively” for exempt purposes under I.R.C. § 501(c)(3) when its sole activity was participation in a surgery-center joint venture with for-profit partners.
2. Whether RSS conferred impermissible private benefit by ceding effective control of the joint venture’s operations to private parties.
3. Whether RSS could qualify for exemption under the integral part doctrine based on its relationship to an exempt hospital system despite the joint venture structure.

## Decision

- The Tax Court upheld the IRS’s denial of § 501(c)(3) status to RSS.
- The court found RSS had ceded effective control over the partnerships and surgery center to private parties, resulting in impermissible private benefit.
- The court held RSS therefore failed the § 501(c)(3) operational test because it was not operated exclusively for exempt purposes.
- The court rejected RSS’s integral part doctrine argument because the private benefit arising from the surgery center’s operations prevented exemption under that theory.
- The Ninth Circuit affirmed per curiam, expressly adopting the Tax Court’s holdings and reasoning.

## Legal Principles

- To qualify under I.R.C. § 501(c)(3), an organization must be organized and operated exclusively for exempt purposes; the operational test examines actual operations rather than formal labels.
- A substantial nonexempt purpose defeats exemption even if the organization also furthers exempt purposes.
- Impermissible private benefit—more than incidental benefit to private interests—disqualifies an organization from § 501(c)(3) status.
- In joint ventures with for-profit participants, effective control over operations is central to determining whether the exempt entity can ensure activities further charitable purposes rather than profit objectives.
- A subsidiary’s affiliation with an exempt health system does not establish exemption under the integral part doctrine where the subsidiary’s principal activity confers impermissible private benefit and lacks charitable control safeguards.

## Conclusion

RSS did not qualify for § 501(c)(3) exemption because its sole activity was a joint venture in which it ceded effective control to for-profit parties, producing impermissible private benefit; this defect also foreclosed exemption under the integral part doctrine, and the Ninth Circuit affirmed on the same grounds.


Redlands Surgical Servs. v. Comm’r, 113 T.C. 47 (1999), aff’d per curiam, 242 F.3d 904 (9th Cir. 2001)