## Facts

- St. David’s Health Care System, Inc., historically operated hospitals in Austin, Texas and was recognized as a tax-exempt charity under 26 U.S.C. § 501(c)(3).
- Facing financial pressures in the 1990s, St. David’s decided to consolidate with another health care organization and, in 1996, formed a partnership with Columbia/HCA Healthcare Corporation (HCA), a for-profit hospital company.
- Under the transaction, St. David’s contributed its hospital facilities to the partnership, and HCA contributed its Austin-area facilities.
- The partnership retained Galen Health Care, Inc., an HCA subsidiary, to manage day-to-day operations of the facilities.
- Governing documents included a charitable-purpose requirement aimed at continuing St. David’s community-health mission, including service to the poor, and provided St. David’s certain approval rights and a reversionary interest if charitable purposes were abandoned.
- After an IRS audit, the IRS concluded St. David’s no longer qualified under § 501(c)(3) because it had effectively ceded control to the for-profit participant and was operating for private interests.
- The IRS assessed federal income tax for 1996; St. David’s paid under protest and sued for a refund.

## Issues

1. Whether, after entering a joint venture with a for-profit hospital company and delegating daily management to the for-profit’s subsidiary, St. David’s remained “organized and operated exclusively” for charitable purposes under § 501(c)(3).
2. Whether genuine disputes of material fact existed regarding (a) effective control over partnership operations and (b) whether the arrangement produced more than incidental private benefit, making summary judgment improper.
3. Whether the district court’s attorney’s fee and cost award could stand once the merits judgment was vacated.

## Decision

- The Fifth Circuit vacated the district court’s summary judgment for St. David’s and remanded for further proceedings.
- The court rejected a per se rule that participation in a joint venture with a for-profit entity automatically destroys § 501(c)(3) status.
- The court held the summary-judgment record presented genuine issues of material fact on effective control and private benefit, which are central to the exemption inquiry.
- The court vacated the attorney’s fee and cost award because it depended on the vacated merits judgment.

## Legal Principles

- Under § 501(c)(3) and Treasury regulations, an organization must be operated exclusively for exempt purposes; exemption fails if more than an insubstantial part of activities does not further an exempt purpose.
- Tax exemption prohibits private inurement and also prohibits more than incidental private benefit; any private benefit must be incidental both qualitatively (a necessary byproduct of charitable ends) and quantitatively (not substantial relative to public benefit).
- A nonprofit’s participation in a joint venture with a for-profit entity is not automatically disqualifying; the decisive questions are actual control and whether operations primarily advance charitable purposes rather than private interests.
- In hospital joint ventures, the analytical framework reflected in Rev. Rul. 98-15 focuses on whether the exempt organization retains sufficient control to ensure charitable operation; applying that framework commonly requires a fact-intensive inquiry.
- Summary judgment is improper where material disputes exist about operational control, decision-making authority, and the practical effects of the arrangement on charitable mission and private benefit.

## Conclusion

The Fifth Circuit held that St. David’s exemption could not be resolved on summary judgment because disputed facts about who effectively controlled the hospital partnership and whether the venture produced more than incidental private benefit required further fact development, and it therefore vacated the refund judgment and the related fee award and remanded.


St. David’s Health Care Sys. v. United States, 349 F.3d 232 (5th Cir. 2003)