## Facts

- St. David’s Health Care System, Inc. (St. David’s) was a Texas nonprofit corporation that operated community hospitals and had long been recognized as tax-exempt under I.R.C. § 501(c)(3).
- In 1996, St. David’s entered into a whole-hospital joint venture with HCA (a for-profit hospital company) through a limited partnership structure.
- St. David’s contributed its hospitals and related medical assets to the partnership; HCA contributed its Austin-area hospitals and related medical assets to the same partnership.
- Governance of the partnership was shared: St. David’s and HCA each had the right to appoint an equal number of members to the partnership’s governing board.
- Although board seats were evenly divided, St. David’s had the exclusive power to appoint the chairman of the governing board.
- The partnership’s governing documents required that the partnership operate the hospitals for the benefit of the community and reflected St. David’s charitable mission as an operational constraint on the venture.
- The Internal Revenue Service revoked St. David’s § 501(c)(3) status on the ground that the joint venture caused St. David’s to fail the “operated exclusively” requirement by serving private interests of the for-profit participant more than incidentally.
- St. David’s brought suit against the United States seeking to overturn the revocation and obtain related relief, including a tax refund for amounts assessed and paid.
- The parties filed cross-motions for summary judgment on whether St. David’s continued to qualify for exemption after the formation of the partnership.

## Issues

1. Whether St. David’s continued to qualify as an organization “organized and operated exclusively” for charitable purposes under I.R.C. § 501(c)(3) after contributing its hospitals to a limited-partnership joint venture with a for-profit hospital company.
2. Whether the joint venture arrangement resulted in prohibited private inurement or more-than-incidental private benefit to HCA, requiring revocation of exemption.
3. Whether summary judgment was appropriate on the exemption question based on the partnership’s governance and mission-based operating restrictions.

## Decision

- The court granted St. David’s motion for summary judgment.
- The court denied the United States’ cross-motion for summary judgment.
- The court held that the IRS’s revocation of St. David’s § 501(c)(3) status was improper on the summary-judgment record because St. David’s retained sufficient control and the partnership was bound by community-benefit requirements.
- The court concluded that St. David’s was entitled to refund relief tied to the challenged assessment.

## Legal Principles

- A § 501(c)(3) organization must satisfy the operational test: it must primarily conduct activities that accomplish one or more exempt purposes, and it may not operate for nonexempt purposes except to an insubstantial extent.
- No part of an exempt organization’s net earnings may inure to the benefit of private shareholders or individuals; transactions that confer improper private inurement are inconsistent with exemption.
- Even absent inurement, exemption can be lost if an organization confers more than incidental private benefit on private parties; any private benefit must be incidental both qualitatively (a byproduct of charitable activity) and quantitatively (not substantial in amount).
- For hospitals, community-benefit principles inform whether operations are charitable: operating in a manner directed to community health needs and open access, rather than private profit as the primary end, supports § 501(c)(3) status.
- A nonprofit’s participation in a joint venture with a for-profit entity does not automatically defeat exemption; the controlling inquiry is whether the nonprofit keeps effective control and enforceable mission-based limits sufficient to keep the venture’s operations directed to charitable/community benefit rather than private interests.
- Summary judgment is proper only when there is no genuine dispute of material fact and the moving party is entitled to judgment as a matter of law.

## Conclusion

The district court held that St. David’s did not forfeit its § 501(c)(3) exemption by placing its hospitals into a limited-partnership joint venture with HCA because St. David’s retained effective governance control (including the exclusive right to appoint the board chair) and the partnership was contractually required to operate the hospitals for community benefit, making any private benefit to HCA incidental on the record presented.


St. David's Health Care System, Inc. v. United States, 2002 U.S. Dist. LEXIS 10453 (2002)