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Click here for the full text of this decision The evidence presented by the parties demonstrates that there remain genuine issues of material fact regarding whether St. David’s ceded control to HCA, a for-profit company. FACTS:St. David’s Health Care System Inc. brought suit in federal court to recover taxes that it paid under protest. St. David’s argued that it was a charitable hospital, and therefore tax-exempt under 26 U.S.C. �501(c)(3). The government responded that St. David’s was not entitled to a tax exemption because it had formed a partnership with a for-profit company and ceded control over its operations to the for-profit entity. St. David’s and the government filed motions for summary judgment. The district court granted St. David’s motion, and ordered the government to refund the taxes paid by St. David’s for the 1996 tax year. The district court also ordered the government to pay $951,569.83 in attorneys’ fees and litigation costs. The government filed the instant appeal. HOLDING:Vacated and remanded. When a nonprofit organization forms a partnership with a for-profit entity, the nonprofit should lose its tax-exempt status if it cedes control to the for-profit entity. The court examines whether St. David’s has shown that there is no genuine issue of material fact regarding whether St. David’s ceded control to Columbia/HCA Healthcare Corp. In Revenue Ruling 98-15, the IRS indicated how a nonprofit organization that forms a partnership with a for-profit entity can establish that it has retained control over the partnership’s activities. The revenue ruling states that a nonprofit can demonstrate control by showing some or all of the following: 1. that the founding documents of the partnership expressly state that it has a charitable purpose and that the charitable purpose will take priority over all other concerns; 2. that the partnership agreement gives the non-profit organization a majority vote in the partnership’s board of directors; and 3. that the partnership is managed by an independent company (an organization that is not affiliated with the for-profit entity). The partnership documents in the present case leave the court uncertain as to whether St. David’s has ceded control to HCA. St. David’s did manage to secure some protections for its charitable mission: the Partnership Agreement expressly states that the manager of the partnership “shall” operate the partnership facilities in a manner that complies with the community benefit standard; the Management Services Agreement between Galen and the Partnership provides that, if Galen takes any action with a “material probability of adversely affecting” St. David’s tax-exempt status, that action will be considered an event of default; St. David’s can exercise a certain degree of control over the partnership via its membership on the partnership’s board of governors; St. David’s also contends that the Partnership Agreement gives it authority over the partnership’s chief executive officer; St. David’s argues that its power to dissolve the partnership provides it with a significant amount of control over partnership operations. According to St. David’s, the above protections in the partnership documents (the purpose statement in the Partnership Agreement; St. David’s power to terminate the Management Services Agreement and the CEO; its ability to block proposed action of the board of governors; and its power of dissolution) provide it with a large measure of control over partnership operations. However, as the government argues, there are reasons to doubt that the partnership documents provide St. David’s with sufficient control; St. David’s does not control a majority of the board; and Galen, which manages the operations of the partnership on a day-to-day basis, is a for-profit subsidiary of HCA. As a result, it is not apparent that Galen would be inclined to serve charitable interests. It seems more likely that Galen would prioritize the (presumably non-charitable) interests of its parent organization, HCA. Galen’s apparent conflict of interest is only partly mitigated by the fact that �3.2 of the Partnership Agreement requires the manager to abide by the community benefit standard. As the government points out, that requirement is useful only to the extent that the governing documents of the partnership empower St. David’s to enforce the provision. St. David’s appears to assert that the primary means through which it can force Galen to comply with �3.2 is by taking legal action. Given the time and expense of judicial proceedings, the court doubts that St. David’s will resort to litigation every time Galen makes a single decision that appears to conflict with the community benefit standard. St. David’s also asserts that it can control the management of the partnership via its position on the board of governors. However, the power of the board is limited in scope. The board of governors is empowered to deal with only major decisions, not the day-to-day operation of the partnership hospitals. Thus, St. David’s could not, via its position on the board, overrule a management decision that fell outside the range of the board’s authority. The Management Services Agreement does appear to provide St. David’s with a certain degree of control over Galen. The agreement permits St. David’s to unilaterally cancel the contract with Galen if the manager takes action that has a “material probability” of undermining St. David’s tax-exempt status. It is not entirely clear whether St. David’s would be willing to exercise this termination option without the consent of HCA. Nor is it clear whether St. David’s could ensure that Galen was replaced by a manager that would prioritize charitable purposes. Nonetheless, the Management Services Agreement does appear to give St. David’s some authority over Galen, and therefore seems to provide St. David’s with a degree of control over partnership operations. The court is also uncertain about the amount of control that St. David’s exercises over the partnership’s CEO. St. David’s appears to assert that its authority to appoint the initial CEO, and its power to terminate the officer, demonstrate its control within the partnership. The government has created a general issue of material fact, however, regarding St. David’s by pointing to instances in which the CEO failed to comply with the Partnership Agreement. Although the Partnership Agreement states that the CEO “shall” provide the board of governors with annual reports of the amount of charity care, see Partnership Agreement, �8.4(f), it seems that no such report was prepared for 1996 (the first year of the partnership and the tax year at issue in this case). Indeed, it does not appear that any annual report on charity care was prepared until after the IRS began auditing the partnership. Despite St. David’s assertions about its power over the CEO, the non-profit does not claim to have taken any punitive action against the CEO for failing to prepare these reports. If St. David’s was in fact unable to enforce a provision of the Partnership Agreement dealing specifically with charity care, that raises serious doubts about St. David’s capacity to ensure that the partnership’s operations further charitable purposes. Finally, the court questions the degree to which St. David’s has the power to control the partnership by threatening dissolution. The Partnership Agreement appears to permit St. David’s to request dissolution only when there is a change in the law, not simply when the partnership fails to perform a few charitable functions. HCA may not take seriously any threat of dissolution made by St. David’s. HCA must be aware that St. David’s has a strong incentive not to exercise its power to dissolve the corporation. The partnership documents include a noncompete clause, which provides that, in the event of dissolution, neither partner can compete in the Austin area for two years. That result might be slightly unpleasant for HCA, but would not destroy the entity; HCA would still have its nationwide health care business. For St. David’s, by contrast, dissolution would be disastrous. St. David’s serves only the Austin community. If it were forbidden from competing in that area, St. David’s would (in effect) cease to exist. In light of the realities of the situation, it seems unlikely that St. David’s would exercise its option to dissolve the partnership even if the partnership strayed from St. David’s charitable mission. The evidence presented by the parties demonstrates that there remain genuine issues of material fact regarding whether St. David’s ceded control to HCA. OPINION:Garza, J.

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