• Redlands Surgical Services v.

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    • Abstract: Redlands Surgical Services v.Commissioners of InternalRevenue Service113 T.C. 47 (1999), aff’d, 242 F.3d 904 (9th Cir. 2001)Thornton, Judge. manages the day-to-day operations of the surgical

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Redlands Surgical Services v.
Commissioners of Internal
Revenue Service
113 T.C. 47 (1999), aff’d, 242 F.3d 904 (9th Cir. 2001)
Thornton, Judge. manages the day-to-day operations of the surgical
center, in return for a percentage of gross revenues.
* * * Several months after forming the general partnership,
Petitioner is a California nonprofit public benefit RHS formed petitioner to succeed to its interest in it.
corporation with its principal place of business in Red- Petitioner has no activity other than its involve-
lands, California. It is a wholly owned subsidiary of ment with the partnerships. The question is whether
Redlands Health Systems, Inc. (RHS), a California petitioner is operated exclusively for exempt purposes
nonprofit public benefit corporation that has been rec- within the meaning of § 501 (c)(3). . . .
ognized as exempt under § 501(c)(3) of the Code and ....
as a public charity. . . . RHS is the parent corporation of Redlands Hospital has its own outpatient surgery
three subsidiaries in addition to petitioner, namely Red- program within the hospital facility. It also maintains a
lands Community Hospital (Redlands Hospital) and 24-hour emergency room that provides emergency
Redlands Community Hospital Foundation (Redlands medical services for all patients regardless of their abil-
Foundation), both of which are California nonprofit ity to pay. It maintains an open medical staff and is
public benefit corporations that have been recognized governed by a community-based board of directors. It
as exempt under § 501(c)(3); and Redlands Health Ser- does not discriminate on the basis of race, gender, age,
vices, a for-profit corporation. color, national origin, or disability.
. . . [I]n 1990 RHS became co-general partner Since its inception in 1983, the Inland Surgery
with a for-profit corporation, Redlands-SCA Surgery Center Limited Partnership (the Operating Partner-
Centers, Inc. (SCA Centers), in a general partnership ship) has operated a freestanding ambulatory surgery
formed to acquire a 61-percent interest in an existing center (the Surgery Center) in a 12,000-square foot
outpatient surgical center in Redlands, California, two building within two blocks of Redlands Hospital.
blocks from the Redlands Hospital facility. This gen- During the 1980’s, the Operating Partnership was a
eral partnership in turn became sole general partner in successful for-profit venture, serving only surgical
the California limited partnership that owns and oper- patients who were able to pay, by insurance or other-
ates the surgical center. Under a long-term manage- wise. Prior to its affiliation with the General Partner-
ment contract, SCA Management Co. (SCA ship, the Operating Partnership comprised Beaver
Management)—a for-profit affiliate of SCA Centers— Medical Clinic, Inc., and some 30 physician partners,
who were also physicians on the medical staff of Red- of the purchase price, the General Partnership agreed to
lands Hospital. contribute $1,598,495 by delivering to the limited part-
ners (with the exception of Beaver Medical Clinic) shares
The Affiliation of Redlands Hospital of SCA common stock with an equivalent market value.
With the Surgery Center To determine the General Partnership’s invest-
Before 1990, Redlands Hospital desired to increase ment, the Operating Partnership was valued at four to
its outpatient surgery capacity but lacked the capital five times earnings. No formal appraisal was acquired;
resources and experience to develop and operate its rather, the valuation was determined based on SCA’s
own freestanding outpatient facility. In addition, such a experience and knowledge of the market and by a re-
facility would have been in competition with the exist- view of historical records. An unrelated bidder (a for-
ing Surgery Center, and there was concern that the profit company, not otherwise identified in the record)
Redlands community could not sustain both. was offering the Operating Partnership a higher pur-
On March 1, 1990, RHS and SCA Centers entered chase price based on approximately six times earnings.
into a general partnership agreement to acquire jointly a The existing partners of the Operating Partnership
61 percent general partnership interest in the Surgery agreed to the offer made by the General Partnership
Center. The partnership is known as Redlands Ambula- due to the desire to have an affiliation with Redlands
tory Surgery Center (the General Partnership). Hospital for quality control review and other reasons,
SCA Centers is a for-profit, wholly owned subsidi- such as to supervise the teaching and maintenance of
ary of Surgical Care Affiliates, Inc. (SCA), a publicly up-to- date surgery methodologies.
held corporation based in Nashville, Tennessee, and The General Partnership is the sole general partner
specializing in owning and managing ambulatory sur- of the Operating Partnership. There are 32 limited
gery centers. Prior to formation of the General Partner- partners. Except for Beaver Medical Clinic, Inc., the
ship, neither SCA nor any of its affiliated entities had limited partners are all physicians who are also on the
any relationship, contractual or otherwise, with RHS or medical staff of Redlands Hospital. Two of the limited
any of its affiliated entities, or with the Surgery Center. partners are board members of Redlands Hospital and
RHS contributed $1,131,289 to the General Part- RHS. The amended Operating Partnership agreement
nership, borrowing $796,829 from SCA and the bal- contains no statement of charitable purpose and im-
ance of $334,460 from Redlands Hospital. SCA Centers poses no requirement that the Operating Partnership
contributed $1,946,993 in cash and stock to the Gen- operate for a charitable purpose.
eral Partnership. In return for its approximately 37 per-
[A summary of the operating partnership agree-
cent capital investment, RHS received a 46 percent
ment is omitted.]
interest in profits, losses, and cash-flows of the General
Partnership. In return for its approximately 63 percent . . . [O]n April 30, 1990, the Operating Partnership
capital investment, SCA Centers received a 54 percent entered into a contract with SCA Management,
interest in profits, losses, and cash-flows of the General whereby SCA Management was retained “for the pur-
Partnership. pose of rendering management, administration and
purchasing services and support, and all other man-
[A lengthy description of the partnership agree-
agement support needed for operation and, in the best
ment is omitted.]
interest, of the [Surgery] Center.” The management
Effective April 30, 1990, the General Partnership agreement is signed on behalf of both the Operating
entered into an amended and restated agreement of the Partnership and SCA Management by David E. Crock-
Operating Partnership in accordance with the Revised ett, in his capacities as secretary and vice president,
Limited Partnership Act of the State of California. Pur- respectively, of these two entities.
suant to this agreement, the General Partnership ac- Pursuant to the management contract, SCA Man-
quired, for approximately $3 million, a 61 percent general agement has wide-ranging authority for operational
partnership interest in the Operating Partnership. As part management of the Surgery Center, except that it has
“no power or authority to make any decision relating to however, if the number of surgical cases performed at
the care or treatment of patients or other medical mat- the Surgery Center was less than 4,225 during any year.
ters,” this power and authority being specifically re- The agreement states that if it is terminated for any
served to the Operating Partnership’s Medical Advisory reason, the parties agree to negotiate in good faith an
Committee. SCA Management is authorized to enter agreement on substantially the same terms.
into contracts relating to the affairs of the Surgery Cen-
ter, subject to certain exceptions, requiring express Medical Advisory Group
authorization of the Operating Partnership. These ex- Pursuant to paragraph 9.6 of the Operating Part-
ceptions include lease or contractual obligations requir- nership agreement, supra, all questions regarding medi-
ing payments in excess of $50,000 in any 12-month cal standards and policies at the Surgery Center are
period, and obligations to a related party in excess of determined by a Medical Advisory Group, which also
$5,000. reviews procedures being performed at the Surgery
Center. The Medical Advisory Group is composed of
[A summary of the management agreement is
six physicians who are all limited partners of the Oper-
ating Partnership. The managing directors of the Gen-
eral Partnership select three members of the medical
Quality Assurance Agreement advisory group; Beaver Medical Clinic—which is a lim-
Paragraph 13 of the General Partnership agree- ited partner in the Operating Partnership—selects the
ment, supra, requires SCA Management to enter into a other three members. Prior to the affiliation of the
quality assurance agreement with RHS whereby RHS General Partnership with the Surgery Center, the Medi-
will agree to perform “certain managerial and supervi- cal Advisory Group was inactive.
sory quality assurance duties” in connection with the
operation of the Surgery Center. The General Partner- Redlands Surgical Services (Petitioner)
ship agreement provides that the quality assurance On August 1, 1990, 5 months after entering into
agreement is to continue from year to year unless ter- the General Partnership agreement, RHS incorporated
minated by either of the parties. petitioner as a California nonprofit public benefit cor-
Effective April 30, 1990, SCA Management and poration. On September 30, 1990, RHS transferred its
RHS entered into a quality assurance agreement. The interest in the General Partnership to petitioner.
agreement states that SCA Management “retains RHS RHS formed petitioner with the intent that peti-
for the purpose of the management and supervision tioner’s sole planned activity would be its efforts with
of quality assurance programs for the [Surgery] Center respect to the Operating Partnership. The decisions to
and [to] oversee its affairs, and for providing addi- incorporate petitioner as a separate corporate entity and
tional services as SCA [Management] may reasonably to transfer the interests in the General Partnership to
request.” petitioner were made to protect Redlands Hospital and
The quality assurance agreement recites as one of its Redlands Foundation from potential creditors of the
premises that SCA Management “desires to reimburse Surgery Center and to keep petitioner’s and the Surgery
RHS for certain services, including without limitation Center’s activities free of the debt covenants of Red-
management and the supervision of quality assurance lands Hospital.
programs with respect to the [Surgery] Center.” . . . ....
On September 30, 1990, RHS transferred its obli- Petitioner’s bylaws limit membership to one mem-
gations and rights under the Quality Assurance Agree- ber. The sole member is RHS, which has the right to
ment to petitioner. elect, remove, and fill vacancies in petitioner’s Board of
By its terms, the quality assurance agreement was Directors. Petitioner’s bylaws provide that the directors
to continue from year to year unless terminated by ei- must be among those persons serving as members of
ther SCA Management or petitioner. The quality assur- the Enterprise Committee of petitioner’s parent corpo-
ance agreement was to terminate automatically, ration RHS.
Petitioner’s sole source of financial support is its unable to pay, an effort is made to provide all necessary
share of the revenues from the Operating Partnership. services and to assist the patient in qualifying for ap-
Petitioner has no paid or salaried employees. The presi- propriate medical coverage including Medi-Cal. The
dent of Redlands Hospital serves concurrently as peti- Surgery Center also provides payment plans for pa-
tioner’s president. tients to make payment for procedures more afford-
The Surgery Center’s Operations Since the General Partnership acquired its interest
The Surgery Center operates on a nondiscrimina- in the Operating Partnership, the Surgery Center has
tory basis both as to doctors and patients. There are no accepted more managed care (i.e., care provided by
restrictions as to whether a surgical patient can be op- health maintenance organizations (HMOs)). . . .
erated on at the Surgery Center, other than a review as For the last 6 months of 1993, Medicare accounted
to the appropriateness of conducting the surgical pro- for about 12 percent of total Surgery Center invoices.
cedure in an outpatient setting and the overall medical Because greater medical risks attend surgery of older
condition of the patient. There is practically a 100- per- patients, such as the typical Medicare patient, most
cent overlap between surgeons who operate at Red- Medicare surgeries are performed in a hospital setting,
lands Hospital and at the Surgery Center. rather than in a surgery center.
Between 1990 and 1995, the number of surgical . . . The Surgery Center has no contract with Medi-
procedures performed at the Surgery Center increased Cal directly, although a negligible amount of Medi-Cal
10 percent. Over the same period, the number of out- coverage is provided for surgeries performed at the Sur-
patient surgeries performed at Redlands Hospital de- gery Center pursuant to participating hospital agreements
creased from 2,239 to 1,864. between Redlands Hospital and the Blue Cross of Cali-
fornia Medi-Cal Managed Care Program, effective De-
Procedures Authorized To Be cember 1, 1994, and between Redlands Hospital and
Performed at the Surgery Center PacifiCare of California, a California HMO, effective
.... June 1, 1994. For the last 6 months of 1993, the Surgery
The General Partnership agreement generally pro- Center’s Medicaid invoices totaled 18, or less than 1 per-
vides that, unless otherwise approved by the managing cent (8/10 of 1 percent) of all its invoices.
directors, the Surgery Center will not perform new
surgical procedures until they are available on a non- Integration of the Activities of Redlands
hospital, outpatient basis at a majority of freestanding Hospital and the Surgery Center
outpatient surgery facilities in the area. If the managing Since its affiliation with the General Partnership,
directors deadlock over approval of new procedures, the Surgery Center has served as a training site for Red-
the arbitration provisions of the partnership agreement lands Hospital nurses in outpatient procedures. Red-
do not apply to break the deadlock. lands Hospital nursing surgery staff members train at
Petitioner’s appointees to the managing directors the Surgery Center in circumstances where the fre-
have successfully blocked various proposals by SCA quency of a particular surgery at the Surgery Center
Centers that additional surgical procedures be con- makes such training more efficient and economical. . . .
ducted at the Surgery Center. . . . To be a member of the Redlands Hospital physician
staff, a physician must be board-certified in his or her
Payment for Services specialty and regarded by Redlands Hospital as a capable
The Surgery Center’s charges are determined on practitioner. Redlands Hospital uses a “proctory” review
the basis of customary and usual charges for similar process to approve new members of its physician staff.
services provided by other organizations in the area. Before the General Partnership acquired its interest in
The Surgery Center offers no free care to indigents and the Surgery Center, no proctoring was conducted at the
has no emergency room or certification to treat the Surgery Center. Since the affiliation of the Surgery Cen-
emergency patient population. For persons who are ter with the General Partnership, it is frequently the case
that, as new surgeons join Redlands Hospital’s staff, the partnership agreements and related management con-
Redlands Hospital proctoring requirements are satisfied, tract are structured to give for-profit interests control
in whole or in part, during surgeries performed at the over the Surgery Center. Respondent contends that
Surgery Center. both before and after the General Partnership acquired
Redlands Hospital has been involved in teaching an ownership interest in it, the Surgery Center was a
new procedures to be performed at the Surgery Center. successful profit-making business that never held itself
An example is laser arthroscopic surgery, which elimi- out as a charity and never operated as a charitable
nates incision. These procedures were developed at health care provider.
Redlands Hospital, and the knowledge was shared with Petitioner argues that it meets the operational test
the Surgery Center. under § 501(c)(3) because its activities with regard to the
Surgery Center further its purpose of promoting health
The Surgery Center’s Financial Results for the benefit of the Redlands community, by providing
The Surgery Center’s profit levels and payor mix access to an ambulatory surgery center for all members
are comparable to other ambulatory surgery centers. Its of the community based upon medical need rather than
profits are used for equipment additions, replacements, ability to pay, and by integrating the outpatient services
improvements in services, and cash distributions to the of Redlands Hospital and the Surgery Center. Petitioner
partners. argues that its dealings with the for-profit partners have
In the first 5-month period after April 30, 1990, been at arm’s length, and that its influence over the ac-
when the amended Operating Partnership and the SCA tivities of the Surgery Center has been sufficient to fur-
Management contract became effective, the Operating ther its charitable goals. Petitioner further contends that
Partnership had net income of $451,430, which was it qualifies for exemption because it is organized and
34.5 percent of gross revenues. SCA Management re- operated to perform services that are integral to the ex-
ceived $80,458 in fees. empt purposes of RHS, its tax-exempt parent, and Red-
Cash distributions from the Operating Partnership lands Hospital, its tax-exempt affiliate.
to petitioner, SCA Centers, and the limited partners,
expressed as an average rate of return on investment II. Applicable Legal Principles
basis for fiscal years 1990-1993, were as follows: [A To qualify for exemption from Federal income tax,
table of distributions is omitted.] an organization must be “organized and operated exclu-
Upon its Form 1023, Application for Recognition sively for . . . charitable . . . purposes.” [citation to §
of Exemption, under § 501(c)(3), filed August 7, 1990, 501(c)(3)] The applicable regulations provide as follows:
petitioner estimated that between 50 and 80 percent of
. . . An organization will be regarded as “operated
its total annual income would be used to support RHS
exclusively” for one or more exempt purposes only
and Redlands Hospital, which were stated to have total
if it engages primarily in activities which accomplish
annual losses of $340,544 and $460,595, respectively.
one or more of such exempt purposes specified in §
Petitioner has used its share of the cash distributions
501(c)(3). An organization will not be so regarded if
from the Operating Partnership to pay off the note
more than an insubstantial part of its activities is not
payable to SCA for its initial capital contribution and to
in furtherance of an exempt purpose.
make distributions to RHS or Redlands Hospital.
.... The operational test focuses on the actual pur-
poses the organization advances by means of its activi-
I. The Parties’ Positions ties, rather than on the organization’s statement of
Respondent contends that petitioner is not oper- purpose or the nature of its activities. To determine
ated exclusively for charitable purposes because it op- whether the operational test has been satisfied, we look
erates for the benefit of private parties and fails to beyond “the four corners of the organization’s charter
benefit a broad cross-section of the community. In to discover ‘the actual objects motivating the organiza-
support of its position, respondent contends that the tion.’” (citations omitted)
Although an organization might be engaged in An organization does not operate exclusively for
only a single activity, that single activity might be di- exempt purposes if it operates for the benefit of private
rected toward multiple purposes, both exempt and interests such as designated individuals, the creator or
nonexempt. If the nonexempt purpose is substantial in his family, shareholders of the organization, or persons
nature, the organization will not satisfy the operational controlled, directly or indirectly, by such private inter-
test. . . . ests. The private benefit proscription inheres in the
The fact that an organization engages in a trade or requirement that an organization operate exclusively
business is not conclusive of a substantial nonexempt for exempt purposes.
purpose and does not, in and of itself, disqualify the The proscription against private benefit shares
organization from exemption under § 501(c)(3), pro- common elements with, but is distinct from, the pro-
vided the activity furthers or accomplishes an exempt scription against the inurement of organizational earn-
purpose. (citations omitted) ings to private shareholders and individuals. . . . The
Whether an organization has a substantial nonex- proscription against private benefit encompasses not
empt purpose is a question of fact to be resolved on only benefits conferred on insiders having a personal
the basis of all the evidence presented by the adminis- and private interest in the organization, but also bene-
trative record. . . . The burden of proof is on petitioner fits conferred on unrelated or disinterested persons.
to demonstrate, based on materials in the administra- The mere fact that an organization seeking exemp-
tive record, that it is operated exclusively for exempt tion enters into a partnership agreement with private
purposes and that it does not benefit private interests parties that receive returns on their capital investments
more than incidentally. . . . does not establish that the organization has impermis-
Section 501(c)(3) specifies various qualifying ex- sibly conferred private benefit. The question remains
empt purposes, including “charitable” purposes. The whether the organization has a substantial nonexempt
term “charitable” is not defined in § 501(c)(3), but is purpose whereby it serves private interests.
used in its generally accepted legal sense. In applying ....
this standard, courts have looked to the law of charita-
ble trusts. (citations omitted) III. Petitioner’s Claim to Exemption
The promotion of health for the benefit of the on a “Stand-Alone” Basis
community is a charitable purpose. As applied to de- Applying the principles described above, we next
terminations of qualification for tax exemption, the consider whether petitioner has established that re-
definition of the term “charitable” has not been static. spondent improperly denied it tax-exempt status as a §
. . . [I]n recognition of changes in the health care in- 501(c)(3) organization.
dustry, the standard no longer requires that “the care
of indigent patients be the primary concern of the A. The Relevance of Control—
charitable hospital, as distinguished from the care of The Parties’ Positions
paying patients.” Rather, the standard reflects “a pol- Respondent asserts that petitioner has ceded ef-
icy of insuring that adequate health care services are fective control over its sole activity—participating as a
actually delivered to those in the community who co-general partner with for-profit parties in the part-
need them.” Under this standard, health care provid- nerships that own and operate the Surgery Center—to
ers must meet a flexible community benefit test based the for-profit partners and the for-profit management
upon a variety of indicia, one of which may be company that is an affiliate of petitioner’s co-general
whether the organization provides free care to indi- partner. Respondent asserts that this arrangement is
gents. indicative of a substantial nonexempt purpose,
To benefit the community, a charity must serve a whereby petitioner impermissibly benefits private
sufficiently large and indefinite class; as a corollary to interests.
this rule, private interests must not benefit to any sub- Without conceding that private parties control its
stantial degree. activities, petitioner challenges the premise that the
ability to control its activities determines its purposes. B. Indicia of For-Profit Control Over
Petitioner argues that under the operational test, “ the the Partnerships’ Activities
critical issue in determining whether an organization’s 1. No Charitable Obligation
purposes are noncharitable is not whether a for-profit Nothing in the General Partnership agreement, or
or not-for-profit entity has control. Rather, the critical in any of the other binding commitments relating to the
issue is the sort of conduct in which the organization is operation of the Surgery Center, establishes any obliga-
actually engaged.” . . . tion that charitable purposes be put ahead of economic
We disagree with petitioner’s thesis. It is patently objectives in the Surgery Center’s operations. The Gen-
clear that the Operating Partnership, whatever chari- eral Partnership agreement does not expressly state any
table benefits it may produce, is not operated “in an mutually agreed-upon charitable purpose or objective
exclusively charitable manner.” . . . The Operating of the partnership.
Partnership’s income is, of course, applied to the After the General Partnership acquired its 61-
profit of petitioner’s co-general partner and the nu- percent interest, the Operating Partnership—which had
merous limited partners. It is no answer to say that long operated as a successful for-profit enterprise and
none of petitioner’s income from this activity was never held itself out as a charity—never changed its
applied to private interests, for the activity is indivisi- organizing documents to acknowledge a charitable
ble, and no discrete part of the Operating Partner- purpose. . . .
ship’s income-producing activities is severable from
those activities that produce income to be applied to 2. Petitioner’s Lack of Formal Control
the other partners’ profit. Under the General Partnership agreement, control
Taken to its logical conclusion, petitioner’s thesis over all matters other than medical standards and poli-
would suggest that an organization whose main activity cies is nominally divided equally between petitioner and
is passive participation in a for-profit health-service SCA Centers, each appointing two representatives to
enterprise could thereby be deemed to be operating serve as managing directors. (As discussed infra, mat-
exclusively for charitable purposes. Such a conclusion, ters of medical standards and policies are determined
however, would be contrary to well-established princi- by the Medical Advisory Group, half of whom are cho-
ples of charitable trust law. sen by the General Partnership’s managing directors.)
. . . The binding commitments that petitioner has Consequently, petitioner may exert influence by block-
entered into and that govern its participation in the ing actions proposed to be taken by the managing di-
partnerships are indicative of petitioner’s purposes. To rectors, but it cannot initiate action without the consent
the extent that petitioner cedes control over its sole of at least one of SCA Center’s appointees to the man-
activity to for-profit parties having an independent aging directors. For instance, petitioner lacks sufficient
economic interest in the same activity and having no control unilaterally to cause the Surgery Center to re-
obligation to put charitable purposes ahead of profit- spond to community needs for new health services,
making objectives, petitioner cannot be assured that the modify the delivery or cost structure of its present
partnerships will in fact be operated in furtherance of health services to serve the community better, or, as
charitable purposes. In such a circumstance, we are led discussed in more detail infra, terminate SCA Manage-
to the conclusion that petitioner is not operated exclu- ment, if SCA Management were determined to be
sively for charitable purposes. managing the Surgery Center in a manner inconsistent
Based on the totality of factors described below, with charitable objectives.
we conclude that petitioner has in fact ceded effective The administrative record shows that petitioner has
control of the partnerships’ and the Surgery Center’s successfully blocked various proposals to expand the
activities to for-profit parties, conferring on them sig- scope of activities performed at the Surgery Center. Peti-
nificant private benefits, and therefore is not operated tioner’s ability to veto expansion of the scope of the
exclusively for charitable purposes within the meaning Surgery Center’s activities, however, does not establish
of § 501(c)(3). that petitioner has effective control over the manner in
which the Surgery Center conducts activities within its suggests that petitioner commands allegiance or loyalty
pre-designated sphere of operations. Nor does it tend to of the SCA affiliates or of the limited partners to cause
indicate that the Surgery Center is not operated to them to put charitable objectives ahead of their own
maximize profits with regard to those activities. Indeed, economic objectives. Indeed, until April 1992, peti-
given that all the partners except petitioner are for- profit tioner was in a debtor relationship to SCA. The limited
interests not shown to be motivated or constrained by partners (except for Beaver Medical Clinic, Inc.) all
charitable objectives, and given that all the limited part- became common stockholders of SCA when the Gen-
ners except Beaver Medical Clinic were issued SCA eral Partnership acquired its interest in the Operating
common stock when the General Partnership acquired Partnership.
its interest in the Operating Partnership, and given that The administrative record does not establish that
SCA Management derives a management fee computed petitioner has the resources or ability effectively to
as a percentage of gross revenues, we find, in the ab- oversee or monitor the Surgery Center’s operations.
sence of evidence to the contrary, that a significant Petitioner has almost no resources apart from its assets
profit-making objective is present in the Surgery Center’s invested in the General Partnership. The president of
operations. The high rates of return earned on the part- Redlands Hospital also serves as petitioner’s president
ners’ investments (including petitioner’s) in the Operat- and as one of the four managing directors of the Gen-
ing Partnership bolster this finding. eral Partnership.
.... ....
. . .[N]either the General Partnership agreement,
the Operating Partnership agreement, nor the man- C. Competitive Restrictions
agement contract itself requires that SCA Management and Market Advantages
be guided by any charitable or community benefit, goal, By entering into the General Partnership agree-
policy, or objective. Rather, the management contract ment, RHS (petitioner’s parent corporation and prede-
simply requires SCA Management to render services as cessor in interest in the General Partnership) not only
necessary and in the best interest of the Operating acquired an interest in the Surgery Center, but also re-
Partnership, “subject to the policies established by [the stricted its future ability to provide outpatient services
Operating Partnership], which policies shall be consis- at Redlands Hospital or elsewhere without the approval
tent with applicable state and Federal law.” of its for-profit partner. Paragraph 16 of the General
Petitioner argues that the management contract Partnership agreement prohibits the co-general part-
“was negotiated at arm’s length, between parties of ners and their affiliates from owning, managing, or
equal bargaining strength.” The administrative reco

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