Redlands Surgical Servs. v. Commissioner

*47 THORNTON, JUDGE: Petitioner brought this action for a declaratory judgment, pursuant to section 7428 and Title XXI of this Court's Rules. Petitioner requests the Court determine the correctness of respondent's adverse determination with respect to its initial qualification as a tax-exempt organization under section 501(c)(3). ¹ The parties have submitted this *48 case fully stipulated under Rule 122 on the basis of the pleadings and the stipulated *30 administrative record, which is incorporated herein by this reference.

FINDINGS OF FACT

Petitioner is a California nonprofit public benefit corporation with its principal place of business in Redlands, California. It is a wholly owned subsidiary of Redlands Health Systems, Inc. (RHS), a California nonprofit public benefit corporation that has been recognized as exempt under section 501(c)(3) of the Code and as a public charity within the meaning of section 509(a). RHS is the parent corporation of three subsidiaries in addition to petitioner, namely Redlands Community Hospital (Redlands Hospital) and Redlands Community Hospital Foundation (Redlands Foundation), both of which are California nonprofit public benefit corporations that have been recognized as exempt under section 501(c)(3); and Redlands Health Services, a for-profit corporation.

As described in more detail below, and as reflected schematically in the appendix hereto, in 1990 RHS became co-general partner with a for-profit *31 corporation, Redlands-SCA Surgery Centers, Inc. (SCA Centers), in a general partnership formed to acquire a 61- percent interest in an existing outpatient surgical center in Redlands, California, two blocks from the Redlands Hospital facility. This general partnership in turn became sole general partner in the California limited partnership that owns and operates the surgical center. Under a long-term management contract, SCA Management Co. (SCA Management) -- a for-profit affiliate of SCA Centers -- 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, RHS formed petitioner to succeed to its interest in it.

Petitioner has no activity other than its involvement with the partnerships. The question is whether petitioner is operated exclusively for exempt purposes within the meaning of section 501(c)(3). We hold that it is not.

*49 Redlands Hospital

Since its founding in 1929, Redlands Hospital has been recognized by respondent as a charitable organization described in section 501(c)(3) and as a "hospital" described in section 170(b)(1)(A)(iii). Its mission includes providing necessary medical *32 care free of charge, or at a discount, to individuals without insurance or other means of paying.

Redlands Hospital has its own outpatient surgery program within the hospital facility. It also maintains a 24-hour emergency room that provides emergency medical services for all patients regardless of their ability to pay. It maintains an open medical staff and is governed by a community-based board of directors. It does not discriminate on the basis of race, gender, age, color, national origin, or disability.

Inland Surgery Center, L.P.

Since its inception in 1983, the Inland Surgery Center Limited Partnership (the Operating Partnership) has operated a freestanding ambulatory surgery center (the Surgery Center) in a 12,000-square foot building within two blocks of Redlands Hospital. During the 1980's, the Operating Partnership was a successful for- profit venture, serving only surgical patients who were able to pay, by insurance or otherwise. Prior to its affiliation with the General Partnership, the Operating Partnership comprised Beaver Medical Clinic, Inc., and some 30 physician partners, who were also physicians on the medical staff of Redlands Hospital.

The Affiliation of Redlands *33 Hospital With the Surgery Center

Before 1990, Redlands Hospital desired to increase its outpatient surgery capacity but lacked the capital resources and experience to develop and operate its own freestanding outpatient facility. In addition, such a facility would have been in competition with the existing Surgery Center, and there was concern that the Redlands community could not sustain both.

On March 1, 1990, RHS and SCA Centers entered into a general partnership agreement to acquire jointly a 61-percent general partnership interest in the Surgery Center. ² The *50 partnership is known as Redlands Ambulatory Surgery Center (the General Partnership).

SCA Centers is a for-profit, wholly owned subsidiary of Surgical Care Affiliates, Inc. (SCA), a publicly held corporation based in Nashville, Tennessee, and specializing in owning and managing ambulatory surgery centers. ³ Prior to formation of the General Partnership, neither SCA nor any of its affiliated entities had any relationship, contractual or otherwise, *34 with RHS or any of its affiliated entities, or with the Surgery Center.

RHS contributed $ 1,131,289 to the General Partnership, borrowing $ 796,829 from SCA and the balance of $ 334,460 from Redlands Hospital. SCA Centers contributed $ 1,946,993 in cash and stock to the General Partnership. In return for its approximately 37-percent capital investment, RHS received a 46-percent interest in profits, losses, and cash-flows of the General Partnership. In return for its approximately 63-percent capital investment, SCA Centers received a 54-percent interest in profits, losses, and cash-flows of the General Partnership.

The General Partnership agreement provides in relevant part:

         AGREEMENT OF GENERAL PARTNERSHIP

        OF REDLANDS AMBULATORY SURGERY CENTER

   This AGREEMENT OF GENERAL PARTNERSHIP, [is] entered into as of

   the 1st day of March, 1990, by and between REDLANDS-SCA SURGERY

   CENTERS, INC., a California corporation ("SCA Centers") and a

   wholly owned subsidiary of Surgical Care *35 Affiliates, Inc.

   ("SCA") * * *, RHS Corp., ("RHS") a California not-for-profit

   corporation, * * * and Redlands Community Hospital, a California

   not-for-profit corporation (the "Hospital"). SCA Centers and RHS

   are collectively referred to as "Partners."

               WITNESSETH:

     WHEREAS, RHS desires to insure the availability of high

     quality health services in the most cost effective setting

     in which such services can be rendered; and

*51      WHEREAS, the use of an ambulatory surgical center by the

     area-wide residents will contribute to RHS's corporate goal

     of providing comprehensive health care services at an

     affordable price; and

     WHEREAS, SCA is a corporation that is engaged in the

     development and management of ambulatory surgical centers

     and has the expertise necessary to operate ambulatory

     surgical centers; and

     WHEREAS, RHS and SCA Centers desire to enter into a

     Partnership to be equally controlled by representatives of

     the Partners.

     NOW, THEREFORE, in consideration of the mutual covenants

     herein contained, SCA Centers and RHS agree to be partners

     in a general partnership (the "Partnership") pursuant to

     the *36 California Uniform Partnership Act (the "Act") on the

     terms and conditions hereinafter set forth.

     1. Name and Purpose.

       (a) The Partnership shall be carried on under the name

       of Redlands Ambulatory Surgery Center or such other name

       as may be selected by the Managing Directors. The

       Partnership has been formed to acquire a 61 percent

       general partner interest (the "General Partner

        Interest") in a California limited partnership (the

       "Operating Partnership") which owns and operates a

       freestanding ambulatory surgery center in Redlands,

       California known as the Inland Surgery Center (the

       "Center"). The Partnership may engage in any and all

       other activities as may be necessary, incidental or

       convenient to carry out the business of the Partnership

       as contemplated by this Agreement.

                  * * * * * * *

     3. Term. The Partnership shall commence on April 30, 1990,

       or such later date as the Partners shall mutually agree,

       and shall continue until March 31, 2020, or such other

       date as the partners shall mutual [sic] agree.

     4. Management.

       (a) General Management by the Managing *37 Directors. The

       general management and determination of all questions

       relating to the affairs and policies of the Partnership,

       except for questions relating to the medical standards

       and medical policies of the centers, shall be decided by

       a majority vote of the Managing Directors. The Managing

       Directors shall consist of four (4) persons, two (2) of

       whom shall be chosen by SCA Centers and two (2) of whom

       shall be chosen by RHS. Notwithstanding the above, it is

       recognized that the Managing Directors have no authority

       to amend the Partnership Agreement. In the event the

       Managing Directors are unable to agree on a matter,

       either Partner may institute the following arbitration

       procedure to resolve the matter. Within three (3) days

       of a Partner's notifying the other of institution of

       this arbitration procedure, each Partner shall select an

       arbitrator to resolve the matter. Within seven (7) days

       after the selection of the arbitrators, those

       arbitrators shall select a third. Within five (5) days

       after selection of the third arbitrator, each Partner

       shall submit in writing *38 to each of the arbitrators the

       Partner's position on the matter to be resolved. The

       arbitrators shall decide the matter and advise the

        Partners in writing of their decision within fourteen

       (14) days after the Partners' submission of their

       written positions. In hearing such arbitration the

       arbitrators shall determine the procedural rules to be

       applied and shall apply the substantive law of the State

       of California without regard to conflict *52 of law

       considerations. The decision of a majority of the

       arbitrators shall be final and binding. The costs and

       expenses of the arbitrators shall be divided equally

       between the Partners.

       (b) Medical Advisory Group. The determination of all

       questions relating to the medical standards and medical

       policies of the center shall rest with the Medical

       Advisory Group. The determination as to what constitutes

       a medical decision, standard or policy shall rest with

       the Managing Directors. The Managing Directors shall

       select 50 percent of the Medical Advisory Group.

       (c) Operating Partnership Agreement and Purchase

       Agreement. RHS hereby *39 authorizes SCA Centers to execute

       on behalf of the Partnership: (i) the Operating

       Partnership's Partnership Agreement; (ii) an agreement

       to acquire the General Partner Interest (the "Purchase

       Agreement"); and (iii) all exhibits to the Purchase

       Agreement.

              *   *   *   *   *   *   *

       12. Management Agreement. The Operating Partnership

       shall enter into a Management Agreement with SCA

       Management Company, a wholly-owned subsidiary of SCA

       ("Management") whereby Management assumes full

       responsibility for administering the day-to-day

       operation of the ambulatory center in accordance with

       the goals, policies and objectives of the Operating

       Partnership. The Agreement will be for a term of fifteen

       (15) years with two (2) five (5) year extensions at

       Management's sole discretion and will provide Management

       with a fee equal to Six Percent (6%) of the Operating

       Partnership's gross revenues. Legal, accounting, travel,

       lodging, meals and other such professional services

       associated with the management and administration of the

       ambulatory surgery center shall be reimbursed *40 to

       Management.

       13. Quality Assurance Agreement. Management shall enter

       into an [sic] Quality Assurance Agreement with RHS

       whereby RHS will agree to perform certain managerial and

       supervisory quality assurance duties in connection with

       the operation of the Center. The Quality Assurance

       Agreement will continue from year to year unless

       terminated by either of the parties thereto. RHS will

       receive no fee under the Quality Assurance Agreement

       during the first year thereof and thereafter will be

       paid a fee equal to one percent of gross revenues as

       defined in such Agreement, payable monthly.

              *   *   *   *   *   *   *

       16. Non-Compete. The Partners and RHS hereby agree that

       during the term of this Partnership, and for two years

       thereafter, neither party, nor an affiliate of either

       party, shall participate in the ownership, management or

       development of a free-standing surgical center which is

       within those portions of San Bernardino and Riverside

       Counties falling within a twenty (20) miles radius of

       the Center unless authorization is obtained from the

       other *41 party. Further, the Hospital shall not expand or

       promote its present outpatient surgery program within

       the Hospital. Notwithstanding the foregoing in the event

       that either Partner acquires the entire interest of the

*53        other Partner herein, this Section 16 shall not apply

       thereafter to the purchasing Partner or its affiliates.

       17. Affiliated Status. To the extent legally

       permissible, the Hospital agrees to recognize the

       surgery center as an affiliate for managed care

       contracting purposes (i.e., HMOs and PPOs).

       18. New Services and Procedures.

         (a) Exhibit B lists medical services and procedures

         currently available at the Center and those which

         the Partners expect to be performed there in the

          near future. SCA Centers acknowledges that (1) RHS

         is an affiliate of the Hospital, and (2) that the

         Hospital enjoys a valuable reputation in the area

         for providing quality medical care to patients, (3)

         that the Hospital's association with the Center

         through RHS's participation in this Partnership will

         benefit the Center and (4) that RHS has an important

         *42 interest in ensuring that services and procedures

         performed at the Center, or by an entity with which

         RHS is associated by virtue of this Partnership,

         within the Hospital's service area are only such

         services and procedures which are recognized by a

         majority of the medical community as being safely

         and efficaciously performed in a non-hospital,

         outpatient setting.

         (b) Unless otherwise approved by the Managing

         Directors (whose actions in matters under this

         Paragraph shall be final and not subject to

         arbitration or review, even if deadlocked), no

         procedures or services currently available to

         patients in the State of California which are not

         listed on Exhibit B shall be performed at the Center

         (or by RHS, SCA or the Center limited partnership,

         or an affiliate of any of them, excluding the

         Hospital), within the area set forth in Paragraph

         16, unless and until such procedures or services are

         performed or available on a non-hospital, outpatient

         basis at a majority of the free-standing outpatient

         surgery facilities in Imperial, *43 Kern, Los Angeles,

         Orange, Riverside, San Bernardino, San Diego and

         Ventura Counties.

         (c) With respect to new services or procedures which

         first become available in California during the term

         hereof, such services or procedures shall not be

         performed by RHS, SCA, the Center limited

         partnership or an affiliate of any of them in the

         area identified above until the Managing Directors

          determine, based on reliable medical evidence and/or

         testimony, that such services and procedures can be

         safely and efficaciously performed on a non-

         hospital, outpatient basis.

               *   *   *   *   *   *   *

       23. Assignment. Each Partner shall have the right,

         without the prior approval of the other and without

         triggering the provisions of paragraph 14 hereof, to

         transfer or assign all or any part of its interest

         in this Partnership to an affiliated entity; * * *

         in the event either Partner assigns its interest

         hereunder the provisions of Section 16, shall

         continue to apply to the assignor, as well as to the

         assignee, and the interest *44 held by the assignee

         shall be subject to repurchase as provided in

         Section 19 hereof, upon the breach of Section 16 by

         the assignor, the assignee [or] their Affiliates.

*54 The General Partnership's Acquisition of the Operating Partnership Interest

Effective April 30, 1990, the General Partnership entered into an amended and restated agreement of the Operating Partnership in accordance with the Revised Limited Partnership Act of the State of California. Pursuant to this agreement, the General Partnership acquired, for approximately $ 3 million, a 61-percent general partnership interest in the Operating Partnership. ^4*45 As part of the purchase price, the General Partnership agreed to contribute $ 1,598,495 by delivering to the limited partners (with the exception of Beaver Medical Clinic) shares of SCA common stock with an equivalent market value. ⁵

To determine the General Partnership's investment, the Operating Partnership was valued at four to five times earnings. No formal appraisal was acquired; rather, the valuation was determined based on SCA's experience and knowledge of the market and by a review of historical records. An unrelated bidder (a for-profit company, not otherwise identified in the record) was offering the Operating Partnership a higher purchase price based on approximately six times earnings. The existing partners of the Operating Partnership agreed to the offer made by the General Partnership due to the desire to have an affiliation *46 with Redlands Hospital for quality control review and other reasons, such as to supervise the teaching and maintenance of up-to-date surgery methodologies.

The General Partnership is the sole general partner of the Operating Partnership. There are 32 limited partners. Except for Beaver Medical Clinic, Inc., the limited partners are all physicians who are also on the medical staff of Redlands Hospital. Two of the limited partners are board members of Redlands Hospital and RHS. The amended Operating Partnership agreement contains no statement of charitable purpose and imposes no requirement that the Operating Partnership operate for a charitable *55 purpose. Relevant portions of the amended Operating Partnership agreement are set out below:

       AMENDED AND RESTATED CERTIFICATE AND AGREEMENT

             OF LIMITED PARTNERSHIP

           OF INLAND SURGERY CENTER, L.P.

            *   *   *   *   *   *   *

                IV. BUSINESS

     The business of the Partnership is to own and operate the

   Center and to carry on any and all activities necessary, proper,

   convenient, or advisable in connection therewith.

            *   *   *   *   *   *   *

          VI. CAPITAL CONTRIBUTION, STATUS AND

            ADDITIONAL *47 WORKING CAPITAL

     6.1 Capital Contribution of the General Partner. Upon

   execution of this Agreement, the General Partner will contribute

  $ 1,979,077 to the Partnership to be paid $ 1,655,842 by check or

   by wire transfer and $ 1,598,495 by delivering Shares, ⁶ which

   shall be simultaneously distributed to the Limited Partners,

   other than [Beaver Medical Clinic], in the amounts set forth on

   Schedule C. For purposes of payment of the contribution, the

   Shares shall be valued at the average of the closing prices of

   the Shares, as reported by the NASDAQ National Market System, on

   each of the five trading days which are prior to the ten

   business days prior to April 30, 1990.

            *   *   *   *   *   *   *

     SCA will also make available to each Limited Partner, other

   than [Beaver Medical Clinic], appropriate officers of SCA who

   will respond to questions relating to the material furnished and

   the business and affairs of SCA.

     The Limited Partners who receive such shares shall not

   sell, exchange, pledge hypothecate or otherwise dispose of the

   *48 shares prior to the date six months have elapsed from the date

   this Agreement is executed. In any transfer of the Shares, the

   Limited Partners shall comply with the prospectus delivery

   requirements of the Securities Act of 1933.

            *   *   *   *   *   *   *

     7.3 Management Fees. SCA Management Company, a subsidiary

   of SCA, will enter into a Management Agreement with the

   Partnership pursuant to which SCA Management Company will

   provide management, purchasing and other services and support to

   the Partnership. SCA Management Company will be reimbursed for

   any direct costs incurred in managing the *56 Partnership and will

   be paid an annual management fee equal to 6% of the

   Partnership's Gross Revenues payable monthly.

     VIII. ALLOCATION OF INCOME AND LOSS: CASH DISTRIBUTIONS

     8.1 Available Cash Flow. The Partnership shall distribute

   Available Cash Flow and any other property received by the

   Partnership as a result of the operations of the Center or sale

   of its assets (a) 1.1366% to the holder of each outstanding

   Unit,(b) 10.3% to [Beaver Medical Clinic] and (c) the balance to

   the General Partner.

            *   *   *   *   *   *   *

     8.4 Profits *49 and Losses. Profits and losses shall be

   allocated 10.3% to [Beaver Medical Clinic], 1.1366% to the

   holder of each Unit and the balance to the General Partner.

   * * *

            *   *   *   *   *   *   *

    IX. RIGHTS, POWERS AND OBLIGATIONS OF THE GENERAL PARTNER

     9.1 Powers. The management and control of the  Partnership

   and its business and affairs shall rest exclusively with the

   General Partner, which shall have all the rights and powers

   which may be possessed by a general partner pursuant to the Act,

   and such additional rights and powers as are otherwise conferred

   by law or are necessary, advisable or convenient to the

   discharge of its duties under this Agreement. The General

   Partner shall be the "tax matters partner" within the meaning of

   the Code. Without limiting the generality of the foregoing, the

   General  Partner may, at the cost, expense and risk of the

   Partnership:

        9.1.1. Spend the capital and net income of the

     Partnership in the exercise of any rights or powers

     possessed by the General Partner hereunder;

        9.1.2. Lease the Land, manage and operate the Center

     and enter into agreements containing such terms, provisions

     and *50 conditions as the General Partner in its discretion

     shall approve;

        9.1.3. Purchase from or through others contracts of

     liability, casualty and other insurance which the General

     Partner deems advisable for the protection of the

     Partnership or for any purpose convenient or beneficial to

     the Partnership;

        9.1.4. Incur indebtedness in the ordinary course of

     business;

        9.1.5. Subject to the provisions of Section

        9.4.1.2 of this Agreement, sell or otherwise dispose

     of, upon such terms and conditions as the General Partner

     may deem advisable, appropriate or convenient, any of the

     assets of the Partnership;

        9.1.6. Invest in short-term debt obligations

     (including obligations of federal and state governments and

     their agencies, commercial paper and certificates of

     deposit of commercial banks, savings banks or savings and

     loan associations) and "money market" mutual funds, such

     funds as are temporarily not required for the purposes of

     the Partnership's operations; and

*57         9.1.7. Delegate all or any of its duties hereunder

     and, in furtherance of any such delegation, appoint,

     employ, or contract *51 with any person (including affiliates

     of the General Partner) for the transaction of the business

     of the Partnership, which persons may, under the

     supervision of the General Partner, act as consultants,

     accountants, attorneys, brokers, escrow agents, or in any

     other capacity deemed by the General Partner necessary or

     desirable, and pay appropriate fees to any of such persons;

     provided, however, the General Partner shall not delegate

     duties hereunder which are required to be performed by SCA

     Management Company under the Management Agreement.

     9.2. Independent Activities. Subject to the provisions of

   Section 16.2 of this Agreement, the General Partner and each

   Limited Partner may, notwithstanding the existence of this

   Agreement, engage in whatever activities they choose, whether or

   not the same be competitive with the Partnership, without having

   or incurring any obligation to offer any interest in such

   activities to the Partnership or any party hereto, and, as a

   material part of the consideration for the General Partner's

   execution hereof and for the admission of such Limited Partner,

   each Limited Partner hereby waives, relinquishes *52 and renounces

   any such right or claim of participation.

     9.3. Duties. The General Partner shall manage and control

   the Partnership, its business and affairs to the best of its

   ability and shall use its best efforts to carry out the business

   of the Partnership. The General Partner shall devote itself to

   the business of the Partnership to the extent that it, in its

   discretion, deems necessary for the efficient carrying on

   thereof. The General Partner shall act as a fiduciary with

   respect to the safekeeping and use of the funds and assets of

   the Partnership.

     9.4. Certain Limitations.

        9.4.1 Without obtaining the consent of all of the

     Partners, the General Partner shall not:

        9.4.1.1. Act in contravention of this Agreement;

        9.4.1.2. Except as provided in Article XII of this

     Agreement, do any act which would make it impossible to

     carry on the ordinary business of the Partnership;

        9.4.1.3. Confess a judgment against the Partnership;

        9.4.1.4. Assign the Partnership property in trust for

     creditors or on the assignee's promise to pay the debts of

     the Partnership;

        9.4.1.5. Submit a Partnership claim or liability *53 to

     arbitration or reference; or

        9.4.1.6. Dispose of the goodwill of the Partnership.

              *   *   *   *   *   *   *

     9.6. Medical Advisory Group. The Partnership shall have a

   Medical Advisory Group consisting of six Limited Partners

   appointed annually. Three members of the Medical Advisory Group

   shall be appointed by [Beaver Medical Clinic]. The three

   remaining members shall be appointed by the General Partner.

   Vacancies in the Medical Advisory Group shall be filled in

   accordance with the above procedure. Subject to law regulations,

   and the standards of applicable regulatory bodies, the medical

   standards of the Partnership will be under the control of the

   Medical Advisory Group. *58 The General Partner will determine what

   are medical standards and policies.

           *   *   *   *   *   *   *

     10.4 Government Regulation. In the event that, in the

   opinion of counsel to the Partnership, the referral of Medicare

   or any other patients to the Center by Partners becomes illegal,

   the Partnership shall require each Limited Partner to offer his

   interest to the General Partner for five times the reportable

   taxable income allocated to that *54 interest on the Partnership

   Return for the tax year immediately preceding the year in which

   counsel determines such reference is illegal. Up to 50% of the

   purchase price shall, at the option of the General Partner, be

   paid in unregistered Shares. The General Partner shall have 30

   days in which to accept such offer.

            *   *   *   *   *   *   *

          XV. LIABILITY OF THE GENERAL PARTNER

     15.1. Return of Capital Contribution. Anything in this

   Agreement to the contrary notwithstanding, the General Partner

   shall not be individually liable for the return of the Capital

   Contributions of the Limited Partners, or any portion thereof,

   it being expressly understood that any such return shall be made

   solely from Partnership assets.

     15.2. Exculpation and Indemnification. The doing of any act

   or the failure to do any act by the General Partner shall not

   subject the General Partner to any liability to the Partnership

   or the Partners, except for gross negligence or willful

   malfeasance. The Partnership shall indemnify the General Partner

   against losses sustained in connection with the Partnership,

   provided that the losses were not the result of gross

   *55 negligence, self-dealing or willful malfeasance on the part of

   the General Partner.

            *   *   *   *   *   *   *

     16.5. Amendments. Amendments to this Agreement may be

   proposed by the General Partner or Limited Partners with a

   Limited Partnership Percentage in excess of 50%.

            *   *   *   *   *   *   *

     16.5.2. In addition to any amendments otherwise authorized

   herein, the General Partner may, without obtaining the consent

   of the Limited Partners, amend this Agreement from time to time:

     (a) To add to the representations, duties or obligations of

     the General Partner or its affiliates or surrender any

     right or power granted to the General Partner or its

     affiliates herein, for the benefit of the Limited Partners;

     and

     (b) To cure any ambiguity, to correct or supplement any

     provision herein * * * which may be inconsistent with any

     other provision herein, or to make any other provisions

     with respect to matters or questions arising under this

     Agreement * * * as the case may be, which will not be

     inconsistent with the provisions of this Agreement * * *,

     provided that the Partnership receives a written opinion *56 of

     independent counsel that such *59 amendment does not adversely

     [a]ffect the interests of the Limited Partners.

              *   *   *   *   *   *   *

     (e) Upon advice of counsel that the operations of the

     Partnership are in violation of law, to cause this

     Agreement to comply with law; provided, however, such

     amendments shall not alter materially the economic

      objectives of the Partnership and, further, provided that

     any amendment to or deletion of any provision shall not in

     the opinion of the General Partners materially reduce the

     economic return to the Limited Partners.

The Management Contract With SCA Management

Pursuant to the provisions of paragraph 12 of the General Partnership agreement, supra, and paragraph 7.3 of the Operating Partnership agreement, supra, on April 30, 1990, the Operating Partnership entered into a contract with SCA Management, whereby SCA Management was retained "for the purpose of rendering management, administration and purchasing services and support, and all other management support needed for operation and, in the best interest, of the [Surgery] Center". The management agreement is signed on behalf of both the Operating *57 Partnership and SCA Management by David E. Crockett, in his capacities as secretary and vice president, respectively, of these two entities.

Pursuant to the management contract, SCA Management has wide-ranging authority for operational management of the Surgery Center, except that it has "no power or authority to make any decision relating to the care or treatment of patients or other medical matters", this power and authority being specifically reserved to the Operating Partnership's Medical Advisory Committee. ⁷ SCA Management is authorized to enter into contracts relating to the affairs of the Surgery Center, subject to certain exceptions, requiring express authorization of the Operating Partnership. These exceptions include lease or contractual obligations requiring payments in excess of $ 50,000 in any 12-month period, and obligations to a related party in excess of $ 5,000.

The management contract states that SCA Management is authorized to provide services to the Operating Partnership (referred to as "the Owner" in *58 the following quoted provisions), as follows:

*60             II. MANAGEMENT SERVICES

     1. Subject to the provisions of Article I, the Manager will

   render all services, direction, advice, supervision and

   assistance in the operation of the Center, as necessary,

   including, but not in any way limited to, the following:

        A. Maintaining the accreditation of the Center

     with the proper agencies and insurance companies;

        B. Arranging for the purchase by the Owner of hazard,

     liability, professional and other necessary insurance

     coverage for the Center; provided, however, that the

     physicians practicing in the Center shall obtain their own

     malpractice insurance;

        C. Employing, supervising, directing, leasing and

     discharging on behalf of the Owner, all non-physician

     personnel performing services at the Center, including the

     administrator of the Center, as needed. The administrator

     shall be subject to the Owner's approval.

        D. Negotiating fee payment methods, including Medicare

     reimbursement, with the appropriate third party payers and

     state and federal agencies;

        E. Establishing staffing schedules, wage structures

     and *59 personnel policies for all personnel;

        F. Determining and setting patient charges for

     services provided by the Center, excluding charges for

     physicians' services, and arranging for payment of such

     charges by others, when appropriate;

        G. Providing administrative policies and non-medical

     operating procedures to all departments;

        H. Providing standard formats for all charts, invoices

     and other forms used in the operation of the Center;

        I. Providing for the purchase or lease by the Owner of

     all supplies and equipment used in the operation of the

     Center;

        J. Directing the day-to-day operations of the Center

     to insure the operations are conducted in a business-like

     manner;

        K. Developing an ongoing advertising and promotion

     program;

        L. Negotiating or retaining on behalf of the Owner

     contractual relationships for anesthesiology, radiology and

     pathology services, as appropriate; and

        M. Performing all management and non-medical oversight

     responsibilities for the Owner.

     2. All costs and expenses incurred with respect to the

   services specified in Paragraph 1 above will be borne by the

   *60 Manager.

       III. ACCOUNTING AND BOOKKEEPING SERVICES

     1. The Manager agrees to review, direct and supervise the

   following accounting and bookkeeping services for the Owner in

   the operation of the Center.

        A. Receipt for and deposit in a special bank account

     selected by the Owner, separate from all other monies of

     the Manager, all funds received from the operation of the

     Center and supervise the disbursement of such funds for the

     operating expenses of the Center;

*61         B. Maintain the books of account, including all

     journals and ledgers, check register and payroll records;

        C. Post all patient and other charges, including

     necessary analysis and corrections;

        D. Establish adequate receivable, credit and

     collection policies and procedures;

        E. Process vendor's invoices and other accounts

     payable;

        F. Prepare payroll checks from time sheet summaries

     prepared under the Manager's supervision;

        G. Prepare payroll and supervise preparation of the

     Owner's tax returns (fees paid to independent accountants

     will be the responsibility of the Owner);

        H. Prepare monthly bank reconciliations;

        *61 I. Prepare and distribute to the Owner monthly profit

     and loss statements;

        J. Establish patient insurance billing procedures;

        K. Furnish the Owner on or before the 30th day

     following the end of each calendar quarter (i) an accrual

     basis balance sheet of the Owner at the end of the previous

     quarter and (ii) an accrual basis statement of income for

     the quarter then ended of "available cash" at the end of

     such quarter and (iii) a list of all outstanding and unpaid

     obligations of the Owner at the end of such quarter. * * *

        L. Furnish the Owner for its approval, during the

     fourth quarter of each fiscal year, the operating budget

     and capital expenditure budget of the Center for the next

     fiscal year.

Under the management contract, SCA Management is entitled to receive a monthly management fee equal to 6 percent of gross revenues, defined as the net collectable portion of revenues billed as fees or other charges arising out of the operation of the Surgery Center, with no deduction for bad debts. In addition, SCA Management is entitled to be reimbursed for direct expenses incurred in managing the Surgery Center. The Operating Partnership *62 is required to approve any single expense in excess of $ 5,000.

The term of the management contract is equal "to the term of any indebtedness, lease or other obligation of the * * * [Operating Partnership] guaranteed by SCA or an affiliate of SCA but not less than 15 years." The management agreement is renewable by SCA Management at its option for two 5-year terms. Except for circumstances involving bankruptcy or insolvency, the management contract is terminable by the Operating Partnership only if SCA Management breaches the agreement, and then generally only after a 90-day notice and 90-day cure period.

*62 Managing Directors of the General Partnership

As indicated in paragraph 4 of the General Partnership agreement, supra, overall management of the General Partnership, except for questions of medical standards and medical policies, is vested in its managing directors, consisting of four persons, two of whom are appointed by petitioner, and two of whom are appointed by