Four Pennsylvania hospitals in Chester and Montgomery counties may owe hundreds of thousands of dollars in real property taxes after a Pennsylvania appeals court found that the hospitals failed to prove they are entitled to an exemption as a nonprofit entity.
Tower Health, LLC, which has federal tax-exempt status, purchased four hospitals in 2017 from a for-profit entity. Tower created individual LLCs to run each hospital as a nonprofit entity, with Tower as the sole owner. The individual LLCs then applied to their respective county Boards of Assessment for exemptions from real property taxes for tax years 2018 through 2021.
In each of the four cases, an appellate court held that the hospitals were not entitled to an exemption from real property taxes under Pennsylvania law as a “purely public charity” because the hospitals did not operate entirely free from profit motive, and because a substantial portion of their services were not donated or rendered at a reduced fee. The appellate court found that the financial goal of the health system was profitability, not reinvestment in the health system itself.
Although Pennsylvania courts have specifically held that surplus revenue is not synonymous with running a for-profit entity, the focus of exemption analysis is on how such revenue is used. Diversion of money to employees through excessive salaries and fringe benefits may be evidence of a profit motive, especially where executive compensation is tied to the entity’s financial performance.
The court scrutinized the salary and bonuses of Tower executives, noting that their “eye-popping” bonus structure was tied to the financial performance of the hospitals and that the executives’ salaries increased substantially after the 2017 purchases. The court also pointed out that Tower paid federal excise taxes as a nonprofit entity that paid its executives more than $1 million per year, and that this excise tax was assessed against the individual hospital LLCs. Additionally, the court criticized the “ever-increasing” management fees Tower charged the hospitals.
The court also took issue with the negligible percentage of services the hospitals rendered for no or reduced cost. Other issues, such as a failure by the hospitals to provide accounting evidence based on generally accepted accounting principles, also contributed to the court’s decision.
Although these cases were based on Pennsylvania law, and petitions for allowance to appeal have been filed with the Pennsylvania Supreme Court for each case, they demonstrate the kind of scrutiny a nonprofit entity may face in regard to property tax exemptions elsewhere. Moreover, given the size and scope of the buildings on hospital campuses, the risk to hospitals of having to pay real property taxes is enormous.
Barry F. Rosen is the chairman & CEO of the law firm of Gordon Feinblatt LLC, heads the firm’s health care practice group, and can be reached at 410-576-4224 or [email protected]. Tonya R. Foley is an associate in Gordon Feinblatt’s health care and employment law practice groups and can be reached at 410-576-4238 or [email protected].