On February 10, 2023, in a much-anticipated group of Opinions, the Pennsylvania Commonwealth Court (“Court”) held that four separate Tower Health hospitals (one in Montgomery County and three in Chester County) did not qualify as institutions of purely public charity and thus, the hospitals were not entitled to real property tax exemptions for the 2018 through 2021 tax years.

Relevant Background

In 2017, Reading Health System, n/k/a Tower Health, LLC (“Tower Health”), purchased several for-profit hospital facilities from Community Health Systems (“CHS”), a for-profit entity, in Montgomery and Chester Counties.  Tower Health, a nonprofit 501(c)(3), created separate LLCs (Chester Hospitals and Montgomery Hospital) to run each of the purchased hospital facilities as nonprofit entities.  Those LLCs were:  Pottstown Hospital, LLC (“Montgomery Hospital”); and Brandywine Hospital, LLC, Jennersville Hospital, LLC and Phoenixville Hospital, LLC (“Chester Hospitals”).

Chester Hospitals and Montgomery Hospital filed real property tax exemption appeals for the 2018 tax year in their respective county.  The Montgomery County Board of Assessment Appeals (“Montgomery Board”) granted Montgomery Hospital real property tax exemption as a nonprofit entity for tax years 2018 through 2021.  However, the County of Chester Board of Assessment Appeals (“Chester Board”) denied Chester Hospitals real property tax exemptions for tax years 2018 through 2021.

The Pottstown School District appealed the Montgomery Board decision to the Court of Common Pleas of Montgomery County (“Montgomery trial court”).  After a de novo trial, the Montgomery trial court granted the real property tax exemption for Montgomery Hospital. 

Likewise, Chester Hospitals appealed the Chester Board decisions to the Court of Common Pleas of Chester County (“Chester trial court”).  After a de novo trial, the Chester trial court denied the real estate tax exemptions for Chester Hospitals. 

The Court reviewed the Montgomery trial court decision and record, and reversed the trial court’s order granting the real property tax exemption for Montgomery Hospital[1].  Additionally, in a surprise plot twist, the Court reviewed the Chester trial court decision and record, and instead of affirming the Chester trial court’s order denying real property tax exemption for Chester Hospitals, the Court dismissed Chester Hospitals’ appeals because all the issues on appeal were waived[2].  The Court could have ended its Chester Hospitals opinions on the waiver issue, but for some unknown reason, the Court proceeded to provide a complete analysis of the exemption criteria to show Chester Hospitals that they would not have satisfied all of the criteria necessary to be deemed an institution of purely public charity anyway.

Relevant Issues

Although there were numerous issues raised on appeal to the Court, I think the following are the two relevant issues addressed by the Court:

  1. Entitlement to Real Property Tax Exemption; and
  2. Standing for tax year 2018.

Entitlement to Real Estate Tax Exemption

In order to qualify for an exemption as an institution of purely public charity, an entity must first meet the five constitutional requirements set forth in Hospital Utilization Project v. Commonwealth, 487 A.2d 1306 (Pa. 1985), know as the HUP test.  After satisfying the five parts of the HUP test, an entity must then also satisfy the five statutory requirements of the Institutions of Purely Public Charity Act, commonly known as Act 55[3].  Once all ten prongs of the HUP test and Act 55 are satisfied, the entity must also comply with any additional and not inconsistent requirements of the relevant county assessment law.  Moreover, the party seeking a tax exemption has the burden of proving its entitlement to the exemption. 

In these appeals, the Court held that Montgomery Hospital and Chester Hospitals did not “operate free from private profit motive,” which is one of the five HUP test criteria.  Specifically, the Court concluded that tying 40% of executive compensation bonus to financial performance of each hospital was sufficiently substantial to indicate a private profit motive.  The Court looked to In re Dunwoody Village, 52 A.3d 408 (Pa. Cmwlth. 2012) for guidance, where it found that a nursing home did not operate free from private profit motive because the CEO’s maximum incentive bonus was 24% of salary and the chief financial officers was 18-19%.

Additionally, the Court found that Tower Health charged Montgomery Hospital and Chester Hospitals “exorbitant” management and administrative fees that grew exponentially from year to year and none of the hospitals “studied the charges to determine whether the administrative and management fees were fair or reasonable for the services provided” by Tower Health.   Thus, the Court concluded that Montgomery Hospital and Chester Hospitals failed the requirements of the HUP test.

The Court could have ended its analysis right there because it concluded that one of the prongs was not met – operates entirely free from private profit motive.  However, the Court found that Chester Hospitals failed the “gratuitous services” prong of the HUP test and also failed the requirements of Act 55 because Chester Hospitals’ financial evidence failed to use GAAP accounting for calculations as required by 10.P.S. § 375(f)(3).  The Court agreed with the Chester trial court that Chester Hospitals failed to show the amount of gratuitous services it provided because Chester Hospitals did not provide information concerning whether patients receiving free, discounted, or reimbursed services actually had the ability to pay the full costs.  The Court noted “[a]lthough inability to pay is not expressly part of the HUP test, it was recognized as relevant to gratuitous services in St. Margaret Seneca Place[4].”

Standing for tax year 2018

The Montgomery trial court concluded that Montgomery Hospital had standing to seek tax exemption for tax year 2018 because it was the equitable owner pursuant to the pending asset purchase agreement and was therefore an aggrieved person.  Conversely, the Chester trial court concluded that Chester Hospitals did not have standing to apply for 2018 tax exemptions because neither Chester Hospitals nor Tower Health was the record owner of the properties at issue at the time the exemption applications were filed.

Although the exemption appeals for tax year 2018 for Montgomery Hospital and Chester Hospitals manifested because of the same purchase agreement between Tower Health and CHS, the trial courts came to two different conclusions regarding standing for tax year 2018.

Fortunately, the Court expounded on the statutory “any person aggrieved” language found in 53 Pa.C.S. § 8844(c)(1) and held that Montgomery Hospital and Chester Hospitals had standing for tax year 2018 because “the owner of a property who may feel aggrieved [for tax assessment purposes] includes not only the registered owner of the real estate, but also an equitable owner or owner of a taxable interest in the property.”  The Court noted “if [Montgomery Hospital] was forced to wait until it has record ownership of the properties, the window for seeking a tax exemption for tax year 2018 would have passed, even though [Montgomery Hospital] would have had legal title during that entire tax year.”

Key Takeaways

The trial courts from two adjoining counties reached two completely different outcomes using essentially the same facts and law, thus showing how convoluted and problematic this area of the law really is when trying to advise nonprofits in general.  If there was ever an area of law that should be black and white – this should be it – but clearly isn’t.  Keep in mind, nonprofits have charitable missions that benefit the public as a whole.  Every dollar that a nonprofit brings in the door should be used to accomplish its charitable mission, not fight over exempt status.  However, the nonprofits in Pennsylvania have to spend their limited resources deciphering a set of rules that are very fact specific, open to interpretation and grey at best, on top of having the “heavy” burden of proving entitlement to exempt status.

The taxing districts will undoubtedly smell the “blood in the water” caused by these Court Opinions and a new wave of taxing district appeals fighting current exempt nonprofit hospital property and other exempt nonprofit properties will ensue, much like after the HUP decision in 1985. 

Accordingly, nonprofits at the very least need to:

  • Review all executive compensation, with a specific eye on all bonus structures as they relate to financial performance of the nonprofit entity.
  • Analyze the reasonableness of all management and administrative fees charged by any parent or operating entity, similar to a transfer price study done for Federal and State income tax purposes.
  • Understand the HUP test, Act 55 and relevant county assessment law.
  • Be willing to entertain or enter into “payment in lieu of taxes agreements” commonly referred to as PILOT Agreements with taxing districts.

Please contact Paul Morcom, Esq. at 717-237-5364 or Adam Koelsch, Esq. at 717-237-5305 if you have any questions regarding the “purely public charity” exemption in Pennsylvania.

[1] Pottstown School District v. Montgomery County Board of Assessment Appeals et. al., 1217 C.D. 2021 (2/10/23).

[2] Brandywine Hospital, LLC v. County of Chester Board of Assessment Appeals et. al., 1279, 1280, 1283 and 1284 C.D. 2021 (2/10/23), Jennersville Hospital, LLC v. Chester County Board of Assessment Appeals, et. al., 1282 and 1286 C.D. 2021 (2/10/23) and Phoenixville Hospital, LLC, v. Chester County Board of Assessment Appeals, et. al., 1281 C.D. 2021 and 1285 C.D. 2021 (2/10/23).

[3] Codified at 10 P.S. § 371 et seq.

[4] St. Margaret Seneca Place v. Bd. of Prop. Assessment, Appeals & Rev., 640 A.2d 380 (Pa. 1994).