Pennsylvania Courts Continue To Scrutinize Real Estate Tax Exemptions ' Evaluating The Key Takeaways From The Denial Of Tower Health's Tax Exemption Bids

• Jurisdiction: Pennsylvania,United States
• Law Firm: Buchanan Ingersoll & Rooney PC
• Subject Matter: Corporate/Commercial Law, Food, Drugs, Healthcare, Life Sciences, Tax, Charities & Non-Profits , Property Taxes, Executive Remuneration
• Author: Ms Sydney R. Bierhoff, Stanley J. Parker and John Washlick
• Published date: 27 April 2023

Introduction

On February 10, 2023, the Pennsylvania Commonwealth Court (the "Court") issued four related but distinct opinions (the "Tower Cases") which it is reasonable to expect may be used by local taxing authorities to attempt to challenge the property tax-exempt status of certain Pennsylvania non-profit hospitals.¹ The Tower Cases support the notion that the courts are going to scrutinize the real estate tax exemption of Pennsylvania non-profit hospitals, notwithstanding that they may have an open admissions policy, accept Medicare and Medicaid payments, and/or be money-losing operations. The Tower Cases, at the very least, put Pennsylvania non-profit hospitals on notice of the importance of continuously re-evaluating management fees, executive compensation, and financial assistance policies to ensure compliance with property tax exemption requirements. As hospitals and hospital systems continue to grow, the Pennsylvania courts continue to scrutinize what qualifies for real estate tax exemption. Therefore, in order to be best positioned to withstand such scrutiny, hospitals should take the teachings of the Tower Cases into account in making decisions for their own operations.

Background

In 2017, Reading Health System, now known as Tower Health, LLC ("Tower"), purchased several for-profit hospital facilities and related properties in Montgomery and Chester Counties from Community Health Systems, including Brandywine Hospital, Jennersville Hospital, Phoenixville Hospital, and Pottstown Hospital (the "Tower Hospitals").

Tower Health, which is tax-exempt through its status as a nonprofit under 26 U.S.C. ' 501(c)(3), formed the following non-profit LLCs, of which it is the sole member of each, to run each of the Tower Hospitals: Brandywine Hospital, LLC Jennersville Hospital, LLC Phoenixville Hospital, LLC, and Pottstown Hospital, LLC (the "Hospital LLCs").

In October of 2021, we wrote an article discussing the potential implications of a decision by Judge Jeffrey R. Sommer of the Chester County Court of Common Pleas (the "Chester County Trial Court"), rejecting the tax exemption bid of Brandywine Hospital, LLC, Jennersville Hospital, LLC, and Phoenixville Hospital, LLC (collectively, the "Chester Hospitals). The decision came just one week after the Montgomery County Court of Common Pleas ( "Montgomery County Trial Court") ruled in favor of Tower Health's bid for Pottstown Hospital's property tax-exempt status.²

As we stated in our first article, Judge Sommer anticipated'and hoped'his decision would be appealed and lead to legislative and judicial evaluation of the current framework for evaluation of tax exemption of non-profit hospitals. The aforementioned cases were ultimately appealed; on February 10, 2023, despite dismissing the appeals in the three cases involving the Chester Hospitals due to procedural errors, the Commonwealth Court agreed with the Chester County Trial Court in its finding that the Chester Hospitals did not qualify for property tax exemption. The Commonwealth Court also reversed the ruling in favor of Pottstown Hospital, thereby denying the property tax exemption bid for each of the Tower Hospitals.

Applicable Law

An entity must qualify as an institution of purely public charity to be eligible for tax exemption, meaning it must: (1) satisfy the constitutional requirements set forth in Hospital Utilization Project v. Commonwealth, 487 A.2d 1306 (Pa. 1985) (the "HUP Test); (2) meet the statutory requirements of the Institutions of Purely Public Charity Act, commonly known as Act 55;³ and (3) act in accordance with additional requirements set forth under the Consolidated County Assessment Law (CCAL), to the extent such requirements are not inconsistent with Act 55.

An entity bears the burden of demonstrating that it satisfies the HUP Test's five criteria to qualify as a purely public charity. An entity must show that it: (1) advances a charitable purpose; (2) donates or renders gratuitously a substantial portion of its services; (3) benefits a substantial and indefinite class of persons; (4) relieves the government of some of its burden; and (5) operates entirely free from private profit motive.

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