“Non-Charity” Nonprofit Hospital Must Start Paying Property Taxes

Funding of public schools: property taxes

Public schools across the United States are funded primarily through property taxes. State and federal governments provide additional funds, but the amount of that support varies widely between and within each state, leaving property taxes as the foundation of all public school budgets. Property taxes are based on the estimated value of real estate, both the land and the buildings or houses built on it.

Critics have long argued that the concept of local funding leads to systemic inequality of educational opportunities. Schools located in neighborhoods where property values ​​increase considerably better than schools surrounded by poor neighborhoods or empty commercial and industrial sites. Wealthy homeowners have the means to challenge overvalued property assessments, unlike the poorest homeowners. The formula embodies the aphorism: the rich get richer and the poor get poorer.

Opposition to the property tax system ranges from periodic popular protests to direct litigation, such as a lawsuit currently in Pennsylvania Commonwealth Court. In School District William Penn et al. vs. Pennsylvania Department of Education et al., vocational education advocates sued state legislative leaders, state education officials and the governor for failing to meet their obligation under the state constitution to provide a “comprehensive and effective” public education system.

Meds and Eds: Strongholds of the property tax exemption?

Inequalities in property taxes are compounded when local or municipal governments cap, or even eliminate, tax burdens to induce new employers or employers to relocate. Equally vexatious are vast swathes of developed, yet valuable, tax-exempt property dedicated to worthy, nonprofit missions such as education and healthcare. In many American cities, large nonprofit hospitals, health centers, universities, and colleges – “doctors and educators” – pay little or no property taxes, which shifts the burden of paying local schools. to all other property taxpayers. Exemptions for “drugs and health care” are generally enshrined in state laws governing “charities”. For the moment, the stronghold of land tax exemption “meds and eds” seems well fortified against a legislative revision. Yet some “drugs” have found a new trap: litigation that calls into question their nonprofit nature.

A recent decision by a Pennsylvania trial court could be the wake-up call for nonprofits whose operations and compensation regimes are more like those of for-profit corporations that pay property taxes. A judge in suburban and rural Chester County in southeastern Pennsylvania ruled that three local nonprofit hospitals were not tax-exempt “charities,” thus exposing them to start pay millions in annual local property taxes. The move is leading municipalities and school districts to consider sending property tax bills to nonprofit health organizations.

Most hospitals and health centers are organized as not-for-profit corporations and have been recognized as 501 (c) (3) tax exempt by the IRS. More than two decades after for-profit hospitals entered the market, there are still twice as many non-profit hospitals as there are for-profit hospitals in the United States. .

Tower health opinion

The Chester County Court ruled against three hospitals owned by Tower Health, a non-profit company based in neighboring Berks County. Deviating from more than a century of tax rulings for nonprofit hospitals, Judge Jeffrey Sommer ruled that Tower Health hospitals were not considered “charities” under the Law of. 1997 on the institutions of pure public charity (10 Pa. Stat. §371-385). The court ruled that hospitals had failed to prove that they had provided “unpaid” patient care. The court also questioned the administrative structure of the company and the executive compensation plans which drained “enormous sums … from [hospitals and to Tower Health], which causes the hospital to “show” a significant net loss. “

The court issued its decision in October 2021 after a two-week trial. Tower Health’s three hospitals claimed they were providing “charitable care” by providing services for which Medicare and private insurers paid less than the hospitals wanted. The court disagreed, distinguishing “undercompensated care” from truly “unpaid” or charitable care. partly because the hospitals’ own witness “testified [that] the master imputation sheet has no meaning or value. … [T]These numbers, in essence, are drawn out of nowhere and are created only because [the hospital] is required to have a charge sheet to meet federal requirements.

The three hospitals claimed they each lost money, but the court noted that Tower Health billed various fees in excess of $ 43 million to the three local hospitals in 2020 alone. The court noted that executives of Tower Health received millions of dollars in annual compensation, well above the threshold of $ 1 million for the potential imposition of a 21.5% IRS excise tax. “Maybe if every hospital hadn’t been forced to pay Tower Health exorbitant amounts for management fees and interest, they wouldn’t have been ‘failed businesses.’ In other words, if an organization A nonprofit looks, acts and pays itself like a for-profit business, it can be treated like a for-profit business – or at least, it won’t be treated as a “charity.”

Tower Health’s notice acknowledges that the decision will be appealed. The judge in fact implores the legislator for a long awaited modernization of the tax statutes to adapt to the current world of the organizations of health and reimbursements. In the meantime, Tower Health’s decision sounds a warning to nonprofit healthcare organizations such as skilled nursing facilities, retirement communities, home care businesses and others. Townships, boroughs, and cities in Pennsylvania and beyond are examining how they can apply the ruling to nonprofits that operate similarly to their for-profit counterparts.

Nonprofits may want to pay close attention to Tower Health’s decision. They may want to review:

  • how and why revenues from a licensed healthcare business are transferred to a parent or supported entity;
  • the overall amount of compensation for local leaders and the parent company – salary, bonus, etc. ; and
  • billing and accounting practices for truly unpaid care as opposed to undercompensated care.

Nonprofits that want to avoid becoming tax targets like Tower Health may need to create positive evidence showing that parent companies are paid commercially reasonable management fees, that their executives are not paid beyond directives from the IRS and that they really provide unpaid compensation, rather than just undercompensated — care. Yet the decision to tax nonprofit hospitals on the basis of more consistent behavior with for-profit providers may yield little or no benefit to the tax authorities: even before the decision is made. Made, Tower Health announced that it would close two of the three community hospitals — Jennersville Hospital and Brandywine Hospital — by Jan.31, 2022.

This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.

Author Info

Bill kennedy is a partner in the Philadelphia office of White and Williams, LLP, where he advocates and advises a wide range of clients in healthcare, retirement homes and manufacturing.

Jared johnson is a partner in the Philadelphia office of White and Williams, LLP, where he provides tax representation and advice on complex tax laws and litigation, corporate transactions, reporting, asset protection and cross-border issues.

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