May 18, 2000 | Read Time: 3 minutes
The Supreme Court of Pennsylvania has upheld lower-court decisions that Easton Hospital, a non-profit organization with for-profit affiliates, deserved to be exempt from having to pay property taxes. The Wilson Area School District, where the hospital is located in eastern Pennsylvania, and two local governments had argued that the facility, which has a charitable exemption under federal law, did not qualify for a real-estate tax exemption under state law.
Easton Hospital serves residents of Northampton County as well as five surrounding counties in Pennsylvania and New Jersey. It has an “open admissions” policy and maintains four tax-exempt properties, including the hospital itself.
In 1986, the hospital formed a “parent corporation,” Valley Health, that created a foundation to raise money for the hospital and formed for-profit subsidiaries. The hospital subsequently made loans to Valley Health and its subsidiaries, some of which were made without expectation of repayment.
At issue in the appeal to the state Supreme Court was whether the hospital was qualified as a “purely public charity” for a tax exemption under Pennsylvania law.
The school district argued that Easton Hospital flunked a requirement, set out in a 1985 Pennsylvania Supreme Court ruling, that tax-exempt groups must operate “entirely free from private profit motive.” The hospital should not be allowed to funnel surplus money to for-profit organizations and keep its exemption, the school district said.
But the court rejected that argument and accepted the hospital’s view that its loans to Valley Health from surplus funds were made with the expectation of — and actually resulted in — increased efficiency and improved medical care at the hospital.
One reason: Some of the money went to a family-physician practice that served people with low incomes, with a goal of reducing the number of inappropriate visits made to the hospital’s emergency room. “In addition to increased efficiency,” the court said, “capitalizing some of the sister organizations is an attempt to provide more effective health care to an underserved population, which is clearly in furtherance of the hospital’s charitable mission.”
Moreover, the court said that, if taken to its logical conclusion, the school district’s argument that groups exempt from paying property tax must avoid commercial enterprises “becomes absurd, since it is beyond peradventure that most, if not all, charitable organizations invest in some type of for-profit organizations, even if passively through the stock market.”
The court also concluded that none of the revenue received by the hospital improperly “inured” to people associated with the hospital or its related groups.
Supreme Court Justice Russell M. Nigro offered a dissenting opinion. “The use of the hospital’s surplus to fund its corporate affiliates is evidence that the hospital is not operating entirely free of a private profit motive,” he said. “While Easton Hospital is free to expand its own facilities, which have a charitable mission, it should not be permitted to capitalize other entities without such a purpose and maintain its tax-free status.” (Wilson Area School District, Borough of Wilson, and Northampton County v. Easton Hospital, J-253-98.)
