Pottstown S.D. v. Montgomery County Board of Assessment Appeals

IN THE COMMONWEALTH COURT OF PENNSYLVANIA

Pottstown School District, :

Appellant :

:

v. :

:

Montgomery County Board of :

Assessment Appeals, Pottstown :

Hospital, LLC, Pottstown Borough : No. 1217 C.D. 2021

and County of Montgomery : Argued: November 16, 2022

BEFORE: HONORABLE RENÉE COHN JUBELIRER, President Judge

HONORABLE PATRICIA A. McCULLOUGH, Judge

HONORABLE ANNE E. COVEY, Judge

HONORABLE MICHAEL H. WOJCIK, Judge

HONORABLE CHRISTINE FIZZANO CANNON, Judge

HONORABLE ELLEN CEISLER, Judge

HONORABLE LORI A. DUMAS, Judge

OPINION

BY JUDGE FIZZANO CANNON FILED: February 10, 2023

Pottstown School District (School District) appeals from a decision of

the Court of Common Pleas of Montgomery County (trial court) granting real

property tax exemptions to Pottstown Hospital, LLC (Hospital) in several

consolidated cases.1 After thorough review, we reverse the trial court’s order. We

dismiss as moot Hospital’s application for relief seeking to strike the briefs filed by

amici curiae in support of School District.

1

Pottstown Borough and the County of Montgomery did not file notices of appeal but filed

notices joining in School District’s brief.

I. Background

In 2017, Reading Health System, now known as Tower Health, LLC

(Tower Health), bought several for-profit hospital facilities and related properties

formerly owned by Community Health Systems, a for-profit entity, in Montgomery

and Chester Counties. Trial Ct. Op. 10/8/21 at 1-2. Tower Health, a limited liability

company (LLC) with federal nonprofit status under 26 U.S.C. § 501(c)(3), created a

new LLC to run each of the purchased hospital facilities as a nonprofit entity. Id. at

2. Tower Health is the sole member of each new LLC. Id. at 3. Hospital is one of

the new LLCs and operates a hospital facility in Montgomery County. Id.

Hospital is a community acute care hospital providing a full range of

health services. Trial Ct. Op. 10/8/21 at 4. Hospital also provides education and

training to medical residents, participates in clinical research, and engages in

community outreach programs. Id. at 5. Hospital operates under Tower Health’s

501(c)(3) certification and is exempt from state sales and use tax as a charitable

entity. Id. Tower Health adopts a budget for Hospital and limits the expenditures

Hospital can make without Tower Health’s approval. Id. at 5-6. Hospital’s revenues

are placed in Tower Health’s checking account. Id. at 6. For fiscal year 2018,

Hospital had a net income surplus of $12,687,723, which was reinvested in

furtherance of Hospital’s mission. Id. For fiscal years 2019 and 2020, Hospital had

deficits in net income of $34,116,689 and $75,684,171, respectively. Id. at 8.

The Montgomery County Board of Assessment Appeals (Board)

granted Hospital’s application for a property tax exemption as a nonprofit entity for

tax years 2018 through 2021.2 School District appealed to the trial court, which held

a de novo trial. The trial court was troubled by the compensation of Tower Health’s

2

The Board filed a notice joining in Hospital’s brief before this Court.

2

executives but nonetheless granted the property tax exemption, believing itself

constrained by this Court’s decision in Phoebe Services, Inc. v. City of Allentown,

262 A.3d 660, 670 (Pa. Cmwlth. 2021), appeal denied, 273 A.3d 509 (Pa. 2022).

School District then appealed to this Court.

Before this Court, Patientrightsadvocate.org and Families USA filed a

joint brief and Phoenixville Area School District filed a separate brief as amici curiae

in support of the Board’s denial of the property tax exemption. Hospital has filed an

application for relief seeking to strike the briefs of the amici because they discuss

matters not in the record. The application was listed for disposition with the merits.

II. Issues

As an initial matter, Hospital contends that School District improperly

filed a single notice of appeal. Although several tax exemption matters involving

separate tracts were consolidated by the trial court, which issued a single decision,

Hospital maintains that School District should have filed a separate notice of appeal

for each case.

Hospital also filed an application for relief asking this Court to strike

amicus briefs in support of School District, contending the briefs discuss extra-

record information.

In its appeal,3 School District raises several issues, which we

summarize and reorder as follows.

3

This Court has explained:

Our appellate role in cases arising from non-jury trial verdicts is to

determine whether the findings of the trial court are supported by

competent evidence and whether the trial court committed error in

any application of the law. The findings of fact of the trial judge

3

School District contends that for tax year 2018, Hospital had no

standing to seek tax exemptions. Because Tower Health’s purchase of the affected

properties was not complete or certain at the time the applications for the tax

exemptions were filed in 2017, School District maintains that Hospital had no

ownership interest sufficient to confer standing to seek tax exempt status at that time.

School District also asserts that Tower Health, not Hospital, is the true

party in interest. School District posits that Tower Health actually controls

Hospital’s day-to-day operations, including management and administration.

On the merits, School District maintains that the trial court erred in its

conclusion that Hospital sustained its burden of demonstrating entitlement to tax

exempt status under the various applicable legal tests.

must be given the same weight and effect on appeal as the verdict of

a jury. We consider the evidence in a light most favorable to the

verdict winner. We will reverse the trial court only if its findings of

fact are not supported by competent evidence in the record or if its

findings are premised on an error of law. However, [where] the

issue . . . concerns a question of law, our scope of review is plenary.

Newman & Co. v. City of Phila., 249 A.3d 1240, 1244 n.5 (Pa. Cmwlth. 2021) (additional citations

and quotation marks omitted). Specifically, in tax assessment appeals, the trial court is the finder

of fact, and all matters of credibility and evidentiary weight are within its province; such findings

are binding on appeal if they are supported by substantial evidence of record. Lutheran Home v.

Schuylkill Cnty. Bd. of Assessment Appeals, 782 A.2d 1, 6 (Pa. Cmwlth. 2001) (first citing Appeal

of M.W. Kellogg Co., 492 A.2d 130 (Pa. Cmwlth. 1985); and then citing St. Margaret Seneca Place

v. Bd. of Prop. Assessment, Appeals & Rev., 640 A.2d 380 (Pa. 1994)).

4

III. Discussion

A. Single Notice of Appeal

This matter consists of three consolidated cases relating to three pieces

of property Tower Health purchased – Hospital and two related buildings. School

District filed a single notice of appeal. Its brief explains:

On November 19, 2021, the Commonwealth Court issued

an Order Per Curiam stating:

NOW, November 19, 2021, it appearing that

Appellant filed a single notice of appeal seeking to

appeal the October 8, 2021 Order of the Court of

Common Pleas of Montgomery County, which

disposed of three consolidated matters, the parties

shall address the propriety of [School District’s]

filing of a single notice of appeal in their principal

briefs on the merits or by other appropriate motion.

See Commonwealth v. Walker, 185 A.3d 969 (Pa.

2018).

In Walker, the Pennsylvania Supreme Court held that the

Rules of Appellate Procedure require the filing of separate

notices of appeal from all cases involved where one or

more orders resolve issues arising on more than one docket

or relating to more than one judgment.

The tax appeal matters involving the three properties

identified above were consolidated for discovery, filing

and trial purposes under docket 2017-27756 . . . by a

December 4, 2020 Agreed Order. ([Reproduced Record

(RR) at] 224a-226a). That Order also directed the

Montgomery County Prothonotary to close dockets 2017-

27758 and 2017-27783 (involving the two outlying office

buildings). Id. The [trial c]ourt’s Memorandum and Order

entered October 8, 2021 identified all three docket

numbers in its caption, in the lead docket (2017-27756).

Id.

Counsel for [School] District prepared three Notices of

Appeal, one in each case. ([RR at] 430a). When staff

5

attempted to file a Notice of Appeal Order in one of the

closed dockets, the firm received an error message from

the Montgomery County automated filing system that

nothing could be filed in the case because it was closed.

Id. In an effort to clarify the issue, the Prothonotary was

called and asked how the Notice of Appeal could be filed

in the closed dockets. Id. The Prothonotary’s office

instructed the staff member to file a Notice of Appeal in

the open docket, using all three docket numbers in the case

caption. ([RR at] 431a). The [f]irm then resubmitted the

Notice of Appeal identifying all three actions based upon

the instructions provided by the Prothonotary. (Notice of

Appeal).

Of significance under these facts, following its decision in

Walker, the Pennsylvania Supreme Court held that “filing

a single notice of appeal from a single order entered at the

lead docket number for consolidated civil matters where

all record information necessary to adjudication of the

appeal exists, and which involves identical parties, claims

and issues, does not run afoul of Walker, Rule 341 [of the

Pennsylvania Rules of Appellate Procedure] or its Official

Note.” Always Busy Consulting, LLC v. Babford & Co[.],

247 A.3d 1033, 1043 (Pa. 2021). That is precisely the case

here. The three cases were consolidated for all purposes,

and as can be seen from the Dockets, entries ceased in

2017-27758 and 2017-27783[.] [RR at] 11a and 15a.

Further, in Township of Cranberry v. Spencer, 249 A.3d 9

(Pa. [Cmwlth.] 2021), the Commonwealth Court appears

to have acknowledged, that for matters that have been

consolidated before the trial court, there is no requirement

that appellant file individual notices of appeal. See . . .

Spencer, 249 A.2d at 11 (noting in that at “under . . .

Walker . . . , Spencer [the appellant] was required to file

individual notices of appeal for each of the six cases, as

they had not been consolidated before the trial court”).

Accordingly, all three cases from the [c]ourt below are

properly before this Court and should not be quashed or

otherwise limited.

Sch. Dist.’s Br. at 60-62 (emphasis added).

6

School District’s argument is well taken and correctly and cogently

applies the relevant principles of law. We agree with School District that a single

notice of appeal was sufficient in this case.

B. Application to Strike Amicus Briefs

Hospital filed an application for relief asking this Court to strike the

brief of amici Patientrightsadvocate.org and Families USA and the brief of amicus

Phoenixville Area School District on the basis that the briefs relied on matters that

were outside the record or raised issues that were not preserved. This Court does

not consider evidence outside the record. See Tennyson v. Zoning Hearing Bd. of

W. Bradford Twp., 952 A.2d 739 (Pa. Cmwlth. 2008) (stating that assertions outside

of the record may not be considered on appeal). Further, we do not consider any

legal arguments not preserved by the parties and amici may not assert such

arguments. See Stilp v. Commonwealth, 905 A.2d 918, 928 n.14 (Pa. 2006) (noting

that amici must take the issues as raised by the parties and cannot inject new issues

that the parties have not preserved). Therefore, we have not considered any extra-

record information or new arguments contained in briefs filed by the amici.

Accordingly, we dismiss Hospital’s application for relief as moot.

C. Standing for Tax Year 2018

School District argues that for tax year 2018, Hospital had no standing

to seek a tax exemption, because Tower Health’s purchase of the affected properties

was not complete or certain at the time it filed applications on behalf of Hospital for

the tax exemptions in 2017. See Sch. Dist.’s Br. at 58-60. School District contends

7

the trial court erred in concluding that Hospital had standing when it did not have

legal title or possession of the properties at the time it applied for tax exempt status.

However, the asset purchase agreement was pending for several months

before the deed transferring the properties was recorded in October 2017. See Trial

Ct. Op. 12/21/21 at 5-7. The trial court specifically observed that the deed recorded

in October 2017 “was not the result of an agreement a few days prior to the deed[;]

rather it was a result of the Asset and Membership Interest Purchase Agreement

dating back to May 30, 2017.” Id. at 6.

The trial court explained that although Hospital was not the record

owner of the properties when it applied for tax exempt status, it was the equitable

owner pursuant to the pending asset purchase agreement and was therefore an

aggrieved person. Trial Ct. Op. 12/21/21 at 6. The trial court posited that “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.’” Id. at 4 (quoting W. Mifflin Area Sch. Dist. v.

Bd. of Prop. Assessment, Appeals & Rev., 802 A.2d 687, 690 (Pa. Cmwlth. 2002)).

The trial court also reasoned that if Hospital was forced to wait until it

had record ownership of the properties, the window for seeking a tax exemption for

tax year 2018 would have passed, even though Hospital had legal title during that

entire tax year.4 Trial Ct. Op. 12/21/21 at 6; see also 53 Pa.C.S. § 8844(c) (providing

that an aggrieved person may seek relief from a tax assessment on or before

4

Moreover, it is logical that the conditional nature of a purchase agreement should neither

defeat equitable ownership nor impede the prospective purchaser’s ability to seek a tax exemption

for the ensuing year. Depending on the amount at issue and the purchaser’s financial

circumstances, the purchaser may need to know whether a tax exemption is available before

finalizing the purchase transaction, as the purchase might not be financially feasible if the

exemption will not be available.

8

September 1 for the ensuing tax year). Thus, the trial court concluded that “it was

appropriate for [Hospital] to apply for the 2018 tax exemption . . . before the 2017

deadline.” Trial Ct. Op. 12/21/21 at 7. We agree with the trial court’s reasoning and

likewise conclude that Hospital had standing to seek a tax exemption prospectively

for tax year 2018 while the purchase transaction was pending.

D. Tower Health as the True Party in Interest

Citing Appeal of Community General Hospital, 708 A.2d 124 (Pa.

Cmwlth. 1998), School District argues that the trial court erred in failing to find that

Tower Health’s degree of control over Hospital’s operations made Tower Health the

true party in interest that had to prove charitable status and entitlement to a tax

exemption. Sch. Dist.’s Br. at 51-53. In Community General, this Court opined that

control of a parent corporation over a corporate subsidiary

is relevant in a charitable tax exemption case only where,

under the analysis utilized when determining whether to

pierce the corporate veil, the parent’s level of control is so

great that the subsidiary is merely a sham corporation or,

in other words, the alter ego of the parent.

708 A.2d at 130.

School District suggests that Tower Health is the true party in interest

under the reasoning of Community General. However, this argument ignores the

critical fact that Community General involved a parent-subsidiary relationship. By

contrast, Hospital is an LLC, of which Tower Health is the sole member.

Accordingly, management responsibilities are as provided by Section 8847(a) and

(b) of the Nonprofit Corporation Law of 19885:

5

15 Pa.C.S. §§ 5101-6145.

9

(a) Determination of management of company.—A[n

LLC] is a member-managed [LLC] unless the operating

agreement:

(1) expressly provides that:

(i) the company is or will be manager-

managed;

(ii) the company is or will be managed by

managers; or

(iii) management of the company is or will be

vested in managers; or

(2) includes words of similar import.

(b) Member-managed company.—In a member-managed

[LLC], the following rules apply:

(1) Except as expressly provided in this title, the

management and conduct of the company are vested

in the members.

(2) Each member has equal rights in the

management and conduct of the company’s

activities and affairs.

(3) A difference arising among members as to a

matter in the ordinary course of the activities and

affairs of the company may be decided by a majority

of the members.

(4) Except as provided under section 325 (relating

to approval by [LLC]) with respect to a transaction

under Chapter 3 (relating to entity transactions), an

act outside the ordinary course of the activities and

affairs of the company may be undertaken only with

the affirmative vote or consent of all members.

(5) Except as provided under section 8822(d)

(relating to amendment or restatement of certificate

of organization), the certificate of organization may

be amended only with the affirmative vote or

consent of all members.

10

(6) The operating agreement may be amended only

with the affirmative vote or consent of all members.

15 Pa.C.S. § 8847(a) & (b) (emphasis added).

Here, the operating agreement provides, in pertinent part:

The Company shall be managed by a Board of Trustees

(the “Board”), subject to certain powers reserved to the

Member. . . . Notwithstanding anything to the contrary in

this Agreement, any power or duty not delegated to the

Board pursuant to this Section 3.1 shall be reserved to the

Member.

Operating Agreement, § 3.1, RR at 1255a-56a. Thus, it appears Hospital is a

member managed LLC. School District cites no authority to support the proposition

that a member’s management of an LLC pursuant to statute would entitle an

opposing party in litigation to pierce the corporate veil of the LLC solely by reason

of such management.

Moreover, although it is true that Tower Health provides extensive

management and administrative services to Hospital, it bills Hospital for those

services, at least on paper. In addition, School District’s brief fails to explain what,

if any, difference in the outcome of this appeal would arise if Tower Health, a

501(c)(3) nonprofit entity, were deemed the real party in interest.

For these reasons, we reject School District’s assertion of error in the

trial court’s failure to find Tower Health rather than Hospital to be the real party in

interest.

11

E. Entitlement to Real Estate Tax Exemption

1. General Legal Requirements for Tax Exemption

Pursuant to article VIII, section 2(a)(v) of the Pennsylvania

Constitution, the General Assembly may by law exempt from taxation “[i]nstitutions

of purely public charity . . . .” PA. CONST. art. VIII, § 2(a)(v). In order to implement

article VIII, section 2(a)(v), the General Assembly enacted the Institutions of Purely

Public Charity Act,6 commonly known as Act 55. In order to qualify for an

exemption as an institution of purely public charity, an entity must meet both the

constitutional requirements set forth in Hospital Utilization Project v.

Commonwealth, 487 A.2d 1306 (Pa. 1985), known as the HUP test, and the statutory

requirements of Act 55. Mesivtah Eitz Chaim of Bobov, Inc. v. Pike Cnty. Bd. of

Assessment Appeals, 44 A.3d 3, 9 (Pa. 2012). The entity must also comply with any

additional and not inconsistent requirements of the Consolidated County Assessment

Law (CCAL).7 See 53 Pa. C.S. § 8812(a)(3) & (c).

The party seeking a tax exemption has the burden of proving its

entitlement to the exemption. See Section 236 of the Tax Reform Code of 1971,8 72

P.S. § 7236; Fayette Res., Inc. v. Fayette Cnty. Bd. of Assessment Appeals, 107 A.3d

839, 844-45 (Pa. Cmwlth. 2014).

6

Act of November 26, 1997, P.L. 508, No. 55, 10 P.S. §§ 371-385.

7

53 Pa. C.S. §§ 8801-8868.

8

Act of March 4, 1971, P.L. 6, as amended, 72 P.S. §§ 7101-10004.

12

2. The HUP Test

a. Legal Requirements

In order to qualify for an exemption under any law enacted pursuant to

article VIII, section 2, an entity must show that it is an institution of “purely public

charity” by satisfying the five criteria of the HUP test; specifically, the entity must

show that it:

(a) Advances a charitable purpose;

(b) Donates or renders gratuitously a substantial portion of

its services;

(c) Benefits a substantial and indefinite class of persons

who are legitimate subjects of charity;

(d) Relieves the government of some of its burden; and

(e) Operates entirely free from private profit motive.

HUP, 487 A.2d at 1317.

An institution advances a charitable purpose “if it benefits the public

from an educational, religious, moral, physical or social standpoint.” City of

Washington v. Bd. of Assessment Appeals, 704 A.2d 120, 122-23 (Pa. 1997) (citing

HUP, 487 A.2d at 1315). An institution can advance a charitable purpose even

where it accepts payment from those who are able to pay or from Medicare or

Medicaid. See St. Margaret Seneca Place v. Bd. of Prop. Assessment, Appeals &

Rev., 640 A.2d 380, 383 (Pa. 1994) (finding that accepting Medicaid payments was

“perfectly consistent” with a nursing home’s charitable purpose). Further, an

institution relieves the government of some of its burden where “the institution bears

a substantial burden that would otherwise fall to the government”; the institution

need not “fully fund[] the care of some people who would otherwise be fully funded

by the government.” Id. at 384.

13

The final criterion of the HUP test, operating “entirely free from private

profit motive,” is a major issue in this appeal. In applying this criterion, “surplus

revenue is not synonymous with private profit . . . .” Guthrie Clinic, Ltd. v. Sullivan

Cnty. Bd. of Assessment Appeals, 898 A.2d 1194, 1199 n.6 (Pa. Cmwlth. 2006) (first

citing Wilson Area Sch. Dist. v. Easton Hosp., 747 A.2d 877, 880 (Pa. 2000); and

then citing St. Joseph Hosp. v. Berks Cnty. Bd. of Assessment Appeals, 709 A.2d

928, 938 (Pa. Cmwlth. 1998)). Instead, the analysis focuses on how such revenue is

used, specifically:

1) Whether the utilization of the revenue is made with the

expectation of a reasonable return or some non-monetary

benefit;

2) Whether the utilization of the revenue ultimately

supports or furthers the eleemosynary nature of the

charitable entity; and

3) Whether the utilization of the revenue inures, directly

or indirectly, to any private individual related to the

charitable entity or related organization(s).

Wilson, 747 A.2d at 880. Under the third of these factors, in determining whether

revenue is used in furtherance of an institution’s charitable purpose, courts consider

the compensation of the institution’s executives to determine whether it includes a

“private or pecuniary return.” HUP, 487 A.2d at 1312 (quoting Episcopal Acad. v.

Philadelphia, 25 A. 55, 56 (Pa. 1892)). That analysis requires consideration of

whether the amount of executive compensation is reasonable, and the extent, if any,

to which it is based on the financial performance of the institution. Compare, e.g.,

Wilson, 747 A.2d at 881 (upholding a tax exemption where hospital executives

received reasonable salaries and no bonuses or fringe benefits), with In re Dunwoody

Vill., 52 A.3d 408, 423 (Pa. Cmwlth. 2012) (denying exemption where, inter alia,

14

“a substantial percentage” of executive compensation was based on the institution’s

financial or marketplace performance).

b. Analysis

The trial court concluded that Hospital met all five criteria of the HUP

test. First, regarding a charitable purpose, the trial court found Hospital benefits the

public from both an educational and a social standpoint. Trial Ct. Op. 10/8/21 at 28.

Hospital provides education to its medical residents and the community at large and

operates to prevent and treat disease and injury. Id. Hospital has an open admission

policy and accepts patients regardless of their ability to pay. Id. at 27. Therefore,

the trial court determined that since tax year 2018, Hospital has advanced a

charitable purpose, and the fact that Hospital accepts payments from Medicare and

Medicaid or from those patients who are able to pay did not require a different

conclusion. Id.

Second, regarding provision of a “substantial” percentage of services

gratuitously, the trial court again relied on Hospital’s written financial assistance

policy of providing medically necessary care without regard to patients’ ability to

pay. Trial Ct. Op. 10/8/21 at 28. The court found that Hospital donated or

gratuitously rendered care in fiscal years 2018 through 2020 in the amounts of

$15,607,753, $27,801,908, and $43,106,410, respectively, including costs for

charity care, bad debt write-offs, and undercompensated care provided to patients on

Medicare or Medicaid. Id. at 27-28. For fiscal years 2018-2020, Hospital’s

donations to the community exceeded its net income, and approximately 46-47% of

patients paid less than the full cost of their care. Id. at 28. Therefore, the trial court

concluded that “[u]nder the totality of the circumstances, Hospital has made a ‘bona

15

fide effort to service primarily those who cannot afford the usual fee,’” and

consequently, Hospital donated or rendered gratuitously a substantial portion of its

services. Id. at 29.

Third, regarding benefits to persons who are legitimate objects of

charity, the trial court once again pointed to Hospital’s open admission policy. Trial

Ct. Op. 10/8/21 at 30. Further, the court observed that “people whose costs are only

partially covered by Medicaid payments are manifestly legitimate objects of charity

and people who cannot afford to pay.” Id. at 29 (quoting St. Margaret Seneca Place,

640 A.2d at 384) (additional quotation marks omitted).

Fourth, regarding relief of some of the government’s burden, the trial

court found that Hospital regularly accepts Medicare and Medicaid payments that

are less than the costs of services rendered to the covered patients. Trial Ct. Op.

10/8/21 at 30. The court reasoned that without Hospital, the government would have

to fund the full costs of such services. Id. Therefore, the trial court concluded that

Hospital’s acceptance of less than full payment relieves the government of some

financial burden. Id.

Fifth, regarding operations free from private profit motive, the trial

court found Hospital’s surplus revenue in 2018 was reinvested into Hospital to

improve services. Trial Ct. Op. 10/8/21 at 31. There were deficits in 2019 and 2020.

In all three fiscal years, Hospital’s uncompensated services exceeded its net income.

Id.

Regarding executive compensation, the trial court found that such

compensation paid by Tower Health, as well as Hospital, was relevant to this factor

of the HUP test. Trial Ct. Op. 10/8/21 at 32. The trial court described the high

compensation of Tower Health’s executives as “eye popping,” but nevertheless

16

determined it was reasonable because the trial court concluded it was bound by this

Court’s decision in Phoebe Services. Trial Ct. Op. 2/3/22 at 24-26.

In Phoebe Services, we concluded the HUP test was not violated where

an “incentive pay plan [was] typical of other healthcare nonprofits, represent[ed] fair

market value for the services provided, and [was] not directly tied to the financial

status of the nonprofit” and “[t]he compensation scheme [was] designed to stay

competitive within the market, and retain employees rather than lose the employees

to competitors . . . .” Slip op. at 18-19. This Court reached that conclusion even

though the base salaries of some executives were between the 75th and 90th

percentile of market salary levels and the bonus and incentive pay for the chief

executive officer (CEO) could exceed 25% of base compensation. Id. at 18.

Relying on Phoebe Services, the trial court here concluded executive

compensation of both Hospital and Tower Health met the HUP test because salaries

did not exceed the 90th percentile. Trial Ct. Op. 10/8/21 at 22 & 25-26. The trial

court reached this conclusion even though 40% of incentive pay was based on

financial performance. See id. at 13.

Concluding that all factors were met, the trial court determined that

Hospital met the HUP test requirement to operate entirely free from private profit

motive. Trial Ct. Op. 10/8/21 at 33. Accordingly, the trial court concluded Hospital

met the constitutional requirements for a tax exemption as a “purely public charity.”

Id.

Despite the trial court’s careful analysis, we disagree with its

conclusion. The trial court made clear that it would have rejected Hospital’s

argument regarding the reasonableness of the executive salaries if it had not been

17

constrained by this Court’s analysis in Phoebe Services. However, we do not find

Phoebe Services applicable or persuasive in this case.

In Dunwoody Village, this Court explained that the requirements of the

HUP test are separate from those of Act 55. 52 A.3d at 422 (explaining that “an

entity seeking a tax exemption as an institution of purely public charity must first

meet the constitutional requirements of the HUP test before the question of whether

it satisfies the corresponding statutory criteria in act 55 can be addressed”) (citing

Mesivtah Eitz Chaim)). For example, Act 55 requires an applicant for a tax

exemption to demonstrate, in part, that employee compensation “is not based

primarily upon the financial performance of the institution.” Dunwoody Vill., 52

A.3d at 421 (quoting Section 5(c)(3) of Act 55, 10 P.S. § 375(c)(3)) (additional

quotation marks omitted). However, the HUP test, which must be satisfied first,

may preclude a tax exemption even though less than the majority of an employee’s

compensation is based on the institution’s financial performance. Dunwoody Vill.,

52 A.3d at 422.

The executive compensation at issue in Dunwoody Village “included

incentives related to [the institution’s] financial or marketplace performance,” such

that compensation was based “in part” on the institution’s annual financial

performance. 52 A.3d at 422-23. This Court observed that the CEO’s maximum

incentive bonus was 24% of salary and the chief financial officer’s was 18-19%. Id.

at 423. We described this as “a substantial percentage” of compensation that was

based on financial performance. Id. Notably, there was no discussion in Dunwoody

Village stating how much of the bonus incentive was tied to financial performance

rather than other criteria. See id. Nonetheless, we affirmed the lower court’s

18

decision that the institutional taxpayer “failed to establish that it operate[d] entirely

free from private profit motive.” Id. (additional citation omitted).

Phoebe Services concerned an application for an exemption from a

business privilege tax imposed by a city ordinance. At issue was whether the

nonprofit taxpayer was a “business” within the meaning of the ordinance, which

defined that term as “any activity carried on or exercised for gain or profit in the

[c]ity.” 262 A.3d at 663. The city argued that the taxpayer operated with a profit

motive because its executive compensation included bonuses based on financial

performance. Id. at 666. This Court found cases analyzing the HUP test’s “private

profit motive” criterion, including Dunwoody Village, to be instructive. Id. at 669.

Contrary to the city’s argument, however, we found that the executive compensation

in Phoebe Services was “not directly tied to the financial status of the nonprofit.” Id

at 671. Thus, Phoebe Services is distinguishable from Dunwoody Village in this

regard.

Accordingly, we find Dunwoody Village more analogous and

persuasive than Phoebe Services in this case. We do not accept the suggestion that

the executive salaries at issue must be deemed reasonable merely because they do

not exceed the 90th percentile for such salaries.9 We agree with the trial court’s

characterization of the Tower Health executive salaries at issue as “eye popping,”10

9

We also note that when Tower Health’s executive committee was informed in 2019 that

executive salaries for 2018 were above the 90th percentile, the committee authorized its salary

consultant to create a new custom nationwide peer group for salary comparison rather than

comparing only east coast salaries. RR at 2441a-42a.

10

For example, in 2017, Tower Health’s CEO received a salary of $1,012,788 and a bonus

of $425,000. RR at 2347a. For 2018, after the asset purchase, he received a base salary of

$1,149,500, and in December 2018, Tower Health’s executive compensation committee approved

payments of a fiscal year 2018 incentive for its CEO of $547,428 and an annualized retention

19

and we also conclude that tying 40% of the bonus incentives to Hospital’s financial

performance is sufficiently substantial to indicate a private profit motive,11 contrary

to the HUP test.

In addition, in its analysis regarding net income, the trial court did not

acknowledge or consider any evidence regarding the reasonableness of the charges

imposed by Tower Health for the management and administrative services it

provided to Hospital. Significantly, those fees grew exponentially from year to year.

For fiscal year 2018, Hospital was charged fees of $4,446,862. RR at 1367a. For

fiscal year 2019, Hospital was charged fees of $10,933,807. Id. at 1368a. For fiscal

year 2020, Hospital was charged fees of $23,167,740. Id. at 1369a. Nonetheless, at

award of 20% of base salary per year for fiscal years 2019-2023, subject to vesting. RR at 2399a

& 2425a. In March 2019, the committee approved an additional $30,000 added to the 2018

incentive, for a total incentive of $577,428. RR at 2439a. By fiscal year 2020, Tower Health’s

CEO was receiving a base salary of $1,400,000, plus incentive and his 20% retention award. See

RR at 2449a.

Notably, while Tower Health’s executive salaries were increasing dramatically, the salaries

of Hospital’s executives were not only far lower, but were actually decreasing. Hospital’s CEO

received total compensation of $542,058 for fiscal year 2018, including a $75,132 annual incentive

award, and $494,162 for fiscal year 2019, including a $25,196 annual incentive award; other

Hospital executives likewise received lower levels of compensation in 2019. Trial Ct. Op. 2/23/22

at 9. Similar discrepancies appear in the salaries in related cases in the Chester County Court of

Common Pleas, which contributed to that court’s conclusion that

[the CEO] and the Board of Tower Health were no more tha[n]

corporate health care raiders . . . . The goal as evident from the

financial documentation offered at trial was simple and direct –

drain the juice out of the hospitals until there was nothing left but a

dried-out husk and then leave, close the doors, or sell what was left.

Brandywine Hosp., LLC v. Cnty. of Chester Bd. of Assessment Appeals, ___ A.3d ___, ___ (Pa.

Cmwlth., Nos. 1279, 1280, 1283 & 1284 C.D. 2021, filed Feb. 10, 2023), slip op. at 17 (quoting

Chester County Court of Common Pleas) (quotation marks omitted).

11

We also note that during negotiations with Tower Health’s CEO, its negotiator expressly

suggested “that the best way to optimize his income is by getting great results for [Tower Health]

and maxing out the bonus opportunity.” RR at 2402a.

20

trial, a Hospital witness testified that Hospital never studied the charges to determine

whether the administrative and management fees charged by Tower Health were fair

or reasonable for the services provided. RR at 445a.

Without evidence to establish the reasonableness of the fees it paid to

Tower Health, Hospital could not satisfy its burden of showing that it operated

entirely free from a profit motive under the HUP test. For this additional reason, we

conclude that Hospital did not demonstrate compliance with the requirements of the

HUP test.

Because we conclude that Hospital has not met the HUP test, we

reverse the trial court’s decision. Accordingly, analysis of the Act 55 and CCAL

factors is not necessary, as Hospital must satisfy all three tests to qualify for tax

exempt status. See 53 Pa. C.S. § 8812(a)(3) & (c); Mesivtah Eitz Chaim, 44 A.3d at

9.12

IV. Conclusion

Based on the foregoing analysis, we reverse the trial court’s order

granting tax exempt status and hold that Hospital is not entitled to a real property tax

12

Nonetheless, we note our agreement with the trial court’s conclusion that Hospital did

not fully meet all criteria of the CCAL, 53 Pa.C.S. § 8812(a)(3)(ii) (stating that “[t]he property of

purely public charities is necessary to and actually used for the principal purposes of the institution

and not used in such a manner as to compete with commercial enterprise”), regarding two of the

three properties for which Hospital sought tax exemptions. The trial court found that only 66% of

another building that Tower Health bought along with Hospital was used for Hospital’s principal

purposes; therefore, only 66% of that property was deemed tax exempt. Trial Ct. Op. 10/8/21 at 2

& 37-38. A third property was sold by Tower Health in 2020; therefore, the trial court observed

that no tax exemption for that property would be available for 2021. Id. at 2 & 38. Neither Hospital

nor Tower Health challenges those limitations on Hospital’s tax-exempt status.

21

exemption for the 2018 to 2021 tax years. We dismiss as moot Hospital’s application

for relief seeking to strike the briefs filed by amici in support of School District.

__________________________________

CHRISTINE FIZZANO CANNON, Judge

Judge Wallace did not participate in the decision in this case.

22

IN THE COMMONWEALTH COURT OF PENNSYLVANIA

Pottstown School District, :

Appellant :

:

v. :

:

Montgomery County Board of :

Assessment Appeals, Pottstown :

Hospital, LLC, Pottstown Borough : No. 1217 C.D. 2021

and County of Montgomery :

ORDER

AND NOW, this 10th day of February, 2023, the October 8, 2021 order

of the Court of Common Pleas of Montgomery County is REVERSED. The

application for relief seeking to strike briefs filed by amici curiae in support of

Pottstown School District is DISMISSED AS MOOT.

__________________________________

CHRISTINE FIZZANO CANNON, Judge