By C. Frederick Geilfuss II and Lynette M. ZigmanOn July 19, 2011, the Wisconsin Supreme Court issued its much-anticipated opinion in Covenant Healthcare System, Inc. v. City of Wauwatosa [enhanced version available to lexis.com subscribers / unenhanced version available from lexisONE Free Case Law].
The court concluded that Covenant's off-campus outpatient clinic was
exempt from property tax because it was used for the primary purpose of a
hospital, it did not constitute a doctor's office, it was not property
used for commercial purposes, and no benefit from it inured to a private
Wisconsin hospitals with offsite hospital-based operations will want
to consider filing for a property tax exemption for such facilities on
real estate it owns. The exemption is not automatic, and the Covenant
decision, as reflected below, provides lessons as to steps a Wisconsin
hospital will want to consider and implement with respect to its offsite
In 2003, Covenant, a non-profit entity, constructed an outpatient
clinic and transferred the building and equipment to St. Joseph
Regional Medical Center, a non-profit entity for which Covenant served
as the sole corporate member. St. Joseph operated an acute care
inpatient hospital approximately five miles from the outpatient clinic
and operated the outpatient clinic as a provider-based department of St.
Joseph. The outpatient clinic was constructed to hospital standards,
was accredited by the joint commission, and offered a gift shop and
cafeteria to patients and visitors. It provided a range of outpatient
services, including an urgent care center, outpatient surgery, pain
management, and physical therapy, among other services. The outpatient
clinic did not have inpatient beds.
Covenant sought a property tax exemption for the portion of the
facility used and operated by St. Joseph as a hospital-based department
of the hospital. The city assessor denied the exemption. The trial
court, after a nine-day trial, concluded the outpatient clinic was
exempt from property taxation. The court of appeals reversed and
concluded the outpatient clinic was a doctor's office and, therefore,
was not eligible for an exemption under the applicable Wisconsin
The Wisconsin Supreme Court reversed the court of appeals. It
concluded that the outpatient clinic qualified for the property tax
exemption notwithstanding the fact that it offered no inpatient beds and
was located more than five miles from the inpatient hospital operated
by St. Joseph. The court's conclusion was premised on a number of
factors that were peculiar to the St. Joseph situation.
It is not safe to assume that every off-campus department of a
hospital that is operated as provider based for purposes of the Medicare
program will qualify as exempt from property tax. Rather, it is
important for a hospital to document the presence of a number of factors
for such an outpatient operation to qualify as property tax exempt.
The Wisconsin Supreme Court looked at four different issues in
concluding that the St. Joseph outpatient clinic was tax exempt. The
court's discussion of the four issues and certain factors it considered
in addressing those issues, provide some lessons that a hospital should
review as it seeks a property tax exemption.
Was the Outpatient Clinic Used Exclusively for the Purposes of a Hospital?
The court concluded that the fact that the outpatient clinic was offsite and five miles from the St. Joseph
inpatient hospital did not mean that the facility was disqualified from
being used for purposes of a hospital. In reaching the conclusion that
the outpatient clinic was used for the purposes of a hospital the court
noted the outpatient clinic was utilized by St. Joseph because of "genuine limitations" at the inpatient hospital.
In particular, there was evidence that the outpatient clinic was
pursued to reduce, and has reduced, diversion of patients from the
inpatient hospital. The outpatient clinic also was developed to house
hyperbaric chambers for which there were space limitations at the
The court also observed that the outpatient clinic fulfilled the
primary purpose of the inpatient hospital in other ways: freeing up
space for outpatient services, delivering services more conveniently and
efficiently, creating a single unit to address special health needs,
and providing modern facilities.
The court further noted that systems were fully integrated,
including records and systems. Based on all these factors, the court
found the outpatient clinic served the purposes of the hospital.
Lessons. The key lesson on this issue is that a hospital
opening an off-campus location should document the reasons why the
operations that are part of the outpatient clinic are being located
offsite and how the interests of the hospital are furthered by doing so.
The reasons the court found persuasive discussed above are examples of
reasons to relocate certain operations offsite.
Is the Outpatient Clinic a Doctor's Office?
This issue caused the most uncertainty in obtaining the property
tax exemption. Both the court of appeals and the dissenting Supreme
Court justice concluded that the outpatient clinic was a doctor's office
and, thus, should not be property tax exempt. The majority concluded
that it was not a doctor's office.
The majority analyzed seven factors in assessing this issue and
found that five of the seven favored a conclusion that the outpatient
clinic was not a doctor's office. The majority also noted some other
matters that bolstered its conclusion. The factors and their application
to the outpatient clinic are as follows:
In weighing all seven factors and the other matters noted, the court
concluded that the outpatient clinic was not a doctor's office.
Lessons. For a hospital seeking an exemption this discussion suggests some important criteria. It will be important not
to have physicians with dedicated office space in the outpatient
location. As is common in hospital-based operations the hospital should
be billing a facility fee and not charging the physicians rent. The
compensation of the physicians both for the professional services
provided and for oversight of non-physician hospital personnel also
should be analyzed. Ownership of the space and equipment and integration
of software and systems also will be important issues. The presence of
other factors, such as a gift shop and cafeteria, also will be factors. A
hospital may want to consider structuring operations to reflect these
factors as it considers its application for an exemption.
Was the Outpatient Clinic Used for Commercial Purposes?
The court explained that the fact that the facility was operated
to generate revenues in excess of expenses did not mean that it was
operated for commercial purposes. As the court stated: "A not-for-profit
entity is 'not required to use only red ink in keeping its books and
Instead, the court stated the test as to whether the outpatient
clinic was operated for commercial purposes was whether making a profit
was its primary aim.
The court noted that the outpatient clinic was devoted to the
diagnosis, treatment, and care of the sick, injured, and disabled. It
listed several goals beyond profit margin. Its business plan promoted
faith-based health care. And, it served Medicare and Medicaid patients.
With all these factors, the court concluded the primary aim was
not profit generation and the outpatient clinic was not operated for
Lessons. The lessons on this point are to articulate the
reasons and purposes for the outpatient operation with an emphasis on
the provision of and access to quality health care. Taking
Medicare/Medicaid patients and offering a charity care policy also will
Did Any Part of the Net Earnings Inure to the Benefit of Any Shareholder, Member, Director, or Officer?
The court analyzed this question as turning on whether Covenant, a
not-for-profit hospital corporation that was the corporate member of St. Joseph, qualified as a "member" as that term is used in the Wisconsin
property tax exemption statute. The court analyzed the issue and
concluded that a not-for-profit corporation is not a "member" for
determining whether net earnings improperly inure to a member.
Lessons. There is little from a planning perspective with
respect to this issue. Tax exempt entities with not-for-profit corporate
members, which is a typical structure, should not cause concerns on
qualifications for the exemption.
The Wisconsin Supreme Court has made it clear that offsite
outpatient departments of a hospital may qualify for a property tax
exemption in Wisconsin. Hospitals with offsite departments that are not
currently tax exempt will want to consider filing for a property tax
exemption. In doing so, they will want to consider certain lessons,
noted above, on how to structure the outpatient clinic to help ensure
their outpatient facilities are property tax exempt.
Legal News Alert is part of our ongoing commitment to providing
up-to-the-minute information about pressing concerns or industry issues
affecting our clients and colleagues. If you have any questions about
this alert or would like to discuss the topic further, please contact
your Foley attorney or the following:
C. Frederick Geilfuss
Lynette M. Zigman
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