The Appeals Court of Massachusetts last week denied the tax-exempt status of a physician group practice affiliated with a small not-for-profit hospital.
The court on Friday affirmed an earlier denial of abatement of real estate taxes for fiscal years 1997-2000 on property owned by the Sturdy Memorial Foundation, parent of 124-bed Sturdy Memorial Hospital in Attleboro, Mass.
Although the court affirmed that both the foundation and hospital qualify as charitable organizations, it ruled that Sturdy's operation of a physician clinic was akin to a commercial medical group practice and did not operate as a charity.
In 1997, the Board of Assessors of North Attleborough denied the foundation's application for abatement of real estate taxes for the clinic on land used by Sturdy Memorial Associates. The foundation appealed to the state Appellate Tax Board, saying the clinic lost money, treated high-risk patients and continued the hospital's charitable mission.
But the appeals board found the clinic lost money because the hospital foundation subsidized physician expenses and startup costs for new practices and paid the employed doctors not only competitive salaries, but bonuses tied to collections and productivity.
The appeals board twice concluded that the clinic was not operated as a charity but as a commercial enterprise in which the physician employees received inurement that otherwise would have gone to support its charitable mission.
Officials at Sturdy Memorial Hospital could not be reached for comment at deadline.
In another tax case, a jury last week ruled that St. David's Healthcare System of Austin, Texas, a six-hospital joint venture between the not-for-profit St. David's and investor-owned HCA, deserved its tax-exempt status.
The verdict culminated a legal process that began with an Internal Revenue Service tax audit six years ago, its revocation of St. David's tax-exempt status in 2000, an appellate court decision favoring the government and millions of dollars in legal fees. Healthcare tax specialists said while it's possible that the IRS could appeal the verdict, it's unlikely.
In 1996, St. David's and HCA each contributed three hospitals to form St. David's HealthCare Partnership and signed a 54-year partnership agreement. That agreement required the hospitals to maintain community benefit standards, gave St. David's the right to fire the CEO, name the board chairman and dissolve the partnership with HCA.
After its 1998 audit, the IRS ruled that because the St. David's system entered a partnership with a for-profit entity, it no longer operated exclusively for charitable purposes and revoked its tax-exempt status.
St. David's President and CEO Neal Kocurek, who testified during the trial, said the case hinged on the jury's understanding that St. David's established enough controls in the agreement to maintain its charitable mission. "We're very pleased and are absolutely certain that this is the correct verdict," Kocurek said. "We regret that we've spent six years and millions of dollars in an effort to show what we already knew."