Charitable Hospitals and the Wealthy Healthy
A nearly twenty-year-old property tax exemption case, one that has been litigated all the way to the Georgia Supreme Court and back down again, is proving why the IRS ought to pay more attention to exempt hospitals. The Service announced it was on the verge of doing so at the ABA Tax Section fall meeting this week. Here is the gist of the case:
In the early 2000s the Georgia Medical Center Authority issued private activity bonds to help Columbus Regional Health Care System, Inc. a 501(c)(3) build Spring Harbor at Green Island. The Spring Harbor website pretty much depicts a plush retirement village with very healthy-looking wealthy residents. The “healthy wealthy” according to the Columbus Georgia Tax Assessor. Spring Harbor’s website says “as the first and only not-for-profit Continuing Care Retirement Community in the Columbus, Georgia area, we believe in living life to the fullest at every age. You’ve already put in the work, now it’s time to play!” The Columbus Georgia Board of Tax Assessors refused to recognize a property tax exemption for Spring Harbor, arguing that a “resort-style retirement community open only to the healthy and wealthy is not public property, as required by Georgia Law.” The Tax assessors proposed to tax the Medical Center Authority, even though it owns the land as a public agency.
With the bond proceeds, the Authority leased land from Columbus Regional and then promptly hired Columbus Regional to build and operate Spring Harbor on that land. All the improvements revert to Columbus Regional, by the way, after the expiration of the long term lease. Columbus Regional promptly built the retirement village. Columbus Regional then hired its own affiliated management company to operate Spring Harbor. That is essentially how private activity bonds are supposed to work, actually. A private, usually nonprofit entity borrows money from a public entity that finances the deal with tax exempt bond proceeds. And there are complex rules to ensure that tax exemption does not result in unnecessary private benefit. In this case, the bonds were even approved on two separate occasions by judicial process despite stated misgivings about private benefit. The problem is, Spring Harbor only accepts the healthy wealthy. That fact is undisputed. Residents have to meet strict financial requirements and can’t be sick, lest they become a drain on the retirement village.
To be “public property” exempt from tax according to Georgia law, the property must not only be owned by a public entity, it may not be operated for private gain. The trial and appellate courts have now twice reversed the assessor’s decision to treat Spring Harbor as taxable property based on the finding that it is operated in a way that conveys private gain. After the second time, the Tax Assessor appealed to the Georgia Supreme Court. The Assessor prevailed the first time before the Supreme Court but only on the preliminary issue regarding the correct standard of proof. On remand, the trial court purportedly applied the correct standard and found again that the property should be tax exempt as public property. The Court of Appeals affirmed and now the Tax Assessor has filed another petition for Supreme Court review. Here is how the Tax Assessor characterized Spring Harbor in its petition for cert:
This case presents the question whether a resort-style retirement community open only to the healthy and wealthy is “public property” exempt from taxation despite evidence showing gain and income to a private entity.
. . .
The high net worth and income required for admission to Spring Harbor make residency unattainable for most Columbus residents. Also, no one who needs a lot of healthcare can move there. To gain admission, one must possess “significant resources,” enjoy “good health,” and be able to “live independently” with no “diagnosed medical conditions” that would risk “premature transfer from independent living.” Spring Harbor typically rejects applicants for not meeting its “financial criteria” or its “medical criteria for independent living.” The record reflects that, as of 2011, the entrance fee for Spring Harbor ranged from $100,205 to $514,547, with additional fees ranging from $18,795 to $31,470 for a second person. Additional monthly fees ranged from $1,956 to $4,376—or $23,472 to $52,512 annually. Both to qualify for admission and remain at Spring Harbor, one must submit documentation that he or she has, and will continue to have, income that equals at least 160% of the monthly fee. If a resident fails to pay the monthly fee or any other charges, Spring Harbor can terminate the agreement.
. . .
For those fortunate enough to live at Spring Harbor, “[e]very day is about exciting choices and limitless possibilities” to enjoy luxurious services and amenities. The services and amenities provided within this gated community include formal and informal dining venues with alcohol, a putting green, movie theatre, club and game room, computer/business center, library, woodworking shop, ballroom, music and reading room, exercise facility, indoor pool and hydro-therapy center, arts and crafts room, market shoppe, local bank branch, hair salon, post office, pharmacy delivery services, outdoor fireplace, gazebos, walking trails, transportation services, concierge services, 24-hour security, and weekly housekeeping and laundry service. As Spring Harbor boasts in its marketing materials, many of these amenities are what one finds at a resort, not a health care facility.
Columbus Regional pretty much admits all of that in its Response to Petition for Cert, explaining that just because Spring Harbor serves wealthy people doesn’t mean it is providing private gain rather than public benefit. It relies on the “just about anything health related is community benefit” ethos that prevails for exempt hospitals. Of course, the law is a bit more than that. Health care tax exemption is appropriate for the treatment of wealthy people, too. That is, when the benefits are available to the entire community without regard to whether people are rich or poor. It is hardly appropriate in the face of explicit limitations of charitable impact to those who can afford the very high costs. And aren’t even sick anyway. And yet the trial and appellate courts have twice ruled the property worthy of tax exemption.
Those lower courts seem to think that because Columbus Regional is the direct beneficiary of the public financing and is operating a health care system, the community benefit it provides precludes private gain. Or those courts are being willfully blind. To the extent a 501(c)(3) operates an unrelated business, it is not pursuing a public purpose. Spring Harbor seems like an unrelated business even if the organizers have never admitted it. An unrelated business is just a private business – not public charity or benefit — with illegitimate public subsidy. The subsidy is properly withdrawn by way of the unrelated business income tax. That seems what the Taxing Authority is getting at with the entertaining recitation of what only the wealthy healthy get at Spring Harbor. One need not be a tax geek to see that there is no justification for subsidizing a regular old retirement village, admission to which is strictly based on income and good health.
Second, to the extent a 501(c)(3) unnecessarily limits its charitable impact, it is operating for private gain of those to whom the benefit is limited. The tax assessor’s focus on the benefit accruing to Columbus Regional seems to have confused the courts, since a benefit to a charity is presumptively public benefit. But a limitation is unnecessary if does not tend to achieve public benefit. Like relevancy. Limiting residency to the wealthy healthy is not public benefit. Instead there is private benefit oozing from Spring Harbor into the pockets of the wealthy healthy who are rich enough to live there. That is how tax exemption jurisprudence would explain this. Tax exemption jurisprudence would explain that Columbus Regional is operated for the private benefit of those who pay for admission. The managed care tax exemption cases rely on this conclusion to deny (c)(3) status to most HMOs. And a special tax subsidy that achieves no public benefit proves private benefit. All these cases – property or income tax exemption, or private activity bond limitations — are about whether the public subsidy benefits private persons unnecessarily. The private benefit doctrine prevents the public from being ripped off.
I gotta say, this feels like a rip-off.
darryll k. jones