Case Name: UTAH COUNTY, a body politic, By and Through the COUNTY BOARD OF EQUALIZATION OF UTAH COUNTY, State of Utah, Plaintiff, v. INTERMOUNTAIN HEALTH CARE, INC., and Tax Commission of the State of Utah, Defendants
Court: Utah Supreme Court
Jurisdiction: Utah
Decision Date: 1985-06-26
Citations: 709 P.2d 265
Docket Number: No. 17699
Parties: UTAH COUNTY, a body politic, By and Through the COUNTY BOARD OF EQUALIZATION OF UTAH COUNTY, State of Utah, Plaintiff, v. INTERMOUNTAIN HEALTH CARE, INC., and Tax Commission of the State of Utah, Defendants.
Judges: HALL, C.J., and DAVID SAM, District Judge, concur.
Reporter: Pacific Reporter 2d
Volume: 709
Pages: 265–303

Head Matter:
UTAH COUNTY, a body politic, By and Through the COUNTY BOARD OF EQUALIZATION OF UTAH COUNTY, State of Utah, Plaintiff, v. INTERMOUNTAIN HEALTH CARE, INC., and Tax Commission of the State of Utah, Defendants.
No. 17699.
Supreme Court of Utah.
June 26, 1985.
Rehearing Denied Sept. 26, 1985.
David L. Wilkinson, Atty. Gen., Noall T. Wootton, Utah County Atty., Lynn W. Davis, Deputy County Atty., Provo, Ted Cannon, Salt Lake County Atty., Bill Thomas Peters, Sp. Asst. County Atty., Salt Lake City, for plaintiff.
Daniel M. Allred, Michael D. Dazey, Salt Lake City, for St. Marks.
Jonathan A. Dibble, Salt Lake City, for Holy Cross.
Alan L. Sullivan, S. David Colton, A. Jaynne Allison, Salt Lake City for Inter-mountain Health Care.
John H. McDonald, Craig S. Cook, Salt Lake City, for Pathology.

Opinion:
DURHAM, Justice:
Utah County seeks review of a decision of the Utah State Tax Commission reversing a ruling of the Utah County Board of Equalization. The Tax Commission exempted Utah Valley Hospital, owned and operated by Intermountain Health Care (IHC), and American Fork Hospital, leased and operated by IHC, from ad valorem property taxes. At issue is whether such a tax exemption is constitutionally permissible. We hold that, on the facts in this record, it is not, and we reverse.
Amici curiae have entered the case. St. Mark's Hospital and Holy Cross Hospital have filed briefs supporting IHC's position, and Salt Lake County has filed a brief supporting that of Utah County. Pathology Associates Laboratories (PAL) supports Utah County and argues that allowing nonprofit hospitals such as those operated by IHC to enjoy a tax exemption, in addition to their nonprofit status, gives them an unfair advantage over competitors such as PAL, a for-profit corporation. By minute entry of this Court, IHC's motion to strike the brief of PAL was granted to the extent that the brief deals with factual issues not raised in the proceedings below. We set forth hereafter those pertinent facts that have been established in the somewhat limited record before us.
IHC is a nonprofit corporation that owns and operates or leases and operates twenty-one hospitals throughout the intermoun-tain area, including Utah Valley Hospital and American Fork Hospital. IHC also owns other subsidiaries, including at least one for-profit entity. It is supervised by a board of trustees who serve without pay. It has no stock, and no dividends or pecuniary profits are paid to its trustees or incor-porators. Upon dissolution of the corporation, no part of its assets can inure to the benefit of any private person.
IHC's policy with respect to all of its hospitals is to make charges to patients for hospital services whenever it is possible to do so. Hospital charges are paid either by patients, by private insurance companies such as Blue Cross and Blue Shield, or by governmental programs such as Medicare and Medicaid. IHC and its individual hospitals also are the recipients of private bequests, endowments, and contributions in amounts not established in the record.
Utah County seeks the resolution of two issues: (1) whether U.C.A., 1953, § 59-2-30 (1974) and 59-2-31 (1974), which exempt from taxation hospitals meeting certain requirements, constitute an unconstitutional expansion of the charitable exemption in article XIII, section 2 of the Utah Constitution; and (2) whether Utah Valley Hospital and American Fork Hospital are exempt from taxation under article XIII, section 2 of the Utah Constitution.
Utah. County does not seriously dispute that the two hospitals in this case comply with sections 59-2-30 and 59-2-31, but contends instead that these statutes unlawfully expand the charitable exemption granted by article XIII, section 2 of the Utah Constitution (1895, amended 1982), which provides in pertinent part:
The property of the state, cities, counties, towns, school districts, municipal corporations and public libraries, lots with the buildings thereon used exclusively for either religious worship or charitable purposes, . shall be exempt from taxation.
In ruling upon the validity of a statute which purports to define the meaning of a constitutional provision, we are obligated to scrutinize the language of the Constitution with considerable care. It is true, as explained in Justice Howe's dissent, that a significant degree of deference is due to a legislative construction of the meaning of a constitutional term. But his opinion itself, in accord with well-established principles of judicial review, acknowledges that this Court's obligation is to serve as the "final arbiter" of the question of what constitutes "charitable purposes." "Section 2 of art. XIII grants a charitable exemption and our statutes cannot expand or limit the scope of the exemption or defeat it. To the extent the statutes have that effect, they are not valid." Loyal Order of Moose, #259 v. County Board of Equalization, Utah, 657 P.2d 257, 261 (1982) (emphasis in the original).
The power of state and local governments to levy property taxes has traditionally been limited by constitutional and statutory provisions such as those at issue in this case that exempt certain property from taxation. These exemptions confer an indirect subsidy and are usually justified as the quid pro quo for charitable entities undertaking functions and services that the state would otherwise be required to perform. A concurrent rationale, used by some courts, is the assertion that the exemptions are granted not only because charitable entities relieve government of a burden, but also because their activities enhance beneficial community values or goals. Under this theory, the benefits received by the community are believed to offset the revenue- lost by reason of the exemption.
A consideration of the reasons for exemption provisions is important in determining the proper standards under which they should be reviewed.
A liberal construction of exemption provisions results in the loss of a major source of municipal revenue and places a greater burden on nonexempt taxpayers, thus, these provisions have generally been strictly construed. For the same reasons parties seeking an exemption bear the burden of proving their entitlement to it. The doctrine of strict construction and the difficulties taxpayers have in bearing the burden of proof explain why taxation has been the rule and exemption has been the exception. In some jurisdictions, however, the doctrine of strict construction has been eroding. Courts in these jurisdictions pay "lip service" to the doctrine but fail to apply it to exemption provisions.
Comment, Real Estate Tax Exemption for Federally Subsidized Housing Corporations, 64 Minn.L.Rev. 1094, 1096-97 (1980) (footnotes omitted).
Unlike the courts described in the foregoing comment, this Court recently reaffirmed its commitment to the doctrine of strict construction as applied to the charitable exemption provision contained in the Utah Constitution. In Loyal Order of Moose, 657 P.2d at 264, we determined that the clause exempting property "used exclusively for . charitable purposes" is to be strictly construed, Utah Const. art. XIII, § 2. Accord Salt Lake County v. Tax Commission ex rel. Laborers Local No. 295, Utah, 658 P.2d 1192, 1194 (1983).
An entity may be granted a charitable tax exemption for its property under the Utah Constitution only if it meets the definition of a "charity" or if its property is used exclusively for "charitable" purposes. Essential to this definition is the element of gift to the community.
Charity is the contribution or dedication of something of value . to the common good_ By exempting property used for charitable purposes, the constitutional convention sought to encourage individual or group sacrifice for the welfare of the community. An essential element of charity is an act of giving.
Salt Lake County v. Tax Commission ex rel. Greater Salt Lake Recreational Facilities, Utah, 596 P.2d 641, 643 (1979) (emphasis added). A gift to the community can be identified either by a substantial imbalance in the exchange between the charity and the recipient of its services or in the lessening of a government burden through the charity's operation. Laborers Local No. 295, 658 P.2d at 1198 (Oaks, J., concurring). In Friendship Manor Corp. v. Tax Commission, 26 Utah 2d 227, 487 P.2d 1272 (1971), this Court declined to exempt from taxation property used as a home for the elderly because the alleged givers of the charity also constituted its sole beneficiaries. We were unable in that case to find any gift to the general public. We there quoted with approval United Presbyterian Association v. Board of County Commissioners, 167 Colo. 485, 503, 448 P.2d 967, 976 (1968): "[W]here material reciprocity between alleged recipients and their alleged donor exists — then charity does not." Friendship Manor, 26 Utah 2d at 238, 487 P.2d at 1279. Similarly, in Laborers Local No. 295, 658 P.2d at 1196, we held that a union was not entitled to a tax exemption for condominium office space because the primary purpose of this use was to benefit union members, and there was no gift to the general public.
Given the complexities of institutional organization, financing, and impact on modern community life, there are a number of factors which must be weighed in determining whether a particular institution is in fact using its property "exclusively for . charitable purposes." Utah Const. art. XIII, § 2 (1895, amended 1982). These factors are: (1) whether the stated purpose of the entity is to provide a significant service to others without immediate expectation of material reward; (2) whether the entity is supported, and to what extent, by donations and gifts; (3) whether the recipients of the "charity" are required to pay for the assistance received, in whole or in part; (4) whether the income received from all sources (gifts, donations, and payment from recipients) produces a "profit" to the entity in the sense that the income exceeds operating and long-term maintenance expenses; (5) whether the beneficiaries of the "charity" are restricted or unrestricted and, if restricted, whether the restriction bears a reasonable relationship to the entity's charitable objectives; and (6) whether dividends or some other form of financial benefit, or assets upon dissolu tion, are available to private interests, and whether the entity is organized and operated so that any commercial activities are subordinate or incidental to charitable ones. These factors provide, we believe, useful guidelines for our analysis of whether a charitable purpose or gift exists in any particular ' case. We emphasize that each case must be decided on its own facts, and the foregoing factors are not all of equal significance, nor must an institution always qualify under all six before it will be eligible for an exemption.
Because the "care of the sick" has traditionally been an activity regarded as charitable in American law, and because the dissenting opinions rely upon decisions from other jurisdictions that in turn incorporate unexamined assumptions about the fundamental nature of hospital-based medical care, we deem it important to scrutinize the contemporary social and economic context of such care. We are convinced that traditional assumptions bear little relationship to the economics of the medical-industrial complex of the 1980's. Nonprofit hospitals were traditionally treated as tax-exempt charitable institutions because, until late in the 19th century, they were true charities providing custodial care for those who were both sick and poor. The hospitals' income was derived largely or entirely from voluntary charitable donations, not government subsidies, taxes, or patient fees. The function and status of hospitals began to change in the late 19th century; the transformation was substantially completed by the 1920's. "From charities, dependent on voluntary gifts, [hospitals] developed into market institutions financed increasingly out of payments from patients." The transformation was multidimensional: hospitals were redefined from social welfare to medical treatment institutions; their charitable foundation was replaced by a business basis; and their orientation shifted to "professionals, and their patients," away from "patrons and the poor."
The magnitude and character of the change in hospital care is suggested by a number of factors. (1) The social composition of hospital patients appears to have changed until by the early 20th century it became quite similar to the population at large. Paul Starr, The Social Transformation of American Medicine at 159 (1982). The change in hospital architecture (large wards were replaced with private rooms) suggests the same movement away from the poor to paying patients. Id. (2) The number and percentage of paying patients increased as did the percentage of revenue derived from patient fees. This revenue amounted to over 65 percent for general hospitals in the country as a whole by 1922. Public appropriations amounted to about 18 percent; endowment income amounted to 3.6 percent; and donations added 5.7 percent. Id. at 161. (3) The practice of not permitting physicians to charge private patients for their services in hospitals was abandoned during this period. In 1880, according to one study, no hospital permitted physician fees. By 1905, 47 of 52 New England hospitals surveyed permitted physicians to charge for services to private patients. Id. at 163-64. (4) Before 1880, less than 2 percent of physicians had hospital privileges; by 1933, 5 of 6 physicians had hospital privileges. Id. at 162, 167. (5) The number of hospitals increased, according to census figures, from 178 in 1872 to over 4,000 in 1910. Id. at 169. (6) Between 1890 and 1920 there was a substantial growth in for-profit hospitals, organized by physicians and corporations, as the opportunity for profit in the hospital business improved. Id. at 170. All of the above factors indicate a substantial change in the nature of the hospital; a part of that change was the gradual disappearance of the traditional charitable hospital for the poor.
Also of considerable significance to our review is the increasing irrelevance of the distinction between nonprofit and for-profit hospitals for purposes of discovering the element of charity in their operations. The literature indicates that two models, described below, appear to describe a large number of nonprofit hospitals as they function today.
(1) The "physicians' cooperative" model describes nonprofit hospitals that operate primarily for the benefit of the participating physicians. Physicians, pursuant to this model, enjoy power and high income through their direct or indirect control over the nonprofit hospitals to which they bring their patients. The nonprofit form is believed to facilitate the control by physicians better than the for-profit form. Pauley & Redisch, The Not-For-Profit Hospital as a Physicians' Co-operative, 63 Am.Econ. Rev. 87, 88-89 (1973). This model has also been called the "exploitation hypothesis" because the physician "income maximizing" system is hidden behind the nonprofit facade of the hospital. Clark, Does the Nonprofit Form Fit the Hospital Industry?, 93 Harv.L.Rev. 1416, 1436-37 (1980). A minor variation of the above theory is the argument that many nonprofit hospitals operate as "shelters" within which physicians operate profitable businesses, such as laboratories. Starr, supra, at 438.
(2) The "polycorporate enterprise" model describes the increasing number of nonprofit hospital chains. Here, power is largely in the hands of administrators, not physicians. Through the creation of holding companies, nonprofit hospitals have grown into large groups of medical enterprises, containing both for-profit and nonprofit corporate entities. Nonprofit corporations can own for-profit corporations without losing their federal nonprofit tax status as long as the profits of the for-profit corporations are used to further the nonprofit purposes of the parent organization. Id. at 437. (IHC owns at least one for-profit subsidiary.) The emergence of hospital organizations with both for-profit and nonprofit components has increasingly destroyed the charitable pretentions of nonprofit organizations: "The extension of the voluntary hospital into profit-making businesses and the penetration of other corporations into the hospital signal the breakdown of the traditional boundaries of voluntarism. Increasingly, the polycorporate hospitals are likely to become multihospital systems and competitors with profit-making chains, HMO's and other health care corporations." Id. at 438.
The foregoing discussion of the economic environment in which modern hospitals function is critical to our analysis in this case because it is an analysis which is generally not present in any of the cases relied upon by the dissenting opinions. Those cases, in our view, do not take into account the revolution in health care that has transformed a "healing profession" into an enormous and complex industry, employing millions of people and accounting for a substantial proportion of our gross national product. Dramatic advances in medical knowledge and technology have resulted in an equally dramatic rise in the cost of medical services. At the same time, elaborate and comprehensive organizations of third-party payers have evolved. Most recently, perhaps as a further evolutionary response to the unceasing rise in the cost of medical services, the provision of such services has become a highly competitive business. Furthermore, even the more recent cases cited by the dissenting opinions contradict the rule this Court has adopted strictly construing our constitutional provision, Loyal Order of Moose, 657 P.2d at 264, and requiring every charity to show an element of gift. Community Memorial Hospital v. City of Moberly, Mo., 422 S.W.2d 290 (1967), as an example, contains no mention of the element of gift that this Court has held crucial to the meaning of charity. It appears that the hospital in Moberly was granted its tax exemption largely on the basis of its nonprofit structure, for the Missouri court held it of no account that the hospital gave charity in an amount less than 1.4 percent of the amount collected from paying patients, that this so-called "charity" included some bad debts, and that for four of the eight years at issue no charity at all was given by the hospital. Id., 422 S.W.2d at 293. Similarly, Vick v. Cleveland Memorial Medical Foundation, 2 Ohio St.2d 30, 206 N.E.2d 2 (1965), does not insist on identifying the element of gift in an organization's practices before it can be held to be a charity. Both Moberly and Vick, as well as other cases cited in the dissents, are therefore inconsistent with the holdings of this Court. See Laborers Local No. 295, 658 P.2d 1192; Greater Salt Lake Recreational Facilities, 596 P.2d 641; Friendship Manor, 26 Utah 2d 227, 487 P.2d 1272.
Having discussed the standards for the application of Utah's constitutional exemption for property used for charitable purposes, and the economic and historic context in which we conduct this review, we now examine the record respecting the two hospitals ("the defendants") whose eligibility has been challenged by Utah County. We note that this examination focuses exclusively on what the record before us demonstrates regarding these two hospitals, and only these hospitals. The policies, practices, and structure of Intermountain Health Care, Inc., are relevant to this examination insofar as they have been shown in this case to affect the operations of these hospitals. Evidence concerning the functions and operations of other hospitals in the IHC system appears to be entirely irrelevant, as the exempt status of the property used by those hospitals is not now before us.
The stated purpose of IHC regarding the operation of both hospitals clearly meets at least part of the first criterion we have articulated for determining the existence of a charitable use. Its articles of incorporation identify as "corporate purposes," among other things, the provision of "care and treatment of the sick, afflicted, infirm, aged or injured within and/or without the State of Utah." The same section prevents any "part of the net earnings of this Corporation" to inure to the private benefit of any individual. Furthermore, under another section, the assets of the corporation upon dissolution likewise may not be distributed to benefit any private interest.
The second factor we examine is whether the hospitals are supported, and to what extent, by donations and gifts. The findings of the Tax Commission are ambiguously worded in regard to this element, since they do not make any distinction between patient charges, third-party payments from private insurers and government entitlement programs, and "gifts (wills, endowments and contributions)." The finding reads: "The sources of revenue of IHC are derived primarily from patient charges, third parties (Blue Cross, Blue Shield, Medicare, Medicaid), and gifts (wills, endowments and contributions)." Therefore, we have examined the testimony and exhibits in evidence on this question. The latter demonstrate that current operating expenses for both hospitals are covered almost entirely by revenue from patient charges. Although a substantial donation to capital was identified in the case of Utah Valley Hospital, there was no demonstration of the impact of that donation on the current support, maintenance, and operation of that hospital in the tax year in question in this lawsuit. The evidence was that both hospitals charge rates for their services comparable to rates being charged by other similar entities, and no showing was made that the donations identified resulted in charges to patients below prevailing market rates. Presumably such differentials, if they exist, could be quantified and introduced into evidence. The defendants have failed to provide such evidence, and it is they who bear the burden of showing their eligibility for exemption.
Justice Stewart's dissenting opinion argues that the element of charitable giving from private donors and benefactors to a nonprofit entity, without more, satisfies the requirement of "gift" in the definition of "charitable purpose" under the Utah Constitution. Although that argument is attractive, we believe that it is inconsistent with our precedent, the language of the Constitution, and public policy. Many institutions are largely or partly created and supported by gifts, but do not therefore automatically qualify for tax exemptions for their property. Examples might include private, nonprofit schools, museums, research organizations, libraries, planetariums, zoos, scientific consulting groups, environmental research agencies, professional associations, and so forth.
One of the most significant of the factors to be considered in review of a claimed exemption is the third we identified: whether the recipients of the services of an entity are required to pay for that assistance, in whole or in part. The Tax Commission in this case found as follows:
The policy of [IHC's hospitals] is to collect hospital charges from patients whenever it is reasonable and possible to do so; however, no person in need of medical attention is denied care solely on the basis of a lack of funds.
The record also shows that neither of the hospitals in this case demonstrated any substantial imbalance between the value of the services it provides and the payments it receives apart from any gifts, donations, or endowments. The record shows that the vast majority of the services provided by these two hospitals are paid for by government programs, private insurance companies, or the individuals receiving care. Collection of such remuneration does not constitute giving, but is a mere reciprocal exchange of services for money. Between 1978 and 1980, the value of the services given away as charity by these two hospitals constituted less than one percent of their gross revenues. Furthermore, the record also shows that such free service as did exist was deliberately not advertised out of fear of a "deluge of people" trying to take advantage of it. Instead, every effort was made to recover payment for services rendered. Utah Valley Hospital even offered assistance to patients who claimed inability to pay to enter into bank loan agreements to finance their hospital expenses.
The defendants argue that the great expense of modern hospital care and the universal availability of insurance and government health care subsidies make the idea of a hospital solely supported by philanthropy an anachronism. We believe this argument itself exposes the weakness in the defendants' position. It is precisely because such a vast system of third-party payers has developed to meet the expense of modern hospital care that the historical distinction between for-profit and nonprofit hospitals has eroded. For-profit hospitals provide many of the same primary care services as do those hospitals organized as nonprofit entities. They do so at similar rates as those charged by defendants. The doctors and administrators of nonprofit hospitals have the same opportunity for personal remuneration for their services as do their counterparts in for-profit hospitals. See Georgia Osteopathic Hospital, Inc. v. Alford, 217 Ga. 663, 665, 124 S.E.2d 402, 403 (1962).
The dissent of Justice Stewart suggests that the fact that "ability to pay" is not a criterion for admission to IHC's facilities is dispositive of the question of "charitable purpose," regardless of the actual amount of free care provided therein. This argument overlooks the fact that for-profit institutions may well implement similar policies, either for public relations reasons or by virtue of regulations mandated by their receipt of federal- or state-funded payments. Institutions constructed with Hill-Burton funds, for example, were required to provide free care to qualify under that act. Furthermore, many for-profit service providers both provide free care and write off "bad debts," thereby satisfying this criterion. The dissent's reasoning would therefore require that any health care provider that accepted patients regardless of ability to pay be deemed eligible for a charitable exemption unless the for-profit/nonprofit distinction is to become the sole means of identifying "charitable purposes" under the Utah Constitution. This Court rejected that unilateral test in William Budge Memorial Hospital v. Maughan, 79 Utah 516, 3 P.2d 258 (1931), and we are not persuaded that we should adopt it now.
The fourth question we consider is whether the income received from all sources by these IHC hospitals is in excess of their operating and maintenance expenses. Because the vast majority of their services are paid for, the nonprofit hospitals in this case accumulate capital as do their profit-seeking counterparts. The record indicates that this accumulated capital is used for the construction of additional hospitals and other facilities throughout the IHC system and the provision of expanded services. The record before us is undeveloped on this point, but there is nothing therein to indicate that the capital accumulated by either of the defendant hospitals is even earmarked in any way for use in their facilities or even in Utah County. In view of the fact that Intermountain Health Care owns and operates facilities, for-profit and nonprofit, throughout this state and in other states, we are particularly concerned that there is no showing on the record that surplus funds generated by one hospital in the system will not be utilized for the benefit of facilities in other counties, outside the state of Utah, or purely for administrative costs of the system itself.
Indeed, it is difficult to see a significant difference between the operation (as opposed to the form of corporate structure) of defendants' facilities and the operation of the for-profit hospital in Budge, where William Budge Memorial Hospital had a similar policy of collecting charges, in all cases where it was possible, for the services and accommodations furnished its patients. 79 Utah at 521, 3 P.2d at 260. In Budge, we were unable to find a single distinctive charitable feature that marked Budge Memorial as a charitable institution, even though no benefits or profit had ever actually been distributed to or received by the shareholders of the owner corporation. 79 Utah at 528, 3 P.2d at 263. The only apparent difference between Budge Memorial and the defendants is that the hospitals in this case have adopted a nonprofit corporate format in their legal organization. Yet Budge decisively rejected, as we have already noted, the contention that all nonprofit corporations are entitled to a charitable exemption for purposes of property taxes. See also Friendship Manor, 26 Utah 2d at 239, 487 P.2d at 1280; Greater Salt Lake Recreational Facilities, 596 P.2d at 644. The significant difference between for-profit and nonprofit hospital corporations is, in effect, the method of distribution of assets upon dissolution of the corporation, which is itself a rare occurrence.
A large portion of the profits of most for-profit entities is used for capital improvements and new, updated equipment, and the defendant hospitals here similarly expend their revenues in excess of opera tional expenses. There can be no doubt, in reviewing the references in the record by members of IHC's administrative staff, that the IHC system, as well as the two hospitals in question, has consistently generated sufficient funds in excess of operating costs to contribute to rapid and extensive growth, building, competitive employee and professional salaries and benefits, and a very sophisticated management structure. While it is true that no financial benefits or profits are available to private interests in the form of stockholder distributions or ownership advantages, the user entity in this ease clearly generates substantial "profits" in the sense of income that exceeds expenses. This observation is not intended to imply that an institution must consume its assets in order to be eligible for tax exemption — the requirement of charitable giving may obviously be met before that point is reached. However, there is a serious question regarding the constitutional propriety of subsidies from Utah County taxpayers being used to give certain entities a substantial competitive edge in what is essentially a commercial marketplace. None of the defendants in this case made any effort to demonstrate that they would suffer any operating losses or have to discontinue any services if they are ineligible for exemption from property taxes. Justice Stewart's assertion that the taxes levied by the county would have to be passed on to patients in the form of higher charges is without any foundation in the evidence. The far more logical assumption is that growth of the IHC system would possibly be slowed, but there is no indication of a likelihood that current and future levels of care would be jeopardized.
The final two factors we address are whether the beneficiaries of the services of the defendants are "restricted" in any way and whether private interests are benefited by the organization or operation of the defendants. Although the policy of IHC is to impose no restrictions, there were some incidents recounted in the testimony which suggested that these institutions do not see themselves as being in the business of providing hospital care "for the poor," an activity which was certainly at the heart of the original rationale for tax exemptions for charitable hospitals. Otherwise, it appears that they meet this criterion. On the question of benefits to private interests, certainly it appears that no individuals who are employed by or administer the defendants receive any distribution of assets or income, and some, such as IHC's board of trustees members, volunteer their services. We have noted, however, that IHC owns a for-profit entity, as well as nonprofit subsidiaries, and there is in addition the consideration that numerous forms of private commercial enterprise, such as pharmacies, laboratories, and contracts for medical services, are conducted as a necessary part of the defendants' hospital operations. The burden being on the taxpayer to demonstrate eligibility for the exemption, the inadequacies in the record on these questions cannot be remedied by speculation in the defendants' favor.
In summary, after reviewing the facts in this case in light of the factors we have identified, we believe that the defendants in this case confuse the element of gift to the community, which an entity must demonstrate in order to qualify as a charity under our Constitution, with the concept of community benefit, which any of countless private enterprises might provide. We have no quarrel with the assertion that Utah Valley Hospital and American Fork Hospital meet great and important needs of persons within their communities for medical care. Yet this meeting of a public need by a provision of services cannot be the sole distinguishing characteristic that leads to an automatic property tax exemption. "[T]he usefulness of an enterprise is not sufficient basis for relief from the burden of sharing essential costs of local government." In re Marple Newtown School District, 39 Pa.Commw. 326, 336, 395 A.2d 1023, 1028 (1978). Such a "usefulness" rule would have to be equally applied to for-profit hospitals and privately owned health care entities, which also provide medical services to their patients. We note, for example, that the increasing em phasis on competition in health care services is resulting in significant expansion of the activities and roles of health care providers generally, including hospitals, both for-profit and nonprofit. Laboratory services, pharmaceutical services, "birthing" centers, and outpatient surgical units are becoming common adjuncts to traditional hospital care. It would be impossible to justify a distinction, within the constitutional boundaries of "charitable" activities, between outpatient surgical services, for example, provided on property owned by an IHC hospital and those provided on privately owned property, where both are identical and are remunerated at the same rate. As we have pointed out, there was no showing in the record that either of the hospitals in question uses billing rates which differ materially from rates charged for the same services by for-profit hospitals, or that the defendants' rates or services would change if they were required to pay county property taxes.
Furthermore, if the "importance" of the public benefit resulting from the operation of an enterprise were to become the primary constitutional test for a charitable purpose, as the dissents imply, this Court would be required to accomplish the impossible task of determining the relative value to the public or to the community of any function performed by any entity and its consequent entitlement to a "charitable" tax exemption. See Loyal Order of Moose, 657 P.2d at 263-64. This cannot be the rule under our precedents established in Loyal Order of Moose, 657 P.2d 257, and Laborers Local No. 295, 658 P.2d 1192. It may very well be, as a matter of public policy, that all hospitals, for-profit and nonprofit, should be granted a tax exemption because of the great public need they serve. But it is beyond the power of the Legislature to grant such a public policy-based exemption under the language of the Utah Constitution as it now reads. This Court has clearly and recently affirmed the necessity of identifying the element of "gift," a nonreciprocal contribution to the community. Laborers Local No. 295, 658 P.2d at 1195. The dissenting opinions fail to acknowledge that, however worthy the principles of public policy they articulate may be, the standards they advocate would require us to overrule or ignore both the construction given to the "charitable purpose" language in the past by this Court and the strict analytical approach we have used in such construction. Under these circumstances, the extensive references to authority from other jurisdictions in the dissent are not persuasive on the question before us; they would only become so if we were to contemplate abandonment of our own precedent, an approach that is not openly sought here by either the defendants or the dissenting members of the Court.
Neither can we find on this record that the burdens of government are substantially lessened as a result of the defendants' provision of services. The record indicates that Utah County budgets approximately $50,000 annually for the payment of hospital care for indigents. Furthermore, the evidence described two instances within a three-month period where, after a Utah County official had declined to authorize payment for a person in the emergency room, Utah Valley Hospital refused to admit the injured person on the basis of that person's inability to pay. The county official was told in these instances to either authorize payment or to "come and get" the person. Such behavior on the hospital's part is inconsistent with its argument that it functions to relieve government of a burden. Likewise, as we have pointed out, there has been no showing that the tax exemption is a significant factor in permitting these defendants to operate, thereby arguably relieving government of the burden of establishing its own medical care providers. In fact, government is already carrying a substantial share of the operating expenses of defendants, in the form of third-party payments pursuant to "entitlement" programs such as Medicare and Medicaid.
As we noted in the introduction to this opinion, the "burden" theory of tax exemptions has been traditionally based on the notion that a charitable organization should be eligible for exemption because it performs a task which the government would otherwise have to perform. The basis for the tax exemption is a quid pro quo: "private charities perform functions that the state would be required to undertake and tax exemption is granted as a quid pro quo for the performance of these functions and services." E. Fisch, D. Freed & E. Schacter, Charities and Charitable Foundations § 787, at 602 (1974) (footnote omitted). A hospital, whether nonprofit or for-profit, that provides its services to paying patients relieves no public burden because, in its absence, the government would not (or would have no duty to) provide free health care to patients able to pay for treatment. See Note, Exemption of Educational, Philanthropic and Religious Institutions from State Real Property Taxes, 64 Harv.L.Rev. 288, 290 (1950). If nonprofit hospitals, which charge fully for their services, were to be made tax exempt under the "burden" theory, for-profit hospitals logically ought to be treated in the same manner since both provide the public with the same service. Indeed, it might be argued that for-profit hospitals relieve a greater portion of the public "burden" because they provide medical care without public subsidy. All hospitals use tax-supported public services, including road construction and maintenance, police protection, fire protection, water and sewer maintenance, and waste removal, to name a few. Exempt hospitals use those services at the expense of nonexempt health care providers and other taxpayers, commercial and individual. Furthermore, nonprofit hospitals that generate a surplus from their operations ought not to be tax exempt under the "burden" theory because they are not passing along the benefit of the exemption to the public unless they are charging less for services than would be required absent the tax exemption: "Even if the organization uses such surplus to expand its public benefit services, thereby remaining within the definition of nonprofitability, it does so at the expense of the beneficiaries whom it was created to serve." Ginsberg, The Real Property Tax Exemption of Nonprofit Organizations: A Perspective, 53 Temp.L.Q. 291, 317-18 (1980).
While the practice of courts has often deviated from the strict logic of the "burden" theory, the general pattern is that "burden" jurisdictions generally require some degree of almsgiving or unpaid services for the granting of a charitable tax exemption. "Consequently in these states operations financed primarily or entirely with funds supplied by the beneficiaries are classified as noncharitable." E. Fisch, Charities, supra, § 791, at 610.
We cannot find, on this record, the essential element of gift to the community, either through the nonreciprocal provision of services or through the alleviation of a government burden, and consequently we hold that the defendants have not demonstrated that their property is being used exclusively for charitable purposes under the Utah Constitution.
Because we so hold, it follows that U.C.A., 1953, § 59-2-31 provides no safe harbor for defendants. In Loyal Order of Moose, 657 P.2d 257, we reiterated the principle that our statutes cannot expand the scope of the tax exemption granted by article XIII, section 2 of our Constitution. "To the extent the statutes have that effect, they are not valid." Id. at 261. Accord Laborers Local No. 295, 658 P.2d at 1193-94. Property used exclusively for hospital purposes is not automatically being used for charitable purposes, even where the hospital is nonprofit.
We reverse the Tax Commission's grant of an ad valorem property tax exemption to defendants as being unconstitutional. We emphasize, contrary to the assertions of the dissents, that this opinion is no more than an extension of the principles of strict construction set forth in Loyal Order of Moose, 657 P.2d 257. This is a "record" case, and we make no judgment as to the ability of these hospitals or any others to demonstrate their eligibility for constitutionally permissible tax exemptions in the future. We note, however, that reliance on automatic exemptions granted heretofore, and on the kind of minimal efforts to show charity reflected in this record, will no longer suffice.
The circumstances of this decision are very similar to those in Loyal Order of Moose, 657 P.2d 257, which gave rise to that case's holding respecting its effective date. The defendants here have relied for many years on a statutory interpretation of a constitutional provision, and this opinion resolves a difficult question of first impression. Because of the substantial delay entailed in the litigation process, retroactive application requiring the assessment of back taxes might well result in an unreasonable burden on the defendants in this case and on other similarly situated entities. Substantial changes in their operating budgets, record-keeping, and admission policies may result from our holding. It may be that adjustments in accounting practices and other policies will enable these defendants and other hospitals to qualify in the future for the constitutional exemption. In order to avoid the unreasonable burden that might otherwise be placed on them, we hold that the ruling of this case shall be applied prospectively only, with an effective date of January 1, 1986.
HALL, C.J., and DAVID SAM, District Judge, concur.
. § 59-2-30. This section is intended to clarify the scope of exemptions for property used exclusively for either religious worship or charitable purposes provided for in section 2 of Article XIII of the Constitution of the state of Utah. This section is not intended to expand or limit the scope of such exemptions. Any property whose use is dedicated to religious worship or charitable purposes including property which is incidental to and reasonably necessary for the accomplishment of such religious worship or charitable purposes, intended to benefit an indefinite number of persons is exempt from taxation if all of the following requirements are met:
(1) The user is not organized to produce a profit from the use of the property.
(2) No part of any net earnings, from the use of the property, inures to the benefit of any private shareholder or individual, but any net earnings shall be used directly or indirectly, for the charitable or religious purposes of the organization.
(3) The property is not used or operated by the organization or other person so as to benefit any officer, trustee, director, shareholder, lessor, member, employee, contributor, or any other person through the distribution of profits, payment of excessive charges or compensations.
(4) Upon the liquidation, dissolution, or abandonment of the user no part of any proceeds derived from such use will inure to the benefit of any private person.
§ 59-2-31. (1) Property used exclusively for religious, hospital, educational, employee representation, or welfare purposes which use complies with the requirements of section 59-2-30, shall be deemed to be used for charitable purposes within the exemption provided for in section 2 of Article XIII of the Constitution of the state of Utah, and section 59-2-30.
. We emphasize in this regard the language of article XIII, section 2 itself:
All tangible property in the state, not exempt under the laws of the United States, or under this Constitution, shall be taxed....
Utah Const, art. XIII, § 2 (1895, amended 1982) (emphasis added).
. E. Fisch, D. Freed & E. Schachter, Charities and Charitable Foundations § 787, at 602 (1974).
. Id. at 603 & n. 42.
. This article also contains the following information on the significance of local tax revenues:
Property taxes are the most important source of municipal revenue. For example, in 1970 to 1971 they comprised 64% of general revenue raised by local governments. Advisory Comm'n of Intergovernmental Relations, The Property Tax in a Changing Environment 99 (1974). In 1972, 84% of all local tax revenue and 36.4% of all local government revenue from all sources came from property taxes. Bureau of the Census, U.S. Dep't of Commerce, Statistical Abstract of the United States 242, 245 (1974). See also E. Fisch, D. Freed & E. Schachter, [supra note 3,] at 599-60. ("Property taxes are an important source of revenue for governmental subdivisions which are finding it increasingly difficult to obtain adequate funds." (footnote omitted)); O. Old-man & F. Schoettle, State and Local Taxes and Finance 137 (1974) ("As a producer of revenue, the property tax ranks second only to the federal personal income tax_"); Cy-pen, Access to Health Care Services for the Poor: Existing Programs and Limitations, 31 U. Miami L.Rev. 127, 152 (1976) ("To freely allow tax exemptions would . inevitably result in the depletion of sources of revenue from taxation."); Note, Nebraska Supreme Court Approves State Property Tax Exemption for Nonprofit Nursing Home Corporation Closely Associated with For-Profit Corporations, 12 Creighton L.Rev. 1331, 1332 (1979) ("The ratio of tax exempt property to taxable property is steadily increasing. Because of the resulting loss of tax revenues, local government subdivisions cast a jaundiced eye upon property tax exemptions.").
64 Minn.L.Rev. at 1096 n. 17.
. This six-factor standard has been adapted from the test articulated by the Minnesota Supreme Court in North Star Research Institute v. County of Hennepin, 306 Minn. 1, 6, 236 N.W.2d 754, 757 (1975).
. Paul Starr, The Social Transformation of American Medicine at 150 (1982). "Voluntary" hospitals, like public hospitals (which evolved from almshouses for the dependent poor), performed a "welfare" function rather than a medical or curing function: the poor were housed in large wards, largely cared for themselves, and often were not expected to recover. See id. at 145, 149, 160. Early voluntary hospitals had paternalistic, communal social structures in which patients entered at the sufferance of their benefactors, "had the moral status of children," and received more moralistic and religious help than medical treatment. Id. at 149, 158.
Voluntary hospitals were charities for the quite obvious reason that they housed and tended to those who were both sick and poor, i.e., those without resources and in need of charity. Because hospitals performed no medical treatment function and because they were largely institutions for the poor, the nonpoor in need of medical treatment and their treating private physicians overwhelmingly avoided them. See generally Starr, supra.
. Id. at 146.
.Id. at 147-48. This transformation was propelled significantly by (1) the professionalization of nursing and doctoring, and (2) advances in medical science, particularly in hygiene and anesthesia. Not only did the quality of medicine improve, but more importantly, the practice of medicine rapidly became linked to hospitals. Consequently, hospitals ceased being custodial holding institutions for the poor and instead became centers of medical treatment, especially surgery, attractive, for the first time, to private physicians and paying patients. A major consequence of this change was a great increase in the cost of establishing and operating hospitals. "Hospital budgets soared beyond the capacity of charity to meet them." Id. at 160. While the change increased costs, it also "enlarged the potential for income. Many people were now coming to hospitals who could afford to pay, and since the real value of hospital care had increased, charges would not drive them away." Id. at 161. Hospitals' ability to attract and financial need for paying patients, in turn, greatly increased the power of physicians over hospitals at the turn of the century as physicians acted as "feeders," controlling the traffic of paying patients to hospital beds. Id. at 178-79. "Hospitals had gone from treating the poor for the sake of charity to treating the rich for the sake of revenue_" Id. at 159. (For a case history of this change in New York hospitals, see David Rosner, A Once Charitable Enterprise (1982).)
. The dissents attempt tp characterize this opinion as "equating" profit and nonprofit enterprises. We disavow any such purpose. The point of this analysis is to emphasize that whatever salient distinctions exist between such entities in the health care field, they provide no automatic predicate for presuming, the existence of charitable uses. For-profit entities are known, for many reasons, to engage in charity, and nonprofit entities to withhold it. The point of this opinion is to reiterate the essential requirement of the Utah Constitution that any entity claiming a charitable use exemption must demonstrate its entitlement and not rely upon unexamined and anachronistic assumptions about its status.
. Justice Howe's dissent asserts that we erroneously conclude that the rates of services of the two hospitals in this case would not change if their tax exemption is not upheld. We emphasize that the only thing this opinion concludes is that, on this record, these defendants have entirely failed to demonstrate that such a change would occur. This is a "record" case, and the record below strongly suggests that defendants, like the dissenters, took the view that they were entitled to an automatic tax exemption without any evidentiary showing of the existence of charitable use.
. The dissenters rely upon a statement in the record from the chairman of IHC's board to the effect that its rates were lower than those charged by for-profit hospitals. A careful examination of the record shows that testimony to have been identified as a mere opinion and not based upon any examination of comparable rate information. No "break-out" data from any hospitals was offered, and the context of the chairman's testimony makes it clear that no foundation was laid for his opinion. His actual statements were as follows:
Q. Mr. Jones, what are the sources of the money which Intermountain Health Care uses to operate its hospitals and to purchase capital improvements in those hospitals?
A Well, the sources of money, of course, the primary source is patient revenue. And we, if I can say it again, we accepted a stew-artship [sic] and a responsibility as unpaid volunteer trustees, which we feel very intensely, which is to provide health service to our communities. Therefore, the revenue incomes, if all things are compared, daily bed rate, the ancillary services, which are all the lab services and the x-rays and things like that, which it's hard to get the right mix if you had two people have the same appendix in two hospitals, you'd get that, but it's hard to compare just from a price list, if you will.
We feel that we charge significantly less for the same admission, if you will, but in addition to that as a source of revenue — of course, we are all familiar with Blue Cross, Blue Shield which we call third party, that is, it is neither the provider [nor] the patient. It is a third party, and Medicaid, Medicare which is a major provider or payer of health care.
. The chairman of IHC's board of directors, for example, testified as follows:
[W]e provide as a policy in Intermountain Health Care charity care to a certain level, and when I say certain level I should say that we provide health. We try not to publish that because everybody wants charity care, and they all consider them as good for charity cases. We don't turn people away.
. The record does reflect that Utah Valley Hospital is the sole provider of tertiary care for a large geographic region. Because of the unique character of this sophisticated medical care, it may well be possible to identify a substantial imbalance in the exchange between Utah Valley Hospital and the recipients of its tertiary care, or a lessening of a government burden through the offering of such care. In light of our statement in Loyal Order of Moose, 657 P.2d at 264, that "any separate part of the building occupied and used exclusively for charitable purposes . qualifies for exemption," it may be possible that the provision of tertiary care services could qualify as a charity if the requisite gift to the community were to be demonstrated. In this case, no effort was made to demonstrate for the record whether certain types of care were actually being "given away" by either institution or whether they could not in fact be provided without the off-setting factor of a tax exemption, at least to the extent of the value of the facilities needed to provide such care. We do not rule on the availability of tax exemptions under such circumstances in the context of this undeveloped record. We emphasize, however, that Justice Howe's assertion that "no institution can qualify" under this rule for the charitable purposes exemption is inaccurate. This case is decided on this record. We decline to describe the activities and policies of a qualifying institution, finding only that, in this case, the activities and policies of the two defendant hospitals, as established in this record, fall short, in several important respects, of the constitutional standard.
. The testimony clearly established in at least one of those cases that the individual was in need of emergency medical care.
. There is no requirement in this opinion that taxes be imposed on any institution; there is only a requirement that institutions claiming charitable exemptions be put to their proof as to eligibility.