Court Opinion

ID: 9370010
Source: CourtListenerOpinion
Date Created: 2023-02-10 16:08:42.757113+00
Date Added: 2024-06-11T17:16:18.610878
License: Public Domain

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