Outpatient clinic considered a “department” of parent
hospital, qualifies for tax exempt status
The sole not-for-profit corporate member of St. Joseph Regional Medical
Center, Covenant Healthcare Systems, is not considered a
“member” for purposes of the property tax statutes.
By Joe Forward, Legal Writer,
State Bar of Wisconsin
July 20, 2011 – A not-for-profit outpatient medical clinic,
located five miles from the hospital that owns it, is exempt from local
property tax, the Wisconsin Supreme Court recently concluded.
The City of Wauwatosa assessed property taxes against St.
Joseph Outpatient Clinic (Clinic) for tax years 2003-2006. St. Joseph
Regional Medical Center Inc. (St. Joseph Hospital) owns the Clinic.
Covenant Healthcare Systems Inc. (Covenant), sole member of St. Joseph
Hospital, sued for a refund.
Wis. Stat. section 70.11(4m)(a) exempts from taxation real property
“used exclusively for the purposes of any hospital of 10 beds or
more devoted primarily to the diagnosis, treatment or care of the sick,
injured, or disabled.” The exemption does not apply to
property considered a “doctor’s office,” if it is used
for “commercial purposes,” or if the net earnings inure to
the benefit of a “member.”
The City of Wauwatosa argued that tax assessment was
proper, regardless of whether the Clinic served the purposes of St.
Joseph Hospital, because it was actually a doctor’s office, it was
used for commercial purposes, and the net earnings inured to the benefit
Reversing a court of appeals decision, the supreme court in Covenant
Healthcare System Inc. v. City of Wauwatosa,
2011 WI 80 (July 19, 2011), rejected Wauwatosa’s
arguments and ruled (by 7-1 vote) that the Clinic is used exclusively
for the primary purpose of St. Joseph Hospital. As a result, Wauwatosa must refund property taxes
assessed against the Clinic.
In a dissenting opinion, Chief Justice Shirley Abrahamson argued that Covenant did not meet
its burden to prove the Clinic was not used as a doctor’s office
because the doctors there see most patients by appointment during
scheduled business hours and the Clinic does not provide inpatient,
Clinic used exclusively for hospital
The Clinic effectively serves as a department of St. Joseph Hospital,
the majority concluded after a fact-intensive analysis of the purposes
served by the Clinic. Thus, it concluded that the Clinic is used
exclusively for the purposes of St. Joseph Hospital, a requirement under
The majority noted that the Clinic operates under the same hospital
license, the Clinic and St. Joseph Hospital share the same billing and
record systems, and the Clinic “address[es]
limitations and goals that could not be addressed or satisfied within
the physical confines” of St. Joseph Hospital.
For instance, the majority opinion notes that the Clinic can address
less serious injuries, thereby reducing the amount of patients that must
be rerouted due to overcrowding at the hospital. This expands the
availability of the hospital’s emergency room to receive patients,
the opinion notes.
Under section 70.11(4m)(a), property considered a doctor’s
office – a building where doctors have their offices – is
not exempt from property tax.
Wauwatosa argued that the Clinic is a
doctor's office because it does not provide inpatient services and
the physicians see most patients by appointment during regular business
hours. However, the majority focused on five factors to determine the
Clinic was not considered a doctor’s office:
(1) physicians practicing at the Clinic do not receive variable
compensation related to the extent of their services; (2) the physicians
do not receive extra compensation for overseeing non-physician staff;
(3) the Clinic’s bills are generated on the same software system
as the bills generated by St. Joseph Hospital; (4) physicians at the
Clinic do not have their own offices; and (5) the physicians practicing
at the Clinic do not own or lease the building or equipment.
Chief Justice Abrahamson disagreed on this point.
“Although the [Clinic] may be capable of hospital-like care, the
[Clinic], including the Urgent Care Center, is actually used to
treat conditions similar to those generally treated in a doctor’s
office,” she wrote in the dissent.
The chief justice fears the majority’s opinion will place
for-profit doctors' offices at a competitive disadvantage with
not-for-profit hospitals operating outpatient facilities that provide
the “same services in the same manner.” She
also fears an inequitable apportionment of the tax burden.
Under section 70.11(4m)(a), property used for commercial purposes
is not exempt from property tax. The majority rejected Wauwatosa’s argument that the Clinic is
used for commercial purposes because it operates to generate profit in
competition with other for-profit and not-for profit clinics.
Although the Clinic may generate a profit, the majority noted, that is
not its primary purpose. “This is not a case where private
physicians or individual shareholders will receive any excess revenues
that the [Clinic] generates,” wrote Justice Gableman.
Covenant not a “member”
Under section 70.11(4m)(a), a hospital may take a property tax
exemption as long as “no part of the net earnings ... inures to
the benefit of any shareholder, member, director or officer.
…” Covenant is the sole member of St. Joseph Hospital,
which owns the Clinic.
Thus, Wauwatosa argued that Covenant could not take a
property tax exemption because the net earnings of St. Joseph, through
its ownership of the Clinic, inure to the benefit of Covenant.
But the majority held that Covenant, as a not-for-profit hospital
corporation, does not qualify as a “member” as the term is
used in section 70.11(4m)(a).
“If we interpret the term ‘member’ in Wis. Stat. § 70.11(4m)(a) to include not-for-profit corporate
members, then those not-for-profit corporate members would have to be
excluded from any distribution of assets upon dissolution,” the
majority explained. “As the circuit court concluded, this is an
unreasonable construction of the statute.”
The majority explained that a different conclusion would require
not-for-profit corporations to rewrite bylaws to transfer assets
elsewhere upon dissolution, or risk losing their tax exempt status.
Don M. Millis and Kristina E. Somers of Reinhart Boerner Van Deuren S.C., Madison, represented Covenant
Healthcare System Inc. Robert Horowitz of Stafford Rosenbaum LLP, Madison, Alan R. Kesner (city attorney) and Beth Thorson Aldana (assistant city
attorney) represented the City of Wauwatosa.