Reed Smith Client Alerts

On February 10, 2023, the Commonwealth Court of Pennsylvania (Court) issued a series of en banc opinions affirming the Chester County Court of Common Pleas (Trial Court) denials of tax-exempt applications for Brandywine Hospital, Jennersville Hospital, and Phoenixville Hospital ‒ three hospitals acquired by Tower Health LLC 1 . Although the Court ultimately dismissed the cases on appellate procedural grounds, the Court addressed fully the Trial Court’s determinations that Tower’s applications failed under the HUP Test. The Court’s decisions, however, focused not on each of the applicants but on the activities of the applicants’ management company.

The facts are relatively straightforward. Tower, then the Reading Health System, acquired several “for-profit” hospitals formerly owned by Community Health Systems in 2017. The acquisition was funded by a $590 million bond. Tower, a 501(c)(3) entity, created new limited liability companies to hold the acquired properties. Tower was the sole member of each limited liability company. The new limited liability companies each filed a tax exemption application for tax year 2018, each seeking to qualify as a “purely public charity.” The exemption applications were denied at the administrative level and then at the Trial Court.

On appeal, the Court focused most intensely on whether Tower (as opposed to each separate LLC) met the prong of the HUP Test that requires a purely public charity “[o]perates entirely free from private motive.” The Court found three of Tower’s practices to be grounds to uphold the trial court’s decision that Tower “failed to sustain its burden of demonstrating the absence of a profit motive,” namely, (1) Tower’s “improperly exorbitant management fees;” (2) Tower’s investment of interest payments on the bonds for the acquisition of hospital properties in areas other than the efficiency and facilities of each hospital; and (3) Tower’s executive compensation.