UPMC Lawsuit Dismissed
UPMC, which employs over 55,000 individuals in over 20 hospitals and 400 outpatient clinics worldwide, was sued by the City of Pittsburgh (“Pittsburgh”) for six year’s worth of back local municipality payroll taxes and real estate taxes. Pittsburgh Mayor Luke Ravenstahl said, “City taxpayers should not subsidize the $10 billion hospital system that has fueled UPMC’s rise as Pennsylvania’s largest employer and the region’s richest nonprofit organization.” UPMC, which generated over $10 billion in annual revenue and $300 million in operating revenue in 2012, could benefit Pittsburgh with $20 million of its estimated tax revenue. Pittsburgh, in their legal challenge, questioned whether or not UPMC fulfilled its state obligation to advance a charitable purpose, donate a significant amount of services to the community, and operate without a for-profit motive.
BACKGROUND OF UPMC LAWSUIT
During March 2013, Pittsburgh filed suit against UPMC challenging UPMC’s current tax-exempt status; thus exempting UPMC from having to pay local municipality payroll taxes and real estate taxes. As large healthcare systems and hospitals, similar to UPMC, continue to grow and local governments continue to struggle to meet their budgets, tax-exempt hospitals, along with other tax-exempt organizations, are bearing closer scrutiny. More local governments are taking a closer look at the charitable missions and accomplishments of their local tax-exempt organizations and questioning whether or not the tax-exempt organization’s charitable purposes are being met.
It is up to the court to define “an institution of purely public charity”, not the legislature. The “HUP Test”, which comes from the 1985 court case Hospital Utilization Project v. Commonwealth, states the five characteristics that must be met in order to be worthy of tax-exempt status. These five shared characteristics are:
- Advance a charitable purpose,
- Donate a substantial amount of its services,
- Benefit a large portion of people who need charity,
- Relieve the government of some of its burden, and
- Operate entirely free of a profit motive.
RECENT EVENTS
After over a year-long dispute between Pittsburgh and UPMC, Pittsburgh decided to drop its lawsuit challenging the tax-exempt status of UPMC. Subsequent to this action, UPMC withdrew its lawsuit against Pittsburgh which claimed that its civil rights had been violated. In a July 25 letter, Pittsburgh notified UPMC that it had “made the decision to not proceed with an appeal of the litigation we inherited from Mayor Ravenstahl.”
Current Mayor William Peduto, who had been working to negotiate with UPMC for a long-term agreement, made the determination that the negotiations weren’t going anywhere due to the hostility between the two parties. However, Peduto stated, “That doesn’t mean in the future we don’t have the possibility of pursuing a suit against UPMC and other nonprofits if we feel they’re running a for-profit operation.” In the end, the Mayor is willing to work with UPMC and other tax-exempt organizations on joint efforts to invest in Pittsburgh despite their “current” tax exempt statuses. Peduto stated, “UPMC in some cases has a responsibility, to be able to provide more than just their basic services and to be a good community partner in creating opportunities.”
One consideration which some municipalities are currently utilizing is payments in lieu of taxes (“PILOTS”). PILOTS are payments made voluntarily by tax-exempt organizations as a substitute for real estate taxes. These payments are negotiated between the municipality and the tax-exempt organizations. The use of PILOTS has grown in popularity in recent years as they provide municipalities with an additional mechanism to raise revenue. It is important to note that PILOT programs are considered a voluntary arrangement between the municipality and the tax-exempt organization.
CONCLUSION
In conclusion, as court cases such as UPMC v. Pittsburgh receive publicity, more local governments may consider challenging the status of their local tax-exempt organizations. The public perception as to the community benefit and accomplishment of an organization’s mission will be some of the items of particular focus. It is important for tax-exempt organizations to ensure that their activities and operations are in furtherance of their tax-exempt mission.
