Pennsylvania Supreme Court Oral Argument re: Nonprofit Incentive Compensation and Revenue Sharing

Click here to listen to the oral argument starting around 3:12:00

On Tuesday, the Pennsylvania Supreme Court heard fascinating, instructive and probing oral arguments in Pottstown Sch. Dist. v. Montgomery Cnty. Bd. of Assessment Appeals.  That case considers whether Tower Health, a nonprofit hospital, forfeited property tax exemption because it set executive compensation in part by reference to the hospital's financial performance.  Forty percent of the hospital's executive salaries was determined by reference to the hospital's net revenues.  The Commonwealth Court, finding that some of those hospital executive salaries were "eye-popping,"  affirmed the denial of property tax exemption. 

The Pennsylvania Supreme Court had to determine whether the hospital's incentive compensation plan rendered the hospital ineligible for charitable property tax exemption.  Both sides made compelling arguments and at least one justice focused on whether reasonable compensation may be defined by reference to salaries paid by similar market participants, for profit and nonprofits alike. That approach is consistent with federal tax exemption law.  Another justice focused on whether incentive compensation resulted in private inurement, per se (the court didn't use federal tax exemption lingo). The taxing authority argued that compensation based on revenues automatically precludes charitable tax exemption, even if the amount paid would be reasonable if it were a fixed salary.  That argument harkens back to federal law prior to the adoption of IRC 4958, which allows for the possibility that revenue sharing could be consistent with federal income tax exemption under regulations issued by the Treasury.  But Treasury has never issued regulations that address whether revenue sharing is permissible for federal tax exemption.  

It's a really good back and forth between the justices and the advocates.

darryll k. jones