Missouri Tax Court: Mercy Health Nonprofit Clinics and Pharmacy Are Not Exempt

In four consolidated cases, the Missouri Tax Commission upheld the denial of charitable property tax exemption for three clinics and one  pharmacy all owned and operated by Mercy Health, one of the largest nonprofit health care organizations in the United States. Here is a description of Mercy from Wikipedia:

Mercy operates in Missouri, Arkansas, Oklahoma and Kansas, and has ministry outreach programs in Texas, Louisiana and Mississippi. Mercy's largest hospital complexes are in Greater St. Louis, Springfield, Missouri, Joplin, Missouri, Northwest Arkansas, Fort Smith, Arkansas and Oklahoma City.  Mercy has more than 40 acute care and specialty hospitals. It employs more than 40,000 workers and more than 2,400 physicians.

The four separate but nearly identical opinions harken back to the days before Revenue Ruling 83-157 and Eastern Kentucky Welfare Rights Organization blessed satellite clinics without emergency rooms.  For federal income tax purposes, according to those authorities, a health care facility need not operate an emergency room as a requirement for tax exemption.  Since that time, nonprofit clinics and specialty boutiques are almost indistinguishable from any old Urgent Care Center. 

The Missouri Tax Commission made precisely that observation when it denied exemption to three clinics and one pharmacy that looked like any old CVS or Walgreens.  The cases seem like small potatoes at first.  But Mercy has 44 such facilities up and down tornado alley.  Like a tiny windshield crack, the decisions could spread to all of those without an emergency room.  Small at first, but if not dealt with, the crack could end up destroying the whole windshield.  So if I am in the Mercy board room, I vote to authorize an appeal.  Even so, Mercy's lawyers ought to offer the candid assessment that the chance of victory is akin to a snowball's chances in a very hot place.   The interesting point is that the clinics, though maybe not the pharmacy, would almost certainly win if the cases concerned federal income tax exemption.  The disparate treatment can't be adequately explained by the difference between income and property taxes.  

The facilities were all covered by a financial assistance policy, but none offered services for which indigent patients could receive financial assistance. If someone showed up seeking emergency care, the clinics would call 911 and have the patient transported to an emergency room elsewhere in the community.  They each contain interesting observations about charity in general and charitable health care in particular.  Here is an interesting definition of "charity," for example:

Probably the most comprehensive and carefully drawn definition of a charity that has ever been formulated is that it is a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their hearts under the influence of education or religion, by relieving their bodies from disease, suffering or constraint, by assisting them to establish themselves for life, or by erecting or maintaining public buildings or works or otherwise lessening the burdens of government. . . A charity may restrict its admission to a class of humanity, and still be public, it may be for the blind, the mute, those suffering under special diseases, for the aged, for infants, for women, for men, for different callings or trades by which humanity earns its bread, and as long as the classification is determined by some distinction which involuntarily affects or may affect any of the whole people, although only a small number may be directly benefited, it is public.

And then here is an interesting discussion regarding stand-alone specialty clinics;

Deference is given to hospitals in deciding exemption matters as shown by the decisions in Community Memorial Hospital v. City of Moberly, 422 S.W.2d 290; Jackson County v. State Tax Commission, 521 S.W.2d 378 and Callaway Community Hospital Ass’n v. Craighead, 759 S.W.2d 253. The issue then becomes is this same level of deference given to medical clinics operated by a Not-for-profit entity that also operates hospitals and other healthcare related facilities. A hospital has an emergency department that is open 24 hours per day, a hospital has beds that keep patients overnight; clinics do not. Clinics do not provide emergent care. Clinics have set hours for patients to see healthcare providers. It is clear that the use of the subject property has to be the focus of the exemption and that the general nature of the owning organization—other than that is not-for-profit—cannot be said to determine whether the use of the particular property is charitable or not. Franciscan, 566 S.W.2d at 223.

The Commission made mention of the feeder doctrine noting that the clinics and pharmacy could not be tax exempt merely because revenues are payable to the unquestionably tax exempt parent.  It made no mention at all about the integral part doctrine, which likely saves federal income tax exemption for the entities.  It rested its conclusion on the common sense observation that the clinics and pharmacy were indistinguishable from for-profit organizations.  The opinions seem so sensical that one has to wonder why the clinics, and maybe even the pharmacy would probably easily retain federal income tax exemption if that were ever challenged.  

darryll k. jones