Covenant Healthcare v. City of Wauwatosa, (2011 WI 80)

The Wisconsin Supreme Court this morning released its opinion in Covenant Healthcare v. City of Wauwatosa. In a 6-1 decision, the Court found that the St. Joseph Hospital Outpatient Center qualifies as tax-exempt property.

In an opinion by Justice Gableman, the court held that the Outpatient Clinic is used for the primary purposes of a hospital and is therefore tax-exempt property. The court found that the Clinic is neither a doctor’s office nor a property used for commercial purposes and is therefore tax exempt. Further, the court held that no benefit inured to any member of St. Joseph because the term “member” does not include not-for-profit entities.

St. Joseph Outpatient Clinic is a freestanding clinic located 5 miles from St. Joseph Hospital. The Outpatient Clinic was owned by St. Joseph from 2003 to 2006. Covenant is the sole member of St. Joseph. In 2003, Covenant constructed a building that including three levels of the Outpatient Clinic. Covenant transferred ownership of the building to St. Joseph, but maintained ownership of the land and leased it to St. Joseph.

Covenant filed timely Property Tax Exemption Requests with the City of Wauwatosa in each year from 2003 to 2006. Covenant claimed property tax exemptions for both the Outpatient Clinic building and the land on which the building is located. The city assessor denied the property tax exemption for each of these four years and Covenant paid the assessed tax. Covenant sued to recover the amount of the City’s allegedly unlawful assessment.

Through extensive factual analysis, the court concluded that the Outpatient Clinic is used primarily for the purposes of a hospital because the Outpatient Clinic is fully integrated with St. Joseph Hospital. The court concluded that the Clinic “effectively serves as a department of the larger St. Joseph Chambers Street Hospital.”

The court held that the Outpatient Clinic was not a doctor’s office. According to the court, “physicians practicing at the Outpatient Clinic do not receive variable compensation related to the extent of their services. Second, the Outpatient Clinic physicians do not receive extra compensation for overseeing non-physician staff. Third, the Outpatient Clinic’s bills are generated on the same software system as the bills generated by St. Joseph. Fourth, physicians at the Outpatient Clinic do not have their own offices.”

Additionally, the court held that the Outpatient Clinic was not used for commercial purposes. The court concluded that just because a not-for-profit may operate “in the black” does not mean it is generating revenue in the commercial sense.

Finally, the court held that the benefit did not inure to any member of St. Joseph because the term “member” does not include not-for-profit entities. The court held that even though the net benefits of St. Joseph inured to the benefit of Covenant, the tax exemption can still apply because Covenant is not a “member” for the purposes of property tax exemption determinations.

Chief Justice Abrahamson dissented, concluding that the Outpatient Clinic property is used as a doctor’s office and therefore does not qualify for the property tax exemption.

This post was authored by GLLF’s intern, Lane Oling, a 2L at the University of Wisconsin Law School.