On May 30, 2025, the Pennsylvania Supreme Court reversed the Commonwealth Court and reinstated a trial court order granting a hospital exemptions from local property taxes.
The case originated when a school district appealed the exemptions, arguing the hospital did not operate free from private profit motive due to unreasonably high executive compensation.
Background In The Case
Pottstown School District v. Montgomery County Board of Assessment Appeals (Pa. Supreme Ct. 2025) concerns Pottstown Hospital, which was acquired by Tower Health, a 501(c)(3) nonprofit corporation, in 2017. The hospital is run by a separate nonprofit LLC of which Tower Health is the sole member. The hospital and Tower Health maintain separate executive management groups, but the compensation of both management groups is approved by the Executive Compensation Committee of the Tower Health Board of Directors.
In 2017, the Montgomery County Board of Assessment Appeals granted charitable property tax exemptions to the Hospital for three of its properties.
The Pottstown School District appealed the exemptions to the Montgomery County Court of Common Pleas, arguing (1) given “unreasonably high” executive compensation, the hospital failed to operate free from private profit motive and (2) that Tower Health, not the hospital, was the relevant operating entity for purposes of the tax exemption.
The trial court first found that the executive salaries satisfied the free from private profit motive test. Although the Hospital president received $542,058 in 2018, $75,132 of which was bonus money, the trial court noted that the 60% of the executive bonus structure was based on the success of the hospital in meeting non-financial goals, while only 40% of the bonus was based on the hospital’s financial performance.
Additionally, while the trial court noted that the Tower Health CEO’s 2018 compensation of $2,253,500 was “eye-popping”, the court nevertheless concluded the compensation was not excessive, as it was in the 85th to 90th percentile compared to the salaries of other CEOs at similar institutions.
Additionally, the trial court disagreed with the district’s second argument, noting tax exemptions for a charitable organization must be determined by the finances of that nonprofit and not related entities except under certain circumstances, none of which applied in this case.
The Commonwealth Court reversed. Although the court rejected the district’s argument that Tower Health was the relevant operating entity, it held that the hospital failed to operate free from a private profit motive. The court specifically voiced its concerns regarding “tying 40% of the bonus incentives to the Hospital’s financial performance” as well as the reasonableness of the management and administrative service charges imposed on the hospital by Tower Health, which grew “exponentially” from $4,446,862 in 2018 to $23,167,740 in 2020.
The hospital then appealed to the Pennsylvania Supreme Court, which reversed the Commonwealth Court and reinstated the trial court’s order granting the tax exemptions.
The Opinion
The Pennsylvania Supreme Court first considered whether the Commonwealth Court should have considered the compensation of Tower Health’s CEO, as well as the administrative fees charged by Tower Health to the Hospital, for purposes of the Hospital’s tax-exempt status. In reversing the lower court, the Pennsylvania Supreme Court held that the trial court correctly determined the evidence presented did not support piercing the Hospital’s corporate veil. The court noted that “the size of compensation of Tower Health’s executives and the amount of the management fees which the Hospital paid Tower Health are insufficient by themselves to render the Hospital ineligible for a tax exemption….”
The court then considered whether the structure and amount of compensation for the Hospital’s executives disqualified it from receiving the tax exemption.
Relying on the “fair market value as compared to similar executives at similar healthcare institutions”, the court determined – like the trial court – that “substantial evidence was presented which showed that the percentage of the overall compensation of the Hospital’s executives based on its financial performance, and their total compensation, was reasonable….” Thus, the Pennsylvania Supreme Court reinstated the trial court’s granting of the tax exemptions to the Hospital.
Bottom Line For Schools
The court’s decision highlights the continued challenges facing Pennsylvania public school districts seeking to challenge the tax-exempt status of nonprofit hospitals, even when those hospitals maintain extremely high compensation levels for executives. The decision is likely to exacerbate the impact of such exemptions on schools, including a continued loss of property tax revenue, increased burdens on taxpayers, and a resulting inability to fully fund essential educational services. Now more than ever, effective budgeting and long-term financial planning are critical for schools’ success.
