Town of Falmouth v. Maine Medical Center
(from Maine Townsman, June 2000)
by Geoffrey Herman, Director, State & Federal Relations, MMA
The State Board of Property Tax Review is in the process of hearing an appeal regarding the tax exempt status of five condominium units in the Town of Falmouth owned by Maine Medical Center (MMC) and its affiliate, MMC Realty Corp.
The origin of the issue before the State Board finds its genesis in a 1996 decision of the Maine Supreme Court (City of Lewiston v. Marcotte Congregate Housing, Inc., 673 A.2d 209) that held that a property must be used solely for its charitable purpose in order to be eligible for tax exempt status. For the purposes of this appeal, however, the dispute began two years later — in 1998 — when Falmouth’s tax assessor, Anne Gregory, denied MMC’s application to have five of the 12 condominium units in a building on Bucknam Road given tax exempt status.
The Portland-based hospital and its affiliated charitable non-profit organizations were claiming those five condominium units as being owned, occupied, and used solely for the purpose of a "charitable" organization, and therefore eligible for the exemption.
Although the value of the entire building and the parcel upon which it is located is approximately $5 million, the five condominium units for which the hospital is seeking exemption were assessed in 1998 at approximately $2 million. At a mill rate of 17.3, the property subject to this appeal would generate $36,700 of tax revenue for the town if it were not exempt from taxation. For comparative purposes, $36,700 amounts to 9% of the 1998 salary of the president of MMC. Also for comparative purposes, the total tax commitment for Falmouth in 1998 exceeded $14 million. The town’s pursuit of this matter clearly shows that for Falmouth, the issue at appeal raises a question of important principle.
After being denied and in order to begin the process of appeal, MMC sought an abatement for the taxes assessed against those condominium units for that year, again for the reason that the condo units were owned, occupied, and used solely by charitable organizations for their purposes. Gregory reiterated her position by denying the abatement request, and MMC appealed to the local Board of Assessment Review, which granted the hospital’s tax exempt status for five condominium units with a 4-1 vote.
In turn, the Falmouth Town Council, through its assessor, brought the appeal to the State Board and is seeking a reversal of the decision of the Falmouth Board of Assessment Review.
"Panel B" of the State Board of Property Tax Review opened its hearings on the matter on June 6 at the Augusta Civic Center. For the first two days, the hospital presented its side of the case under the direction of Robert Crawford, Esq., of the Portland law firm Bernstein, Shur, Sawyer & Nelson. Witnesses for the hospital included its Chief Counsel, its Chief Financial Officer, and a doctor familiar with the Falmouth facility. On Wednesday, June 14 the State Board reconvened the hearing and the Town of Falmouth took the witness stand in the person of its tax assessor, under a presentation of its case by William Plouffe, Esq., of the firm Drummond Woodsum & MacMahon.
The standard of review to be applied by the State Board is whether the Maine Medical Center has brought its case for exemption "unmistakably within the spirit and intent of the (state law) creating the exemption". What has emerged thus far in the hearing as the essential facts of the case are these:
The parent corporation for MMC and a number of other affiliated and subsidiary corporations is called Maine Health. MMC is a subsidiary of Maine Health as is MMC Realty. Maine Health, MMC, MMC Realty, and the other Maine Health subsidiaries that either own or occupy the condominium units subject to this appeal have all been determined by the Internal Revenue Service to qualify for federal income tax exemption as charitable 501(c)3 corporations under the IRS code. The creation and the governance structure of the "family" of MMC corporations has evolved over time, and now the several boards of trustees of Maine Health, MMC and MMC Realty are made up of different people, although there is some overlap of corporate officers.
The purpose of MMC Realty, generally, is to purchase, hold, develop and manage property for the general use of Maine Medical Center. Property that is used directly by MMC is moved to MMC’s ownership. MMC Realty retains ownership of property that is either not of immediate use to MMC or that is intended to be developed as a "mixed use" or "joint venture", which means that some of the property will be used directly by the hospital and other parts of the property will be used by other healthcare businesses, which may or may not themselves qualify for tax exemption.
In 1996, MMC Realty purchased a 13-acre parcel on the corner of Route One and Bucknam Road in Falmouth for $955,955. The corporation built a two-story, 40,000 square foot office building on 6.5 acres. The building was completed in 1996.
That same year, the Maine Supreme Court ruled in the Marcotte case that in order for a property owned by a charitable corporation to qualify for a property tax exemption under Maine law, the property had to be occupied or used solely for the qualifying charitable purposes. At issue in the Marcotte case was whether the charitable tax exemption should be prorated for a mixed-use property in Lewiston, where 82% of the property was being used by a charitable organization and 18% was being used by for-profit companies. Reading directly from statute, Maine’s Law Court said that the concept of proration doesn’t apply with respect to the charitable exemption — the property must be used solely for the charitable purposes.
As a direct result of the Marcotte decision, MMC Realty took the necessary legal steps to divide the office building in Falmouth into condominium units. On March 24, 1997, MMC Realty recorded condominium documents creating 12 units, all of which were initially owned by MMC Realty Corp. Ten of the condo units are offices and two of the condominium units house custodial and common use facilities. In order to trigger a provision in the Maine law that requires condominium units to be treated separately for the purposes of taxation, MMC Realty had to "activate" the condominium by conveying at least one condominium unit into separate ownership. On March 28, 1997 in two separate conveyances that were recorded one minute apart, MMC Realty deeded one of the condo units over to Maine Health (then called the Maine Medical Center Foundation) and the Foundation promptly conveyed that same unit to MMC. With that conveyance, MMC Realty owned 11 of the condominium units and MMC owned one, and each one of the condo units was to be taxed as a separate parcel of real estate under Maine’s condominium law.
Although the creation of the condominium units occurred just three days before the April 1, 1997 date of assessment, the hospital failed to file for an exemption for 1997 in a timely way and had to wait a year, until April 1, 1998, to formally seek its exempt status in the Falmouth.
The hospital claims that all five condominiums are essentially satellite facilities of the Portland hospital on the Falmouth "campus".
One of the units is occupied by Maine Diagnostics Center, part of MMC, which provides X-ray services. This formerly for-profit business, known as Falmouth X-Ray and located on Route 1, was bought by MMC and moved to the new building.
A second unit is occupied by a corporation affiliated with MMC called NorDx, which provides blood testing and related laboratory services. The Falmouth office of NorDx is primarily a drop-off site rather than the actual laboratory, which is located in Scarborough. The hospital testified that 70% of NorDx lab work is done for patients of MMC or doctors affiliated with MMC organizations. 30% of NorDx testing is done for private practice physicians. Before being incorporated into the Maine Health "family", NorDx was a taxable laboratory facility in South Portland.
Another unit is occupied by the Learning Resources Center, which is part of the parent Maine Health corporation. The Learning Center, according to the hospital, provides preventative care educational services to patients, families, and the general community in the form of various classes or courses on a variety of health care issues and by providing a lending library of educational resources.
The fourth unit owned by MMC Realty is occupied by the Greater Portland Medical Group. This medical group is a doctors’ office and although some of the physicians were private practice doctors in Falmouth before the creation of the Greater Portland Medical Group, all the physicians in the Group are now employed full time by MMC.
The fifth unit, called "Shared Space", is the single unit owned by MMC itself. Shared Space is a conference room and two examining rooms which are used by MMC to help teach elements of patient care to the University of Vermont medical students and resident physicians at MMC in the doctor’s office setting.
The five office units for which MMC is not claiming any exemption are all medical use offices as well, but for a variety of reasons do not qualify for exemption. In several cases, the doctors in those offices work only part time for MMC and also engage in a private physician’s practice in the condominium unit. In at least one case, the non-profit corporation occupying the condominium has not been certified as a charitable non-profit by the IRS. The hospital is also not seeking exempt status for the remaining two condo units, which are custodial units including the boiler room and electrical closet serving both the exempt and non-exempt offices.
Thus far in the proceeding, the hospital has spent a great deal of time explaining its organizational structure, proving its 501(c)3 status with the Internal Revenue Service and the 501(c)3 status of its several affiliated corporations, describing the organizations which occupy the five condominium units that are subject to this appeal, and detailing the corporate bylaws which articulate the hospital’s charitable purposes and the various organizational strategic plans which further define that charitable purpose in their "mission, vision and values" statements. In summary, the hospital contends that its three fundamental charitable purposes are to provide high quality medical care to whomever needs it, to be a teaching hospital, and to conduct medical research.
Through Gregory’s testimony and Plouffe’s cross examination of the hospital witnesses, the town offered a number of points for the State Board’s consideration of whether the five condominium units at Bucknam Road in Falmouth deserve to be exempt from taxation under Maine law.
The town pressed out some testimony, for example, that suggested that no notices were posted at the Falmouth facilities during the time period in question advertising the fact that the various medical and educational services would be provided even if the recipients could not pay for them. The hospital representatives indicated that people having difficulty paying for the services provided would have to make inquiries, at least in some cases, in order to obtain the reduced rates.
It also came out that the doctors employed by the hospital are paid salaries calculated on the scale of national market averages, and doctors in the Greater Portland Medical Group, as one example, are also provided extra "incentive pay" under certain circumstances.
The hospital’s annual audits of recent years were described to show that the amount of unreimbursed "charity care" provided by MMC amounts to 1.6% of the amount of revenue received, which apparently deviates by an order of magnitude from several decades ago, when 20% of the services provided were for "charity care".
The town also testified that none of the material provided to the assessor pursuant to the hospital’s application for exemption quantified how much actual charity care, if any, was provided at the Falmouth facility.
The several issues that the town would like to the State Board to consider are:
• Going beyond the organizational purposes of the various MMC corporations, as those purposes may be stated in the corporate charters and other documents, have there actually been any significant charitable services provided at the Falmouth facility?
• Did MMC Realty and MMC provide to the town’s assessor the necessary evidence that quantifiable charitable services were being provided at the Falmouth facility sufficient to compel a tax exemption? Does the hospital even have a burden of demonstrating the provision of quantifiable charitable services at a certain property in order to obtain a property tax exemption for that property, or is it merely enough for the hospital to prove it owns and occupies the property, and its "charitability" must then be inferred?
• If as a matter of policy an exempt medical care facility provides services without regard to a patient’s ability to pay, does the facility have to provide any form of advertising or notice to that effect, or can it simply be silent with regard to that policy until a recipient of the service expresses an incapacity to pay?
• From a patient’s perspective, what fundamental differences exist between the services provided by a group of practicing physicians that are employed by a tax exempt hospital and a group of private practice physicians? Are the fees different? Are the physician’s salaries different? What is different?
• If a financial analysis shows that less than 2% of the direct medical services provided by a medical institution can be identified as "charity care," does that institution deserve a property tax exemption?
• Do teaching and research hospitals, and their satellite facilities, deserve a property tax exemption as "charitable organizations" on the grounds of the teaching and research components of their "mission". Is the training of doctors a charitable mission where the training of welders, for example, is not?
• Can a charitable institution organize a seemingly unified and discrete real estate parcel into condominium units to effectively circumvent the provision of Maine law that requires a property to be used solely for its own purposes in order to obtain tax exempt status? Does this type of reorganization bring the hospital’s case for exemption "unmistakably within the spirit and intent" of this state’s law governing institutional property tax exemptions?
At the conclusion of the hearing on June 14, the State Board asked the lawyers on both sides to submit briefs to the Board summarizing their respective positions in July, and the hearing will be reconvened on September 13 so that each side can make its final oral arguments before the Board takes up its deliberation on the matter.