Perham Hospital District v. County of Otter Tail
| Decision Date | 18 March 2021 |
| Docket Number | 56-CV-18-1417,56-CV-18-2758,56-CV-18-1415,56-CV-18-1196,56-CV-18-1198,56-CV-18-1197,56-CV-18-1418,56-CV-18-2760,56-CV-18-2759 |
| Parties | Perham Hospital District, Petitioner, v. County of Otter Tail, Respondent. |
| Court | Tax Court of Minnesota |
This consolidated matter came on for trial before The Honorable Bradford S. Delapena, Judge of the Minnesota Tax Court.
Masha M. Yevzelman and Lynn S. Linné, Fredrikson & Byron, P.A., represent petitioner Perham Hospital District.
Michelle M. Eldien, Otter Tail County Attorney, and Benjamin G.A. Olson, Assistant County Attorney, represent respondent Otter Tail County.
The issue is whether several parcels of real property owned by petitioner Perham Hospital District and operated as medical clinics are exempt from property tax. We conclude that the parcels are exempt.
The court, having heard and considered the evidence adduced at trial and the arguments of counsel, and upon all of the files, records, and proceedings herein, now makes the following:
FINDINGS OF FACT1[]
1. Petitioner Perham Hospital District ("the District") has sufficient interest in the property to maintain this petition; all statutory and jurisdictional requirements have been fulfilled; and the court has jurisdiction over the subject matter of the action and the parties thereto.
2. The District is a governmental entity formed in 1976 as a political subdivision of the State of Minnesota to provide health care to rural communities near Perham, Minnesota. It is a public, nonprofit healthcare organization exempt from federal income taxation under Section 501(c)(3) of the Internal Revenue Code.
3. The District is governed by fourteen elected board members ("District Board" or "Board"), who represent the political subdivisions that own it. The Board's responsibilities include promoting businesslike management.
4. The District's mission is to promote health and wellness throughout life, to prevent disease, and to improve the health of the community it serves.
5. Since its formation, the District has owned and operated a hospital ("Perham Hospital" or the "Hospital").
6. Perham Hospital is a 25-bed critical access hospital that offers patients a broad spectrum of services.
7. In 2011, the District acquired the business and assets of three clinics: Perham Clinic, Ottertail Clinic, and New York Mills Clinic (collectively, the "Clinics" or "Clinic Properties"). The District Board decided to acquire and operate the Clinics to serve the needs of Perham Hospital and its community.
8. During the years in issue (2014 through 2018), the Hospital and the Perham Clinic shared the Perham Facility, with a street address of 1000 Coney St. W., Perham, Minnesota. The Ottertail Clinic had a street address of 105 Otter Dr Ottertail, Minnesota. The New York Mills Clinic had a street address of 20 Centennial 84 Dr. W., New York Mills Minnesota.
9. The District operated the Hospital-including the Clinics, which now constituted its Clinic Department-under the brand "Perham Health."
10. The Hospital operated the Clinic Department similarly to its remaining departments. Although each department had a physical home base in Perham Health's facilities, each provided services throughout those facilities.
11. The Hospital was organized into approximately 20 operational departments. Approximately 13 or 14 departments provided patient care, and only 2 of these- medical/surgical and obstetrics-offered inpatient overnight beds. The remaining clinical departments offered outpatient services only.
12. Although the Hospital offered a full continuum of care, inpatient care represented a relatively small part of the Hospital's services.
13. The District contracted with Sanford Health for management and staffing services to run its facilities, but retained governance and control over Perham Health.
14. The District maintained Professional and Related Services Agreements with Sanford to lease physician and midlevel professional services (nurse practitioner and/or physician assistant services), together with other specified staff services.
15. Pursuant to its agreements with Sanford, the District reimbursed Sanford for salary, benefit, and other expenses Sanford incurred in providing management services, physicians, midlevel providers, other leased employees, software, etc. The District also payed Sanford a management fee for other management and administrative services and an access fee to cover Sanford expenses relating to operation of the Perham Health facilities, such as recruiting and retaining employees, IT hardware, software and licensing fees, training and education, consultant time, infection control, compliance, coding, reimbursements, and other overhead expenses.
16. Each Sanford entity with which the District contracted was a nonprofit corporation and was exempt from federal income tax under I.R.C. § 501(c)(3) (2018).
17. The District operated on a not-for-profit basis during the years in issue.
18. District physicians who were employed by Sanford and leased to the District were paid according to a production-based compensation plan based on Work Relative Value Units.
19. District physicians were paid similarly to nonprofit-employed physicians around the country and were not conducting private medical practices within District facilities.
20. Assuming that hospitals and clinics are properly conceived of as inherently distinct, the District occupied and used the Clinic Properties to improve and run the Perham Hospital during the tax years in issue.
21. Operating the Clinics allowed the Hospital to attract and retain both physicians and patients, which helped ensure the Hospital could survive.
22. The Clinics allowed the Hospital to improve its overall operations.
23. The Clinics improved service delivery and follow-up by furnishing patients with more convenient locations to acquire services.
24. Evolution of the healthcare industry and Congress' passage of the Affordable Care Act ("ACA") have fundamentally changed what hospitals do.
25. The three Clinics the District operated on the Clinic Properties were essential to Perham Hospital's operation as an ACA-compliant hospital.
26. The District occupied and used the Clinic Properties to improve and run the Hospital because it operated the Clinics as Hospital facilities during the years in issue.
27. In that only 2 of the Hospital's 13 or 14 clinical departments (departments that provided patient care) offered inpatient overnight beds, the Clinic Department was typical of the Hospital's remaining clinical departments in offering only outpatient services.
28. The District's three Clinics were part of a fully integrated Hospital and were merely arms or agencies of the Hospital exclusively serving the hospital in necessary and essential ways.
1. Petitioner submitted sufficient credible evidence to rebut the prima facie validity of each property's classification as of each assessment date.
2. The "auxiliary property" doctrine the Minnesota Supreme Court adopted to determine whether non-hospital property is exempt from property tax for purposes of the constitutional Public Hospital Exemption does not apply to the separate and distinct statutory Hospital District Exemption under Minn. Stat. § 447.31, subd. 6 (2020).
3. For purposes of the Hospital District Exemption, which turns on whether a district "acquired, owned, leased, controlled, used, or occupied" property, Minn. Stat. § 447.31, subd. 6, to "improve[] and run [a] hospital," Minn. Stat. § 447.33, subd. 1 (2020), it is necessary to inquire what hospitals actually did-and were required to do-given the economic and regulatory structure of the healthcare industry during the tax periods in issue.
4. During the tax periods in issue, the District's Clinic Properties were exempt from taxation under the Hospital District Exemption. Minn. Stat. § 447.31, subd. 6.
IT IS SO ORDERED. THIS IS A FINAL ORDER. ENTRY OF JUDGMENT IS STAYED FOR 30 DAYS. LET JUDGMENT BE ENTERED ACCORDINGLY.
The parties dispute the classification of several parcels of real property Perham Hospital District ("the District") owns and operates as medical clinics. The County classified the clinic properties as commercial.2[] The District contends the properties are exempt under three separate provisions:3[] (1) the statutory Hospital District Exemption, see Minn. Stat. § 447.31, subd. 6 (2020); (2) the constitutional Public Hospital Exemption; and (3) the constitutional Public Purpose Exemption, see Minn. Const. art. X, § 1.
Before trial, we denied two separate motions for summary judgment. Perham Hosp. Dist. v. Cty. of Otter Tail, No. 56-CV-18-1196 et al., 2020 WL 2517002 (); Perham Hosp. Dist. v. Cty. of Otter Tail, No. 56-CV-18-1196 et al., 2019 WL 3210638 (Minn. T.C. July 10, 2019) (). We now conclude that the District's clinic properties are exempt under the statutory Hospital District Exemption.
As indicated above, the Public Hospital and Public Purpose Exemptions are constitutionally mandated, Minn. Const. art X, § 1 (...
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