Alms for the Not-So-Poor

When is a hospital not a hospital? That's the heart of a little-known tax battle in Jefferson County that could have multimillion-dollar consequences for Colorado's taxpayers.

Two years ago Lutheran Medical Center purchased three office buildings adjacent to its sprawling Wheat Ridge hospital complex. Although Lutheran is one of the area's more upscale hospitals, it also is nonprofit, so it pays no property taxes. Last year Lutheran informed the state that the office buildings were now part of Lutheran, so they shouldn't be taxed, either. The state agreed, but Jefferson County's assessor--who noted that the offices house private physicians who pay Lutheran nearly $2 million each year in rent--did not.

The dispute, which will probably be heard before the state Board of Assessment Appeals sometime this summer, is a narrow one. Yet it reflects a growing discontent with the tax advantages enjoyed by nonprofit corporations. That frustration is driving a proposed ballot initiative that would force most nonprofit organizations in Colorado to begin paying taxes. Although the debate over the initiative has centered on churches, hospitals, too, would forfeit their tax-exempt status.

The Lutheran Medical Center dispute also raises the question of the increasingly shrinking difference between for-profit and not-for-profit health-care facilities. Although the number of for-profit hospitals has been growing, nonprofits still represent the majority of hospitals in Colorado. But what they do to deserve their tax break can be muddy.

In theory, nonprofit hospitals receive a huge tax break because they provide some amount of charity care and programs that benefit a community, which the community would have to do without if the hospitals weren't there. Yet many nonprofits look a lot like their for-profit cousins: They pay generous executive salaries and generate hefty incomes. So some states have begun requiring them to earn their tax break by proving how much charity care they give. If it's not enough, the hospitals must pay taxes.

Not in Colorado, though. This state simply assumes that a hospital does good deeds and so grants a property tax break to every licensed nonprofit hospital that asks for it. Such trust is not always deserved, however. For example, North Suburban Medical Center in Thornton--a for-profit hospital--claims that 2.7 percent of its business is charity work. Meanwhile, PorterCare Hospital--a Denver nonprofit--claims only 2 percent, down from 3.4 percent two years ago. (Lutheran says its charity work represents 3.1 percent of its business.)

The Lutheran dispute began in 1994, when Lutheran Medical Center purchased four pieces of property adjacent to the hospital. Around the middle of the year, the corporation asked the state to take the buildings off the tax rolls. According to Jefferson County records, the former owners had been paying about $200,000 a year in property taxes.

The Division of Property Taxation considered the application through the middle of 1995. In arguing that its office buildings were now part of the hospital--and thus tax-exempt--Lutheran referred to a thirty-year-old Internal Revenue Service ruling, which said that what went on in next-door office buildings had only to be "substantially related" to the hospital's business. Three months ago the state agreed and granted the exemptions.

That's when Jefferson County Assessor Judy Pettit stepped in. She contends that to say what goes on in Lutheran's next-door medical office buildings is related to the hospital's nonprofit mission is like saying General Motors is related to the Consumer Reports car guide: Other than being in the same general business, they have nothing in common.

For instance, Pettit points out that only two of the buildings have actual hospital-related facilities in them, and they occupy only a handful of suites. The vast majority of the space is rented out to doctors and others who may have some affiliation with the hospital but who are all in private practices that have nothing to do with the charitable purposes of a nonprofit hospital. "I know because I've been to some of them," says Pettit. "My eye doctor is there. My urologist is there."

Moreover, Lutheran collects a hefty rent from those doctors. According to documents on file with the state Division of Property Taxation, the tenants of the three office buildings on Lutheran Parkway pay the hospital more than $1.8 million annually.

"Those office buildings are no different than any other office building in the county," Pettit concludes. "It's unfair for them to be exempt from paying property taxes while we tax 160 other similar office buildings."

Larry Wall, president of the Colorado Hospital Association, says that Lutheran--and other nonprofit hospitals--continue to provide benefits to their communities that more than make up for the tax break they receive. He adds that with greater competition for patients, "hospitals have had fewer and fewer opportunities to raise money to meet their charitable mission. The dollars Lutheran generates [from its office buildings] go back into the revenues they use to do more charity care and community education."

Dan Ladd doesn't see it that way. Ladd is district manager for the Wheat Ridge Fire District, and he says the removal of Lutheran's office buildings from the tax rolls will mean fire protection for more buildings that don't pay for it, and another dent in his budget. If Jefferson County loses its fight, Ladd says his fire district will forfeit its share of the three buildings' property taxes--about $12,000 a year, or 2 percent of the district's entire annual budget.

"Our take is that the buildings are being occupied by people who are making a buck, so they ought to be paying their taxes," Ladd says.

Normally, the case before the state Board of Assessment Appeals would be between Jefferson County and the state Division of Property Taxation, which granted Lutheran the exemptions. Yet Lutheran is taking no chances. It has retained one of the best property lawyers in the state, Jim Butler.

Butler claims there is no question that Lutheran's new office buildings meet the definition of "related business" and thus deserve their tax exemption. "It's just like turning a key in a lock," he says. "If you meet the exemptions, you get the tax break."

As a result, Butler says, Pettit's objections to giving a tax break to Lutheran's next-door office buildings are misdirected. "Her frustration needs to be addressed to the legislature, not the tax man," he says.

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Eric Dexheimer
Contact: Eric Dexheimer