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Wisconsin Supreme Court Delivers Win for Hospital Systems with Offsite Facilities

Last month the Wisconsin Supreme Court provided a major victory for hospital systems with offsite outpatient facilities. Its decision in Covenant Health Care, Inc. v. City of Wauwatosa (2011 WI 80) reversed a Court of Appeals decision and held that an outpatient clinic owned by St. Joseph Hospital (the “Clinic”) constituted property used for the purposes of a hospital under Wis. Stat. § 70.11(4m)(a). As a result, Covenant Healthcare System, Inc., the sole member of St. Joseph Hospital and the owner of the real property on which the Clinic stands, was entitled to a refund of real property taxes paid on the Clinic’s property. 


Wisconsin. Stat. § 70.11(4m)(a) excludes from taxation real property used exclusively for the purposes of any nonprofit hospital. The statute specifies that the exemption does not extend to property that is used for commercial purposes or as a doctor’s office, or the earnings from which inure to the benefit of a member.

The Clinic is a five-story building located approximately five miles from St. Joseph Hospital.  Two of the Clinic’s floors are leased to medical providers as office space. The remaining three floors are used to provide outpatient services and include an Urgent Care Center that is open 24 hours a day, seven days a week and is capable of treating all levels of emergency room care, which generally limits its treatment of serious cases to the extent of stabilizing a patient for transport to a different medical facility.

The City of Wauwatosa took the position that the Clinic was in fact a doctor’s office and, therefore, assessed real property taxes on the Clinic. Covenant challenged this assessment as it applied to the Clinic’s three floors that were not used as office space for medical providers.  The Circuit Court ruled in favor of Covenant but the Court of Appeals reversed, holding that the Clinic was a doctor’s office. The Wisconsin Supreme Court reversed the Court of Appeals, ruling in favor of Covenant.


The City of Wauwatosa maintained its position that the Clinic was a doctor’s office. The City also took the alternative positions that the Clinic was used for commercial purposes and that the property’s earnings inure to the benefit of Covenant. The Wisconsin Supreme Court held that Covenant had satisfied its burden of proving that each of the City’s assertions was incorrect. 

Doctor’s Office

The Wisconsin Supreme Court considered seven factors that were previously laid out by the Wisconsin Court of Appeals in 1997 in St. Clare Hospital v. City of Monroe, which also considered whether a health care facility constituted a doctor’s office. The Supreme Court concluded that five of those factors weighed against the Clinic being considered a doctor’s office, and the remaining two were not determinative.

The five factors which persuaded the Supreme Court that the Clinic was not a doctor’s office were: (1) physicians practicing at the Clinic do not receive variable compensation related to the extent of their services; (2) Clinic physicians do not receive extra compensation for overseeing non-physician staff; (3) the Clinic’s bills are generated on the same software system as those of St. Joseph Hospital; (4) Clinic physicians do not have their own offices at the Clinic but instead have access to communal cubicle space; and (5) Clinic physicians do not own or lease the building or any equipment at the Clinic.

The two remaining St. Clare factors that weighed in favor of the Clinic being a doctor’s office were (1) the Clinic does not provide inpatient services and (2) most patients are seen at the Clinic by appointment and during regular business hours. However, the Court pointed out that advances in technology have allowed for more procedures to be performed on an outpatient basis than when St. Clare was decided. In addition, St. Joseph Hospital (as well as several other large area hospitals) has an outpatient clinic on its hospital grounds.  This hospital-based outpatient center has never jeopardized the tax exemption of St. Joseph Hospital despite only seeing patients by appointment during regular business hours. Therefore, the Court did not weigh either of these factors as significant in reaching its conclusion that the Clinic is not a doctor’s office.

Commercial Purposes

The Court interpreted the statutory prohibition against commercial purposes as being a prohibition against a facility having profit as its primary aim. In determining that the Clinic did not have profit as its primary aim, the Court cited the Clinic’s business plan as listing several goals beyond increasing profit margin, including promoting a greater faith-based health care presence. Further, the Court found that the Clinic serves a greater portion of Medicare and Medicaid patients than other Milwaukee and Wisconsin hospitals, indicating to the Court a focus other than profit. 

Private Inurement

Finally, the Court determined that the language of the statutory prohibition against private inurement to any member does not contemplate a not-for-profit member of a nonprofit corporation. According to the Court, interpreting the statute to penalize Covenant’s corporate structure would be an unreasonable construction, and would end up requiring a nonprofit corporation to distribute its assets upon dissolution to unrelated nonprofit entities, rather than its actual member(s), in order to qualify for property tax exemption. 


The earlier Court of Appeals decision in this case called into question the property tax exemptions of nonprofit hospital systems with offsite facilities. The reversal by the Wisconsin Supreme Court has provided some reassurance to Wisconsin’s hospital systems. Although the decision was based on facts unique to the Clinic and did not set bright line standards going forward, the Court confirmed that offsite hospital facilities can qualify as exempt under Wis. Stat. § 70.11(4m)(a), and provided guidance on what types of facts and organizational structures will be considered to qualify an offsite facility for exemption.

©2020 MICHAEL BEST & FRIEDRICH LLPNational Law Review, Volume III, Number 222


About this Author

David J. Hanson, Michael Best, healthcare law attorney, Public utilities Insurance Lawyer

Clients from regulated industries such as health care, insurance, public utilities and financial services call on Dave for sound counsel on a wide range of corporate, transactional, and regulatory matters.

Dave has substantial regulatory experience with state and federal agencies, such as the U.S. Department of Justice, the Federal Trade Commission, the Department of Health and Human Services, the Wisconsin Office of the Commissioner of Insurance, and the Wisconsin Public Service Commission.

Robert L. Gordon, Michael Best Law Firm, tax lawyer

Bob handles complex tax cases, often involving novel or first impression issues. His practice includes:

  • Federal, state, and local taxation and tax controversies

  • Trial and appellate tax litigation

  • Property taxation of commercial, industrial, utility, and special use manufacturing properties

  • Property tax exemptions

Bob is best known for his role in three landmark cases that, respectively, upheld the constitutional right of all Wisconsin property owners to challenge their tax assessments in court; challenged the constitutionality of legislation limiting taxpayer appeal rights; and established the rules under which nonprofit organizations in Wisconsin can obtain property tax exemptions. He is the designated Wisconsin representative of American Property Tax Counsel, the national affiliation of preeminent property tax law firms in the U.S. and Canada, and he serves as the chair of its Best Practices Committee.