Federal or State Jurisdiction in Tax Exempt Challenge?

Should federal regulations and engaging in “foreign” company management defeat a plaintiff’s attempt to keep a challenge to tax exempt status in state court? That is the question Judge Joy Flowers Conti of the U.S. District Court for the Western District of Pennsylvania must answer. The City of Pittsburgh has challenged the tax exempt status of the largest employer and health care service provider in Western PA — the University of Pittsburgh Medical Center (UPMC).

The questions central to the case are quite interesting, for purposes of federal jurisdiction. On the one hand, the City of Pittsburgh has only challenged whether UPMC is truly a “charitable organization” as that term is defined by Pennsylvania law. On the other hand, the Commonwealth does rely on IRS regulations and on whether the business has qualified as a 501(c)(3) organization. Furthermore, the City of Pittsburgh wants to point out (though in a similarly confusing manner, not rely on) the fact that UPMC manages health care organizations outside the borders of Pennsylvania and does so “for profit.”

In this case, I do not envy Judge Flowers Conti, as her decision will be appealed, regardless of how well it is reasoned.

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