Charitable Tax Exemptions Face Greater Challenges

Earlier this year, one of Erie's most prominent nonprofit organizations was hit with an unexpected real estate tax bill.  The Jefferson Educational Society, a local think tank, was assessed $29,000 in real estate taxes on the property that it owns, operates, and uses for its educational events.  The Erie County Board of (Tax) Assessment Appeals ("Tax Board") unanimously denied the nonprofit's request for exemption from property taxes.  While this decision may seem surprising to some, the Tax Board's decision is supported by the Pennsylvania Supreme Court precedent.

Five-Part Test

Whether a nonprofit is exempt from real estate taxes turns on whether the organization is a "purely public charity".  The Pennsylvania Supreme Court established a five-part test that is used to determine whether an organization is a purely public charity.  To be exempt, the charity must:

  1. Advance a charitable purpose.
  2. Donate or render gratuitously a substantial portion of its services.
  3. Benefit a substantial and indefinite class of person who are legitimate subjects of charity. 
  4. Relieve the government of some of its burden.
  5. Operate entirely free from private profit motive.

The "HUP Test", formulated in the Hospital Utilization Project v. Commonwealth case and recent court decisions following it, encourage taxing authorities to challenge charitable tax exemptions.  For example, the challenger may claim that the charity fails to relieve the government of some of its burden, because the services provided are not "essential", or that the charity doesn't benefit legitimate subjects of charity. 

PILOT ("payment in lieu of taxes") programs also have become common.  Typically, under a PILOT, the charity remains tax exempt and yet makes payments in lieu of taxes in recognition of the municipal services received.  While PILOTs create mutually beneficial results, they also have created some confusion as to the tax-exempt status of charities.

Further adding to the confusion was the way that courts applied the HUP Test.  Different courts came to different outcomes.  Nonprofits couldn't turn to one definitive case to determine whether they could be considered a purely public charity and, thus, remain exempt from property taxes.  Lack of clarity increased legal costs for all parties. 

Act 55

In an attempt to resolve all this confusion, the Pennsylvania legislature passed Act 55, also known as the Institutions of Purely Public Charity Act.  Act 55 simplified the HUP Test by providing specific guidance on what each of the HUP Test's five parts meant. Despite its intended goal, a series of court cases chipped away at Act 55's ultimate effectiveness.

In a "split decision", the Pennsylvania Supreme Court returned control of the HUP test to the courts.  In Mesivtah Eitz Chaim of Bobov, Inc. v. Pike County Board of Assessment Appeals, a Jewish summer camp in Pike County fought the revocation of its tax-exempt status.  The Pennsylvania Supreme Court held that the Pennsylvania General Assembly "cannot displace our interpretation of the Constitution," and ruled that the courts, not the legislature and Act 55, determine what constitutes a "purely public charity," which is exempt from tax.  The Supreme Court also upheld the revocation, explaining that, under its interpretation, religious organizations do not presumptively relieve the government of some of its burden.  The Court rejected Act 55's "safe harbor" on this issue. 

Local Impact

That brings us back to the Jefferson Society's battle over its real estate taxes.  The Tax Board ruled that the Jefferson Society does not relieve the government of its burden, and therefore is not a purely public charity exempt from real estate taxes.  The Jefferson Society has appealed the Board's determination to the Court of Common Pleas. 

Whatever the outcome of the Jefferson Society's appeal, charitable organizations face challenges to their tax-exempt status.  To prevail, the charity must prove that it meets all five requirements of the HUP Test, including that it relieves the government of some of its burden and benefits legitimate subjects of charity.

As municipalities struggle with declining revenues and search for new, creative or more aggressive ways to generate new income, this trend is likely to continue.  Local governments have begun reviewing the status of nonprofits to test whether they meet this definition of purely public charity.  For example, presently tax challenges are pending throughout Pennsylvania, including hospitals, college dormitories, and other traditionally tax-exempt charities.

If you have questions regarding charitable tax exemptions, please call our office at 814-870-7600 or complete this form on our website.