United States: PA University's Housing Non-Profit Stripped of Tax Exempt Status

In January 2014, the Monroe County (PA) Court of Common Pleas stripped recently awarded HUP status from a not-for-profit student housing corporation affiliated with East Stroudsburg University ("ESU"). As the record in East Stroudsburg Area School District v. Monroe County Board of Assessment Appeals  reflects, ESU formed the not for profit corporation, University Properties, Inc. ("UPI"), to construct, operate, and maintain student housing for ESU. ESU provided UPI a long-term lease on real estate owned by ESU, a requirement UPI needed to secure financing for the project.
 
UPI secured financing, demolished two existing, traditional student dormitories on the real estate, and constructed two more modern suite-type buildings ("Suites"). The Suites contain substantially more beds than the prior dormitories making ESU more competitive in attracting students. Housing at the Suites is restricted to ESU students, and the Suites also contains other ESU ancillary uses like the campus police headquarters.

UPI sets rates at the Suites to meet its expenses, with debt service the primary expense . The Suites' rates are higher than ESU's traditional dormitory housing, and importantly, UPI does not provide financial assistance to students based on need. However, UPI does provide free housing plus a stipend for resident advisors and directors valued at $288,000 per year. UPI also made donations to ESU totaling an aggregate $775,000 for 2012 and 2013. UPI testified that it further provides subsidies to the extent ESU requires students to reside at the Suites when the lower price dormitory housing is not available. However, UPI failed to produce evidence quantifying the amount of that particular subsidy at trial.

UPI received a tax exemption for tax year 2013 but the East Stroudsburg School District ("School District") appealed that exemption to the Trial Court. At trial, the Parties conceded that UPI satisfied four of the five elements of the traditional HUP test, which is the constitutional test for whether an organization qualifies for a tax exemption as a purely private charity. The School District, however, contested that UPI did not donate or render "gratuitously a substantial portion of its services."

The trial court agreed.
 
Relying on an unreported opinion of the Commonwealth Court, CHF-Kutztown LLC v. Berks County Board of Assessment Appeals, the Trial Court found that neither the provision of free services to resident advisors (which the Trial Court characterized as a management expense) nor the donation of surplus revenue to ESU demonstrated that UPI donated or rendered gratuitously a substantial portion of its services. Rather, the Trial Court held that the focus of this prong should be on whether the Suites provided subsidies to ESU students who did not have the financial resources to pay for housing at the Suites. Because UPI failed to produce any quantifiable evidence on this point, the Trial Court concluded that UPI did not satisfy the HUP test and stripped UPI of its not-for-profit standing.

This case has been reported in the Legal Intelligencer and may spur more challenges to the HUP status of not-for-profit entities created to address student housing shortages at traditional exempt institutions.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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