United States: Real Estate Tax Exemption Issue Muddied Again

On December 23, 2014, the Commonwealth Court of Pennsylvania logged another frustrating mile down the confused and confusing road of property tax exemption for purely public charities.  In Fayette Resources, Inc. v. Fayette County Board of Assessment Appeals, the Court overturned a lower court finding that an operator of group homes for intellectually disabled adults satisfied the requirements for tax exemption as a "purely public charity."  The Commonwealth Court held that Fayette Resources failed to show that it satisfied the second requirement of the so-called HUP test (declared in Hospital Utilization Project v. Commonwealth, 487 A.2d 1306 (Pa. 1985)) that it donate or render gratuitously a substantial portion of its services.

While this opinion may be viewed simply as Fayette Resources failing to make an adequate record below, the case also illustrates the confusion created by the Pennsylvania Supreme Court's decision in the 2012 Mesivtah case, Mesivtah Eitz Chaim of Bobov, Inc. v. Pike County Board of Assessment Appeals, 44 A.3d 3 (Pa. 2012), which held that non-profit entities must satisfy both the statutory requirements of the Purely Public Charity Act ("Charity Act"), codified at 10 P.S. 371-385, and the court-established HUP test.

When the HUP test was developed by the Supreme Court in 1985, there was no statute implementing the charitable exemption for "purely public charities" under Article VIII, Section 2(a)(v) of the Pennsylvania Constitution.  When the Charity Act was passed in 1997, however, the legislature filled that void, and created what should be the standard against which such questions are evaluated, unless the statute itself is declared unconstitutional either on its face or as applied.  Instead, in Mesivtah, the Supreme Court required that entities meet both tests, which can lead to inconsistent results, as occurred here.

The Commonwealth Court recognized that Fayette Resources "satisfies all of the statutory requirements imposed by the Charity Act"; nevertheless, it overturned the exemption because it found that an element of the HUP test was not met.

Even apart from the dual standard itself, it is  troubling that Fayette Resources, which provides staffed homes for the intellectually disabled (who are legitimate subjects of charity), is exempt from federal taxation, relieves the government of the duty and burden to care for the intellectually disabled and has no private profit motive, was found not to have established its entitlement to a real estate tax exemption because it did not show that its costs exceeded its revenues.  This rationale appears to conflict with the evidence that Fayette Resources is compensated by Medicaid payments, that any surplus revenues are directed back into acquisition or fixing up of group homes and that distribution of any funds for a private purpose is prohibited by the organization's by-laws.

Is the Court saying that an entity must lose money on a consistent basis to be entitled to a real estate tax exemption?  Must it solicit charitable contributions to establish its claim?  These are the types of questions the legislature answered in the Public Charity Act.  The Supreme Court's, and here the Commonwealth Court's, insistence on applying the less detailed, court-established standard of the HUP test in addition to the Public Charity Act standards only creates confusion and additional costs to charities who must repeatedly litigate the vagaries of the HUP test — the very result the legislature attempted to avoid.

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