Charitable Exemption For Real Estate Taxes May Change
Written by: Alan Nochumson
Recent bills sponsored by some members of Philadelphia City Council will send a chill down the spine of many charitable organizations that own real estate in the city of Philadelphia.
In Pennsylvania, “institutions of purely public charity” may be exempt from taxation based upon Section 2 of Article VIII of the Pennsylvania Constitution. However, because the Pennsylvania Constitution did not define what constitutes “institutions of purely public charity” and our legislature did not do so until 1997, Pennsylvania courts were forced to interpret what our founders meant by that section of the Pennsylvania Constitution.
In the seminal case of Hospital Utilization Project v. Commonwealth, 487 A.2d 1306 (Pa. 1985), the Supreme Court of Pennsylvania developed a five-part test for the purpose of defining what should be deemed a “purely public charity” for tax-exempt purposes.
The five factors of what is now commonly referred to as the “HUP test” are: (1) advances a charitable purpose; (2) donates or renders gratuitously a substantial portion of its services; (3) benefits a substantial and indefinite class of people who are legitimate subjects of charity; (4) relieves the government of some of its burden; and (5) operates entirely free from private profit motive.
For a better part of a decade after the Supreme Court’s ruling in Hospital Utilization Project, municipalities across the state began to dramatically challenge the tax-exempt status of charitable organizations doing business in Pennsylvania. Many charitable organizations believed that the factors set forth in the HUP test were too inflexible and subjective, leading to inconsistent and inequitable results.
A rise in public concern that truly public charitable organizations began running afoul of the HUP test led to the passage in 1997 of the Institutions of Purely Public Charity Act, 10 P.S. § 371 et seq. which is commonly known as Act 55.
Section 5 of Act 55 sets forth detailed criteria that a charitable institution must meet in order to be deemed a purely public charity.
According to our legislature, the purpose of Act 55 is to include uniform and consistent guidance to charitable organizations seeking to qualify for tax-exempt status.
For years, the effect and enforceability of Act 55 raised concerns with the courts. All of that came to a head in 2012 when the Supreme Court of Pennsylvania in Mesivtah Eitz Chaim of Bobov v. Pike County Board of Assessment Appeals, 44 A.3d 3 (Pa. 2012), held that charitable institutions applying for tax-exempt status first had to satisfy the HUP test without regards to the statutory regime created by Act 55. In Bobov, the majority of the Supreme Court stated that, “If you do not qualify under the HUP test, you never get to the statute.”
Based upon the Supreme Court’s ruling in Bobov, City Council is now considering Bills No. 130009 and No. 130123, which, in City Council’s own words, “will help nonprofits and the city, by clarifying tax liabilities, improving information gathering, and giving the city direction in realizing unpaid tax liability from organizations working outside of their established charitable mission.”
While City Council states that “these bills do not change current tax law,” but rather “clarify existing law and add a sensible annual certification,” a cursory glance of these bills indicates otherwise when it comes to tax-exempt status with regards to real estate owned by charitable institutions within the city limits.
According to these bills, the city will only grant tax exemptions to real estate owned by a charitable organization if: (1) the exempt entity has legal or equitable title to the property; (2) the property is occupied and actually and regularly used by the exempt entity for the purposes that entitled the exempt entity for the tax exemption; and (3) the exempt entity receives no income from the property other than the recipients of the bounty of the exempt entity.
What should be of considerable concern to charitable organizations owning real estate in the city is the third condition set forth by the city. As pointed out by City Council, charitable organizations cannot “sublease their property to for-profit entities (‘lobby Starbucks,’ offices, etc.)” if they wish to receive tax-exempt status on the property.
If either of these bills is enacted in law, it will clearly change the way the city taxes real estate owned by charitable organizations. Presently, if a charitable organization subleases a portion of the real estate it owns, then only that portion of the property that is used for for-profit purposes will be subject to taxation.
Furthermore, these bills require the exempt entity to provide a sworn statement to the city on an annual basis verifying its status as a purely public charity and to detail the uses of its property and the way those uses support the charitable mission. This annual certification process is yet another way for the city to capture revenue it is clearly missing every year when the use of the property fluctuates from year to year.
It is clear the city’s finances are in dire straits and it is trying to raise revenue by changing the way it taxes real estate owned by charitable organizations.
Reprinted with permission from the November 19, 2013 edition of The Legal Intelligencer © 2013 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, firstname.lastname@example.org or visit www.almreprints.com.