[author: James L. Fritz]
The usefulness of the objective Charitable Exemption Standards set out in Act 55 of 1997, the Purely Public Charity Act, seems to have been further undermined by a recent Commonwealth Court decision. As discussed in our May newsletter, the Pennsylvania Supreme Court finally settled the question of whether the Act 55 standards trump prior court decisions interpreting Article VIII, Section 2(a)(v) of the Pennsylvania Constitution - providing for charitable tax exemptions.
In Mesivtah Eitz Chaim of Bobos, Inc. v. Pike County Board of Assessment Appeals, ___ Pa. ___, 44 A.3d 3 (2012), our Supreme Court held, as presaged in earlier cases, that an applicant for Charitable Exemption must prove compliance with the Court’s “HUP Test” (see discussion in accompanying article on “Contribution to Construction Costs …”) before addressing the more objective tests in Act 55. Now, in Appeal of Dunwoody Village, No. 1311 C.D. 2011, July 9, 2012, the Commonwealth Court has interpreted some of the HUP Test factors to establish more strict requirements than those set out in Act 55.
Although Act 55 was intended to provide more definitive, objective standards that would both be consistent with past court decisions and provide more helpful guidance to potentially exempt organizations and local governments, the trend now seems to be back to Pre-HUP days when exemptions were determined on a case-by-case basis under very generally described criteria leaving much to the imagination (or at least to the thought processes of the members of the highest court to deal with a particular exemption claim).
In some respects, the Dunwoody Village decision is unremarkable. The continuing care retirement community did not advance a charitable purpose because it charged substantial entrance and periodic fees, and catered primarily to well-heeled seniors - not to elderly persons in general. Similarly, serving well-heeled seniors does not constitute service to an “indefinite class of persons who are legitimate subjects of charity.” Serving zero Medicaid patients and a small number of subsidized Medicare patients did not significantly “relieve the government of some of its burden.” And, because a significant component (18-24%) of executive compensation was based on financial or marketplace performance, the institution failed to “operate entirely free from private profit motive.”
More troubling, however, was the court’s conclusion that the institution failed to “donate or render gratuitously a substantial portion of its services” even though it provided “uncompensated services” (i.e., the subsidy of costs) representing almost 7.5% of the total cost of services. This exceeded one of the Act 55 provisions treating as “substantial” any subsidy equal to or greater than 5% of the institution’s costs. Instead of the objective test from Act 55, the court applied a “totality of the circumstances” test. Because the institution charged significant entrance fees and monthly fees, and had no Medicaid residents, the court ruled that “[i]t does not appear from the facts that [the institution] makes a bona fide effort to service primarily those who cannot afford the usual fee.”
The court’s holding could be read to call into question whether a general subsidy of operations exceeding 5% of costs, in any circumstances, is sufficient to satisfy the HUP Test.
It seems more likely to the author of this article that the court somewhat allowed the institution’s failure to serve a “class of persons who are legitimate subjects of charity” to color its ruling on what degree of service subsidy will be considered “substantial.” In any event, the court’s reliance on the nebulous “totality of the circumstances test” certainly encourages all sorts of subjective, standardless attacks on the exempt status of Pennsylvania charities.
In addition, in a footnote, the court intimated that the institution’s provision of retirement and savings plans to its employees - which the court did not view as “excessive by themselves” - were an element supporting the conclusion that the institution “does not expend all its revenue in furtherance of a charitable purpose.” One therefore must wonder, at least rhetorically, whether the provision of similar benefits to government employees can be considered an expenditure of public funds for public purposes, as opposed to the diversion of public funds to private benefit.