Back to the Future for Real Estate Tax Exemptions and PILOTs/SILOTs? Charities Must Meet HUP Test and Act 55, Pennsylvania High Court Rules

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[authors: Philip B. Korb and Wendi L. Kotzen]

For charitable organizations in Pennsylvania, obtaining and preserving real estate tax exemptions just got a little more difficult.

The Pennsylvania Supreme Court has ruled that the statute intended to clarify the requirements for real estate tax exemption cannot replace the five-part test announced by the high court in 1985 because only the courts have the power to interpret the provisions of Pennsylvania’s constitution.

The Pennsylvania Constitution permits the General Assembly to exempt from real estate taxes “purely public charities,” but does not define that term.

In its 1985 decision in Hospital Utilization Project v. Commonwealth, the Pennsylvania Supreme Court established requirements an organization must satisfy to qualify as a purely public charity entitled to a real estate tax exemption.

The HUP test requires a charity to satisfy a five-part subjective test to prove it meets the definition of a purely public charity. It must:

  • Advance a charitable purpose
  • Donate or render gratuitously a substantial portion of its services
  • Benefit a substantial and indefinite class of persons who are legitimate subjects of charity
  • Relieve the government of some of its burden
  • Operate entirely free from private profit motive

In the years following that decision, the Pennsylvania Commonwealth Court rarely found a charity that qualified for a tax exemption.

In 1997, in an attempt to simplify the HUP test and provide relief to charities, the General Assembly passed Act 55 to provide objective standards for an organization to satisfy the HUP test.

Since Act 55 was passed, the Commonwealth Court has consistently decided that Act 55’s objective standards do not replace the HUP test because only the courts have the authority to interpret the Pennsylvania Constitution. Instead, the court read Act 55 as an additional requirement for a charity to qualify for a tax exemption. According to the Commonwealth Court, for an organization to qualify as a purely public charity, both the Act 55 objective standards and the subjective HUP test must be satisfied.

Now the Pennsylvania Supreme Court has agreed with the Commonwealth Court. In its 4‑3 decision in Mesivtah Eitz Chaim of Bobov, Inc., v. Pike County Board of Assessment, handed down on April 25, 2012, the Supreme Court held that for an organization to qualify as a purely public charity, it must satisfy both the HUP test and the specific Act 55 standards.

Because the HUP test is subjective, neither a charitable organization nor a taxing authority can determine with any certainty which organizations qualify as purely public charities.

Before Act 55, many taxing authorities entered into payment in lieu of tax and services in lieu of tax (PILOT/SILOT) agreements with charitable organizations so that both could avoid the expense and uncertainty of a protracted dispute over whether the organizations qualified as purely public charities. We would not be surprised to see taxing authorities challenge tax exemptions or once again request charities to enter into PILOT/SILOT agreements.

Please contact Philip B. Korb at 215-864-8709 or korb@ballardspahr.com or Wendi L. Kotzen at 215-864-8305 or kotzenw@ballardspahr.com to discuss your organization’s public charity status.