"Purely Public Charities" in Pennsylvania. Back to the future – again.

by Saul Ewing Arnstein & Lehr LLP

A recent Pennsylvania Supreme Court decision has rekindled the issue of what constitutes a "purely public charity" for real estate tax exemption purposes in Pennsylvania. The decision may lead to a renewed interest of school districts and municipalities in challenging the tax exempt status of properties owned by non-profit organizations and could lead to both increased litigation and another round of PILOT ("payment in lieu of taxes") and SILOT ("services in lieu of taxes") agreements.

In a 4-3 decision, the Pennsylvania Supreme Court upheld a Commonwealth Court decision that Mesivtah Eitz Chaim of Bobov, Inc. was not an "institution of purely public charity" and, therefore, its property in Pike County (used as a summer camp) was not exempt from local real estate taxes. Mesivtah Eitz Chaim of Bobov, Inc. v. Pike County Board of Assessment Appeals, 2012 WL 1415770 (Pa) ("Bobov").


The Pennsylvania Constitution allows (but does not require) the General Assembly to exempt from taxation "institutions of purely public charity." However, the Constitution contains no definition or further explanation of what constitutes a "purely public charity."

In 1985, in Hospital Utilization Project v. Commonwealth, 487 A.2d 1306 (Pa. 1985) ("HUP"), the Pennsylvania Supreme Court set forth a five-part test an institution must meet in order to be deemed a purely public charity within the meaning of the Pennsylvania Constitution. The institution must: (i) advance a charitable purpose; (ii) donate or render gratuitously a substantial portion of its services; (iii) benefit a substantial and indefinite class of persons who are legitimate subjects of charity; (iv) relieve the government of some of its burden; and (v) operate entirely free from private profit motive. This test has come to be known as the "HUP test" for determining tax exemption. In general, the HUP test is considerably more difficult to satisfy than the requirements for qualifying as a tax-exempt charitable organization for federal income tax purposes. After HUP was decided, many counties and school districts challenged the exempt status of properties previously determined to be exempt from real estate tax, which led to an increase in both litigation and the number of PILOT and SILOT agreements. The cases following HUP were often contradictory and confusing, which made it difficult to determine how the courts would rule in any given case. Since real estate taxes are assessed and collected by many local taxing jurisdictions, there was no consistent policy being applied across the Commonwealth.

In order to help "clarify" what was proving to be a difficult test to apply in practice to non-profit organizations, in 1997 the General Assembly enacted the Institutions of Purely Public Charity Act, 10 P.S. §§371-385 ("Act 55"), commonly known as "Act 55." Act 55 sought to flesh out the five parts of the HUP test by providing uniform and consistent guidance on what each of the five parts of the HUP test meant. Act 55 also contained a presumption that if the Pennsylvania Department of Revenue (the "DOR") determined that an organization was a purely public charity for sales and use tax purposes, it was presumed to be a purely public charity for real estate tax purposes as well. The DOR then began to follow Act 55 when issuing rulings on whether a nonprofit organization was entitled to a sales and use tax exemption. This provided a good degree of certainty and uniformity on the issue of whether the nonprofit organization would be considered a purely public charity for real estate tax purposes, and the amount of litigation decreased accordingly.

Act 55 raised a significant separation of powers issue because the General Assembly was attempting, in effect, to modify or clarify the Pennsylvania Supreme Court's interpretation of what the phrase "purely public charity" meant under the Pennsylvania Constitution. Supporters of Act 55 argued that the General Assembly is permitted to clarify and expand on the HUP test to create greater consistency and uniformity, and that the courts should generally defer to the General Assembly's reasonable interpretation of the HUP test as set forth in Act 55. In contrast, opponents of Act 55 argued that the General Assembly cannot overrule the Supreme Court's interpretation of the Pennsylvania Constitution by creating a more expansive definition of "purely public charity," and that Act 55 was completely irrelevant unless a taxpayer could show that it first met the HUP test as applied by the courts without regard to Act 55. Under this latter view, Act 55 did not expand the HUP test, but rather imposed a second, additional hurdle that must be met after a taxpayer first establishes that it satisfies the HUP test as developed by the courts.

Bobov Decision

In Bobov, a nonprofit religious organization owned and operated a 61-acre camp in Pike County. The Commonwealth Court ruled that although Mesivtah Eitz Chaim of Bobov, Inc. satisfied the five-prong test set forth in Act 55, it did not satisfy the HUP test as set forth in court decisions. The specific issue was whether the organization satisfied the requirement that a purely public charity must relieve the government of some of its burden. Under Act 55, an organization that advances or promotes religion can satisfy the relief of government burden prong of the HUP test, but the Commonwealth Court determined that this position was not consistent with the HUP test as developed by the courts.

The majority of the Court in Bobov stated that the "General Assembly cannot displace our interpretation of the Constitution" and rejected the argument that the Court should defer to the General Assembly's definition of "purely public charity." The Court ruled that a taxpayer first had to satisfy the HUP test as developed by the courts, without regard to Act 55, and that "if you do not qualify under the HUP test, you never get to the statute."

While the three dissenting judges would have allowed the provisions of Act 55 to govern the area, for the present time, and until the Supreme Court chooses to change the HUP test or reverse its own decision, the HUP test will guide the courts in their decisions of whether an institution is one of "purely public charity."

There is a good chance that the Bobov decision will encourage many tax-strapped school districts and local municipalities to challenge the tax exempt status of properties previously determined to be exempt from real estate tax. Due to uncertainty over how the HUP test will be applied, there will be an increased incentive to enter into PILOT and SILOT arrangements.

All charitable organizations with real estate in Pennsylvania, and particularly those with a significant presence, will want to take steps to strengthen their position that they meet the requirements of the 1985 HUP test.

Here we go again.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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