Purely Public Charity In Pennsylvania? Retirement Home Fails Tests In Dunwoody

by Pepper Hamilton LLP

The Pennsylvania Commonwealth Court recently upheld a decision that denied a property tax exemption to a continuing care retirement community in Dunwoody Village, Inc., 52 A. 3d 408 (Pa. Commw. Ct. 2012). The court ruled that since the retirement community catered to seniors who could afford the substantial entry fee, the monthly fees, and other charges, the retirement community failed every one of the five prongs of the relevant test for a purely public charity.

Dunwoody Village

Dunwoody Village, Inc. (DVI) operates a continuing care retirement community with three levels of care: independent living, assisted living, and skilled nursing. DVI is exempt from federal tax under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. DVI originated from a testamentary trust of William Hood Dunwoody. In 1972, the Delaware County Orphan’s Court granted a petition to build a retirement home on the grounds, with the understanding that a person could not be forced out of the retirement home for financial reasons once admitted. In the 1990s, this retirement home was demolished and replaced with a modern assisted living facility.

Applicants for the facility sign a life care contract and pay a fee of $1,000 to be put on the DVI waiting list. Accepted applicants pay a one-time entrance fee, which may be nonrefundable or partially refundable at the resident’s option. At the time the case was litigated, no resident had opted for the more expensive partially refundable fee. The entrance fees ranged from approximately $80,000 to $240,000. In addition, residents pay a monthly fee, which ranged, at the time of litigation, from $2,200 per month to $6,700 per month. Monthly fees remained the same regardless of the level of care that a resident required. DVI residents are never evicted for inability to pay; however, they may be evicted for willful refusal to pay when they have the ability to pay. Residents can "graduate" from the independent living facilities, to the assisted living program, and finally to a skilled nursing unit. Non-residents may also be admitted directly to the assisted living program or the skilled nursing unit.

DVI residents are urged to contribute to a reserve fund to help fund those residents who can no longer afford the monthly fee. DVI itself does not contribute to this reserve fund. At the date of the hearing, two residents were receiving funds from the reserve fund. The Dunwoody Trust, which is a separate entity, also provided financial support to residents in need. As of the date of litigation, there were approximately eight or nine residents getting assistance from the Dunwoody Trust.

DVI sought a property tax exemption, which was denied by both Delaware County and the Delaware County Common Pleas Court under the theory that DVI did not pass the five-part test under Hospital Utilization Project v. Commonwealth, 487 A.2d 1306 (Pa. 1985) (hereinafter the HUP Test).


The court easily disposed of DVI’s contention that the trial court erred by looking only at the HUP Test and not considering the criteria established in Section 5 of Act 55, 10 PS §375. The court dismissed this argument by citing Mesivtah Eitz Chaim v. Pike County Board of Assessment Appeals, 44 A.3d 3 (Pa 2012). The court held that, under Mesivtah Eitz Chaim, the failure of the trial court to consider whether DVI met the Act 55 requirements was not an error when the trial court properly determined that DVI failed to meet any of the five prongs of the HUP Test.

The court also observed that the Supreme Court of Pennsylvania had denied a real property exemption to DVI’s continuing retirement care community, as it existed in the late 1970s, in the court’s In re Appeals of Marple Newtown Sch. Dist. decision, 455 A.2d 98 (Pa. 1982). That decision was rendered before the HUP case was decided. In Marple Newtown, the Supreme Court found that a resident needed to have financial resources as a prerequisite to admission in Dunwoody Village, and therefore it was only a "remote possibility" that residents’ payments would be subsidized.

The court analyzed separately each of the five prongs of the HUP Test. These are: advancing a public purpose; donating or rendering gratuitously a substantial portion of services; benefitting a substantial and indefinite class of persons who are legitimate subjects of charity; relieving of the government of some of its burden; and operating entirely free from private profit motive.

Advancing a Public Purpose

DVI alleged that it advanced a public purpose by virtue of providing housing, living assistance, and nursing to the elderly. It contended that charity is not confined to aiding the poor, and that the continuing care of the elderly in its programs, even if the elderly in question have the means by which to provide for themselves, advanced a public purpose. DVI emphasized that it never asked a resident to leave if the resident could no longer afford to pay for care.

The court disagreed with the public purpose contention, noting that under the HUP Test, in order to be charitable in the legal sense, the act in question must be done or given for general public use and for the benefit of an indefinite number of persons. Given the relatively large fees required for entrance, the court determined that the class of persons eligible for admission was not sufficiently indefinite to conclude that DVI largely benefited the general public. The court cited the same conclusion that was reached in Menno Haven, Inc. v. Franklin County Bd. of Assessment and Revision of Taxes, 919 A. 2d 333 (Pa. Cmmw. Ct. 2006), appeal denied, 940 A 2d 367 (Pa. 2007) and a Massachusetts case, W. Mass. Lifecare Corp v. Bd of Assessors, 727 N.E. 2d 97 (Mass. 2001). In both of those cases, as in Dunwoody, in order to be admitted to the facility an applicant was required to satisfy financial criteria. This caused the courts to conclude that the class of persons who had sufficient assets to meet the financial requirements was a limited class, and thus DVI did not advance a public purpose.

Donating Services or Rendering Services Gratuitously

DVI contended it met the second prong because it rendered $1.78 million in uncompensated services during 2008, which was approximately 7.5 percent of the total cost of services. The fact that DVI never discharged a resident based upon his or her inability to pay, in DVI’s opinion, is further evidence of satisfying this prong of the HUP Test. DVI also noted that the Dunwoody Trust, which is a separate legal entity, provided almost a million dollars of support during 2008 and 2009. DVI also suffered significant net operating losses during some of the periods in question. Finally, DVI explained that it did not accept Medicaid patients because it did not have a Medicaid provider agreement, and such agreements were not available in Delaware County.

The court dismissed these arguments based on conclusions that it reached in Menno Haven. There, the court found that Menno Haven charged a "hefty" entrance fee and cared for the Medicaid-eligible residents because of an obligation to do so rather than from a sense of charity. The court in Dunwoody reiterated that DVI charged significant entrance and monthly fees and had no Medicaid residents. Moreover, the court said that it did not appear that Dunwoody made a bona fide effort to service primarily those who could not afford to pay. Only a small number of nonresident applicants who were admitted directly into the assisted living facility received financial assistance provided by DVI and the Dunwoody Trust. Therefore DVI did not donate services or render them gratuitously.

Benefiting Legitimate Objects of Charity

DVI’s arguments, and the court’s response, to this prong were nearly identical to the arguments made with respect to the "advancing a public purpose" prong. DVI stated that legitimate subjects of charity need not be limited to the poor, the infirm, or the needy, and that the elderly that it served were legitimate objects of charity. The court readily dismissed this argument, based on Menno Haven, again noting that the class of persons that DVI served was so finite – those who could afford the substantial financial requirements for admission – that it could not be viewed as serving an indefinite class of people who were legitimate objects of charity. The court observed that Medicaid patients are manifestly legitimate objects of charity, but that DVI did not take Medicaid patients.

Relieving Some Burden of Government

DVI argued that it relieved the government of some of its burden because it provided housing and other nursing-type services to the elderly with the promise that they would never be discharged if they were unable to pay. DVI asserted that the services that it provided to the elderly were the same as the services that the county in which it is located provided at its senior care facility, and therefore it relieved the burden of the government to a certain degree. A further argument was made by the DVI chief executive officer, who testified that its Medicare recovery in the skilled nursing unit was less than its cost of service, thus alleging this satisfied the statutory government service provisions in Act 55.

The court dismissed this argument, noting that DVI did not take any Medicaid patients. Even though it had some Medicare patients, the majority of its residents would not need to reside in county facilities even if DVI did not provide this service, because the admitted patients were people of means. It based its finding on the decision in St. Margaret Seneca Place v. Bd. of Property Assessment, 640 A. 2d 380 (Pa. 1994), which held that the HUP Test of relieving the government’s burden is whether the institution bears a substantial burden that would otherwise be fully funded by the government.

Operating Free of Entirely Private Profit Motive

DVI alleged that it was free from private profit motive because it was incorporated under Section 501(c)(3) of the Code and its governing documents reflected the fact that private inurement was forbidden. The court dismissed this argument, noting that the trial court found that DVI’s executive compensation included incentives relating to financial and marketplace performance. Specifically, the chief executive officer had maximum incentive compensation of 25 percent, the chief financial officer had maximum incentive compensation of 18 percent to 19 percent, and the health services administrator and marketing director also received similar incentive-based compensation. The court also pointed out that DVI provided its employees with a retirement and savings plan. The court’s finding is that:

Although these benefit plans do not appear excessive by themselves, we are constrained to agree with [the] Taxing Authority that the retirement and savings plans, combined with the financial incentives available to DVI’s executive and corporate officers, also provide substantial evidence for the trial court’s determination that DVI does not expend all of its revenue in furtherance of a charitable purpose.

The court’s ultimate finding was that a substantial percentage of officers’ and executives’ compensation was based upon marketplace performance, which refuted the contention that DVI failed to establish that it operated entirely free from private profit motive.

Pepper Perspective

It is clear that the standards for obtaining property tax exemptions for assisted living and nursing homes in Pennsylvania are tightening. Facilities, especially those which charge substantial entrance fees, can no longer rely on expected property tax exemptions but instead must carefully consider whether their activities meet the five-part test. Of special interest is the conclusion that providing senior management with incentive compensation of 25 percent of total compensation will cause the facility to flunk the "operating free of private profit motive test." This will preclude the facility from meeting the HUP Test and from qualifying as a purely public charity. In turn, this may have an adverse effect on the ability of organizations that would otherwise meet the HUP Test to attract and to retain executive talent.

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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