McNees Wallace & Nurick LLC: Contribution to Construction Costs Supports Charitable Exemption

McNees Wallace & Nurick LLC: Contribution to Construction Costs Supports Charitable Exemption

By James L. Fritz

In June, the Commonwealth Court addressed another issue of interest to nonprofit entities seeking charitable exemptions from Pennsylvania Sales & Use Taxes and local real estate taxes - whether a substantial contribution to construction costs may help satisfy the requirement that a charitable institution "donate or render gratuitously" a substantial portion of its services, and may help "relieve the government of some of its burden."  Panther Valley School District v. Carbon County Board of Assessment, No. 1840 C.D. 2011, June 22, 2012 [enhanced version available to lexis.com subscribers].

In this case, an organization sought exemption for its recently-constructed, low-income housing facility for the elderly.  The county's assessment appeals board approved exemption, which was upheld on appeal to the Carbon County Court of Common Pleas.

On further appeal, a three-judge panel of the Commonwealth Court relied extensively on the trial court's analysis of certain issues specific to federally-subsidized housing.  Of more general interest to the charitable community, however, was the court's treatment of contributed construction costs under the second and fourth elements of the so-called "HUP Test."  In Hospital Utilization Project v. Commonwealth, 507 Pa. 1, 487 A.2d 1306 (1985) (HUP) [enhanced version available to lexis.com subscribers] - a sales tax case - the Pennsylvania Supreme Court held that an organization seeking charitable exemption from any Pennsylvania tax must satisfy Article VIII, Section 2(a)(v) of the Pennsylvania Constitution and synthesized the following five requirements from prior cases:

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

In this case, the school district argued that a one-time $600,000 contribution to construction costs could not be equated to a donation of a substantial portion of the organization's services, in satisfaction of the second element of the HUP Test.  The court disagreed:

The services offered by CHC begin with, and could not be provided absent, the construction of the housing facility for low-income senior citizens.  CHC contributed a significant portion of these construction costs.

The court further held that the contribution to construction costs also helped to satisfy the fourth prong of the HUP Test because, absent the contribution, the government would have been forced to pay for construction of such a facility.

The author of this article once faced a trial judge who didn't seem to understand the significance of building fund contributions.  It is good to see a Pennsylvania appellate court recognize that such contributions provide a continuing subsidy to services provided from the facility constructed with such funds.

© 2012 McNees Wallace & Nurick LLC
PA TAX LAW NEWS is presented with the understanding that the publisher does not render specific legal, accounting or other professional service to the reader. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using this material must always research original sources of authority and update this information to ensure accuracy and applicability to specific legal matters. In no event will the authors, the reviewers or the publisher be liable for any damage, whether direct, indirect or consequential, claimed to result from the use of this material.

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