Friday, May 4, 2012

Pennsylvania Supreme Court Case May Open Door to Tax Exemption Challenges

In a "deja vu all over again" case, the Pennsylvania Supreme Court just decided Mesivtah Eitz Chaim of Bobov, Inc v. Pike County Board of Assessment Appeals, that may open (or more appropriately, reopen) challenges by local taxing authorities to property tax exemptions for Pennsylvania charities.

There is a long history here that will provide some context. Back in 1985, the Pennsylvania Supreme Court's Hospital Untilization Project case (507 Pa. 1, 487 A.2d 1306) opened the door to a massive number of challenges to property tax exemption for nonprofit hospitals by holding that an exempt organization must meet a five-factor test, one of which was that the organization "must donate or render gratuitously a substantial portion of its services." Some commentators indicated that as a result of the HUP case, by 1996, local taxing authorities had challenged exemption for 175 of Pennsylvania's then-existing 220 nonprofit hospitals. See Alice A. Noble, Andrew L. Hymans and Nancy M. Kane, Charitable Hospital Accountability: A Review and Analysis of Legal and Policy Initiatives, 26 J. L. Med. & Ethics 116, 121 (1998) (this article is an excellent overall discussion of the HUP case and its impact on nonprofit hospitals in Pennsylvania).

As a result, the Pennsylvania legislature stepped in in 1997 and passed the Institutions of Purely Public Charity Act to "clarify" Pennsylvania state law with respect to tax exemptions, particularly in the case of nonprofit hospitals. Act 55, as it is officially known, essentially overturned the interpretation that substantial charity care was necessary for hospitals to be an "institution of purely public charity" eligible for property tax exemption.

And there things stood until the Pike County case noted above. In this case, the Pennsylvania Supreme Court said that Act 55 could not alter the underlying constitutional principles of tax exemption as set forth in the 1985 HUP case. Organizations claiming exemption must meet the baseline constitutional standards of HUP, regardless what Act 55 might say (this is not much different that the law in Illinois, where the Illinois Supreme Court has similarly held that the legislature cannot override constitutional doctrine regarding property tax exemptions).

Now the question will be whether this decision reopens the door to tax exemption challenges to nonprofit hospitals (and universities? I note that unlike many state constitutions, Pennsylvania's does not automatically grant exemption to "educational" institutions). I suspect there are a lot of very nervous hospital CEO's and university presidents in Pennsylvania these days . . .

JDC

http://lawprofessors.typepad.com/nonprofit/2012/05/pennsylvania-supreme-court-case-may-open-door-to-tax-exemption-challenges.html

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