PROPERTY TAX EXEMPTION DENIED IN PENNSYLVANIA

BACKGROUND
Recent activity has shown that state and local governments and municipalities are removing or modifying the favorable treatment which tax-exempt organizations receive with respect to property tax relief. More state and local governments and municipalities are questioning the true tax-exempt purpose of tax-exempt organizations and whether or not that purpose is being fulfilled. State and local governments and municipalities are increasingly considering, and doing so in certain instances, turning to payments in lieu of taxes ("PILOT"), rather than property taxes, as a means of generating revenue from tax-exempt organizations to assist with easing their current financial burdens in these stressful economic times.

MESIVTAH EITZ CHAIM OF BOBOV, INC. V. PIKE COUNTY BOARD OF ASSESSMENT APPEALS
Recently, the Supreme Court of Pennsylvania affirmed the denial of real estate tax exemption in the case of Mesivtah Eitz Chaim of Bobov, Inc. ("Mesivtah") v. Pike County Board of Assessment Appeals. Mesivtah, the appellant, is a not for-profit religious organization related to the Bobov Orthodox Jewish Community in Brooklyn, N.Y.; an organization recognized as tax-exempt under Internal Revenue Code ("IRC") §501(c)(3). Mesivtah operates a summer camp in Pike County which provides lectures and classes on the Orthodox Jewish faith, and also provides food and recreational activities for its students. The camp is funded by donations, rental income from a building in Brooklyn and tuition from its students. The camp also provides financial assistance to some students, which come from New York, Canada, England, and Israel. Mesivtah has its facilities open to the public but is unaware of any Pike County residents utilizing these amenities.

Article VIII, Section 2(a) of the Pennsylvania Constitution provides that the General Assembly may exempt from taxation "institutions of purely public charity". In the Mesivtah case, the Pennsylvania Supreme Court cited the decision in Hospital Utilization Project v. Commonwealth ("HUP") and ruled that Mesivtah was not an "institution of purely public charity". HUP implemented a standard five-part test for the purpose of defining a purely public charity. The Pennsylvania Supreme Court found that "to receive an exemption without violating the Constitution, the party must meet the definition of "purely public charity" as measured by the HUP test". This five-part test sets forth the following requirements that have become the criteria used by the Commonwealth of Pennsylvania to determine whether or not an organization is a purely public charity:

• Advances a charitable purpose;
• Donates or renders gratuitously a substantial portion of its services;
• Benefits a substantial and indefinite class of persons who are legitimate subjects of charity;
• Relieves the government of some of its burden; and
• Operates entirely free from private profit motive.

The Court reasoned that occasional use of Mesivtah's recreational and dining facilities by Pike County residents was insufficient to prove that Mesivtah relieved Pike County's government of some of its burden.

OTHER STATE PROPERTY TAX EXEMPTION ISSUES
There are other states which are currently denying tax-exempt organizations of property tax exemption. Illinois Governor Pat Quinn announced more than two months ago that the state would resume denying property tax exemptions to hospitals that operate more like for-profit businesses as opposed to public charities. Illinois currently has seventeen pending tax exemption applications for which they have taken no action. Advocates and municipal officials in Illinois have been campaigning to make hospitals live up to their stated missions and to cease providing tax breaks costing municipalities millions from these institutions.

Provena Covenant Medical Center ("Provena"), an IRC §501(c)(3) tax-exempt Catholic institution located in Champaign County, IL owns 43 parcels of real estate. Provena allows outside, for-profit entities to use these facilities to generate personal and/or corporate profit. The Champaign County Board of Review denied Provena property tax exemption ruling that the percentage of free care provided by Provena is inadequate and inconsistent with its claimed charitable purpose.

In Providence, Rhode Island, the local government turned to universities and healthcare organizations in an effort to generate revenue to combat a budget gap. Brown University, a not for-profit university, which is exempt from paying property taxes to the City of Providence, which was already making payments to the City of approximately $4 million per year, agreed to pay an additional $31 million over the next eleven years in order to avoid potential loss of property tax exemption.

In addition, Johnson and Wales University, also in Providence, increased its annual contributions to the City to $958,000 and a large healthcare provider also agreed to pay the City $800,000 per year for the next three years.

PLANNING
In order to minimize any property tax exemption issues, we recommend that your institution review, on an annual basis, all of its properties for which it has been granted tax exemption to determine whether or not this could potentially be challenged.

With respect to hospitals and property tax exemption, the focus has been increasingly on the amount charity care provided. Hospitals, and other types of tax-exempt organizations should use Federal Form 990, Return of Organization Exempt from Income Tax, as a marketing tool to make a strong case, both qualitatively and quantitatively, to provide information with respect to charitable purposes, charity care and other organizational information to aid in justifying property tax exemption.

Access a copy of the Mesivtah Eitz Chaim of Bobov, Inc., Appellant v. Pike County Board of Assessment Appeals case on the IRS Resource Center section.

Please contact a member of WS+B's Healthcare Services Group for further questions or assistance.