Quite a catch, that Catch-22!

In the classic 1970 movie Catch-22, Bob Newhart played the neurotic Major Major.  When Major Major was in his office, you couldn’t get in to see him, you were asked to wait.  You could only go in to see him when he wasn’t there.

This is the kind of Catch-22 that the Pennsylvania Commonwealth Court enabled in a recent case, Helping Enjoying and Loving People 2 Salvation Ministries, Inc. v. Delaware County Board of Assessment Appeals (July 9, 2018) (“HELPS”).  HELPS, a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code,  is by no means a main line church, and though it is affiliated with a number of Ministers and Reverends who founded HELPS, serve on the Board, or participate in its programs, as far as the case discloses it does not conduct regular religious services.  HELPS’s ministries are primarily educational (computer education and donation of computers, Friday night programs for teens), but include feeding and clothing the homeless and needy.  HELPS had applied for a real estate tax exemption for its property in Lansdowne, had been turned down by the Board of Assessment Appeals, and the Delaware County Court of Common Pleas upheld the Board.

Now the nuts and bolts of real estate tax exemption in Pennsylvania are pretty involved, encompassing the Pennsylvania Constitution, a 1985 Pennsylvania Supreme Court case, Hospitalization Utilization Project (“HUP”) v. Commonwealth, and 1997 Pennsylvania legislation known as Act 55.  Starting with the language in the Constitution, a real estate tax exemption in Pennsylvania is to be accorded to “institutions of purely public charity.”  HUP announced a five-prong test for a “purely public charity”: it 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.

The HELPS case focused on the third prong.  The Delaware Court of Common Pleas said that HELPS failed to prove it met the third prong, and the Commonwealth Court said this in upholding the lower court:

“…[I]n order to meet this criterion, an entity must show that it makes a bona fide effort to service those persons who are unable to afford the usual fee or for whom the fee is outside of their financial reach.  The persons need not be in financial distress, but it must be shown that the services are provided to persons who cannot afford to pay ….… HELPS provided no evidence regarding the ability to pay of those who received goods or services relating to the [Lansdowne] Property or evidence that they were unable to obtain such goods and services relating to that property for themselves.”

Seems a pretty high standard of proof to me.  You actually have to trot your students in to testify that they could not afford a computer class or a computer, you have to bring people from the shelter in to testify that they could not afford the donated coat or meal.  So you’re entitled to the exemption if you meet the third prong, but it’s difficult or perhaps nigh on impossible to prove it.  Like I said, pretty good catch, that Catch-22!

Now the reason this is, in my view, a bad case is not because of the harsh result.  HELPS arguably was not entitled to a real estate tax exemption for its Lansdowne property.  None of HELPS’s ministries were carried out there.  The Lansdowne property was used primarily for storage and planning meetings.  It was not even HELPS’s headquarters.  So there was another and (to my mind) better ground to deny the exemption: the Constitution goes on to say that in order for a purely public charity to get the exemption, the subject property has to be “actually and regularly used for the purposes of the institution.”  On the one hand, HELPS could argue that nothing could be accomplished in its ministries without planning and storage, but the Court could have legitimately said that planning and storage is not enough to meet the Constitutional language.  So the reason this is a bad case is that it allows Boards of Assessment Appeals and Courts of Common Pleas, who may not be inclined to be entirely generous with real estate tax exemptions, to impose an impossible and very expensive standard of proof on a charity that would be better to spend its resources on helping its objects of charity.  And get away with imposing this (arguably impossibly) high standard, because it will be the rare charity indeed which will appeal such a determination to the Commonwealth Court after HELPS.


Written by E. Morgan Maxwell

E. Morgan Maxwell

Since beginning his own firm, Mr. Maxwell has continued a tax-law oriented practice encompassing a wide range of transactions, planning and dispute resolution. His dispute resolution experience includes involvement at all levels of the Internal Revenue Service (Examinations, Appeals, Collections, Office of Professional Responsibility, the U.S. Tax Court), the Pennsylvania Department of Revenue, the Tax Litigation Section of the Pennsylvania Attorney General’s Office, Pennsylvania Commonwealth Court, Common Pleas Court and local taxing jurisdictions in southeastern Pennsylvania.

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