Tuesday, May 11, 2010

Is Your Charitable Organization Eligible for Real Estate Tax Relief?

Tuesday, May 11, 2010
In the Commonwealth of Pennsylvania, charitable organizations may qualify for real estate tax relief if the organization qualifies as a “purely public charity”. Other states may have similar laws that allow for a charitable organization to eliminate or reduce its real estate tax burden if certain tests or requirements are met. Since the majority of my experience is with Pennsylvania, I will focus on how an organization can attain this exemption in Pennsylvania.

As stated above, if an organization meets the requirements to qualify as an institution of purely public charity, they will qualify for real estate tax exemption. The basic requirements for an organization to be an institution of purely public charity are described in Pennsylvania Act 55 and the Hospital of the University of Pennsylvania (HUP) court decision. They are:

1. Advancement of a charitable purpose;

2. Operate entirely free from a profit motive;

3. Donate or render gratuitously a substantial portion of its services;

4. Benefit a substantial and indefinite class of persons who are legitimate subjects of charity; and

5. Relieve the government of some of its burden.

Act 55 provides some objective and measureable standards to use when interpreting the court decision in HUP. An institution of purely public charity must satisfy each of the basic requirements using specific criteria stated in the Act.

Act 55 also provides for a rebuttable presumption. Basically, an institution is presumed to meet the standards of a purely public charity if it applies for and receives a sales tax exemption from the Pennsylvania Department of Revenue. However, this rebuttable presumption is not available to organizations with annual program service revenues exceeding $10 million (increasing 1% per year commencing July 1, 1999) unless the organization has entered into a voluntary agreement (PILOT-payment in lieu of taxes) with a political subdivision wherein the organization conducts substantial business operations.

Our experience has been that most charitable organizations can meet requirements #1, #4 and #5. However, organizations have a difficult time proving that they meet the Act 55 standards to satisfy requirements #2 and #3. Particularly troublesome to organizations is supporting the fact that they donate or render gratuitously a substantial portion of their services, requirement #3. Even though there are seven different tests that can be met to satisfy this requirement, the complexity of the mechanics of certain tests, along with the vagueness of the Act 55 legislation, makes for a difficult challenge. However, all is not lost. The fact that portions of Act 55 are somewhat vague and ambiguous creates a two-edged sword that can be used by both the taxing authority and the charitable organization to bolster their positions on any of the five basic requirements.
How do you make this happen? Our experience has been that in most cases the charitable organization will file an appeal with the taxing authority, claiming that they are exempt from real estate tax under the provisions of Act 55. In mostly all cases the taxing authority will deny the appeal and then the fun begins. Both sides engage legal counsel to represent them. Documents are exchanged, meetings are held, and depositions are taken. The attorneys for the taxing authority may hire accountants and other experts to analyze the mountain of paperwork provided by the charitable organization to support their position. Expert reports are prepared by both sides and exchanged. More meetings are held to see if there can be a compromise worked out. If not, it is off to court for a judge to make the final determination.
If you are a Pennsylvania charitable organization, and you are paying real estate taxes, you may want to take a look at Act 55 and the HUP court decision to see if you can meet the tests and be exempt from real estate taxation.



2 comments:

SMU Cox Web Site

If one happens to be in another state, do you have any ideas on who (what agencies) you might want to contact to see if you're eligible there?

Radu Prisacaru – UK Internet Marketer & Web Developer

Great article. Really thank you! Cool.

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