INSIGHT: ‘HUP’ Decision Denies Purely Public Charity Status in Pennsylvania

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By Joseph C. Bright and Heidi Schwartz

In three recent cases, the Pennsylvania Commonwealth Court denied purely public charity status based on interpretations of the decision in Hospital Utilization Project v. Commonwealth, 487 A.2d 1306 (Pa. 1985) (HUP). The institutions benefited low-income elderly people and children. The court found that the institutions did not satisfy one or more prongs of the HUP test.

1. ‘Good Shepherd’

The court held that Good Shepherd was not a purely public charity under Pennsylvania law because it did not donate a substantial portion of its services, since government funding or full tuition covered most of the cost of the services it provided to children. Good Shepherd Child Care Center v. Pike County Board of Assessment Appeals, 2018 WL 1997192 (Pa. Commw. Ct. Apr. 30, 2018) (not reported in Atlantic Reporter).

Good Shepherd was an entity exempt from federal taxes under Section 501(c)(3) of the Internal Revenue Code. It provided daycare and educational services to children on its property in Pike County. In prior tax years, Good Shepherd’s income exceeded its expenses and most of its income came from tuition paid by customers and from government programs that covered students’ tuition expenses. In 2016, more than half of its students were charged full tuition, and the rest paid tuition through government subsidies such as Head Start. It provided some below-cost tuition. Good Shepherd applied for an exemption from real estate tax for the 2017 tax year on the grounds that it was a purely public charity.

In Pennsylvania, an entity must meet two separate sets of tests to establish that it is a purely public charity: First, it must prove that it satisfies the five-prong judicial test set forth in HUP, a set of tests created by the courts to determine whether an entity meets the requirements of Article VIII, Section 2(a)(v) of the Pennsylvania Constitution. Second, it must satisfy the requirements of Act 1997-55, known as the Public Charity Act. 10 P.S. Section 375(a). HUP requires that an entity must “donate or render gratuitously a substantial portion of its services.” HUP, 487 A.2d at 1317. The court held that Good Shepherd failed to satisfy this prong because more than half of the students enrolled in the prior year paid full tuition, and the remainder of the students’ tuition was subsidized by government programs. Although Good Shepherd did have some fundraising income, Good Shepherd did not establish that its fundraising was applied to reduce costs for students, nor that it faced financial risk to offer its services to students. The court relied on National Church Residences of Mercer Cty., which held that a low-income housing provider did not donate gratuitously where federal HUD subsidies covered all costs not covered by tenants’ rent, and concluded that accepting government subsidies for tuition was not a donation on the part of Good Shepherd. National Church Residences of Mercer Cnty. v. Mercer Cnty., Bd. Of Assessment Appeals, 925 A.2d 220 (Pa. Commw. 2007).

2. ‘Rouse Brokenstraw Associates Corp.’

The court held that Rouse Brokenstraw Association Corp. (Rouse) was not a purely public charity under Pennsylvania law because it did not donate a substantial portion of its services, since the cost of services was covered by tenant rent and federal HUD subsidies. Rouse Brokenstraw Assocs. Corp. v. Warren County Board Of Appeals, 2018 WL 2770619 (Pa. Commw. Ct. June 11, 2018) (not reported in Atlantic Reporter). Its tenants were at least 62 years old and low income. Rouse was an entity exempt from federal taxes under Section 501(c)(3) of the Internal Revenue Code.

The court relied on National Church Residences of Mercer County and G.D.L. Plaza Corp., two cases holding that entities providing housing for low income or elderly tenants were not purely public charities because government funding covered the entities’ costs not paid for by tenants’ rent. G.D.L. Plaza Corp. v. Council Rock School District, 526 A.2d 1173 (Pa. 1987).

Rouse argued that the General County Assessment law, 72 P.S. Section 5020-204(a)(3), provides that charitable organizations providing residential housing that receive subsidies for 95 percent of the units from a low-income federal housing program remain tax exempt purely public charities provided that surplus income is monitored by the appropriate government agency. Although 95 percent or more of Rouse’s units were subsidized and HUD monitored any surplus, the court rejected this argument on the grounds that Rouse did not satisfy HUP.

3. ‘Foundation for Eldercare’

The court further held that Foundation for Eldercare (Eldercare) was not a purely public charity under Pennsylvania law where its low-income housing services did not benefit an indefinite class of senior citizens and its work did not relieve the government of a burden. Foundation for Eldercare v. Dauphin County Board of Tax Assessment Appeals, 2018 WL 2107230 (Pa. Commw. Ct. May 8, 2018) (not reported in Atlantic Reporter). Eldercare was an entity exempt from federal taxes under Section 501(c)(3) of the Internal Revenue Code.

Eldercare operated senior housing in Dauphin County. It rented its units to disabled and senior citizens age 65 and over who were lower income under IRS guidance, meaning their income was less than 80 percent of the median household income in Dauphin County. Eldercare charged rent that represented 70 percent of its costs, which was significantly less than fair market rent, and provided subsidies to 60 percent of its tenants in Dauphin County. Eldercare applied for an exemption from real estate tax on the grounds that it was a purely public charity.

At issue were the third and fourth prongs of HUP. To satisfy the third prong, the taxpayer must establish that it benefits a substantial and indefinite class of persons who are the legitimate subjects of charity. The court held that Eldercare did not benefit an indefinite class of people because its housing services were not available to low income seniors generally, but only those tenants who could afford to pay the rent. Potential applicants were screened and could be turned down due to their inability to pay, the size of their family, or the nature of their disability. Eligibility was determined solely based on an interview with the Executive Director of Eldercare. The rent subsidies could be canceled at any time for no reason. The income collected from tenants was sufficient to pay Eldercare’s mortgage and maintenance expenses.

To satisfy the fourth HUP prong, the taxpayer must establish that it relieves the government of some of its burden. The court held that Eldercare did not relieve the government of a burden. Eldercare’s operations did not prevent its tenants from being placed in assisted nursing care or from requiring government housing assistance. Eldercare provided typical landlord maintenance to its tenants, such as snow and ice removal, and repairs; but it did not accept Medicaid, subsidies, or grants, and did not provide medical services, health screenings, meals, or transportation services to its tenants.


In each of these three cases, entities that provided services that benefited needy members of the public were denied purely public charity status based on the Court’s interpretation of HUP.

With respect to Good Shepherd and Rouse Brokenstraw Associates, the conclusion that government subsidies are not a donation focuses on the source of the subsidy, not what the subsidy is intended to accomplish. If governments provide subsidies to help people in need, it seems anomalous to say that the entities providing those services are not contributing to the public good. Before HUP, courts held that entities entirely funded through government subsidies can qualify as purely public charities where profit, if any, would not benefit a for-profit entity. See Four Freedoms House, Inc. v. City of Philadelphia, 279 A.2d 155 (Pa. 1971); United Presbyterian Homes of the Presbytery of Huntington, 236 A.2d 776 (Pa. 1960). The decisions seem sound, particularly in the case of low income housing projects funded through tenant rent and subsidies that satisfy the requirements of Section 5020-204(a)(3) of the General County Assessment law.

In Eldercare, it is hard to understand how the residents of the Eldercare, all of whom received below-market rent and over half of whom received subsidies, would not qualify as an indefinite class of recipients of charity. Individuals who are unable to provide themselves with what the institution provides for them are legitimate subjects of charity. 10 P.S. Section 375(e)(1). A substantial and indefinite class is not predetermined in number. 10 P.S. Section 375(e)(2). “The ‘indefinite class’ test measures whether the benefited class is based upon a voluntary or involuntary characteristic, not whether that classification is invidious or even illegal.” Pottstown School District v. Hill School, 786 A.2d 312, 318 (Pa. Commw. Ct. 2001). Thus an institution may serve some portions of society and still qualify as a purely public charity: an educational institution can exclude half the public by admitting only male students, Pottstown School District, 786 A.2d 312, an arboretum may exclude those who do not pay the entrance fee, Unionville-Chadds Ford School Dist. V. Chester Cnty. Board of Assm’t Appeals and Longwood Gardens, Inc., 552 Pa. 212, 220 (Pa. 1998), and an institution providing care for the elderly may admit into its nursing facilities people who can afford to pay full rent as well as potential Medicaid applicants. Albright Care Services v. Union County Board of Assessment, Nos. 2094 C.D. 2012 and 2100 C.D. 2010 (Pa. Commw. Ct. Jan. 29, 2014). In this case, even though Eldercare required its tenants to contribute some amount towards the services it provided, they would not have been able to access the same type of housing without Eldercare’s subsidies. Their financial circumstances were not within their control. Therefore they should be considered an indefinite class of subjects of charity.

Author Information

Joseph C. Bright is a member and Heidi R. Schwartz is an associate with Cozen O’Connor.

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