Cornwall Children’s Center, Inc., v. Lebanon County Board of Assessment Appeals

Cornwall Children’s Center, Inc., v. Lebanon County Board of Assessment Appeals

Civil Action-Constitutional Law-Taxation-Exemption from Real Estate Taxes-Purely Public Charity-Day Care Program-Burden of Proof-Donation of Substantial Portion of Services

Following the purchase of a building for its operations in 2021, Cornwall Children’s Center, Inc., (“Plaintiff”), was assessed with real estate taxes upon the property.  Plaintiff filed an Appeal of the tax assessment on the basis that it is exempt from payment of real estate taxes as a public charity. 

1. Article VIII, Section 2 of the Pennsylvania Constitution provides that the General Assembly may exempt from taxation institutions of purely public charity only that portion of the real property actually and regularly used for the purposes on the institution. 

2. Under Title 10 P.S. § 375(b), an entity will be found to have a charitable purpose if it is operated primarily to fulfill one (1) of the following purposes:  (1) relief of poverty; (2) advancement and provision of education; (3) advancement of Religion; (4) prevention and treatment of disease; (5) government or municipal purpose; or (6) accomplishment of a purpose that is recognized as important and beneficial to the public.

3. The question to be decided as to whether an entity has a charitable purpose is whether an entity donates or renders gratuitously a substantial portion of its services. 

4. The burden of proof is upon the entity seeking exemption as a purely public charity. 

5. An entity does not qualify for charitable tax exemption merely because it is a nonprofit corporation or a tax exempt charity for Federal income tax purposes.

6. A mere surplus of revenue over expenses does not preclude a finding that an entity is a purely public charity provided that the surplus is reinvested in the entity’s charitable purpose.

7.  Where no evidence was presented that the care of any child was subsidized totally by Plaintiff or a scholarship fund has been maintained by Plaintiff systematically to assist children and families in need and Plaintiff’s financial records do not contain any items reflecting donations of funds or services or that it subsidized a portion of the cost of any student or group of students, Plaintiff failed to carry its burden of proof of establishing that it provided a substantial portion of its services charitably so as to be considered a purely public charity exempt from payment of real estate taxes.

L.C.C.C.P. No. 2022-01328, Opinion by Bradford H. Charles, Judge, May 7, 2024. 

IN THE COURT OF COMMON PLEAS OF LEBANON COUNTY

PENNSYLVANIA

CIVIL ACTION – LAW

CORNWALL CHILDREN’S CENTER, INC,     :

Plaintiff                                                                      :

                                                                                                :

            v.                                                                                 :           2022-01328    

                                                                                                :

LEBANON COUNTY BOARD OF                                    :

ASSESSMENT APPEALS                                      :

Defendant                                                                  :          

                                                                                                :

                                                            ORDER OF COURT

            AND NOW, this 7^th day of May 2024, after hearing and in consideration of the arguments submitted by both parties, and in accordance with the attached Opinion, the Order of this Court is as follows:

1. The Tax Assessment Appeal of Cornwall Children’s Center, Inc. (CCC) is DENIED.
2. CCC shall pay property tax as imposed by local municipalities and the Cornwall-Lebanon School District.

BY THE COURT,

                                                                        ______________________________, J.

                                                                        BRADFORD H. CHARLES

BHC/pmd

cc:        Court Administration

            Andrew Race, Esq.//

            Bret Wiest, Esq.//

            Colleen Gallo, Esq.//

IN THE COURT OF COMMON PLEAS OF LEBANON COUNTY

PENNSYLVANIA

CIVIL ACTION – LAW

CORNWALL CHILDREN’S CENTER, INC,     :

Plaintiff                                                                      :

                                                                                                :

            v.                                                                                 :           2022-01328    

                                                                                                :

LEBANON COUNTY BOARD OF                                    :

ASSESSMENT APPEALS                                      :

Defendant                                                                  :          

                                                                                                :

APPEARANCES:

ANDREW RACE, ESQ.      FOR Plaintiff

BRET WIEST, ESQ.                                                            FOR Defendant

COLLEEN GALLO, ESQ.                                      FOR Cornwall-Lebanon

                                                                                                School District

Opinion, Charles, J., May 7, 2024

            We are asked today to decide whether the Cornwall Children’s Center (“CCC”) is a public charity exempt from payment of real estate taxes.  While CCC has a benevolent purpose – providing care for young children – we received information and documentation revealing the following:

• The vast majority of children served by CCC, 25 of 33, pay the entire price charged by CCC for childcare services.
• Even the 8 children who are not fully family-paid receive government subsidies that are paid to CCC.  Some of the government subsidized families also provide a “co-pay” to CCC.
• The amounts charged by CCC for its services are designed to generate a surplus of revenue over expenses.
• In 2021, CCC’s revenue exceeded its expenses by $313,000. 
• In 2022, CCC’s revenue exceeded expenses by $160,000.
• By the end of the fiscal year in August of 2022, CCC possessed a cash savings account of roughly $330,000, a cash checking account of roughly $47,000 and a “tuition account” that contained $70,000.
• Almost all of the excess revenue outlined above was generated through amounts charged by CCC for its childcare services; fundraising and donations accounted for only about 1% of revenue.
• CCC recently purchased a 5,800 square foot building for $750,000.  $200,000 was paid in cash as a down payment and for renovations. 
• To the knowledge of this Court, no student was completely scholarshipped by CCC. 
• Although CCC presented non-specific testimony about subsidizing a portion of the cost attributable to a small percentage of children it served, no figures were offered to quantify the amount of subsidies provided by CCC to families of limited means.

Based in part upon all of the above, we conclude without hesitation that CCC is not the type of entity that Pennsylvania’s Constitution designates as exempt from payment of local taxes.

I.          PROCEDURAL HISTORY

             Prior to 2021, CCC leased space at local church.  Therefore, the issue of whether CCC could have been considered a charity for purposes of local taxation did not exist.  In 2021, CCC purchased a 5,800 square foot building and accompanying real estate located at 8 Keystone Drive in South Lebanon Township.  This property is located within the Cornwall-Lebanon School District. 

            A Lebanon County Board of Assessment determined that CCC should pay real estate taxes relative to the property at 8 Keystone Drive.  The property was assessed at $594,500.  (See, Exhibit 10).  Based upon that assessment, municipal tax of $3,304 and school tax of $10,320 were imposed. (Exhibits 11 and 12).

            On October 20, 2022, CCC filed an Appeal of the Tax Assessment.  CCC averred that it was exempt from real estate taxes pursuant to 10 P.S. §375 and 10 P.S. §376.  Following the Appeal, nothing happened on this docket until the summer of 2023.  At that point, counsel for CCC requested and were granted a Status Conference. 

            A Status Conference was conducted before Senior Judge Samuel A. Kline on August 28, 2023.  Judge Kline recused himself from any involvement in this case.  As a result, the matter was scheduled before this jurist.  After a continuance was granted, a hearing was ultimately conducted on December 11, 2023. 

            Following the hearing, both parties requested and were granted permission to file briefs.  In addition, a transcript of the hearing was prepared.  All briefs have now been received.  The issue of whether CCC should be exempt from taxation is now before this Court for disposition.

II.        LEGAL PRINCIPLES

             Article VIII §2 of Pennsylvania’s Constitution provides:

(a) The General Assembly may by law exempt from taxation…institutions of purely public charity, but in the case of any real property tax exemption only that portion of the real property of such institution that is actually and regularly used for the purposes of the institution.” (emphasis added).

Almost from the beginning of Pennsylvania jurisprudence, Pennsylvania’s Supreme Court recognized: “One thing was clear at the start, no matter what the Legislative language; the exemption could not extend to any property not ‘purely public charity.’”  Appeal of City of Philadelphia, 15 A. 683, 684 (Pa. 1888).  For a significant period of time, courts struggled with the question of what constitutes a “purely public charity” under the Pennsylvania Constitution. 

In 1985, Pennsylvania’s Supreme Court attempted to clarify the issue in the case of Hospital Utilization Project v. Commonwealth, 487 A.2d 1306 (Pa. 1985).  (This case will be hereafter referred to by the moniker that has been bestowed upon it by courts and litigants alike – HUP).  HUP effectively created a five-prong test for determining whether and to what extent an entity should be considered a “purely public charity.”  Paraphrased, that test requires that all of the below be established for tax exemption to apply:

• The entity must advance a charitable purpose;
• The entity must donate or render gratuitously a “substantial portion” of its services;
• The entity must benefit a class of persons who are “legitimate subjects of charity”;
• The entity must relieve the government of some of its burden; and
• The entity must operate “entirely free from private profit motive.”

If an entity satisfies all of the above elements, it can be declared exempt from taxation as a “purely public charity.” 

HUP did provide guidance for courts tasked with adjudicating whether an entity was a ‘purely public charity”.  However, issues still persisted, particularly as it related to entities that charged money for its services in addition to providing charitable services.  In 1987, the Pennsylvania Supreme Court held that the status of an entity as “non-profit” or religious does not automatically compel classification of that entity as charitable.  In G.D.L. Plaza Corp. v. Council Rock School District, 526 A.2d 1173 (Pa. 1987), the Court held that a religious or non-profit entity that charges tuition fees cannot automatically be considered as a purely public charity.  The Court required that all of the factors of HUP be considered.  Similarly, in the case of St. Margaret Seneca Place v. Board of Assessment of County of Allegheny, 640 A.2d 380 (Pa. 1994), the Court determined that a traditionally profit-driven entity such as a nursing home could be considered charitable if it underwrote without compensation one-third of the cost of services for one-half of its residents. 

            In an effort to create an even more concrete test of when an entity can be considered charitable, Pennsylvania’s General Assembly passed legislation in 1997.  This legislation is found at 10 P.S. §375, and has become commonly known as “Act 55”.  Act 55 codified the five-prong test established by HUP.  However, it expanded the criteria for many of the HUP elements.  Specifically, Act 55 defined the term “charitable purpose” as satisfied if an entity is “operated primarily” to fulfill one of the following:

“(1)Relief of poverty

(2)Advancement and provision of education…

(3)Advancement of religion

(4)Prevention and treatment of disease…

(5)Government or municipal purposes

(6)Accomplishment of a purpose which is recognized as important and beneficial to the public…”

                        See, 10 P.S. §375(b).

Similarly, the term “legitimate subjects of charity” was defined in the Act as: “those individuals who are unable to provide themselves with what the institution provides for them…” 10 P.S. §375(e).  More specific were formulaic financial tests to define whether an entity donates or renders gratuitously a “substantial portion” of its services.  For example, the Act states:

• (d)(1)(c) indicates that an entity provides a “substantial portion” of its services charitably when it “provides uncompensated goods or services at least equal to 75% of the institution’s net operating income but not less than 3% of the institution’s total operating expenses.”;
• (d)(1)(ii)(b) indicates that charity occurs when “[at] least 20% of the individuals receiving goods or services from the institution pay no fee or a fee which is lower than the cost of the goods or services provided by the institution.”;
• (d)(1)(ii)(C) alternately defines charitable when “[at] least 10% of the individuals receiving goods or services from the institution receive a reduction in fees of at least 10% of the cost of the goods or services provided to them.”;     
• (d)(1)(3) requires that an entity provide “wholly gratuitous goods or services to at least 5% of those receiving similar goods or services from the institution.”;
• (d)(v) states that an entity must provide “uncompensated goods or services which in the aggregate are equal to at least 5% of the institution’s cost of providing goods and services.”

10 P.S. §375.^[1]

            What is clear in tax exemption litigation is that the burden of proof is upon the entity seeking exemption as a “purely public charity.”  Fayette Resources v. Fayette County Board of Assessment Appeals, 107 A.3d 839 (Pa. Cmwlth. 2014).  Moreover, “An entity does not qualify for this charitable tax exemption merely because it is a non-profit corporation or a tax-exempt charity for Federal income tax purposes.”  Fayette Resources, supra at page 844.^[2]  In addition, Pennsylvania’s Supreme Court has held that a mere surplus of revenue over expenses does not preclude a finding that an entity is a “purely public charity” provided that the surplus is reinvested in the entity’s charitable purpose. Wilson Area School District v. Easton Hospital, 747 A.2d 877 (Pa. 2000).

III.       ANALYSIS

             A backdrop for the dispute now before this Court was provided by an article published in the Temple Law Review:

“In recent years, school districts and local governments, both taxing authorities in the Commonwealth of Pennsylvania, have aggressively challenged the tax-exempt status of charities throughout Pennsylvania.  Due to a shrinking tax base and an aging population that is less able (or willing) to carry the tax burden by itself, these taxing authorities are in need of additional sources of revenue.  In addition, the public perception of most charities as wealthy and successful businesses suggests to many that they should pay their fair share of the cost of operating local government, particularly in light of the governmental services utilized by those charities.”

Loren Prescott Jr., Pennsylvania Charities, Tax Exemption, and the Institutions of Purely Public Charity Act, 73 Temple Law Review 951 (2000).

This dynamic is directly implicated in this case because a representative of the Cornwall-Lebanon School District provided testimony that the District pays $20,000 annually in order to transport students to and from CCC. 

            As we undertook an analysis of the testimony and voluminous records that were provided, we created two lists.  One contained facts that support CCC’s argument that it is a charity.  The other list contained facts contraindicative of CCC’s proffered status as a purely public charity.  Both lists will be reproduced below:

• Facts Supporting Charitable Status
• The purpose of CCC is to provide safe, quality care for children who cannot care for themselves.
• CCC provides discounts to families with multiple children.
• No CCC Board Member receives monetary compensation.
• The salary of CCC’s Chief Executive Officer is $60,000.^[3]
• Some students in CCC participate in the government-funded Early Learning Resource Center (ELRC) program that subsidizes childcare costs for lower-income families. 
• CCC holds space available for children who are temporarily absent due to family illness.
• “Sometimes”, CCC will work with families who are in an emergency situation.

• Facts Contraindicative of Charity
• Most for-profit childcare facilities offer discounts to families with multiple children.
• Only 8 of 33 children enrolled in CCC participate in ELRC.  The families of these ELRC-elgible students also pay a “co-pay” amount.  For most students, the total of the ELRC subsidy and the private co-pay satisfies the entire cost of the student’s attendance at CCC.^[4] 
• CCC paid $750,000 in 2022 for a 5,800 square foot building to house its childcare center.  Roughly $200,000 was paid in cash as a downpayment or for initial renovations. 
• For the three fiscal years for which we received financial records, the following was noted:

2019-2020                   2020-2021                   2021-2022

                        Cash in

                        Bank^[5]              $335,947                     $382,194                     $534,877

                        Excess Revenue

                        Over Expenses            $ 77,226                      $313,369                     $159,706

• CCC’s 2022 Audited Financial Statement reports Total Net Assets of $1,316,350.
• CCC’s reliance upon donations or fundraising was minimal.  In 2020, the total donations received were $2,983, which represented 0.5% of revenue.  In 2021, total donations were $2,611, which represented 0.4% of revenue.  In 2022, CCC received $5,956 in donations, which was 1% of its revenue.
• Despite purchasing real estate for $750,000, CCC had $252,175 in a savings account as of August 31, 2023.

As important as what we learned about CCC is what was glaringly absent from their presentation.  We did not hear testimony about any children whose care was totally subsidized by CCC.  We did not hear about the existence of any scholarship fund maintained by CCC in order to systemically assist children and families in need.  The financial records of CCC do not contain any line items reflecting donations of money or services to any person or entity.  Perhaps most glaring is the complete absence of any testimony or evidence that would quantify CCC’s claim that it subsidized a portion of the cost of any student or group of students.^[6]  Because CCC has the burden of proving it was in fact a charity, it was the responsibility of CCC to provide information such as that implicated above.

This Court looked for but did not find any decisional precedent that would control the decision now before us.  However, we did locate a non-precedential case involving a childcare facility.  In the case of Good Shepherd v. Pike County Board of Assessment Appeals, 2018 WL1997192 (Pa. Cmwlth. 2018), a childcare facility provided services for 80 children.  Families of 53 of the 80 children paid the entire cost of services. Twenty-seven received subsidies from the Head Start program.  The Court noted: “The record evidence reflects that private tuition payments and government subsidies cover Good Shepherd’s costs, such that its limited fundraising is unnecessary to provide its services for low-incomes families.”

The Commonwealth Court began its analysis of these facts by emphasizing that the burden of proof was upon the childcare center seeking tax exempt status.  The Court stated: “The mere fact that an organization is a non-profit corporation does not mandate that it should be exempt from tax…”  The primary focus in Good Shepherd was upon whether the entity donated or gratuitously rendered a “substantial portion” of its services.  The Court held that Good Shepherd did not meet this component of either the HUP test or Act 55.  The Court cited HUP and stated: “The word ‘substantial’ does not imply a magical percentage.  It must appear from the facts that the organization makes a bona fide effort to service primarily those who cannot afford the usual fee.”  Because the vast majority of students in Good Shepherd paid the entire fee and because even those who did not paid something via government subsidies, the Commonwealth Court declined to declare the childcare center to be a “purely public charity.”

The analysis employed by the Commonwealth Court in Good Shepherd applies equally in this case.  Here, we conclude that CCC did not provide a substantial portion of its services charitably.  In addition, we also conclude that CCC charged for its services in order to generate a profit.^[7]  Under HUP and Act 55, these two conclusions are fatal to CCC’s quest to be tax exempt.  Given the evidence listed above and the glaring lack of additional proof of CCC’s charitable endeavors, we hold without reservation that CCC cannot be considered a “purely public charity” under either the Pennsylvania Constitution or Act 55.

Via a Court Order that will be entered simultaneous with this Opinion, we will deny CCC’s Appeal.  CCC will be required to pay real estate tax on the assessed value of its real estate retroactive to the date on which said tax was originally levied. 

---

[1] Notwithstanding the formulas created by Act 55, the Commonwealth Court in Fayette Resources v. Fayette County Board of Assessment Appeals, 107 A.3d 839 (Pa. Cmwlth. 2014), stated that what constitutes a “substantial portion” of services “does not imply a magical percentage.” Id at page 8.

[2] Further complicating matters is another provision that creates a “presumption” whenever an entity is deemed to be exempt from paying sales tax.  10 P.S. §376(a); Camp Hachshova Moshava of New York v. Wayne County, 47 A.3d 1271 (Pa. Cmwlth. 2012). 

[3] We do not consider this salary to be excessive.  In fact, it is less than what is received by most pastors of tax-exempt churches and CEOs of most non-profit corporations in Lebanon. 

[4] CCC’s CEO, Ms. Geibe, testified that she did not know whether the ELRC reimbursement paid the entire cost of the tuition. (N.T. 36).  Board Member Corey Lamoureux believed that it did. (N.T. 13).  The comptroller, Ms. Showers, did not know. (N.T. 63-64).

[5] Totals from Exhibits 4, 5 and 6 include petty cash, checking account, payroll account, savings account and a “tuition account”.               

[6] CCC had to have realized that services it provided without fees or at a fee below its own cost would be a critical question to be addressed in this proceeding.  If in fact CCC did subsidize all or a portion of the cost for children to attend its facility, the amount of these subsidies could and should have been calculated for presentation to this Court.  The absence of any such calculation is beyond curious. 

[7] The existence of so much money in CCC’s bank accounts without any evidence of scholarship budgeting makes this conclusion almost self-evident.