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Court Says Skilled Nursing Care Centers Not “Purely Public Charities”; Upholds Decision Revoking Tax Exempt Status

In the case of Menno Haven, Inc. v. The Franklin County Board of Assessment and Revision of Taxes, No. 1051 C.D. 2006 (Pa. Cmwlth. 2007) two skilled nursing care centers lost their tax exempt status because they did not function as purely public charities. Menno Haven, Inc. and Menno Haven Penn Hall, Inc. (collectively “Menno Haven”) operate continuing care retirement communities offering independent living, assisted living, and skilled nursing care levels. Menno Haven’s skilled nursing care facilities were considered tax exempt since their construction in 1967. It was determined by the Franklin County Board of Assessment and Revision of Taxes (the “Board”) that Menno Haven’s skilled nursing facilities were, in fact, taxable entities. The Board’s October 18, 2004 decision was affirmed by the trial court. Thereafter, Menno Haven appealed to the Commonwealth Court of Pennsylvania (the “Court”) which also affirmed.

The Court agreed that Menno Haven did not qualify for exemption because it was not a “purely public charity” as required by the Pennsylvania Constitution. Specifically, an entity must be a purely public charity in order to qualify for statutory tax exemption. Accordingly, there are two criteria for tax exempt eligibility. First, an entity must show that it is a “purely public charity.” Second, an entity must meet the statutory requirements for exemption set forth in § 5 of Act 55 (10 P.S. § 375). The second criteria will not be considered without satisfaction of the first criteria.

Whether an entity operates as a purely public charity is determined by satisfaction of a five-part test as set forth by the Pennsylvania Supreme Court in Hospital Utilization Project v. Commonwealth, 487 A.2d 1306 (Pa. 1985). According to the five-part “HUP test”, a purely public charity is an entity that:

  1. advances a charitable purpose;
  2. donates or renders gratuitously a substantial portion of its services;
  3. benefits a substantial and indefinite class of persons who are legitimate objects of charity;
  4. relieves government of some of its burden; and
  5. operates entirely free from private profit motive.

Id, at 1317. The Court ruled that the trial court correctly determined that the second and third elements of the HUP test were not satisfied by Menno Haven.

The Court reasoned that Menno Haven did not donate or render gratuitously a substantial portion of its services for three reasons. Menno Haven charged a sizable entrance fee to its independent living residents which the Court felt was an effort to collect in advance for future services that might be rendered without compensation to residents at the skilled nursing level. Although Menno Haven was not contractually bound to transfer community residents to its skilled nursing facilities and they did so regardless of ability to pay, the Court felt that such transfers were made out of a sense of obligation rather than one of charity or community service. Finally, the Court determined that a very small portion of Day One Medicaid eligible individuals were admitted from the community at large (between 2000 and 2004 only 15 of 179 skilled nursing residents). These factors were considered within the totality of the circumstances and the fact that Menno Haven lost money caring for residents on Medicaid was outweighed.

According to the Court, Menno Haven did not benefit a substantial and indefinite class of persons who were legitimate objects of charity. The Court found that people generally gained access to the community by meeting certain financial requirements, because the person was Medicare eligible, or by chance the person applied for occupancy at a time when Menno Haven was accepting Day One Medicaid eligible individuals from outside the existing residential community. The Court found that it was not typical for Menno Haven to extend its services gratuitously to the community at large but rather preferred elderly residents who possessed the ability to pay. For these reasons the Court upheld the prior rulings that Menno Haven was not a purely public charity and therefore did not consider statutory compliance with Act 55. Litigation concerning the tax exempt status of Menno Haven’s independent living and assisted living facilities is ongoing.

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