Borough of Homestead v. St. Mary Magdalen Church

• Decision Date: 21 May 2002
• Citation: 798 A.2d 823
• Parties: BOROUGH OF HOMESTEAD, Appellant, v. ST. MARY MAGDALEN CHURCH, The Diocese of Pittsburgh and Board of Property Assessment and Review.
• Court: Pennsylvania Commonwealth Court

798 A.2d 823

BOROUGH OF HOMESTEAD, Appellant, v. ST. MARY MAGDALEN CHURCH, The Diocese of Pittsburgh and Board of Property Assessment and Review.

Commonwealth Court of Pennsylvania.

Argued February 11, 2002.

Decided May 21, 2002.

Bernard M. Schneider, Pittsburgh, for appellant.

Christopher G. Ponticello, Pittsburgh, for appellees, St. Mary Magdalene Church and The Diocese of Pittsburgh.

BEFORE: McGINLEY, Judge, and SIMPSON, Judge, and McCLOSKEY, Senior Judge.

OPINION BY Judge SIMPSON.

The Borough of Homestead (Borough) appeals from the order of the Court of Common Pleas of Allegheny County (trial court) that found certain real property owned by St. Mary Magdalen Church and the Diocese of Pittsburgh (collectively Diocese) exempt from taxation under Section 204 of The General County Assessment Law (Law), Act of May 22, 1933, P.L. 853, as amended, 72 P.S. § 5020-204. We affirm.

The property is located in the Borough and, prior to 1987, had been a high school operated by the Diocese. Following the closure of a local steel mill which caused the loss of approximately 12,000 to 15,000 jobs, enrollment at the high school dropped, and the Diocese closed the school. It converted the school into an office building known as the Bishop Boyle Center in which it operated a job center to assist displaced workers. The job center occupies 5% of the Center's space. The remaining space is available to for-profit¹ and non-profit entities² (Licensees) whose missions involve helping the unemployed and generating new businesses for the local economy. Licensees' occupancy of the Bishop Boyle Center is governed by license agreements that are reviewed yearly by the Diocese. Under the terms of the agreements, the Licensees pay fees for occupancy. The Diocese provides janitorial services, snow removal, maintenance of common areas, as well as the interior and exterior of the premises, and it pays all utilities. The for-profit entities occupy 16% of the Center's space and the non-profit entities occupy 79% of the Center's space. The Diocese also allows various local groups and governmental units, including the Borough Council and zoning board, to use space in the Bishop Boyle Center at no cost.

As early as 1995, the Borough sought to collect from the Diocese real property taxes on the Bishop Boyle Center. Sometime prior to March 1999, the Board of Property Assessment and Review determined that the property remained exempt from taxation. The Borough appealed.

Following a bench trial, the trial court sustained the tax exemption. It concluded that the Licensees pay fees below market value when the costs of the services provided by the Diocese are considered. Although some Licensees made improvements at their own expense, such as new carpeting, electrical wiring and converting a storage area into drafting room, these improvements are mainly cosmetic and insubstantial. Also, the trial court found that, since its inception in 1987, the Bishop Boyle Center never generated a profit; rather, the Bishop Boyle Center operated under an $800,000 deficit in the 1990s, and the Diocese subsidizes its operation. The trial court further found that the for-profit entities operate in conformity with the mission of the Bishop Boyle Center in that they use the space to facilitate recruitment efforts and to provide jobs in the local community. Timely appeal was taken by the Borough.³

I.

The Borough contends that under the analyses set forth in Hospital Utilization Project v. Commonwealth, 507 Pa. 1, 487 A.2d 1306 (1985), commonly referred to as the HUP test, the trial court erred in concluding that the Diocese met its evidentiary burden. In particular, the Borough contests the trial court's finding that the Licensees made nominal payments. It argues that payments are close to the going commercial rental rate and that the Bishop Boyle Center received approximately $1,178,983 in steadily rising gross income, thereby evidencing a private profit motive.

Under Art. VIII, § 2(a)(v) of the Pennsylvania Constitution, the General Assembly is empowered to confer tax-exempt status to institutions of purely public charity. In Hospital Utilization Project, our Supreme Court found that an entity qualifies as a purely public charity if it:

(a) Advances a charitable purpose;

(b) Donates or renders gratuitously a substantial portion of its services;

(c) Benefits a substantial and indefinite class of persons who are legitimate subjects of charity;

(d) Relieves the government of some of its burden; and

(e) Operates entirely free from private profit motive.

It is the burden of the party claiming exemption from taxation who must demonstrate that it meets these criteria. Wilson Area School Dist. v. Easton Hospital, 561 Pa. 1, 747 A.2d 877 (2000).

We agree with the trial court that the Bishop Boyle Center is an institution of purely public charity. The Restatement (Second) of Trusts, § 368 provides us guidance in determining what purposes are charitable under the first prong of the HUP test. The Restatement identifies charitable purposes as including the relief of poverty, the promotion of health, governmental and municipal purposes and other purposes the accomplishment of which is beneficial to the community.

The programs offered directly by the Diocese and through its Licensees benefit the community by providing employment services to thousands of unemployed and underemployed workers in the Mon Valley following the close of the local steel mill. The programs also provide support services to those with mental and physical disabilities and addictions, and provide access to food and other social services programs to members of the community. Even the services the Diocese provides through the for-profit Licensees benefit the entire community. It offers space to those bringing employment opportunities to the area to interview prospective employees from the pool of the locally unemployed.

There is no fixed standard to determine what purposes are of social interest to the community; the interests of the community vary with time and place. Restatement (Second) of Trusts, § 368, Comment b. The activities at the Bishop Boyle Center serve a socially important need in this economically depressed area, benefit a substantial and indefinite class of persons and relieve the government of some of its burden in providing the services. We agree with the trial court that the Bishop Boyle Center satisfies the first four prongs of the HUP test.

As to the fifth prong of the HUP test, the Borough contends that because the Bishop Boyle Center generated gross revenue from Licensees, the Diocese did not operate entirely free from private profit motive. Recently addressing this issue, the Supreme Court in Wilson Area School Dist. reminded us that the appropriate inquiry is whether the surplus revenue is being utilized in furtherance of the entity's charitable purpose. Further, as the Supreme Court held in St. Margaret Seneca Place v. Bd. of Property Assessment, Appeals and Review, 536 Pa. 478, 640 A.2d 380 (1994), surplus revenue is not synonymous with a private profit motive, especially where the surplus revenue is utilized to cover operating expenses and increase efficiency, facilities, grounds and buildings. Moreover, surplus revenue would not affect the eleemosynary motive of the institution, especially when any surplus would have been offset by the entity's substantial indebtedness. Id.

Here, the trial court found that the space is provided at below the going market rate, and that the Diocese operates the Bishop Boyle Center at a substantial loss. Any revenue generated by the license payments is returned to the operation and maintenance of the Bishop Boyle Center. The trial court noted that this testimony was uncontradicted. Not only the parties, but we, too, are bound by those findings. St. Margaret Seneca Place. We agree with the trial court's conclusion that the Diocese operated the Bishop Boyle Center free of private profit motive. In summary, there is substantial evidence to support the trial court's finding that the Bishop Boyle Center is an institution of purely public charity.

II.

The Borough also contends that Section 204(b) of the Law relating to rental income precludes tax exemption. Citing the Appeal of the Archdiocese of Philadelphia, 151 Pa.Cmwlth. 480, 617 A.2d 821 (1992), the Borough argues that Section 204(b) prevents exemption unless the taxpayer can prove: (1) that the premises are not the source from which any income or revenue is derived; (2) that any rent paid is merely nominal; and (3) that the tenant was itself the recipient of the owner's charity. See id. at 823. The Borough contends that the premises were the source of income or revenue, that more than nominal rent was paid and that Licensees were not themselves the recipients of the Diocese's charity.

Section 204(b) provides:

(b) Except as otherwise provided in clauses (11) and (13) of this section, all property real or personal, other than that which is actually and regularly used and occupied for the purposes specified in this section, and all such property from which any income or revenue is derived, other than from recipients of the bounty of the institution or charity, shall be subject to taxation, except where exempted by law for State purposes, and nothing herein contained shall exempt same therefrom.

We agree with the trial court that Licensees here are the recipients of the Diocese's bounty. As a result, we agree that income or revenue generated by the Bishop Boyle Center does not preclude a continuation of the tax exemption.

In Archdiocese of Philadelphia, the charitable owner leased its property to another charitable organization under a lease that was "an arm's-length transaction between landlord and tenant for market value." Id. at 824. In addition to annual rent of $12,000, the tenant paid all utilities, maintained the interior and exterior of the property and made a "substantial...