Phoebe Servs., Inc. v. City of Allentown

• Decision Date: 12 August 2021
• Docket Number: No. 706 C.D. 2020,706 C.D. 2020
• Citation: 262 A.3d 660
• Parties: PHOEBE SERVICES, INC. v. CITY OF ALLENTOWN and City of Allentown Tax Appeal Board, Appellants
• Court: Pennsylvania Commonwealth Court

262 A.3d 660

PHOEBE SERVICES, INC.

v.CITY OF ALLENTOWN and City of Allentown Tax Appeal Board, Appellants

No. 706 C.D. 2020

Commonwealth Court of Pennsylvania.

Argued May 13, 2021

Decided August 12, 2021

Scot R. Withers, West Chester, for Appellants.

Gretchen L. Petersen, Allentown, for Appellee.

BEFORE: HONORABLE ANNE E. COVEY, Judge, HONORABLE MICHAEL H. WOJCIK, Judge, HONORABLE ELLEN CEISLER, Judge

OPINION BY JUDGE WOJCIK

The City of Allentown (City) and the City of Allentown Tax Appeal Board (Board) (collectively, the City) appeal from an order of the Court of Common Pleas of Lehigh County (trial court) that sustained the appeal of Phoebe Services, Inc. (Phoebe Services) from the Board's July 23, 2018 tax assessment decision, and held that Phoebe Services is not liable to the City for any business privilege tax under the City's Business Privilege Tax Ordinance (Ordinance).¹ The City argues that the trial court erred by misinterpreting the Ordinance's definition of "business" and concluding that Phoebe Services was not liable for business privilege taxes for the tax years in question. Discerning no error, we affirm.

I. Background

In 2018, the City's Revenue and Audit Bureau issued a Notice of Underpayment and Assessment to Phoebe Services, indicating the City's intention to retroactively impose its business privilege tax on Phoebe Services for tax years beginning July 1, 2007, through June 30, 2017, in the amount of $234,735.00 (Assessment). Phoebe Services filed an appeal with the Board challenging the Assessment. By decision dated July 23, 2018, the Board denied Phoebe Services’ appeal on the basis that Phoebe Services failed to satisfy the constitutional test as set forth in Hospital Utilization Project v. Commonwealth , 507 Pa. 1, 487 A.2d 1306, 1317 (1985), commonly referred to as the HUP test, and the statutory requirements of the Institutions of Purely Public Charity Act (Charity Act)² to qualify for exemption as a purely public charity. Phoebe Services appealed to the trial court. The trial court held a non-jury trial. Afterwards, the parties submitted proposed findings of fact and conclusions of law, which included stipulated findings of fact.

The trial court adopted the following facts based on the parties’ stipulations. Phoebe Services is a Pennsylvania nonprofit corporation, formed in 1989, and located in the City. Phoebe Services was created to enhance the charitable mission of its parent company Phoebe-Devitt Homes, a nonprofit corporation formed in 1903. Phoebe-Devitt Homes is the parent of several nonprofit organizations providing healthcare and housing services to the elderly.³ Phoebe-Devitt Homes and its Affiliates comprise what is generally known as "Phoebe Ministries," a registered fictitious name. Phoebe Services is exempt from federal income tax as a charitable organization under Section 501(c)(3) of the Internal Revenue Code, 26 U.S.C. § 501(c)(3), and holds an exemption from Pennsylvania sales tax as a charitable entity. Phoebe Services’ Articles of Incorporation state that "the corporation does not contemplate pecuniary gain or profit, incidental or otherwise." Phoebe Services is only permitted "to engage in any lawful purpose to be conducted on a not-for-profit basis." Trial Court Op., 6/18/20, Findings of Fact (F.F.) Nos. 1, 9-14.

Phoebe Ministries is a multi-service senior services organization. It provides services to the elderly that include independent living, personal care, skilled nursing, rehabilitation, memory support, adult day services, religious and spiritual services, and pastoral care. Some of these services are provided on four continuing care retirement community campuses. In addition, Phoebe Ministries provides pharmacy services and affordable housing at eight facilities. F.F. No. 15.

Phoebe Services provides management, administrative, and other back-end services including fundraising, human resources, payroll, finance, accounting and budgeting, financial reporting, auditing and legal services, purchasing, marketing, data processing, billing, IT, and pastoral care (Administrative Services) to Phoebe-Devitt Homes and its Affiliates pursuant to written management agreements. As part of its services, Phoebe Services coordinates financing for the Affiliates. This structure exists for efficiency purposes and avoids having duplicative positions and departments across the campuses and facilities. Reduced service costs allow more revenues to be used towards Phoebe Ministries’ charitable mission. The cost of Administrative Services is allocated among the Affiliates based on a percentage of each Affiliate's revenue. Each written management agreement specifies that the failure of an Affiliate to make a full and timely payment shall not be considered a default and Phoebe Services agrees to continue providing such services. F.F. Nos. 18-23.

The trial court then examined the Ordinance, which imposes a tax for the privilege of doing business in the City. The Ordinance defines "business" as any activity carried on or exercised for gain or profit in the City. Applying generally accepted principles of statutory construction and reviewing caselaw addressing similar taxing provisions, the trial court determined that the City's definition of "business" refers to only those activities carried on or exercised for the purpose of gain or profit.

The trial court then examined Phoebe Services’ organizational documents. Phoebe Services’ Mission Statement provides: "A community of faith, called by God, to enrich the lives of our seniors, their families, and the communities we serve." Trial Court Op., at 7. Its Vision Statement provides: "Inspired by our faith, we will lead the way with innovative services that promote fullness of life." Id. According to Phoebe Services’ Articles of Incorporation, its purpose is:

(a) To provide services, including management and related services, to or for the benefit of Phoebe-Devitt Homes, Phoebe Home, Inc., Phoebe Apartments, Inc., Phoebe Terrace, Inc., Phoebe Berks Village, Inc., Phoebe Berks Health Care Center, Inc., Devitt House, Inc., and Slate Belt Nursing and Rehabilitation Center, provided that such services shall be provided to an above-named corporation only if such corporation then qualifies as a tax-exempt organization under Sections 501(c)(3) and 509(a)(1) or (2) of the Internal Revenue Code of 1986, or any corresponding future provisions of the Internal Revenue Code.

(b) To engage in such other activities as may be necessary or desirable for the above purposes and, in furtherance of the above purposes, to engage in any lawful business purpose to be conducted on a not-for-profit basis, subject to the provisions of clause (c) below.

(c) To carry on any activity and deal with and expend any such property or income therefrom for any of the foregoing purposes without limitation, except such limitations, if any, as may be contained in the instrument under which such property is received, the Certificate of Incorporation, the By-Laws of the Corporation, or any other limitations as are prescribed by law, and further provided that such activities only shall be such as are permitted a Corporation formed exclusively for charitable, scientific and educational purposes and exempt from the Federal Income Tax under Sections 501(c)(3) and 509(a)(3) of the Internal Revenue Code of 1986, or any corresponding future provision of the Internal Revenue Code, and in its operation the Corporation shall not:

(1) Attempt to influence legislation by propaganda or otherwise.

(2) Intervene in, or participate in, any political campaign on behalf of any candidate for public office.

(3) Permit any part of the net earnings of this Corporation to inure to the benefit of any private individual.

(4) Permit any director or officer of the Corporation to receive any pecuniary benefits from the Corporation, except such reasonable compensation as may be allowed for services actually rendered to the Corporation.

Trial Court Op., at 7-8; see Reproduced Record (R.R.) at 99a; 559a-67a.

The trial court also reviewed the Administrative Services that Phoebe Services provides to the Affiliates. The trial court found that Phoebe Services’ purpose is not to generate profits for itself, but to reduce costs by providing Administrative Services for the Affiliates. The trial court concluded that this is not an activity carried on or exercised for gain or profit, but a cohesive plan to administer and promote the mission of enhancing the lives of seniors, their families, and the community. Trial Court Op., at 10.

Ultimately, the trial court concluded that Phoebe Services did not carry on or exercise any activity for gain or profit and, therefore, did not engage in "business" as defined under the City's Ordinance.⁴ By order dated June 15, 2020, and amended on June 18, 2020, the trial court held that Phoebe Services was not liable for the City's business privilege tax. The City's appeal to this Court followed.⁵

II. Issue

The sole issue in this appeal is whether the trial court erred as a matter of law by misinterpreting the meaning of "business" as defined in the City's Ordinance and, as a result, concluding that Phoebe Services is not liable for business privilege taxes during the tax years at issue.

III. Discussion

The City maintains that the trial court erred by interpreting the Ordinance's definition of "business" and concluding that Phoebe Services did not meet the definition. According to the City, only nonprofit corporations or associations operating as "purely public charities" are exempt from the City's business privilege tax. Although Phoebe Services is a nonprofit corporation, it does not operate as a purely public charity, and its functions fall squarely within the definition of "business." Phoebe Services’ primary functions are to provide Administrative Services to the Affiliates, for which Phoebe Services is compensated. Further, the City argues that Phoebe Services is operating with a clear profit motive...