The Ceramic Art & Culture Institute v. Berks County Board of Assessment Appeals and Reading School District, 021820 PACCA, 1294 C.D. 2018

Docket Nº:1294 C.D. 2018, 1330 C.D. 2018
Opinion Judge:MARY HANNAH LEAVITT, PRESIDENT JUDGE
Party Name:The Ceramic Art & Culture Institute v. Berks County Board of Assessment Appeals and Reading School District Appeal of: Berks County Board of Assessment Appeals The Ceramic Art & Culture Institute v. The Board of Assessment Appeals of Berks County v. Reading School District, Appellant
Judge Panel:BEFORE: HONORABLE MARY HANNAH LEAVITT, President Judge HONORABLE P. KEVIN BROBSON, Judge HONORABLE ANNE E. COVEY, Judge
Case Date:February 18, 2020
Court:Commonwealth Court of Pennsylvania
 
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The Ceramic Art & Culture Institute

v.

Berks County Board of Assessment Appeals and Reading School District

Appeal of: Berks County Board of Assessment Appeals

The Ceramic Art & Culture Institute

v.

The Board of Assessment Appeals of Berks County

v.

Reading School District, Appellant

Nos. 1294 C.D. 2018, 1330 C.D. 2018

Commonwealth Court of Pennsylvania

February 18, 2020

Argued: December 12, 2019

BEFORE: HONORABLE MARY HANNAH LEAVITT, President Judge HONORABLE P. KEVIN BROBSON, Judge HONORABLE ANNE E. COVEY, Judge

OPINION

MARY HANNAH LEAVITT, PRESIDENT JUDGE

The Berks County Board of Assessment Appeals and the Reading School District (collectively, School District) appeal the August 27, 2018, order of the Court of Common Pleas of Berks County (trial court) that granted The Ceramic Art & Culture Institute (Institute) a real estate tax exemption. In doing so, the trial court held that the Institute was a purely public charity by reason of its educational and cultural activities. On appeal, the School District argues that the Institute does not satisfy the constitutional and statutory test for a purely public charity and, alternatively, that parts of the building are not regularly used by the Institute and should be taxed. The School District further argues that the Institute does not qualify for a tax exemption under the Consolidated County Assessment Law (Assessment Law), 1 because it has only an equitable ownership of the real estate in question. Alternatively, the School District argues that the Assessment Law violates the Pennsylvania Constitution. We affirm.

Background

In March of 2016, Gary and April Kutay purchased a Queen Anne style home (property) at 746 Centre Avenue, Reading, which has an assessed value of $259, 000. The property houses the Institute, a Pennsylvania nonprofit corporation established by the Kutays' daughter, Hollace Kutay.[2] The Institute was incorporated "exclusively for charitable, educational, and scientific purposes" with its "[m]ain [p]urpose" being an "[a]rt gallery and art institute." Reproduced Record at 108a (R.R. __). The Institute is tax exempt under Section 501(c)(3) of the Internal Revenue Code, 26 U.S.C. §501(c)(3), and holds a sales and use tax exemption from the Pennsylvania Department of Revenue. The Institute provides art education to residents of the City of Reading and conducts workshops for at-risk and disadvantaged people in Berks, Lancaster, and Lebanon counties. The Institute's stated mission is "to support individual and artistic growth" and to enhance the arts in Reading by hosting nationally known artists to conduct workshops and exhibit work at the Institute's gallery. R.R. 135a.

From March 2016 through December 2017, the Institute renovated the property to make it suitable for its activities. The renovations included infrastructure improvements to the heating and air conditioning system as well as carpentry, plumbing, painting and tile work throughout the house. The basement was transformed into a clay studio, furnished with a 19.2-cubic-square-foot kiln. The Institute used the property for fundraising events in October 2016, June 2017, October 2017, and June 2018.

In February 2018, the Institute began offering classes at the property. Hollace Kutay serves as the instructor without compensation. Tuition is set below the cost of the materials, kiln firing and instruction. Scholarship students do not pay tuition or for the cost of their materials. The Institute offers free workshops to nonprofit groups serving disadvantaged, at-risk, and disabled populations, as well as Boy Scout chapters in Lancaster and Berks Counties.

Hollace Kutay serves as the Institute's full-time executive director. She lives in Lancaster County and commutes daily to the Institute. She receives no salary or reimbursement for her expenses. The Institute's directors serve without compensation. The Institute has no employees and pays no salaries.

The Institute's articles of incorporation preclude the use of revenue to benefit individuals associated with the organization or "other private persons." R.R. 108a. All revenue must be used for charitable purposes. In 2016 and 2017, the Institute operated at a net loss, finishing 2017 with a deficit of $18, 000.

On August 23, 2017, the Institute entered into an installment sales agreement to purchase the property from the Kutays for $360, 000, which agreement was recorded the same day. Under the agreement, the Institute paid $1, 000 at settlement and agreed to pay the principal balance, with four-percent interest amortized for 20 years, in monthly installments of $2, 175.47. The agreement further provides that a balloon payment of $216, 325.76 must be remitted on August 1, 2027. In the event of a default, prior payments by the Institute are forfeited. The agreement makes the Institute responsible for payment of "any real estate taxes and water and sewer rentals and all other municipal services charges for the [property] payable for the period commencing the date of this agreement." R.R. 512a.

On August 25, 2017, the Institute applied to the Board of Assessment Appeals (Board) for a real estate tax exemption.3 The application stated that the Institute is the "record owner" of the property and that the "[p]roperty [is] actually and regularly used by an institution of purely public charity for the purpose of … [e]ducation[] and [a]rt [g]allery[.]" R.R. 520a. The Institute's application states in relevant part, as follows: Land - Total Acreage .28 Use charitable outdoor events & exhibits

Building - Basement Ceramic Teaching Facility sq. ft. 1, 780

- 1st Floor Art Gallery & Event Space sq. ft. 2, 042

- 2nd Floor Housing for director & visiting artists sq. ft. 1, 640

- Upper Floors Attic space expected to be refurbished for director living quarters sq. ft. 1, 527

R.R. 521a. On November 20, 2017, the Board denied the tax exemption, and the Institute appealed. In July and August of 2018, the trial court held a de novo hearing in which the School District intervened.

At the hearing, April and Hollace Kutay testified to the facts recited above. Hollace Kutay further testified that she selected the property for the Institute because it is located in a neighborhood "in need of revitalization." Notes of Testimony (N.T.), 7/18/2018, at 14; R.R. 27a. The Kutays purchased the property on behalf of the Institute, contingent on the zoning hearing board's approval for "how [the Institute] wanted to use the building." Id. at 12; R.R. 25a.

Hollace Kutay testified that the third floor attic space has not been converted into living quarters because the Institute cannot afford the renovation. Lacking heat and plumbing, the attic is "not habitable" and has been used only for storing Christmas decorations. Id. at 24; R.R. 37a. No one resides at the property. Hollace Kutay has stayed overnight on the second floor "maybe 15 to 20 times" to fire the kiln. Id. at 24; R.R. 37a. Hollace Kutay testified that the first floor of the property has been used for board meetings, and the large room on that floor is planned for gallery exhibitions open to the public. The Institute is the sole occupant of the property.

Hollace Kutay also testified about a carriage house located behind the main house. She explained that she has incorporated a business called "Fine Art at Centre Park," to sell ceramic artworks. In June of 2016, she used the carriage house to display her senior thesis work from college. However, to date, Fine Art at Centre Park has not sold any art and is "only an organization on paper." Id. at 28; R.R. 41a. The Institute has installed a pottery wheel, a kiln, and working tables in the carriage house, where Hollace Kutay has created ceramics for the Institute's fundraising events. She also works with small groups of students there.

Hollace Kutay testified that she wrote to all of the elementary and middle school art teachers in the area about the Institute's classes and scholarship opportunities. She received positive responses. The Institute offered into evidence an email printout, in which an art teacher expressed gratitude that students "are getting an opportunity to work with an expert[.]" R.R. 268a. Hollace Kutay testified that scholarship students make up 50% of the enrollees and pay nothing for instruction or materials. She plans to reduce that number to 25%.

In opposition to the Institute's case, the School District presented the deed, the mortgage agreement, and the installment sales agreement, which showed that the Kutays purchased the property for $280, 000 and sold it to the Institute for $360, 000. The School District also presented an application for a real estate tax exemption filed by the Kutays as title owners in August 2016; the Board's denial of their application; and...

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