Monday, July 22, 2013

"Purely charitable organization" - affordable housing and counseling - evidence about other properties - institution as a whole

Alliance for Building Communities v. County of Lehigh Board of Assessment Appeals – Cmwlth. Court – July 22, 2013

Alliance for Building Communities, Inc. (Taxpayer) appeals the order of the Court of Common Pleas of Lehigh County denying Taxpayer tax exempt status as an “institution of purely public charity” under Article VIII, Section 2(a)(v) of the Pennsylvania Constitution. The trial court affirmed the determination of the Lehigh County Board of Assessment Appeals that Taxpayer failed to establish that it qualified for an exemption as a purely public charity.

Taxpayer argues that the trial court erred by focusing only on Taxpayer’s operation of 20 rental properties it owns in Allentown rather than the charitable nature of Taxpayer’s entire organization. We agree and, therefore, vacate and remand.


Taxpayer is a Pennsylvania non-profit corporation that is tax exempt under Section 501(c)(3) of the Internal Revenue Code, 26 U.S.C. §501(c)(3); Taxpayer is also exempt from Pennsylvania sales and use tax. Its charitable mission is to provide affordable housing and counseling services to low-income persons. To that end, Taxpayer manages approximately 420 individual rental units, of which it owns 90 units. At issue in this case are 36 rental units on 20 real properties located in the City of Allentown. In July 2010, Taxpayer filed applications for real estate tax exemption for these 20 properties, and the Lehigh County Board of Assessment Appeals denied the applications. Taxpayer appealed to the trial court, which consolidated the 20 tax appeals.

Of the 20 properties at issue, 16 are leased to low-income tenants pursuant to a contract between Taxpayer and HUD under its Section 8 rental subsidy program. Those 16 properties contain 25 rental units. The other four properties, comprised of 11 rental units, are leased to mostly low or moderate income tenants at rents that are below market rates for the area.

In Hospital Utilization Project, 507 Pa. 1, 487 A.2d 1306, the Pennsylvania Supreme Court established a five-part test for determining whether an entity qualifies as a “purely public charity” under the Pennsylvania Constitution. The so-called HUP test provides:

[A]n entity qualifies as a purely public charity if it possesses the following characteristics.
(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.

Here, in applying the HUP test, the trial court committed the same error as the trial court in Alliance Home of Carlisle, PA v. Board of Assessment Appeals, 591 Pa. 436, 919 A.2d 206 (2007).  The trial court sustained the School District’s objection to the testimony of Taxpayer’s CEO about the other properties Taxpayer operates. This prevented Taxpayer from offering the necessary evidence on the institution as a whole. Because the trial court limited the testimony to the 20 Allentown properties, and did not make findings of fact or conclusions of law as to the entire institution, this Court cannot perform meaningful review. Couriers-Susquehanna, Inc. v. County of Dauphin, 645 A.2d 290, 294 (Pa. Cmwlth. 1994) (noting that trial court’s lack of critical finding of fact precluded this Court’s meaningful review).

For this reason, we vacate and remand this matter to the trial court to conduct further proceedings necessary to determine Taxpayer’s tax exempt status at the institutional level and then, if necessary, for a review of the 20 properties.

Contracts - 3d party beneficiary

McGaffic v. City of New Castle – Cmwlth. Court – July 22, 2013

Third-Party Beneficiary Law in Pennsylvania

The general rule is that a contract must express an intention to confer standing on a third-party beneficiary. Scarpitti v. Weborg, 530 Pa. 366, 370, 609 A.2d 147, 149 (1992). In Marsteller Community Water Authority v. P.J. Lehman Engineers, 605 A.2d 413 (Pa. Super. 1992), for example, it was held that a contract between a redevelopment authority and an engineering firm to upgrade a water system owned by a water authority expressed an intention to make the water authority a third-party beneficiary of the contract.9

9 What constitutes an “express intention” varies. In Johnson v. Pennsylvania National Insurance Companies, 527 Pa. 504, 594 A.2d 296 (1991), our Supreme Court held that a taxicab passenger was an intended third-party beneficiary of the taxicab owner’s insurance policy and, thus, bound by the policy’s requirement to arbitrate a claim for uninsured motorist benefits. Id. at 508, 594 A.2d at 298. The taxicab passenger was not named in the policy nor a party to the contract. In Keefer v. Lombardi, 376 Pa. 367, 102 A.2d 695 (1954), our Supreme Court found unnamed citizens and property owners to be third-party beneficiaries of a contract between a municipality and a contractor by which the contractor assumed liability for any damages caused by the construction. Id. at 369-70, 102 A.2d at 696. The Supreme Court found that “the drafters of the contract … include[d] as beneficiaries the inhabitants of the city for which they acted.” Id. at 372, 102 A.2d at 698. An express intention to create third-party beneficiaries does not require, even in the context of a government contract, that the beneficiaries be specifically named.

In Guy v. Liederbach, 501 Pa. 47, 59-60, 459 A.2d 744, 751 (1983), our Supreme Court adopted Section 302 of the Restatement (Second) of Contracts (1979), which allows a third-party to enforce a contractual promise even though the contract does not explicitly express that intention. Section 302 states:

Intended and Incidental Beneficiaries
(1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either

(a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or

(b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.

(2) An incidental beneficiary is a beneficiary who is not an intended beneficiary. 10
RESTATEMENT (SECOND) OF CONTRACTS §302 (1979) (emphasis added).

Our Supreme Court has explained that under Section 302 a party becomes a third party beneficiary only where ... the circumstances are so compelling that recognition of the beneficiary’s right is appropriate to effectuate the intention of the parties, and the performance satisfies an obligation of the promisee to pay money to the beneficiary or the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance....  Scarpitti, 530 Pa. at 372-73, 609 A.2d at 150-51 (emphasis added) (citations omitted). Stated otherwise, the “compelling circumstances,” or first prong, “sets forth a standing requirement,” and the second prong defines the type of claim to be presented by a third-party beneficiary. Id. at 371, 609 A.2d at 150. Notably, the named promisee’s inability or lack of incentive to enforce a contractual promise will support the third-party’s standing to enforce the promise. Id.

In sum, whether a contract contemplates enforcement by third-parties is a matter of contract construction. Parties may explicitly state that a contract provision is intended to create third-party beneficiary rights and identify, by name, the holder of those rights. Parties may explicitly state that a contract is not intended to create third-party beneficiary rights or identify the specific persons who do not hold these rights, as noted in Section 302(1) of the Restatement (Second) of Contracts. Most contracts are not explicit, and in that case the principles set forth in Section 302 are employed to ascertain the intention of the parties.