Argued: December 10, 2012
BEFORE: HONORABLE MARY HANNAH LEAVITT, Judge HONORABLE PATRICIA A. McCULLOUGH, Judge HONORABLE JAMES GARDNER COLINS, Senior Judge
MARY HANNAH LEAVITT, Judge
Alliance for Building Communities, Inc. (Taxpayer) appeals the order of the Court of Common Pleas of Lehigh County (trial court) 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.
The trial court held a hearing at which Taxpayer presented the testimony of four of its employees: Gerald F. Alfano, President/CEO; Sheila Rhett, Property Manager; Bradley Fatzinger, Accounting Manager; and Maria Isidor, housing counselor. The testimony of Taxpayer's employees established the following uncontested facts.
Taxpayer's total annual revenue in recent tax years ranged from approximately $1, 427, 000 to $2, 460, 000. Taxpayer is managed by an uncompensated board of directors. Taxpayer's annual payroll ranges from $368, 000 to $450, 000, and employee benefits add approximately $70, 000 to $80, 000 to that annual total. Taxpayer's five highest-paid employees' salaries, as of the date of the hearing, ranged from $40, 973 to $73, 000. Employee compensation is not tied to Taxpayer's financial performance.
Of the 20 properties at issue, 16 are leased to low-income tenants pursuant to a contract between Taxpayer and the United States Department of Housing and Urban Development (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.
HUD's Section 8 housing program provides subsidies to Taxpayer's tenants to assist them with rent. All tenants must be prequalified in accordance with HUD Section 8 regulations and must sign a HUD-drafted lease. Tenants typically pay rent at the rate of 30% or less of their income, and HUD reviews tenants' income annually to establish rent and the HUD subsidy. Some tenants have their leases paid fully by HUD subsidies. Leases may be terminated for failure to pay the HUD-established rent and, although Taxpayer has forgiven delinquent rent in the past, that is not normal procedure. The HUD-established fair market rent is below the market value for the units in Allentown and is below HUD's guidelines for fair market rent in the Allentown-Bethlehem-Easton area. HUD performs regular inspections of the properties and requires that Taxpayer bring the properties up to code as a condition to receiving subsidies. The rents for the four Allentown properties not subsidized by HUD are set by Taxpayer, but they are below HUD's guidelines for fair market rent in the area. Tenants in the unsubsidized properties also have their income verified on a yearly basis by Taxpayer.
Taxpayer uses any revenue received to maintain properties, pay for counseling services and meet its other expenses. Taxpayer also receives charitable donations and government grants from the City of Allentown. The charitable donations and government grants are used for redevelopment projects for low-income housing. However, those grants are not used for any of the properties at issue. In recent years, private donations have declined and account for less than five percent of Taxpayer's total revenue. Taxpayer's expenses for the 20 Allentown properties exceed the combined tenant-paid rent and HUD subsidies for those properties. As a result, the 20 Allentown properties generate losses, and Taxpayer must use funds from its more profitable properties to cover the deficits. Other properties owned by Taxpayer, not at issue in this case, have received tax exemptions. Notably, however, the trial court sustained an objection by the School District and prevented Alfano from testifying fully about Taxpayer's other properties or its real estate tax exemptions in other taxing districts. The trial court found Alfano's proffered testimony not relevant to the 20 Allentown properties that were the subject of the hearing. See Notes of Testimony, November 22, 2011, at 18-20; Reproduced Record at 21a-22a (R.R.).
Taxpayer also provides housing and financial counseling to first-time homebuyers. The Pennsylvania Housing Finance Authority funds these counseling sessions, but it limits payments to two-hour sessions. The counseling sessions typically average three-and-one-half hours. Taxpayer's counseling services are not connected to the 20 Allentown properties at issue in this case.
Taxpayer submitted into evidence its articles of incorporation, bylaws and its tax return filings for 2006 through 2009. Taxpayer's by-laws provide, in relevant part:
[Taxpayer] shall be operated as [a] nonprofit corporation for any lawful purpose or purposes, conducted on a not-for-profit basis as is consistent with 15 P.S. §5301 et seq. [sic], the Pennsylvania Nonprofit Corporation Law. The Primary Purpose of this corporation shall be to provide affordable housing and comprehensive housing counseling to low and moderate income households within the corporate limits of the City of Allentown, Bethlehem, Easton, Reading and the Counties of Lehigh, Northampton, Carbon, Monroe and Berks.
R.R. 61a. Taxpayer's tax return filings showed that it operated at a deficit in 2006 and 2007, but it generated income in 2008 and 2009. The tax returns also show annual donations of $274, 153 for 2006, $211, 082 for 2007, $119, 291 for 2008, and $301, 905 for 2009. Taxpayer also submitted ...