Game Changing Ruling On Tax Exemption?

A Pennsylvania Supreme Court ruling on the tax exempt status of a Brooklyn, N.Y.-based Orthodox Jewish school's camp could have the potential to set precedent for future legal challenges of charities.

According to a report in the Pittsburgh Post-Gazette, the Mesivtah Eitz Chaim of Bobov Inc. summer camp was ruled not to be a nonprofit, despite being owned by a religious institution. This is because most of the 61-acre property surrounding the camp does not meet the criteria for charities in Pennsylvania.

The ruling has some concerned that we could be returning to the times, mainly in the 1980s and 1990s, when the tax exempt status of nonprofits was regularly challenged by local governments. A spokesman for Pennsylvania state Senate Pro Tem Joe Scarnati openly raised the possibility that the state's constitution might need to be amended the clarify the section on purely public charities.

The court's decision, a narrow 4-3 ruling, had this kind of impact for a number of reasons. For one, it turned the notion of what qualifies as a nonprofit on its head. Yet even more telling was that the court cited its own 1985 ruling, Hospital Utilization Project v. Commonwealth, as the controlling point, not a 1997 law known as Act 55, which lays out what defines a public charity.

The 1985 ruling, also known as the HUP Test, states that a purely public charity must pass five tests to gain tax exemption: advance a charitable purpose; donate or render gratuitously a substantial portion of its services; benefit a substantial and indefinite class of persons who are legitimate subjects of charity; operate entirely free from private profit motive; and relieve the government of some of its burden. Mesivtah Eitz Chaim of Bobov Inc met every criteria except the last one.

We have already seen a number of legal challenges of tax exempt organizations in the past year, with the most famous example being the case of a number of nonprofit hospitals in Illinois.

You can read the full story in the Pittsburgh Post-Gazette.