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Jack Owen’s Tax-Exempt Alert MARCH 2019

At the meeting of the Pittsburgh Planned Giving Council on Tuesday March 12, 2019, I reported on several updates in the first quarter of 2019.  The four items I reported on are as follows:

  1. Unrelated Business Tax Inclusion for Parking. The Tax Cuts and Jobs Act (“TCJA”) included a new provision which imposes the unrelated business income tax (“UBIT”) on transportation benefits provided by nonprofit organizations to their employees.  Basically, the UBIT inclusion results in a tax on nonprofit organizations for the expenses they incur in providing transportation benefits, such as parking and transit passes, to their employees.  The inclusion is effective for years beginning in 2018, and nonprofit organizations may need to make estimated quarterly payments in 2019.

There is a strong push to repeal this UBIT inclusion, with legislation introduced by Senators Lankford (Oklahoma) and Coons (Delaware), in Senate Bill 632, the “LIFT for Charities Act”.  Nonprofit organizations should consider supporting this legislation or other efforts to repeal this UBIT inclusion.

  1. The U.S. Department of Labor released its new proposed rule updating the overtime salary threshold under the Federal Fair Labor Standards Act. Previously, the Obama Administration in 2016 proposed to raise the salary threshold to $47,476 per year.  The Trump Administration has proposed to raise the threshold to $35,308 per year (which is up from the current $23,660).  Nonprofit organizations are encouraged to review the impact of the proposed regulations and make an analysis of whether and how the draft rules will affect their finances and their ability to attract and retain workers.
  1. Archbishop of Philadelphia v. Chester County Board of Assessment Appeals. In this Pennsylvania Commonwealth Court case, a Roman Catholic parish office building was granted a 50% real estate tax exemption.  The Church built a new “Holy Family Center,” an approximate 5,400 square foot building containing a pastor’s office, a business office, meeting rooms, an adoration chapel, amongst other meeting rooms and a kitchen.  The Church argued that the chapel was open 24 hours a day, the conference room was used for Bible study, bereavement and prayer, and the pastor’s office was used for counselling, confessions and other spiritual matters.  Other areas and offices, such as the kitchen, youth director, community supervisor, business manager, and parish secretary offices, were found by the Court not to be regularly used for worship activities but only to support worship activities of the 4,000 parishioners.

In what I think is an unusual decision, the trial court found, and the Commonwealth Court affirmed that, the Church is entitled to a 50% exemption since only approximately half of the property is used as an actual place of stated religious worship, with the other non-worship activities being merely incidental to worship.  The Court rejected the Church’s argument that the Holy Family Center would not exist without the parish and a primary purpose of the parish is religious worship.  The Church argued that all of the property that the Church owns is necessary for religious worship and eligible for exemption.

From my review of the case, there was no indication that this new Holy Family Center was used for anything other than worship and for supporting the worship activities of the Church.  It seems quite unusual that a court would rule that church “office” space is not a place of religious worship, when it is more than simply convenient to the operation of the Church as a whole, and includes necessary administration for the operation of a Church with 4,000 some parishioners per weekend.  If this case is correct, then real estate owned by nonprofit organizations and used for administration, and/or “office space”, and not for the conduct of a charity’s operations, may be taxable in Pennsylvania.  Here’s hoping the Pennsylvania Supreme Court reverses this unfortunate result, although it does not appear that the case was appealed.

  1. Commonwealth of Pennsylvania, Office of Attorney General v. UPMC, and UPMC, et al. v. Joshua D. Shapiro. The saga between UPMC and Highmark continues, with the latest chapter involving the Pennsylvania Office of the Attorney General.  In a petition dated February 7, 2019, and widely reported in the local press, the Office of Attorney General has brought a petition to modify the Consent Decrees dating back to July 1, 2014, under which UPMC and Highmark agreed to continue to contract with each other, with such agreement expiring June 30, 2019.  With the June 30, 2019, expiration date of the Consent Decrees quickly approaching, General Shapiro attempted to negotiate a continuation of the Consent Decrees, with Highmark allegedly in agreement with such continuation and General Shapiro’s conditions, and UPMC not in agreement.

Due to UPMC’s refusal to extend the Consent Decrees and the conditions requested by General Shapiro, General Shapiro brought this lawsuit against UPMC.  General Shapiro did not bring suit against Highmark because Highmark apparently agreed to the requested conditions.

In response to the petition brought by General Shapiro, UPMC filed a Complaint-Class Action in the United States District Court, Middle District of Pennsylvania, asking that General Shapiro’s petition be enjoined.  There are numerous reasons cited by UPMC for enjoining the petition, such as federal preemption under various federal laws.

If General Shapiro is successful in this litigation, it appears to me that the Pennsylvania Office of Attorney General would be rewarded with numerous powers which it has not before exercised, including:

  • Require nonprofit organizations to contract with each other when they do not voluntarily agree to contract;
  • Impose mandatory arbitration to determine compensation between nonprofit organizations; and
  • Replace a nonprofit organization’s board of directors.

The UPMC/Highmark situation is highly controversial and elicits strong opinions from many.  Regardless of opinions on UPMC, Highmark, and the Pennsylvania Office of Attorney General, court decisions rendered could have long-lasting impact on all types of nonprofit organizations.

Conclusion

As with all changes in the tax and state laws affecting nonprofit organizations, it is incumbent upon nonprofits, their boards and their advisors to keep abreast of new court decisions and IRS guidance being issued in 2019.

Please do not hesitate to contact our office if you have any questions on these topics.

We sincerely hope you appreciate receiving the information in this newsletter.  But in case you do not want to receive it, please contact Diane Trichtinger at 412.745-1040, or [email protected] to be removed from this list.  Likewise, please contact Diane with any colleagues or other persons who you would like to add to this list.  

Note:  This provides general information regarding matters of interest to tax-exempt organizations.  Such information is neither legal advice nor legal opinion concerning particular situations.  If legal advice or opinion is required, legal counsel should be consulted.  

We would be pleased to address any questions you may have regarding the foregoing or any other tax-exempt issues.  For further information, please contact Susan Ott (412-745-9900), [email protected]; or Jack Owen (412-765-1020), [email protected].

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