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Phoebe Servs. Inc. v. City of Allentown

Pennsylvania Commonwealth Court

August 12, 2021

The issue in this appeal was whether the trial court erred by misinterpreting the meaning of “business” as defined in a City of Allentown ordinance. In 2018, the City’s Revenue and Audit Bureau issued a Notice of Underpayment and Assessment to Phoebe Services (“Phoebe”), indicating the City’s intention to retroactively impose its business privilege tax for tax years 2007 through 2017. Phoebe is a nonprofit created to enhance the charitable mission of its parent company, which is a nonprofit corporation. Phoebe appealed to the City of Allentown Tax Appeal Board, challenging the Assessment. The Board denied the appeal. Phoebe appealed to the trial court, which reversed and concluded that Phoebe did not carry on or exercise any activity for gain or profit and, therefore, did not engage in “business” as defined under the ordinance. The City appealed, and the Pennsylvania Commonwealth Court affirmed. The City argued that Phoebe’s compensation scheme evidenced a clear profit motive because revenues inured directly or indirectly to the benefit of private individuals, not to the charitable cause. The Court found that, although Phoebe’s compensation scheme contained performance incentives for its executive officers, the scheme was designed to enable Phoebe to stay competitive with other nonprofits. The evidence did not demonstrate that the compensation was excessive, unreasonable, or related to Phoebe’s financial performance. The Court declined “to hold that an entity must financially harm itself in order to negate a profit motive.”

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