Tax Exemptions of Charities Face New Challenges

By STEPHANIE STROM

The New York TimesMay 26, 2008

Peter ZehrenMarch 23, 2013

What Constitutes a Charity?

Rainbow Child Care Ruling

Pay property taxes…gave nothing away

Same price per child Regardless of ability to pay

Regardless of government support

95% income from fee for-services (families, county and tribal government)

What ramifications for other nonprofits?

Minnesota State Supreme Court

Questioning Tax-Exempt Status

What constitutes a “charity?”

Run more like a business Charging fees for services

Selling products

Investment/endowment income

Does it give anything away?

Costs local government $8-13 billion

Are Nonprofits Tax Evaders?

“Privileged” Status for Whom? Congress exploring endowment payouts,

MA exploring imposing a 2.5% assessment

How different are hospitals and universities from for profits? (tax-paying competitors)

Accumulating of wealth when a “charity should be giving it away? (% not shown)

Senate Finance Committee asks six evangelical ministries to justify status

What constitutes a charity?

“From soup kitchens, daycare centers, environmental, advocacy, and civil rights groups; to hospitals, educational institutions, theatres, and faith based organizations,

charitable organizations exist to serve and promote the common good.”

Audrey R. AlvaradoED of National Center for Charitable Statistics

What does “tax-exempt” mean?

Provide a public service Substantially reduce government burdens Supposed to “give things away for free”…

Tuition assistance Sliding scale pay

for services

Earned Income does not comprise majority of revenue

Tax Exemption AuthorityState Exemptions– Property Taxes

Federal Exemptions – Income Taxes

The property exemption challenge.

“Local governments are finding their property-tax base shrinking (due to electronic commerce and the digital delivery of information) and large, revenue-generating nonprofits like hospitals and universities can't hide.”

Evelyn BrodyProfessor Chicago-Kent College of Law

A. Charitable Objective: charity primary, if not sole, object.

B. Performance of its Charitable Objective: activities further its charitable objective.

C. Gift or Giving: focus is on performance involving a gift or giving.

Ruling:Hazelden “was founded to provide addicted professionals a high quality, effective recovery experience addressing their unique needs.”

Hazelden Springbrookproperty tax denied

Oregon Tax Court: May 2004

North Star Research Institute vs. County of Hennepin (1975)

1. Seeks to help others without immediate expectation of material reward.

2. Is supported partly or entirely by donations and gifts.

3. Requires recipients of the charity to pay for the aid, in whole or in part.

4. Earns a profit from the income from gifts, donations, or fees.

5. Restricts who benefits from the charity.6. Makes dividends or assets available to private

interests if the organization dissolves.

Minnesota State Supreme Court

Criteria defining a charity

Tax assessor Thomas May Under the Rainbow ruling didn’t change

anything

Mall of America seeks exemption arguing it “aids the state economy”

Hard to define what constitutes a charity, many doing samethings for-profits do

Ruling could impact 3-500 nonprofitsJon Pratt ED MN Council of Nonprofits

1. Extent to which recipients pay for services…whether the organization gives anything away

2. Government payments are not evidence of a charity, the payments where not a gift

Two Key Elements

Russell A. AndersonMinnesota Supreme Court Chief Justice

Under the Rainbow Ruling

Nonprofit Sector Pressure (MN)

To fill services nonprofits do better than the state (Homes for mentally disabled children)

Be more like a business, find ways to fill gap between government funds and program costs

Paying property taxes could force cutting programs and services (The Courage Center)

One year ban on reversing property tax exemptions Set criteria to determine what is “purely

public charity”

Used in many statutes impacting property tax exemption

Era when many nonprofits charge for services and receive negligible donations

Minnesota Legislature

What Constitutes

a “Purely Public Charity?”

“Local government assistance is the great equalizer,” to provide communities with less ability to raise property taxes enough to adequately serve their residents.

Can’t afford to loose nonprofit services

Rep. (MN) Paul MarquartChair House property tax subcommittee

State and Federal Tax exempt challenges.

What constitutes a charity?

Who else will provide public services?

Property tax base shrinking, but is taxingnonprofits the answer?

Summary Points

Tax Exemptions of Charities Face New Challenges

By STEPHANIE STROM

The New York TimesMay 26, 2008

Peter ZehrenMarch 23, 2013

Questions?