Monday, November 11, 2013
A story yesterday in the St. Louis Post-Dispatch highlights a tax-exemption area that may well become the next battleground (after nonprofit hospitals) for state property tax exemption: senior retirement living complexes.
The story highlights the issues. Senior living complexes typically claim charitable status on the grounds of providing services to the aging. Indeed, some complexes do have on-staff health care professionals, and some have sections of the complex designed to provide residents who need on-site health services and some level of daily living help (assisted living). But as the story notes, many of these complexes are thinly-disguised luxury apartments for seniors - and it ought to be obvious that providing luxury apartments to seniors is not a charitable activity.
So why do we have this mess? Largely because of a lack of clear standards for what constitutes "charity" and a lack of understanding (or perhaps a lack of will) on the part of local property tax officials (and frankly, the IRS) to try to distinguish different kinds of senior living arrangements.
At the federal level, tax exemption for senior living complexes was based on a "relief of the poor" standard of charity prior to the 1970's. Before Revenue Ruling 72-124, the IRS position with senior living complexes substantially mirrored its pre-1969 position with respect to nonprofit hospitals: charitable tax exemption depended on providing free services to the poor - in this case, the poor elderly who could not financially afford to take care of themselves. Then in 1972, the IRS adopted more of a "community benefit" approach to senior living complexes, recognizing that "the relief of the distress of old age as a charitable purpose was not based on financial considerations alone. Instead, the ruling recognizes that the elderly as a class face forms of distress other than financial, such as need for suitable housing, physical and mental health care, civic, cultural, and recreational activities and an overall environment conducive to dignity and independence." (That quote and the ones to follow are from a 2004 IRS CPE text on elderly housing). In the ruling, the IRS considered a church-sponsored senior living complex that provided "housing, limited nursing care, and other services and facilities needed to enable its elderly residents to live safe, useful, and independent lives." The organization was self-supporting: "operating funds were derived principally from fees charged for residence in the home. An entrance fee was charged upon admission, with monthly fees charged thereafter for the life of each resident. Fees varied according to the size of the accommodations furnished." A key aspect of the ruling, however, was that "the organization was committed by established policy to maintaining them as residents, even if they subsequently became unable to pay the monthly charges." The IRS found that the arrangement fulfilled the housing, health care and financial security needs of the elderly, and granted exemption.
One aspect of the ruling that seems all but forgotten today was the IRS's position that "The organization operates so as to provide its services to the aged at the lowest feasible cost, taking into consideration such expenses as the payment of indebtedness, maintenance of adequate reserves sufficient to insure the life care of each resident, and reserves for physical expansion commensurate with the needs of the community and the existing resources of the organization." In addition, high-end retirement facilities have all but erased the problem of maintaining residents who become unable to pay the charges by simply requiring large up-front "entry fees" that are designed to cover the actuarial risk of a resident outliving their assets. Some clearly do, of course, but some, to put it bluntly, die early. It doesn't take a genius to figure out how much to charge as an entry fee to minimize back-end risk; it just takes a good actuary.
Rev. Rul. 72-124 is what opened the doors to high-end retirement homes getting tax exemption at the federal level under Section 501(c)(3), and in turn the federal exemption may have influenced similar standards for state property tax exemption. State standards regarding what constitutes a "charity" for property tax purposes are independent of federal standards under 501(c)(3), but particularly in areas where there is little state precedent, when an organization comes to a local assessor's office waving a federal exemption letter, that letter can be influential. And that is doubly true when the organization waving the letter also happens to be a church.
Frankly, most retirement homes have no more claim to exempt status than many profit-obsessed nonprofit hospitals, and it is high time we re-examine exemption for these organizations. Perhaps Senator Coburn would like to look into this issue alongside his NFL exemption crusade. In my view, charitable tax-exemption for high-end retirement complexes is far more of a scandal than trade-association status for the NFL league office, which probably wouldn't pay any taxes anyway.