Wednesday, June 18, 2014

California - Donor Disclosure Law Enacted; Hospital Executive Salary Cap Ballot Initiative Fails

Donor Disclosure Law.  On May 14, 2014, California Governor Jerry Brown signed into law S.B. 27, which requires large donations from nonprofits and other "multi-purpose" (MPOs) organizations to be disclosed beginning July 1.  In addition, the California Fair Political Practices Commission is required to post the names of the top 10 contributors on its website.  The bill's intended effect is to shed light on “dark money” in political campaigns and referendums by eliminating a now common practice of nonprofit and other organizations contributing significant dollars into such campaigns without disclosure of the original donors.  According to the Los Angeles Times, the legislation was advanced after "conservative groups from Arizona poured $15 million into California in 2012 to fight Proposition 30, Gov. Jerry Brown's tax hike, and support an ultimately unsuccessful move to curb unions' political power."

Hospital Executive Pay Ballot Initiative.  A ballot initiative to cap the executive compensation of nonprofit hospital executives failed to qualify for the November 2014 ballot.  The Charitable Hospital Executive Compensation Act of 2014 would have instituted an annual compensation limit (including bonuses and other benefits) for such execs to the salary and expense account of the President of the United States (currently, $450,000).  In addition, the 10 highest-paid executives and 5 largest severance packages would have been required to be publicly disclosed annually.  According to the Los Angeles Times, the proposed ballot initiative was dropped by the SEIU-United Healthcare Workers West Union in a deal struck with the California Hospital Association and a majority of California's 430 hospitals.

 

Nicholas Mirkay

June 18, 2014 in In the News, State – Legislative | Permalink | Comments (0) | TrackBack (0)

Friday, May 30, 2014

Buckles: Obedience Norms that Bind Overseers of Charities

JohnnyBucklesJohnny Rex Buckles (Houston) published "How Deep Are the Springs of Obedience Norms that Bind the Overseers of  Charities?," in 62 Cath. U. L. Rev. 913 (2013).  Here are some excerpts from the article's introduction:

    This Article explores whether and how the exercise of discretion by charity fiduciaries in recasting a charity’s direction is, and should be, limited. Analyzing this basic issue raises additional, difficult inquiries: If the law does limit the ability of charity fiduciaries to determine the charitable paths of their entities, what standards govern the exercise of fiduciary discretion? To what extent does , and should, the law treat fiduciaries of charitable trusts dissimilarly from those who govern charitable nonprofit corporations? What role should governmental actors play in monitoring these decisions by charity managers? If governmental actors should assume some monitoring role, should their review of fiduciary decisions be ex ante or ex post? Which governmental actors should be involved? Can donors and other stakeholders sufficiently protect their interests absent a strong supervisory role by the government?

    These questions are not simply esoteric enigmas deisgned to tickle the ears of legal scholars. . . .  Moreover, these questions are especially timely, for the law of obedience norms governing fiduciaries of charitable corporations is unsettled and in great need of refinement. Even the law governing trustees of charitable trusts, which is comparatively stable and uniform, merits reassessment once the meaning and purposes of obedience norms are thoroughly examined.

    To foster the development of the law governing charity fiduciaries, this Article presents a taxonomy of obedience norms,20 a doctrinal analysis of these norms, and a policy discussion to help answer these questions. Part I explains the fundamental nature of obedience norms and articulates and illustrates the various types of obedience norms. Parts II and III discuss legal authorities supporting or rejecting various obedience norms as applied to trustees of charitable trusts and directors of charitable nonprofit corporations, respectively. Part IV this Article evaluates the policy considerations that may justify one or more obedience norms. Finally, by presenting an analytical series of questions, Part V explains how the law should develop in imposing, and declining to impose, obedience norms on charity fiduciaries.

Nicholas Mirkay

 

 

May 30, 2014 in Publications – Articles, State – Judicial, State – Legislative | Permalink | Comments (0) | TrackBack (0)

Monday, March 31, 2014

Proposed Charitable Fundraising Legislation in Florida

An interesting opinion editorial in the Tampa Bay Times discusses proposed state legislation regulating charitable fundraising.  According to the editorial, an investigation conducted by the Tampa Bay Times/Center for Investigative Reporting found “that of the 50 worst offenders [among charities soliciting funds from the public] across the nation, 11 were based in Florida.” 

The proposed reforms are said to include the following: (1) enhancing “public disclosure of the inner workings of charities and solicitors;” (2) clarifying “when the state has the power to shut them down, including when they are banned in other states;” (3) requiring each employee who makes calls soliciting funds to submit to fingerprinting and a background check for a $100 registration fee; (4) requiring fundraisers “to provide copies of solicitation scripts, the locations and phone numbers from which calls are to be made, and details about what percentage of funds raised actually flow to the charity;” and (5) requiring charities that raise at least $1 million annually but devote less than 25 percent of proceeds to charitable purposes to “submit detailed reports on where the money went ” – the information from which would be made available “in a new online database, enabling Floridians to better investigate a charity before giving.”

JRB

March 31, 2014 in State – Legislative | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 25, 2014

Will Kansas Pull the Plug on Tax Exemption for YMCA's?

An article in the Nonprofit Quarterly notes that there is a bill in the Kansas legislature that would strip state property tax exemption from local YMCA's (the bill targets exemptions for any service provider that receives more than 40% of its revenues from "the sale of memberships or program services").  Meanwhile, at the same time Kansas is considering another bill to give tax breaks to for-profit gyms.  Sigh . . . 

The issues here are related to my post yesterday about charities that are essentially commercial businesses.  As I noted in this post a couple of years ago, many Y's appear to be more like for-profit gyms than charities.  I pointed out in that post that my local Y in Champaign, IL had recently moved into a brand new facility on the far west side of town from an older facility near the center of the city, and about as far as you can get from any minority or disadvantaged population and still be a part of the city of Champaign.  The move was accompanied by an ad campaign touting the benefits of the move as "more value and flexibility for our members! For example, you can work out in the 9,000 square foot fitness center and then take your family to the indoor pool and water slide. Or, you can take advantage of some of our two facilities' specialized programs, like water aerobics or recreational gymnastics."

Now, just because charities compete in some way with for-profit enterprises doesn't make them a commercial business.  The fact that the Salvation Army runs thrift stores doesn't make its primary mission one of selling used goods.  But I noted yesterday that some organizations that might historically have had a charitable mission have essentially morphed into commercial businesses, because their real "primary" mission is no longer charitable.  I think that many (not all) Y's have passed this rubicon just as surely as nonprofit hospitals, major college athletics, and the USOC.

The Nonprofit Quarterly article quotes the CEO of Topeka's Y saying that if they have to pay taxes, that will be the end of the Y.  I wonder . . . I have a sneaking suspicion that if the Champaign Y lost tax exemption, it would soldier on with maybe a $50/mth membership,  instead of $47/mth.  Topeka, Kansas might have a different clientele . . . or maybe not.

John Colombo

February 25, 2014 in Current Affairs, State – Legislative | Permalink | Comments (0) | TrackBack (0)

Saturday, February 8, 2014

Johnston: Give to Charity, Turn A Profit

David_Cay_JohnstonAs noted by TaxProf Blog, David Cay Johnston (Syracuse) has written a piece in State Tax Notes that highlights the ability of certain high-income donors living in Arizona to combine Arizona tax credits with the federal charitable contribution deduction to actually make money by giving to charity.  This is because each of the state tax credits reduce state income tax liability dollar-for-dollar, thereby allowing the taxes saved through the federal income tax deduction to be all profit.  According to Johnston, a married couple in the top federal income tax bracket can make almost $1,300 off charitable contributions of just under $3,300, or almost a 40 percent return.

Lloyd Mayer

February 8, 2014 in Publications – Articles, State – Legislative | Permalink | Comments (0) | TrackBack (0)

Friday, August 2, 2013

Delaware Joins States with Public Benefit Corporations

As reported by The Chronicle of Philanthropy, effective yesterday, August 1, 2013, Delaware joined 19 other states with laws on the books permitting the formation of public benefit corporations.  Delaware Governor Jack Markell signed Senate Bill 47 into law on July 17, 2013.  The new law provides:

A public benefit corporation is a for-profit entity which is managed not only for the pecuniary interests of its stockholders but also for the benefit of other persons, entities, communities or interests. Delaware General Corporation Law Sections 362(a) and 365(a) create and impose on directors of public benefit corporations a tri-partite balancing requirement. Public benefit corporations must be managed in a manner that balances (i) the stockholders’ pecuniary interests, (ii) the interests of those materially affected by the corporation’s conduct, and (iii) a public benefit or public benefits identified in the corporation’s certificate of incorporation.

NAM

August 2, 2013 in In the News, State – Executive, State – Legislative | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 31, 2013

State & Local "Charitable" Exemption Standards Continue to Differ with Feds'

It appears that the difference between the Internal Revenue Code defintion of "charitable" and that applied by state and local taxing authorities continues to affect nonprofit organizations, this time outside of the health care arena.  As reported by The Chronicle of Philanthropy, two organizations in Kittery Maine are disputing the town's revocation of their property tax exemptions on the basis that their art and dance activities do not comport with Maine's "charitable and benevolent" standard.

(For additional coverage, see "Kittery art organizations to fight town tax in court" (Seacoastonline)).

NAM 

July 31, 2013 in Current Affairs, In the News, State – Executive, State – Legislative | Permalink | Comments (0) | TrackBack (0)

Friday, July 26, 2013

Recent New Jersey Law: Charitable Contributions Do Not a Resident Make

As reported in today’s State Tax Today (subscription required), New Jersey has recently passed legislation clarifying that charitable contributions are not relevant in determining the domicile of the donor under the New Jersey gross income tax.  Portions of the statement accompanying the Act include the following:

This bill clarifies in the New Jersey gross income tax statutes that donors' contributions to charities are not a factor in determining where a person is domiciled under New Jersey gross income tax for the purpose of defining who is a resident taxpayer or nonresident taxpayer.  This is the informal position taken by the New Jersey Division of Taxation since 2005 but this position has not since been officially communicated to taxpayers.  Whether a person lives in Florida or Arizona, giving to charities in New Jersey, in and of itself, should not subject the person to New Jersey income tax as a New Jersey resident. …

Taxpayers now make contributions to local, regional, and national charities via modern financial and communication networks. …This bill recognizes these changes in patterns of giving and wishes to encourage contributions to charities, regardless of the locations of the charities, from both New Jersey residents and nonresidents.  Although domicile is usually determined from all the evidence and circumstances, under this bill the Division of Taxation is formally instructed in statute to no longer consider a taxpayer's charitable contributions as relevant or applicable in determinations of domicile.

 JRB

July 26, 2013 in State – Legislative | Permalink | Comments (1) | TrackBack (0)

Friday, June 28, 2013

Lawsuit Challenges Princeton Tax Exemption

One had to figure this was coming sooner or later: a lawsuit challenging state property tax exemption for Princeton University, which a state trial judge has refused to dismiss. The arguments in the case appear familiar: the lawyer for the plaintiffs (property owners in Princeton, N.J.) contends that many of Princeton's buildings are used for commercial purposes, and should be put back on the property tax rolls.  To quote the story:

“In 2011 Princeton University received $118 million in patent royalties and distributed $30 million from the profits to faculty members,” Afran [the lawyer for the plaintiffs] said. “Under the law they are not even entitled to a tax exemption because they are engaged in commercial patent licensing, and the school give out a percentage of profits to faculty. Under the law in New Jersey,  if a nonprofit gives out profits, it is not entitled to an exemption at all.”

The final quote sort of sums it all up:

“In many ways these modern universities have become commercial enterprises.”

JDC

June 28, 2013 in State – Judicial, State – Legislative | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 19, 2013

Reporting Program Service Expenses on the 990

Just as a follow up to yesterday's post on the Oregon spendig requirement, I took a quick look again at the Form 990 (go to page 10) and its instructions regarding the allocation of program service expenses (go to pages 41 through 43).   My personal favorite is the instruction on how to allocate indirect costs, which requires the charity to list everything as an administrative cost in column C (that being not a program service expense) and then to add a separate, self-created line under "Other" in which the charity is instructed to place a negative number in column C in order to allocate indirect costs to program service in B or to fundraising expenses in D.   So that's clear as mud -- no chance of error there.  

Also, take a look at the list of administrative expenses to be reported in column C and think about a smallish charity - one that does a full Form 990 but is still relatively small in terms of revenue and expense - for example, a small medical clinic.  The list in the instructions includes the CEO and staff by default (unless directly involved in program service oversight) as well as "costs of board of directors' meetings; committee meetings, and staff meetings (unless they involve specific program services or fundraising activities); general legal services; accounting (including patient accounting and billing); general liability insurance; office management; auditing, human resources, and other centralized services; preparation, publication, and distribution of an annual report; and management of investments."  I wouldn't be surprised if such a charity had issues, or at least is forced into taking a fairly aggressive position on indirect cost allocations.

When we think about fradulent charities, I don't think most of us think of these types of expenses.

Just a thought.  EWW

June 19, 2013 in Federal – Executive, In the News, State – Executive, State – Legislative | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 18, 2013

Oregon Now Requires 30% Program Spending

Thanks to Lloyd Mayer for pointing me to new legislation in Oregon that will disqualify state charitable contributions to organizations that spend less than 30% of their functional expenses on charitable programs.

H.B. 2060 was signed into law by Governor Kitzhaber on June 4, 2013 and goes into effect 91 days after the 2013 regular session of the Oregon Legislative Assembly ends. Specifically, the Oregon Attorney General can disqualify an organization from receiving state income tax deductible contributions if

the organization has failed to expend at least 30 percent of the organization's total annual functional expenses on program services when those expenses are averaged over the most recent three fiscal years for which the Attorney General has reports containing expense information. The calculation of program services expenses and total functional expenses shall be based on the amounts of program services expenses and total functional expenses identified by the organization in the organization's Internal Revenue Service Form 990 return or other Internal Revenue Service return required to be filed as part of the organization's report to the Attorney General.

Oregon H.B. 2060, Section 2(1) (emphasis added).  There is an appeal procedure that would allow the charity to show that payments were made to affiliates, were being accumulated for capital campaigns, or  "such other mitigating circumstances as may be identified by the Attorney General by rule."  Section 2(2)(c).  A disqualified charity is required to notify its donors that donations to it are not deductible.  Interestingly, a disqualification order may not be issued to "an organization that receives less than 50 percent of the organization's total annual revenues from contributions or grants identified in accordance with Internal Revenue Service Form 990 or an equivalent form" (fee for service charities, rejoice!)  Section 2(4)(g).  The legislation can be found here.

There are a number of issues that first came to mind when I read this legislation.  

  • The first, of course, is the fallacy that a certain level of  "program service" expenditures  is an appropriate indicator of a charity's effectiveness.  Even if it were an appropriate measure, why set it at 30%?  Why exempt fee-for-service charities?  Why exempt small charities?  (On this topic, see GuideStar, BBB Wise Giving Alliance, and Charity Navigator on the “Overhead Myth”).
  • At least in the short term, this legislation punishes the wrong party - a charity's donors - by disallowing the state income tax charitable deduction.   It does appear to also take away the ability of the charity to be tax exempt and, of course, in the long term, the charity's donor base could essentially disappear. 
  • Along those same lines, I am concerned that you could have a charity that is disqualified due to a temporary blip in financials and is then required to send a donor notice.  Even if that charity is subsequently rehabilitated, it is permanently damaged.  The state has now devalued one of the charity's most valuable assets: its donor list.   The Oregon Attorney General's press release talks about targetting bogus charities - I'm not convinced initially that its scope will be so limited.
  • Finally, as is pointed out in this commentary by Nonprofit Quarterly, the error rate on preparing the Form 990 is ridiculously high.  I am somewhat troubled by the assertion by the Nonprofit Association of Oregon that organizations that make a reasonable attempt to allocate expenses won't get caught in this trap.  In my experience, even sophisticated clients with paid accountants regularly misstate program service expenditures.  (I note that the Nonprofit Association takes the position that only full Form 990 filers (not N or EZ filers) would be affected by the legislation.)

Thoughts, especially from our Oregon friends?  EWW        

 

 

June 18, 2013 in Current Affairs, In the News, State – Executive, State – Legislative | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 12, 2013

Michigan Senate Moves to Protect Art Collection at Detroit Institute of Arts

The Michigan Senate has passed a bill intended to protect the Detroit Institute of Arts art collection from sale in the event of a bankruptcy in the City of Detroit.

The Detroit Free Press reports that the Senate voted 24-13 to codify ethical standards adopted by the American Alliance of Museums which bars museums from selling artwork for purposes other than enhancement of the museum’s collection.  The bill now moves to the Michigan House of Representatives.

Detroit’s emergency manager, Kevyn Orr, recently stirred outrage when he said that he has to consider the value of all the city’s jewels when determining how to pull the city out of financial crisis.  Orr went on to say that he was evaluating the DIA’s art collection and preparing in case creditors seek repayment of their debts through asset sales.

VEJ

June 12, 2013 in Current Affairs, In the News, State – Legislative | Permalink | Comments (0) | TrackBack (0)

Saturday, June 1, 2013

California Bill Targeting Sexual Orientation Discrimination by Boy Scouts & Other Youth Groups Advances

According to a Sacramento CBS news report, the California Senate has mustered the two-thirds majority needed for tax increases to pass a bill that would strip state tax-exempt status from any youth group that dsicrminates on the basis of gender identity, race, sexual orientation, nationality, religion or religious affiliation.  The bill, SB323, applies specifically to exemptions from the California's corporate income tax and sales and use tax, but with certain limitations. 

Based on a reading of the bill and the Senate Committee report, the sales and use tax exemption loss applies to the otherwise availalbe exemption from having to collect and pay over to the government sales and use tax on sales by the organization if those sales are irregular or intermittent. While aimed at the Boy Scouts of America, which recently removed its bar on gay youth participating in the Scouts but left in place its bar on gay adult scout leaders, the loss of the sales and use tax exemption applies to any organization with the "primary purpose" of providing "a supervised program of competitive sports for youth, or to promote good citizenship in youth."  The non-discrimination requirement also applies to any youth group sponsored or affiliated with a nonprofit private educational institution at the K through undergraduate level, "including but not limited to any student activity club, athletic group, or musical group."  Finally, the bill applies the non-discrimination requirement to a number of specific organizations, including not only the Boy Scouts but also the Girl Scouts, the YMCA, the YWCA, 4-H Clubs, and many others. 

The loss of corporate income tax exemption for failure to comply with the non-discrimination standard applies to any "public charity youth organization," which is defined as including but not limited to the specifically named organizations.  If the bill becomes law, the California Franchise Tax Board will apparently be responsible for developing a more detailed definition.

The bill does not affect the ability of donors to the covered organizations to take a charitable contribution deduction.  The bill now goes to the state Assembly for consideration, where a two-thirds majority vote is also needed for passage.

Additional coverage:  Huffington Post.

LHM

June 1, 2013 in In the News, State – Legislative | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 13, 2013

Arizona Taking Steps to Exempt "Fallow" Church Property

A couple of years ago one of my students, Brittany Viola (not the Olympic platform diver) wrote a note for the University of Illinois Law Review on the property tax status of "fallow" property owned by exempt organizations, particularly churches.  A PDF of that article is available here.  In the article, Ms. Viola discussed how various states, particularly in the Northeast, were attempting to tax "fallow" property - for example, shuttered Catholic schools or churches that had been closed by the local diocese (though this issue was by no means limited to property owned by the Catholic church).  The essence of the legal issue was the requirement of most state property tax exemption laws that the exempt property be "used" for an exempt purpose; arguably, fallow church property is not being "used" for religious purposes; it literally isn't being "used" at all, and hence potentially does not meet the requirements for exemption.

It appears that Arizona is in the midst of considering legislation that would protect this fallow property from taxation.  This article in the East Valley Tribune details legislation that was first proposed in the Arizona House that would permit religious organizations to buy undeveloped property and hold it subject to exemption (this original version of the legislation also apparently would have exempted other property owned by churches, but used for non-religious purposes, like student dormitories).  Word today is that a compromise version of this bill passed the Arizona House, and although it no longer protects things like student dormitories, it does apparently still provide for exemption of fallow land (I haven't been able to find a full-text version of the amended bill; I'll try to link it when I do).

I've written before about my view that churches ought not to be given the tax benefits accorded "charities." While some clearly do produce "public goods" in the form of helping the poor and disadvantaged, many are nothing more than clubs for believers.  The modern case for general tax exemptions for churches usually rests on the notion that taxing them would be unconstitutional (a violation of the federal free-exercise clause, or similar provisions in state constitutions).  I don't agree - and think that a neutral tax law applied to religious organizations would be upheld.  (The historical rationale for religious exemptions comes from the proposition that human beings could not (or should not) tax God; there are references in ancient Egyptian history and the Old Testament regarding the proposition that human beings did not have the authority to tax priests or temples.  I think we're sort of past the "if we tax churches, plagues of locusts will destroy the fields" theory.)  Social clubs do get federal income tax exemption under Section 501(c)(7), but clubs do not get the other major benefits of charitable tax exemption under 501(c)(3) (e.g., the ability to receive tax-deductible donations or to issue tax-exempt bonds), and states generally do not provide property tax exemptions for clubs.  So let's give churches the same tax benefits we give all social clubs and nothing more.

A colleague at another institution once floated the idea that churches ought to be taxed, but get an unlimited charitable deduction for actual charitable works, like expenditures for programs to help the poor.  That also sounds fine to me.  But the idea that we should be expanding exemption for churches to property that isn't even used for religious worship, particularly given the strains on local budgets, is in my view ludicrous.

JDC 

March 13, 2013 in Church and State, State – Legislative | Permalink | Comments (1) | TrackBack (0)

Tuesday, January 22, 2013

Local Property Tax Exemption Fights Still Going Strong

A modestly-improving economy does not seem to have halted the trend of local property tax exemption fights.   Here's a roundup of recent ones, to give a flavor of the scope of what's going on.

Vanderbilt University is seeking full property tax exemption for 11 fraternity/sorority houses.  According to Vanderbilt, an agreement with the Greek organizations transferred full control over the property to Vanderbilt, and therefore the houses should be exempt like any other student housing.  The move would save Vanderbilt (whose 2013 operating budget was $3.7 billion) $74,000 in annual property taxes.  To paraphrase the late Senator Everett Dirksen, "$74,000 here and $74,000 there, and pretty soon you're talking about real money."

Meanwhile, the town of Hebron, Indiana, is fighting property tax exemption granted by the state to a set of apartment buildings. "Town Clerk-Treasurer Terri Waywood said the exemption was granted because the complex provides its tenants with classes in managing money and other services they can't get anywhere else in town."  Sounds like a tax-exemption blueprint for all the apartment complexes in Indiana; heck, who doesn't need help managing their money?  Even the folks on Downton Abbey could use some instruction on this front . . . 

In Knoxville, Tennessee, a pair of golf courses are fighting to re-establish exempt status, and Texas State University's exempt status apparently is causing some budgetary headaches (heartache?) in San Marcos, Texas.

Some days I wonder whether the solution is just to get rid of all tax exemptions . . .

JDC

 

January 22, 2013 in State – Executive, State – Judicial, State – Legislative | Permalink | Comments (0) | TrackBack (0)

Monday, October 15, 2012

A Lesson in State Property Tax Exemption Law

The dispute between the town of Vestal, NY and United Health Services over a property tax exemption for a new clinic owned by UHS offers a good lesson in the requirements for state property tax exemption.  UHS built the clinic on land leased from a for-profit corporation.   There is no dispute that the building is tax-exempt; the dispute regards an exemption on the underlying land.

While property tax exemption laws vary considerably from state to state, in most states property tax exemption requires that the exempt property meet two requirements: (1) it must be owned by an exempt charity and (2) it must actually be used "exclusively" (which usually really means "primarily") for exempt purposes.  In New York, the relevant statutory language comes from Section 420-a of the New York Real Property Tax Law, which states:

Real property owned by a corporation or association organized or conducted exclusively for religious, charitable, hospital, educational, or moral or mental improvement of men, women or children purposes, or for two or more such purposes, and used exclusively for carrying out thereupon one or more of such purposes either by the owning corporation or association or by another such corporation or association as hereinafter provided shall be exempt from taxation as provided in this section.

The New York law seems pretty clear in requiring "ownership" by an exempt entity, which is pretty clearly not the case in the Vestal-UHS dispute.   It may be, however, that UHS is claiming that the terms of its lease are the equivalent of "ownership" for New York property tax rules.  The IRS sometimes treats very long-term leasing arrangements as the equivalent of fee ownership.  In its regulations regarding tax-deferred exchanges under Code Section 1031, for example, the IRS treats a leasehold of 30 years or more as "like kind" to a fee interest.  Treas. Reg. 1.1031(a)-1(c).

Since UHS has declined to reveal the specific provisions of its lease, I don't know what it's argument is on the ownership question (there is a suggestion in the cited story that UHS is claiming that it is responsible for paying the property taxes, which is enough to meet NY law).  I'm also not sure whether New York would recognize certain leasehold interests (or obligations to pay the taxes) as the equivalent of "ownership" for property tax purposes - perhaps some reader from New York could enlighten us on that point.

But the story is a good illustration of how state property tax exemption differs from federal (or even state) income tax exemption.  Federal income tax exemption is focused solely on the "charitable-ness" of the entity seeking exemption.  Property tax exemption, on the other hand, generally requires meeting a two-pronged "ownership and use" test.  The latter can produce different results - for example, property that is owned by a charity but not used for charitable purposes (e.g., leased to for-profit entities, or not used at all - that is, fallow property) generally will not qualify for exemption, just as property used for exempt purposes but owned by a for-profit entity and leased to a charity will not qualify.

JDC

 

October 15, 2012 in State – Judicial, State – Legislative | Permalink | Comments (0) | TrackBack (0)

Thursday, July 12, 2012

Has the Tax-exemption Rumble Started in Pennsylvania?

A while ago I posted about a recent Pennsylvania Supreme Court decision on tax exemption that I speculated might reopen the door to property exemption challenges.  The President of the Pittsburgh City Council might have kicked that door open a bit recently.   A story posted on Pittsburgh's public radio station web site notes that city council president Darlene Harris is "investigating whether the city could legally challenge the tax-exempt status of large nonprofits in Pittsburgh."  Harris apparently specifically referred to the recent Pennsylvania Supreme Court decision as grounds for her investigation.

“What some call ‘nonprofit’ is not necessarily all nonprofit,” said Harris. “If you can pay for having commercials during Super Bowls, if you can pay for your name to be on the top of the highest buildings in the City of Pittsburgh… There are doctors that will not see poor people.”

It appears that the City Council is not exactly happy with the PILOT deal struck with a consortium of Pittsburgh nonprofits that we blogged about last week.  The story quotes council budget director Bill Urbanic, who stated “If these were ‘taxable organizations,’ the amount of payroll tax we would receive would be somewhere around $22 million… Also, the real estate, with the new assessment, is probably somewhere between $35 to $50 million.  So, you’re looking at somewhere around $60 to $70 million that we’re forgoing, and what we’re getting instead is $2.6 million annually.”

Has the rumble over property tax exemption started in Pennsylvania?

JDC

 

July 12, 2012 in State – Executive, State – Judicial, State – Legislative | Permalink | Comments (1) | TrackBack (0)

Thursday, June 21, 2012

Op-Ed in Support of Minimum Charity Care Requirement for Nonprofit Hospitals

Pablo Eisenberg, a senior Fellow at the Georgetown Public Policy Institute, opined in a recent piece for the Huffington Post that Congress needs to set a benchmark for nonprofit hospitals to provide a minimum amount of charity care in exchange for their tax-exempt status.  Eisenberg discusses a recent investigative report on North Carolina nonprofit hospitals revealing increases in profits, reserves and compensation packages for their executives in recent years while less than 3 percent of their operating budgets were spent on charity care.  Eisenberg also references the recent legislative solution to the standoff between Illinois hospitals and the counties seeking to require a minimum charity care standard in exchange for property tax exemption. He frames that solution as a success for those hospitals in avoiding revocation of their tax exemptions.  A federal legislative solution is necessary, Eisenberg opines, to ensure nonprofit hospitals "earn" their tax-exempt status by adequately serving the poor.

NAM

June 21, 2012 in Federal – Legislative, State – Legislative | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 6, 2012

A Water Park as an Exempt Religious Organization?

I always tell my students in my basic income tax class that I usually forge exam problems from stuff I read in the press, because I can't possibly make up stuff as good as what I read.

And so it is today. Hot on the heels of my post yesterday regarding the definition of a religious organization comes a story in the Milwaukee newspaper that the local Jewish Community Center (JCC) is seeking tax exemption for a family water park. According to the story,

In a legal brief, the JCC noted that what appears to be purely recreational activity "has religious and community-building purposes." At the park, members observe Shabbat, attend kosher barbecues and Jewish holiday events, and play Israeli games. All of the signs in the facility are in English and Hebrew.

<Sigh> OK - so maybe not exactly a claim that the water park is a religious organization, but close. On the other hand, JCC does appear to have raised one interesting issue: why should a YMCA be tax-exempt under Wisconsin law, but not a family water park? Why, indeed . . .

JDC

June 6, 2012 in Current Affairs, State – Executive, State – Legislative | Permalink | Comments (1) | TrackBack (0)

Monday, June 4, 2012

Illinois Enacts Hospital Property Tax Exemption Standards

Late last week, the Illinois Legislature enacted a new law setting specific standards for nonprofit hospitals seeking property tax (and sales tax) exemptions.   The new law, SB2194 (the tax exemption provisions begin on page 48 of the PDF file linked above), essentially requires nonprofit hospitals to provide unreimbursed services to the poor or government entities in an amount at least equal to the property tax that would have been assessed on the hospital's property in order to retain exempt status.  For-profit hospitals would get a property-tax credit for the value of such services.

The new law is a response to the Illinois Supreme Court's decision in the Provena Covenant hospital exemption case, which we have previously blogged about a number of times (key posts are here and here). In that case, a plurality of the court held that Provena Covenant hospital in Urbana, Il failed to provide sufficient charity care to qualify for property tax exemption, although the court declined to set a specific standard for how much charity care would be enough.  The resulting uncertainty created a mess, and this legislation was designed to end the uncertainty.

While I'm not going to attempt a detailed dissection of the legislation in this blog post, I do want to comment on a few items.  The first is that while the bill does retreat a bit from the classic community benefit formulation of tax exemption for nonprofit hospitals in that it focuses on the unreimbursed costs of services to the poor or underserved populations as the only things that "count" for tax exemption purposes, the breadth of the definition of those services is very wide indeed.   In addition to classic charity care (not charging charity patients at all or heavily discounting their services), Medicaid shortfalls count, as do Medicare shortfalls for so-called "dual eligible" patients (e.g., Medicare-eligible patients that also meet eligibility requirements for Medicaid).  Also counting in the calculation are

the portion of unreimbursed costs of the relevant hospital entity attributable to providing, paying for, or subsidizing goods, activities, or services that relieve the burden of government related to health care for low-income individuals. Such activities or services shall include, but are not limited to, providing emergency, trauma, burn, neonatal, psychiatric, rehabilitation, or other special services; providing medical education; and conducting medical research or training of health care professionals. 

While the hospital in question will have to make an allocation for the above costs attributable to low-income inividuals, you can see that the "community benefit" theme still runs strongly in this legislation. So strongly, in fact, that I seriously doubt the legislation will effect any change to nonprofit hospital behavior.  In fact, a hospital that "missed" its numerical target could simply cut a check to an appropriate entity (e.g., a clinic for the poor) and maintain exemption that way.  And the fact the legislation was supported heavily by the hospital industry causes me to think that my "serious doubt" will prove to be reality.

I also wonder if the result of having a specific mathematical target (the property tax that would otherwise have been due) will lead over time to fewer services for the poor than more.  While I certainly don't see any hospital CEO getting up in front of her Board and requesting changes in policies to reduce services for the poor (that would certainly get a headline in the Chicago Tribune, if not the New York Times!), one wonders if over time more subtle changes in policy (or lack of new policies) will result in a "remarkable accident" where hospitals all end up just meeting the statutory requirements in order to retain exemption.  As I told one reporter, call me in five years and let's see what has happened.

In addition, there is some question whether the legislation is in fact constitutional.   The Illinois Supreme Court had previously held in the Eden Retirement Center case that what constitutes a "charity" for property tax exemption purposes is in the first instance a constitutional matter, and therefore the legislature may not contradict the courts interpretations of charity for property tax exemption purposes. How this plays out with SB2194 is an interesting question.   On the one hand, the bill does stick to defining broad concepts laid out by the Illinois Supreme Court in Provena - the concept of charity care as a broad gift to the community and the overall concept of relief of government burden as a sine qua non of property tax exemption.  On the other hand, the bill curiously "overrules" some specifics of the Provena case - for example, the plurality in Provena quite clearly stated that Medicaid shortfalls do not count for tax exemption purposes, while this bill quite clearly says they do.

Finally, there is the question whether this legislation will become a model for other states.  (If I were in a snarky mood, I might ask why anyone in their right mind would copy something passed by the Illinois Legislature, but as the saying goes, even a stopped clock tells the right time twice a day).  The truth is that I doubt it.  The issue of nonprofit hospital tax exemption has been settled in many states either by statute (e.g., New York, Pennsylvania, Texas); or prior litigation (e.g., Vermont, in the Medical Center Hospital v. Burlington case).   While there are a few states where the issue may still be open, I didn't see any rush by state departments of revenue or local county assessment boards to copy the Provena analysis, and I similarly doubt there will be much interest in the Illinois solution to the Provena case.   

JDC

 

 

 

 

 

June 4, 2012 in State – Legislative | Permalink | Comments (3) | TrackBack (0)