Banking & Finance, Law, and Nonprofits

Court clarifies tax rules for charities

State Supreme Court says charging fees for services does not necessarily disqualify nonprofits from tax exemptions.

August 4, 2017
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The Michigan Supreme Court has clarified one of the guidelines under which charitable organizations may qualify for real and personal property tax exemptions.

According to Terry Zabel, a tax attorney at Rhoades McKee, there has been a trend in Michigan of local tax authorities denying tax exemptions to charities in the past few years.

“When the recession hit, a lot of assessors were put under pressure to obtain additional funding for their cities or townships,” Zabel said. “One of the things that has happened with a lot of taxing authorities is they have withdrawn charitable exemptions and put the properties back on the (tax) rolls.”

The court issued a new opinion on this subject June 28 in a case called Baruch SLS Inc. v. Tittabawassee Township.

Baruch, a faith-based adult foster care provider on the east side of the state, sought real and personal property tax exemptions as a charitable institution for its Stone Crest Assisted Living facility for 2010-12, based on the fact that it provided an income-based subsidy to residents who had made at least 24 monthly payments to Baruch.

The Michigan Tax Tribunal and the State Court of Appeals each denied the exemption on grounds Baruch did not qualify as a charitable institution under factors set forth in Wexford Med Group v. City of Cadillac, particularly the third factor, which requires organizations to provide charity on a nondiscriminatory basis. The lower courts said that by limiting the availability of its income-based subsidy, the nonprofit did not meet the requirement for nondiscriminatory services.

The case moved to the Supreme Court, which heard arguments on whether to grant the exemption or take other peremptory action.

On the grounds the lower courts did not consider Baruch’s policies under a proper understanding of Wexford’s third factor, the court vacated the lower courts’ opinions and remanded the case to the Tax Tribunal, where a hearing is set for Sept. 19.

In the original Wexford ruling this opinion clarifies, the Michigan Supreme Court said a charitable institution:

  1. Is a nonprofit
  2. Is organized chiefly, if not solely, for charity
  3. Serves any person who needs the particular type of charity being offered (i.e., it does not offer its charity on a discriminatory basis by choosing whom, among the group it purports to serve, deserves the services)
  4. Brings people’s minds or hearts under the influence of education or religion; relieves people’s bodies from disease, suffering or constraint; assists people to establish themselves for life; erects or maintains public buildings or works; or otherwise lessens the burdens of government
  5. Can charge for its services as long as the charges are not more than what is needed for its successful maintenance
  6. Need not meet any monetary threshold of charity as long as its overall nature is charitable

Zabel said the high court’s opinion was the lower courts were “using the wrong analysis for discrimination” in the third factor.

“The Supreme Court said there has to be some requirement for who receives the charity, otherwise you have a first-come, first-served criterion, and that’s not to the benefit of the organization or the public,” he said. “So, there needs to be some criteria for who receives the gift.

“The new standard that has come out of this Baruch case is as long as the charitable institution can show that the restriction on the gift (Factor No. 3) is reasonably related to the goal of the charitable organization (Factor No. 4), it meets that factor, and it should be entitled to the exemption.”

According to the Michigan Nonprofit Association, Michigan has 47,000 nonprofits. Zabel said the clarification in the Baruch case likely will encourage nonprofits across the state to reapply for exemptions — or apply for the first time, in some cases.

“Maybe (a) client didn’t file for exempt status because of the trend of how assessors were treating these properties … now they might want to see if they’ll qualify,” he said.

“The clarity will be beneficial to the assessing officers, as well as the charitable organizations. There was a big void there, and the economic pressures caused some of the assessors to deny the exemptions.”

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