Two Cases Illustrate The Fine Distinctions Of Tax-Exemption Law

A not-for-profit organization that operates a CCRC should be entitled to a property-tax exemption, right? Not necessarily—or at least not always. To establish the exempt status, the organization must first structure or position the operation so that it meets the religious-use and/or charitable-use tests required for a property-tax exemption. Then, the CCRC must remain in compliance with those standards or requirements to ensure that the exemption isn’t revoked. “Local tax assessors can attempt to revoke the exemption under certain circumstances,” according to Attorney John Durso, partner at Ungaretti and Harris in Chicago, whose law firm represents various not-for-profit senior living providers. “And we could be seeing more challenges than in the past due, in part, to the downturn in the economy. Government at every level is in need of more tax revenues.”

Property-tax exemptions are based on state tax law, so the rules as to who or what is entitled to an exemption can vary from state to state. “It’s not a black-and-white issue,” Durso added. “Not-for-profit senior living providers must analyze how the local laws in their particular state require them to structure their operation in order to position themselves properly to receive and to maintain their exempt status.”

Most states, it’s fair to say, exempt from real estate taxes any property that is used for educational, religious, and/or charitable purposes. State legislatures have tried to limit the exemption to property that is used “exclusively” for those purposes, but courts have held that a property satisfies the requirement if it is “primarily” used for one or more of those purposes. And if the property is used incidentally for secular purposes, that does not destroy the exemption.

Religious use: In applying religious-use standards, taxing authorities look to the intentions and motivations of the property owner when establishing and maintaining the facility and whether the activities are religiously or secularly motivated—that is, whether they carry out the mission of the religious organization. It does not preclude the activities from being operated as a business or commercial enterprise. The U.S. Supreme Court and lower courts in many jurisdictions have broadly defined religious use and purpose, holding that they relate to more than a physical building used as a house of worship and services conducted therein. “Religious-use exemptions for faith-based not-for-profits will become more important as charitable use is more narrowly defined,” noted Durso.

Charitable use: Charitable-use standards may be applied to almost any activity of a not-for-profit organization if that activity is within the law and promotes the well-being of society. The criteria do not preclude an organization from charging a fee to residents who can afford to pay if the fee is waived for those who need the benefits but are unable to pay.

“The care of seniors, whether they have financial means or are destitute, doesn’t really change their needs,” explained Durso. “Some courts have ruled that housing for seniors, in and of itself, is a charitable endeavor despite their exact income or financial situation. Seniors have certain physical, security, and other emotional issues, so it doesn’t matter whether they have financial means or not. I would also submit that people who live in a CCRC setting live happier, healthier, longer lives. And they are less likely to use up their assets as fast as they would if they were to go straight into a nursing home. As a result, they are less likely to need public aid. So in a sense, a CCRC can relieve the burden of government, which is another basis for exemption.”

How much charity care is enough? In some states, the court cases simply refer to “primarily charitable.” So besides the specific use of the property or premises or the number of units devoted to needy residents, activities such as community service could be used to establish the charitable nature of the organization.
When applying for an exemption, the taxpayer shoulders the burden of proof as to its right to an exemption. When an exemption is revoked, the taxing authority must present compelling evidence that the original determination was incorrect. Even in that event, however, the organization seeking the exemption still must expend time and money to defend itself and prove that it and/or the use does comply.

Two recent cases—one pending in Chicago and another in Rye, New York—illustrate the complexity of the exemption issue and the fine distinctions that are sometimes made by taxing authorities and/or the courts. These examples (see August 2009 issue of Senior Living Business) also illustrate how tricky, time-consuming, and ultimately costly it can get when local authorities question a CCRC’s eligibility for a property-tax exemption.