Category Archives: charity

Are Religious Organizations Required to Pay Property Taxes?

Tax-exempt religious organizations are generally exempted from paying property taxes.  To avail itself of this exemption, the religious organization must show that:

     (1) the owner of the property is organized exclusively for a tax-exempt purpose;

     (2) the property is actually and exclusively used for the tax-exempt purpose; and

     (3) the owner’s operation and use of the property is not for profit.

This test was recently applied by the Appellate Division of the Superior Court of New Jersey in City of Newark of the County of Essex v. (148) Block 1861, Lot 24, 605-611 Central Avenue, 2010 WL 3932996 (N.J. Super. A.D. September 27, 2010). In 2007, the City of Newark filed suit against Yes Lord Ministries, Inc. (“Yes Lord”) for back taxes.  In 2008, Newark rejected that application. The trial court then granted summary judgment in favor of Newark, allowing it to foreclose on the property for failure to pay taxes.  Yes Lord appealed to the Appellate Division.

In rendering its decision, the Appellate Division noted that the building was purchased by Yes Lord in 2004 and consisted of approximately 20,000 square feet.  The warehouse portion of it was structurally intact; but the offices were completely unusable due to roof leakage and dangerous wiring.  Yes Lord intended to renovate the property for church activities, but that work was delayed by financial obstacles.  Yes Lord never paid property taxes on the property and it owed more than $120,000 in delinquent taxes and redemption fees when Newark started the lawsuit.

Yes, Lord claimed that the warehouse portion of the property was being used for meetings of men’s and women’s auxiliary groups related to church activities and for other prayer services.  However, the property was not open to the public for regular church services and Yes Lord did not possess a Certificate of Occupancy for the property.  Newark conceded that Yes Lord was organized exclusively for a recognized tax-exempt purpose and that its use of the property was not for profit.  However, Newark claimed that Yes Lord was not “actually using” the property for the tax-exempt purpose.

The Court relied heavily upon the decision in Grace & Peace Fellowship Church, Inc. v. Cranford Twp., 4 N.J. Tax 391 (Tax 1982).  In Grace & Peace, the Tax Court determined that “an uncompleted church building was not exempt from taxation because occasional meetings of church auxiliary and prayer groups were being held in the building during the construction work.”  Grace & Peace Fellowship Church at 394-95, 401.  The Tax Court also noted that the church did not receive a Certificate of Occupancy until after the date of tax assessment, despite using  the property for religious services.  The Tax Court reasoned that “the public benefit underlying the tax exemption had not yet begun and that denying tax exemption was both consistent with the language of the statute (N.J.S.A. 54:4-1) and an appropriate incentive for the exempt organization to complete the construction.”  Id. at 397-401.

The Appellate Division held that Yes Lord was not “actually using” the property for the tax-exempt purpose.  It further held that New Jersey law (N.J.S.A. 54:4-1 et seq.) implied that the “actual use” of the property must be legally authorized.  Thus, a Certificate of Occupancy was required to use the warehouse.  Yes Lord did not have a Certificate of Occupancy, so its use of the property was not legally authorized and it was not entitled to exemption from property taxes on it.

Comments/Questions: ljm@gdnlaw.com

© 2010 Nissenbaum Law Group, LLC

How Can a Charity Lose Its Tax-Exempt Status?

A charity’s tax-exempt status under §501(c)(3) of the Internal Revenue Code may be revoked for many reasons. However, the most common is if the charity stops operating exclusively for charitable purposes.  The United States Court of Appeals for the Third Circuit has developed and applied a 2-prong test “drawn directly from the wording of §501(c)(3) and the legislative history of its enactment. The statute explicitly cites as qualifying for tax exemption those entities ‘organized exclusively for religious, charitable . . . or educational purposes.’”  Presbyterian & Reformed Publishing Co. v. Comm’r of Internal Revenue, 743 F.2d 148, 152 (3d Cir. 1984).  That inquiry requires courts to determine: (1) the purpose of the organization claiming tax-exempt status and (2) to whose benefit the organization’s activities inure.

In Presbyterian & Reformed Publishing Co., the lower Tax Court affirmed revocation of tax-exempt status for Presbyterian & Reformed Publishing Co. (“P&R”).  The Tax Court reasoned that P&R, a religiously-oriented publishing house that was tax-exempt since 1939, had become a profitable venture as of 1980. By that point it had only a distant relationship to a church. P&R was engaged in the publication of religiously-oriented books that had become similar to a commercial enterprise.

In reaching its decision, The Tax Court considered the following factors: (a) that P&R’s net and gross profits between 1969 and 1979 increased dramatically; (b) that the prices set for its books generated consistent and comfortable profit margins; and (c) that it was in competition with commercial publishers as a result of its purchase and sale of books with a commercial publishing house. After weighing these factors, the Tax Court determined that P&R was not operating exclusively for charitable purposes and revoked its tax-exempt status.

However, that decision was reversed on appeal. The Third Circuit disagreed with the Tax Court and held that P&R would not lose its 501(c)(3) status.  The Third Circuit cited the 2-prong inquiry referred to above, which was drawn from the plain language of the statute and its legislative history.  That legislative history included a statement by the sponsor of the statute, Senator Bacon, who made the following comments:

[T]he corporation which I had particularly in mind as an illustration at the time I drew this amendment is the Methodist Book Concern, which has its headquarters in Nashville, which is a very large printing establishment, and in which there must necessarily be profit made, and there is a profit made exclusively for religious, benevolent, charitable, and educational purposes, in which no man receives a scintilla of individual profit.  Of course if that were the only one, it might not be a matter that you would say we would be justified in changing these provisions of law to meet a particular case, but there are in greater or lesser degree such institutions scattered all over this country.  If Senators will mark the words, the amendment is very carefully guarded, so as not to include any institution where there is any individual profit, and further than that, where any of the funds are devoted to any purpose other than those which are religious, benevolent, charitable, and educational. (emphasis added)  Presbyterian & Reformed Publishing Co. at 153.

In its analysis, the Third Circuit first determined to whose benefit the organization’s activities inured.  The Court determined there was no factual basis for concluding that P&R’s increased commercial activity inured to the personal benefit of any individual.  There was no evidence of personal enrichment of any individual at P&R.  In fact, the highest salaried employee of P&R in 1979 received $15,350; none of the seven other paid employees received annual salaries over $12,500 and five were paid under $6,250.  The Court was satisfied that the benefits of the organization’s activities did not inure to any individual.  For comparison purposes, see Church of Scientology of California v. Comm’r of Internal Revenue, 412 F.2d 1197 (Ct. Claims 1969) (since church allowed leader of Scientology, L. Ron Hubbard, to receive ten percent of church’s gross income instead of a salary, the earnings of the church directly inured to the private benefit of Mr. Hubbard and tax-exempt status was denied to the Church of Scientology).

Second, the Third Circuit determined P&R’s purpose.  It held that its purpose was religious, despite the fact that it was not formally affiliated with or under the control of any particular church.

Third, the Third Circuit considered the Tax Court’s concern that P&R was accumulating “profits.”  As early as March, 1974, P&R notified the IRS that it was accumulating surplus cash as a “building fund” and actually used this fund to purchase land in Harmony, New Jersey.  In 1978, P&R built a combined warehouse/office building on that site using the fund and in 1979 purchased equipment using the fund.  P&R’s notice to the IRS and the IRS’ recognition of P&R’s expansion led the Third Circuit to conclude that this accumulation of cash did not amount to “profits” such that P&R’s tax-exempt status was in jeopardy.  The Third Circuit was satisfied that P&R had not deviated from its claimed tax-exempt purpose, despite the accumulation of a cash surplus.

On this basis, the Third Circuit reversed the decision of the Tax Court and permitted P&R to maintain its tax-exempt status.

Comments/Questions: ljm@gdnlaw.com

© 2010 Nissenbaum Law Group, LLC

Can the State Require Financial Disclosure of How the Money is Distributed When You Donate Items to a Charity?

Texas recently passed a law that applied to professional resellers that collect clothing and household goods in the name of charities. The law imposed certain disclosure requirements on those resellers. The disclosures were meant to apply in three situations:
 
     (1) if none of the money will be paid to a charitable organization;

     (2) if only a percentage of the money will be paid to a charitable organization; and

     (3) if a flat fee for use of the charitable organization’s name will be paid by the reseller.

In each of those scenarios, the law required the information to be disclosed to the public.

A number of charitable organizations in Texas brought a lawsuit to overturn this law. They based their challenge largely on the grounds that it violated the First Amendment to the United States Constitution, as applied to the states through the Fourteenth Amendment. The First Amendment prevents the government from restricting free speech, which has been interpreted to apply to certain restrictions on fundraising by non-profit charities.

The United States District Court for the Northern District of Texas, Dallas Division decided the lawsuit, National Fed. of the Blind of Texas, Inc. v. Abbott, 682 F.Supp.2d 700 (N.D. Tx. 2010), on February 1, 2010.  In analyzing the issues, the District Court relied upon United States Supreme Court precedent in which the Supreme Court determined that disclosure requirements would interfere with fundraising by resellers on behalf of charities.  The District Court also held that the requirements discriminated against small charities that must use resellers out of necessity.  Larger charities that could absorb the costs and did not use resellers were able to avoid the disclosure requirements.  The Supreme Court also suggested alternatives to the disclosure requirements, such as: 1) requiring professional solicitors to disclose fundraising costs to the public; 2) vigorously enforcing anti-fraud laws; or 3) requiring resellers to disclose their identity and status as professional solicitors.

Following Supreme Court precedent, the District Court in Texas held that the disclosure requirements were not constitutional.  The requirement to disclose how they paid the charities and that donated items would be re-sold for profit was not constitutional because the requirements only applied to charities that used resellers.  However, the more limited aspect of the law requiring resellers to disclose their name and status as a for-profit entity was sufficiently narrowly tailored and, therefore, was constitutional.  The District Court stated:

Although charitable organizations are not for-profit entities, they are certainly selling the donations for and at a profit.  As passed, the Act’s disclosure requirements are unconstitutionally underinclusive because they discriminate against charitable organizations who hire professional resellers to solicit and sell donations in favor of charitable organizations who conduct the solicitation and resale in-house.  Texas is constitutionally permitted to put its citizens on notice that the clothing and household goods donated are going to be resold instead of being reused or donated.  But if Texas chooses to do so, it must require all organizations engaging in this resale activity to inform the public of this fact, not jut some of these organizations.

National Fed. of the Blind of Texas, Inc., 682 F.Supp.2d at 714-15.

The District Court also held that disclosure was not constitutional where only a percentage of the money would be paid to a charitable organization, nor where a flat fee for use of the charitable organization’s name would be paid by the reseller.  There were many reasons that this violated the Constitution. Two examples were that such requirements (a) were content-based restrictions of free speech which violated the First Amendment and (b) likely would be enforced against different classes of people unequally, thus violating the Equal Protection Clause of the Constitution.

Comments/Questions: ljm@gdnlaw.com

© 2010 Nissenbaum Law Group, LLC