Rejecting Charitable Institution Exemption – Michigan

Author: LegalEase Solutions 

What basis is recognized in case law to reject a 501c (3) entity a charitable institution exemption?

In the recent unreported case law Camp Retreats Foundation, Inc. v. Township of Marathon Not Reported in N.W.2d, 2012 WL 1698379 Mich.App.,2012, the appellate court reversed the tax tribunal’s decision and remanded for entry of judgment in favor of Camp Retreats Foundation. The gist of the facts was that Camp Retreats Foundation, Inc., a Michigan non-profit corporation, owns 106 acres of land in Marathon Township. The property includes a lodge, dining hall, athletic facilities, two swimming pools, residence dormitories, a prayer hall, and other buildings. Nonprofit organizations primarily associated with the Muslim faith use the facility for camps, retreats, and other philanthropic activities. Camp Retreats is a 501(c)(2) organization. 501(c)(2) organizations are “[c]orporations organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt under this section,” e.g. a 501(c)(3) corporation. 26 USC 501(c)(2). The Tax Tribunal denied Camp Retreats a charitable exemption from ad valorem taxation, finding that it did not meet the definition of a charity.

In the above case, the court discussed the Wexford Med Group case, 474 Mich. 192, where our supreme court examined the contours of the charitable institution exemption. The initial test that must be applied to property for which a charitable exemption is claimed includes the following components:

(1) The real estate must be owned and occupied by the exemption claimant;

(2) The exemption claimant must be a … charitable … institution;

(3) The claimant must have been incorporated under the laws of this state;

(4) The exemption exists only when the buildings and other property thereon are occupied by the claimant solely for the purposes for which it was incorporated. [Id. at 203 (quotation marks and citation omitted).]

The disputed issue in this case was whether the Tax Tribunal misinterpreted the law by finding the nature of Camp Retreats to be “recreational” rather than charitable. The court of appeals ultimately reversed the Tax Tribunal’s decision and remanded for entry of judgment in favor of Camp Retreats Foundation. The court did so by reexamining a few of the court’s findings. One was that the 501c3 parent company of the 501c2 camp organization occupied the property minimally – 2-4 weeks a year – and caretaker overseeing campgrounds. The lower court however found that this minimally satisfied the occupancy requirement. Second was that the purpose of the organization was recreational instead of charitable for various reasons (to promote sports and recreation), including that the organization was not open to all but more for those of the Muslim faith. The court of appeals found that the camp was open to public but advertising was targeted to those of Muslim because word of mouth marketing and the gender separation the camp offers. The Court also declared that organization can target a particular group, just not discriminate within members of that group. Although the articles of corporation indicated the focus on those of the Islamic faith, the court asserted that it is important to look at all the evidence and the evidence showed that people of other faiths were welcome and never prevented from attending. Another relevant case the court draws from is, Gull Lake Bible Conference Ass’n v. Ross Twp, 351 Mich. 269; 88 NW2d 264 (1958).

In Liberty Hill Housing Corp. v. City of Livonia 480 Mich. 44746 N.W.2d 282, the court held that a nonprofit corporation that leased housing to low-income individuals was not entitled to property tax exemption.  In the above case, the nonprofit corporation appealed the Tax Tribunal’s denial of property tax exemption for houses that nonprofit corporation owned and leased to disabled and low-income individuals. The Court of Appeals, 2006 WL 1328885, affirmed holding that:

  1. to occupy property, for purposes of property tax exemption, charitable institution has to at a minimum have a regular physical presence on the property, overruling Pheasant Ring v. Waterford Twp., 272 Mich.App. 436, 726 N.W.2d 741;
  2. nonprofit corporation did not occupy the property and, thus, was not entitled to property tax exemption.

In Wexford Medical Group v. City of Cadillac, No. 127152 (MI 5/4/2006) (MI, 2006), Court held that nonprofit provider of health care was entitled to ad valorem property tax exemption as a charitable institution. In this case, a nonprofit provider of health care appealed Tax Tribunal’s refusal to grant it a charitable institution exemption and public health purpose exemption under the General Property Tax Act. The Court of Appeals affirmed. On appeal, the Supreme Court held that:

  1. if the overall nature of an institution is charitable, it is a charitable institution, for purposes of property tax exemption, regardless of how much money it devotes to charitable activities in a particular year, and
  2. provider was entitled to property tax exemption as a charitable institution.

The decision was reversed in part and vacated in part. While considering the above case, the court observed as follows:

“[a] corporation does not qualify for a tax exemption merely because it is structured to be nonprofit and in fact makes no profit,” “[b]y the same token, a nonprofit corporation will not be disqualified for a charitable exemption because it charges those who can afford to pay for its services as long as the charges approximate the cost of the services.” citing Michigan Sanitarium & Benevolent Ass’n v Battle Creek, 138 Mich 683; 101 NW 855 (1904).

Furthermore, the court held that for a claimant to be entitled to tax exemption:

(1) the real estate must be owned and occupied by the exemption claimant;

(2) the exemption claimant must be a nonprofit charitable institution; and

(3) the exemption exists only when the buildings and other property thereon are occupied by the claimant solely for the purposes for which it was incorporated.

Further, “it is not enough, in order to exempt such associations from taxation, that one of the direct or indirect purposes or results is benevolence, charity, education, or the promotion of science. They must be organized chiefly, if not solely, for one or more of these objects.” (Wexford Medical Group v. City of Cadillac, P. 205). The Court further observed that “a corporation is sufficiently charitable to entitle it to the privileges of the act when the charges collected for services are not more than are needed for its successful maintenance.” (Id. P.206). The court noted an ALR discussion on tax exemption for charitable institutions as follows:  “The determination of the exemption in a particular case seems to depend, in the last analysis, upon two things: First, whether the organization claiming the exemption is a charitable one; and, second, whether the property on which the exemption is claimed is being devoted to charitable purposes. In general, it may be said that anybody not organized for profit, which has for its purpose the promotion of the general welfare of the public, extending its benefits without discrimination as to race, color, or creed, is (Id. P.207) a charitable or benevolent organization within the meaning of the tax exemption statutes.

In determining whether the property is being devoted to charitable purposes within the meaning of the statute, the rule that tax exemptions are to be construed strictly is generally applied, with the result that, in the absence of a specific charter or statutory provision, no property owned by a charitable institution, but held as a source of income, can escape taxation, although the fact that a charge is made for benefits conferred, against those who are able to pay, in no way detracts from the charitable character of an organization.”

In ProMed Healthcare v. City of Kalamazoo, 249 Mich.App. 490, 644 N.W.2d 47 (Mich. App., 2002), the court discussed the burden of proving one’s entitlement to a tax exemption. In its initial opinion, the Tax Tribunal ruled that a petitioner seeking a tax exemption bears the burden of proving its entitlement to the exemption beyond a reasonable doubt. In order to determine the applicable burden of proof in tax exemption cases, the court examined precedents from the Michigan Supreme Court. In Ladies Literary Club v. Grand Rapids, 409 Mich. 748, 754, 298 N.W.2d 422 (1980), the Court quoted with favor the following passage from Justice Cooley’s treatise on taxation: “Exemptions are never presumed, the burden is on a claimant to establish clearly his right to exemption, and an alleged grant of exemption will be strictly construed and cannot be made out by inference or implication but must be beyond reasonable doubt’ (Quoting 2 Cooley on Taxation [4th ed.], § 672, pp. 1403-1404 [emphasis added].) In Ladies Literary Club v. City of Grand Rapids, 409 Mich. 748, 754, 298 N.W.2d 422 (Mich., 1980), court cited Detroit v. Detroit Commercial College, which determined that an institution seeking an educational exemption must fit into the general scheme of education provided by the state and supported by public taxation. This proposition was refined in David Walcott Kendall Memorial School v. Grand Rapids, 11 Mich.App. 231, 160 N.W.2d 778 (1968), which declared that an educational exemption may be available to an institution otherwise within the exemption definition, if the institution makes a substantial contribution to the relief of the burden of government. However, the court held that, it cannot be maintained that were it not for the Ladies Literary Club’s programs, which enhance educational and cultural interests, the burden on the state would be proportionately increased. The club’s programs do not sufficiently relieve the government’s educational burden to warrant the claimed educational institution exemption. The Court further stated that the tribunal referee was correct in finding that plaintiff “is essentially a social club which happens to engage in some non- profit activities. While the community may benefit culturally from (plaintiff’s) activities, these activities are not the type which entitles one to an exemption because he has relieved the community from the expense of a like service.”

Although, recognizing that questions of tax exemption are strictly construed, the court in Ladies Liberty Club stated that they must not construe the instant statute so narrowly as to do violence to the Legislature’s intent. The Court referred Justice Cooley’s words in his treatise on taxation:    “When it is said that exemptions must be strictly construed in favor of the taxing power, this does not mean that if there is a possibility of a doubt it is to be at once resolved against the exemption. It simply means that if, after the application of all rules of interpretation for the purpose of ascertaining the intention of the legislature, a well founded doubt exists, then an ambiguity occurs which may be settled by the rule of strict construction. The rule of strict construction does not relieve the court of the duty of interpreting the exemption by the ordinary rules of construction in order to carry out the intention of the legislature * * *. A fair and reasonable construction of the statute or contract must always be adopted, giving the language used its ordinary meaning, and taking into consideration the purpose and spirit of the exemption as well as the public policy entertained at the time * * * when the statute was passed.” 2 Cooley on Taxation (4th ed.), § 674, pp. 1415-1417.

In view of the above, the court of appeals concluded by observing that: “To read the statute so narrowly would obviously frustrate the intent of the Legislature. Here, as in National Music Camp v. Green Lake Twp., 76 Mich.App. 608, 257 N.W.2d 188 (1977), a narrow reading of the legislation, appropriate a half century ago, would be invalid today. Education, even in a traditional sense, does not stop with an end to formal schooling. The broad scope of the Ladies Literary Club’s theatrical, [409 Mich. 764] library, benevolent, charitable and educational functions confers a significant impact on a large urban area. This enables citizens, without regard to wealth or status, to partake of important cultural activities otherwise denied the populace at large. (Emphasis added.) By whatever statutory category-theater, library, benevolent, charitable or educational-the Ladies Literary Club merits exemption under the statute. As the plaintiff organization exists only to make this distinct and significant contribution to the public welfare, we find that it is statutorily exempt from real property taxation.” 92 Mich.App. 570-571.

The case Pheasant Ring v. Waterford Tp.272 Mich.App. 436726 N.W.2d 741, was decided on decided October 17, 2006 by the Court of Appeals of Michigan stating that a landowner which rented homes to persons with autism qualified for property tax exemption for charitable institutions. While deciding the case, the Court of Appeals held that: landowner was a “charitable institution”; landowner qualified for exemption even though it did not personally occupy the premises but rather rented premises to persons with autism; and Tribunal’s opinion was sufficient to afford meaningful appellate review.

In ProMed Healthcare v. City of Kalamazoo, 249 Mich.App. 490, 644 N.W.2d 47 (Mich. App., 2002), the court observed that several decisions of this Court have more directly addressed the appropriate burden of proof in tax exemption cases.  Courts hold that the standard of proof depends on the type of claim that the petitioner advances before the Tax Tribunal. The Court ruled that the beyond a reasonable doubt standard applies when the petitioner attempts to establish that an entire class of exemptions was intended by the Legislature. However, the preponderance of the evidence standard applies when the petitioner attempts to establish that it is a member of an already exempt class. Four years later, in Michigan United Conservation Clubs v. Lansing Twp., 129 Mich.App. 1, 11, 342 N.W.2d 290 (1983), the Court held that a petitioner before the Tax Tribunal must establish its entitlement to a tax exemption beyond a reasonable doubt. The decision did not discuss the Retirement Homes ruling and did not indicate that the applicable burden of proof differed depending on the type of claim advanced by the petitioner. Rather, the decision relied on Justice Cooley’s remarks as quoted in Ladies Club.

To conclude, for the purpose of rejecting a 501c (3) entity as a charitable institution exemption, typically the courts rely on the initial test standard set forth by the Supreme Court in the decision  Wexford Med Group, 474 Mich. 192. Charitable exemption claim includes the following components:

(1) The real estate must be owned and occupied by the exemption claimant;

(2) The exemption claimant must be a … charitable … institution;

(3) The claimant must have been incorporated under the laws of this state;

(4) The exemption exists only when the buildings and other property thereon are occupied by the claimant solely for the purposes for which it was incorporated.

“It is not enough, in order to exempt such associations from taxation, that one of the direct or indirect purposes or results is benevolence, charity, education, or the promotion of science. They must be organized chiefly, if not solely, for one or more of these objects. Wexford Medical Group v. City of Cadillac, No. 127152 (MI 5/4/2006) (MI, 2006)

What have the case outcomes been when membership dues are at issue (Wexford factor 5)? What are the basic requirements? What does the court look at (e.g., actual income and expenses, or the organization structure regardless of the income and expenses)? What types of documentation have been presented?

In Michigan Sanitarium & Benevolent Ass’n v Battle Creek, 138 Mich 676; 101 NW 855 (1904) the court dealt with tax exemption of property gifted to another with the condition that the property be used “`for the purpose of founding or endowing a hospital or other charitable asylum within this State, for the care or relief of indigent or other sick or infirm persons . . . .'” Id. at 680. A dispute arose when the respondent city taxed the petitioner’s property because the respondent believed, among other things, that the petitioner was not using the property for charitable purposes as required by the statute. In determining whether the petitioner was a “charitable” hospital the court examined the nature of the petitioner’s activities. The court observed that the petitioner operated a hospital in which it treated sick and infirm persons for free and some at a reduced rate. Id. at 682. While most of the petitioner’s patients paid “a regular schedule of prices fixed by [the petitioner’s] management,” the court concluded “that the charges collected from patients were not larger than were necessary to the successful maintenance of the institution.” Id. at 682-683.

A charitable institution can have a net gain—it is what the institution does with the gain that is relevant. Auditor General v R B Smith Mem Hosp Ass’n, 293 Mich 36, 41; 291 NW 213 (1940).  In this case, the court observed that the facts of the case compelled the conclusion that the hospital was tax-exempt. The hospital operated as a public hospital, rather than a private one, relying heavily on donations of money and volunteer work from the community. Id. at 40. It was maintained without anyone profiting monetarily from it, and it did not pay any dividends. Id. And surpluses, when there were any, were invested back into the hospital and used to maintain it. Id. The court held that the hospital was entitled to tax exemption and noted that an institution does not lose its charitable character merely because “in some years, instead of the usual deficit, it shows a small surplus which is used to supply needed equipment.” Id. at 41.

In Michigan Baptist Homes & Dev Co v City of Ann Arbor, 396 Mich 660 ; 242 NW2d 749 (1976) the court affirmed the city’s decision to tax Hillside Terrace observing that Hillside Terrace was funded entirely by loans, debentures, and resident fees. Residents paid a substantial up-front sum and monthly fees thereafter. Id. at 667, 668. Hillside Terrace had losses for two consecutive years, although the petitioner admitted that it would have raised the residents’ fees to eliminate the deficit had the losses continued. Id. at 669. The petitioner had neither solicited nor received any gifts, despite the fact that gifts to Hillside Terrace were tax-deductible. Id. at 667. The petitioner offered reduced rates to four of its 72 residents in one year and waived the fees for one other resident. Id. at 668. Residents were hand-selected by the establishment after an application process that asked them to fully detail their financial status and their health. Id. at 668-669. Those who could not show sufficient means or who were in less than reasonably good health were, in large part, rejected. Id. at 669.  The court found that Hillside Terrace, while purported to exist for benevolent, charitable, and general welfare purposes, was not actually furthering those objectives. Id. at 671. Because of its selection process and resident-funded mechanism, the court concluded that the home did not “serve the elderly generally,” but, rather, “provide[d] an attractive retirement environment for those among the elderly who have the health to enjoy it and who can afford to pay for it.” Id. at 671. This structure for the nursing home, the court held, did not comport with the legislative intent behind the charitable institution exemption statute.

In this case, the Michigan Baptist alleged unequal treatment between another home owned by another association that was granted tax-exempt status and the petitioner’s home Hillside Terrace. The court observed that the other home, Anna Botsford Bach Home, was endowed by and partially financed through charitable contributions and annual charity drives. Id. at 674. Rather than rely on resident fees for its maintenance, operational costs were paid using principal and interest from the endowment fund. Id. The Bach Home residents did not pay the full cost of their care, nor were they expected to. Id. And residents were accepted on the basis of their lack of ability to find care elsewhere, not on the basis of being in good financial and physical health. Id. The court rejected the petitioner’s equal protection claim that Hillside Terrace deserved the same tax exemption granted to the Bach Home. Id. at 674. In light of the fundamental differences in the way the homes were run, the court held that the city’s decision to treat the entities differently was fully justified.

In Michigan United Conservation Clubs v Lansing Twp, 423 Mich 661,; 378 NW2d 737 (1985) the court held an environmental organization engaged in conservation efforts, the promotion of natural resource management, and the protection of the rights of citizens to bear arms as not a charitable institution. Id. at 665. The organization conducted or sponsored educational seminars and courses, published informational brochures, maintained a library, conducted lobbying, and administered a fund to oppose any movement to restrict gun ownership. Id. at 666-667. Although the court noted that the petitioner did provide some services that could be deemed charitable gifts, it found that, on balance, the petitioner was organized to benefit its paying members rather than to benefit “the general public without restriction” or “for the benefit of an indefinite number of persons.”

In Retirement Homes of the Detroit Annual Conference of the United Methodist Church, Inc, v Sylvan Twp, 416 Mich 340; 330 NW2d 682 (1982), the petitioner sought tax exemption as a charitable institution for the apartment complex it operated in conjunction with a licensed nursing home and a licensed home for the aged which were tax-exempt. Id. at 343. The court observed the Tax Tribunal’s findings that residents were admitted “on the basis of their health and ability to pay the monthly fee,” which contradicted the petitioner’s articles of incorporation. [T]here is no “gift” for the benefit of an indefinite number of persons or for the benefit of the general public without restriction in the operation of the apartments. The monthly fee is designed to cover all operating costs as well as to recover the construction costs of the apartments. While it does not appear that the apartments are operated for a profit, neither does it appear that the residents receive any significant benefit that they do not pay for. There is no “gift” to the residents. Therefore it was held to be non charitable.

In both Michigan Baptist and the apartment complex in Retirement Homes, the cost of maintaining the institutions was covered by fees collected from the residents. Prospective residents whose health or financial status did not meet strict requirements were not accepted. So they were not treated to be charitable one.  However, the court has held that a nonprofit corporation will not be disqualified for a charitable exemption because it charges those who can afford to pay for its services as long as the charges approximate the cost of the services. Retirement Homes, at 350 n 15.

It can be seen that the courts look both at the organization structure and the actual income and expenses.  The courts note whether these organizations exist for benevolent, charitable, and general welfare purposes, and whether they are actually furthering those objectives. The income and expenses are considered and the courts look at whether the services are given without any limitations and whether recipients obtain value  from these services. In the case of those who have to pay, the inquiry is whether they are obtaining services or benefits that are worth more than the value of their consideration.

What is the status of the case law on partially completed space and the dates of actual occupancy or occupancy by a certificate of occupancy?

MCL 211.7o(1) provides: “Real or personal property owned and occupied by a nonprofit charitable institution while occupied by that nonprofit charitable institution solely for the purposes for which that nonprofit charitable institution was incorporated is exempt from the collection of taxes under this act.”

Wexford Medical Group v. City of Cadillac 474 Mich. 192, 713 N.W.2d 734 puts forth that (1) the real estate must be owned and occupied by the exemption claimant; (2) the exemption claimant must be a nonprofit charitable institution; and (3) the exemption exists only when the buildings and other property thereon are occupied by the claimant solely for the purposes for which it was incorporated.

In McLaren Regional Medical Center v. City of Owosso 275 Mich.App. 401, 738 N.W.2d 777 Mich.App., 2007, the court dealt with this occupancy issue where the property was owned by an institution deemed charitable and some space was provided to nonprofit organization but not deemed charitable. The court concluded that the portions of 216 East Comstock at issue, for the years at issue, were (1) owned by MRMC, a nonprofit charitable institution, and (2) either (a) occupied by MRMC solely for the purposes for which MRMC was organized, or (b) made available to MMM, also a nonprofit charitable institution, and occupied by MMM solely for the purposes for which MMM was organized. With respect to the portion of the property occupied by MMM, had MRMC occupied this portion solely for the purposes for which it was organized, the property would likewise be exempt.

Similarly, in American Legion Memorial Home Ass’n of Grand Rapids v City of Grand Rapids, 118 Mich. App 700, 708; 325 NW2d 543 (1982), which involved a tax exemption for memorial homes, this Court stated: “With respect to a statutory requirement that an institution be occupied “solely” for the purposes for which it was incorporated, tax exemption is not lost by virtue of occasional or incidental uses for other purposes. If the primary use of a building is for clearly exempt purposes, the exemption is not lost because on occasion the building is used for social purposes or is let out to other organizations. [Citation omitted.]”

In American Legion Memorial Home, this Court determined that use of the premises at issue for social purposes or by groups not affiliated with the American Legion did not defeat the plaintiff’s entitlement to a tax exemption. Id. at 710-711. This Court held that the purposes that the MTT found objectionable “did not detract from the primary purpose of the building as a site for strictly American Legion functions.” Id. at 711.

Further, in Saginaw Co Agricultural Society v City of Saginaw, 142 Mich.App 173, 177-178; 368 NW2d 878 (1984), involving a tax exemption for agricultural society property, this Court relied on its previous decision in American Legion Memorial Home. The issue was whether the tax exemption for the Saginaw County Fairgrounds was defeated by the lease of the premises for private storage. Id. at 175. After quoting its previous decision in American Legion Memorial Home, this Court concluded that the tax exemption was not lost “by virtue of occasional or incidental uses for other purposes.” Id. at 177-178.

In the recent unreported case City of Port Huron v. State Tax Com’n Not Reported in N.W.2d, 2012 WL 933604 Mich.App.,2012, Petitioner has argued for a strict construction of the statutory language at issue and relies on Liberty Hill Housing Corp. v. City of Livonia, 480 Mich. 44 (2008), for the proposition that the Court must find that the phrase “owned, used, and occupied” unambiguously means “owned and used and occupied.” Our Supreme Court in Liberty Hill held that a charitable organization did not qualify for a tax exemption under MCL 211.7o because, although it owned the property at issue, it did not “occupy” the property. 480 Mich. at 59. While the opinion is largely devoted to the definition of “occupy,” that determination was critical to the outcome of the case because it was necessary that the taxpayer both own and occupy the property.

In MCL 207.5(4)(b), the phrase “owned, used, and occupied” modifies “tangible property, real and personal.” Applying the literal meaning of the conjunctive to the modified phrase would lead to the conclusion that, in order to have a suit in this state, tangible real property must be owned and used and occupied, and tangible personal property must be owned and used and occupied. It might be argued, as respondent does, that this result is dubious because personal property can rarely be “occupied.” But as the Court discussed in Liberty Hill, 480 Mich. at 57–58, “occupy” has multiple meanings and the appropriate one must be selected in light of the type of property involved and not all definitions require physical “occupation.” The court in the above unreported decision concluded that that, for MCL 207.5(4)(b) to apply, all three conditions of “owned, used and occupied” must be satisfied.