Are you a tax-exempt charity? Sure about that?

While it’s not yet true that “Illinois Does A Few Adult Films To Make Ends Meet”, the state has begun to cast lascivious glances at its nonprofits.  Those property-tax exemptions look mighty comfortable.  Why don’t you push that  cushion over to my side of the bed? And with most interactions taking place behind closed doors, don’t expect a warning before the moment of truth arrives—or to be kissed while you’re getting screwed.

Unlike other localities re-evaluating nonprofit tax exemptions, Illinois has bypassed the legislative process, allowing county assessors and the Department of Revenue to take the initiative.  And this spring the Illinois Supreme Court decided that the state’s constitutional provision exempting charities from property taxes applied not to all nonprofits but only to genuine charities.

When the Court ruled that Provena Covenant Hospital didn’t merit a property tax exemption because it failed to provide adequate charity care, there was a brief frenzy of press speculation about the decision’s impact on hospitals—but hospitals only.  Rarely do the media connect the dots between the budget crises of state and local governments and their relationships with nonprofits, and then generally the focus is on the governments’ failure to pay nonprofits for contracts they’ve already performed.

But revocation of property tax exemptions poses an even bigger and longer-term threat than governments’ failure to pay.  And it’s a threat of which few nonprofit executives—let alone members of the public—are aware.

Two cases of denied exemption, one in nearly-bankrupt Chicago and the other in one of its suburban counties, are now working their way through the Illinois courts.  Each concerns a luxury retirement community, and either could break new ground by clarifying what qualifies as “charity” and how much of it a nonprofit has to provide.

The state legislature hasn’t specified a percentage of charitable services required to support continued property-tax exemption.  And though the Provena court ruled that the hospital’s practice of charging fees for nearly all patient care meant it could not be considered a charity, it too stopped short of prescribing when enough charity will be enough.

“The property-tax assessors out there are going to be aggressive, because they need you back on their rolls,” said Elaine Waterhouse Wilson, a partner at the Quarles & Brady law firm. “They’re going to make you come in and prove” charitable work.  Ms. Wilson said the charities that may be at risk “include organizations that are supported primarily by fees . . . . It was very clear [under the ruling] that you had to be giving things away rather than providing general charitable benefits,” she said.

It’s not a tragedy that people are asking whether Illinois nonprofits are worthy of favored tax treatment.  What would be a tragedy is if the challenge came as a complete shock, catching agencies unaware with the sudden need to prove their charitable nature.  Yet that’s what seems likely to happen.

Executives at several Chicago-area nonprofits seemed incredulous at the idea that Provena would be applied to them.  “We provide human services and all our activities are nonprofit,” said Karen  Singer, Executive Director of the Evanston/North Shore YWCA.  “So it’s not on my radar screen at the moment.  It probably should be, but there are only so many things I can think about.”  William Ratner, Executive Director of Lawyers for the Creative Arts, and Alvin Katz of Mayer Brown LLP, the attorney for Victory Gardens Theater and the Chicago Architecture Foundation, both expressed confidence that the organizations they represent are secure in their exemptions.  “They’ll keep going after the hospitals because it’s easy, and because that’s where the money is,” Mr. Ratner said.

But there’s also money in, or rather under, many other nonprofits.  The Chicago retirement development sits on prime Gold Coast real estate.  Can YMCAs in gentrifying neighborhoods withstand challenges to their exemptions when they look and feel—and charge—so much like for-profit health clubs?  Can settlement houses be considered charities if they get paid, by government or clients, for all the services they provide?  Can arts organizations be considered “charitable” just by offering art, or do they have to give out a certain number of free admissions?  (Churches and schools are immune from this calculus because the Illinois constitution separately exempts them; but the educational programs of arts groups aren’t considered “schools.”)

Perhaps the charities will organize and persuade the Illinois legislature to clarify the amount of “charity” necessary to retain tax exemption.  But Professor Phillip Hablutzel of IIT Chicago-Kent College of Law, co-author of the Illinois Not-for-Profit Corporation Act, doubts it.  Though he predicted Illinois nonprofits other than hospitals will soon find themselves battling efforts to withdraw their exemptions, “In the twenty years I’ve been involved, there hasn’t been a coherent front among charities in facing the legislature.  It’s hard to get these people to make common cause–the museum people don’t see what they have in common with the churches.”  Nor, apparently, do many human services agencies or arts groups see what they have in common with the hospitals.

If and when a Provena-style loss of exemption hits another nonprofit, the impact on its operation will be substantial.  “In the current economy,” said Professor Hablutzel, “it would be hard to do fundraising for another one-third of your budget so the taxes could be paid.”

Maybe there’s something to be said for making adult films after all.

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9 Responses to “Are you a tax-exempt charity? Sure about that?”

  1. MItzi Naucler Says:

    Oregon confronted the YMCA exemption several years ago and subsequently levied taxes on the facility/health club in a “tony” part of downtown Portland. This move is not surprising and maybe suggests (especially for property taxes) that many nonprofits should be off-loading their real estate and looking for long-term leases instead.

    • Nonprofiteer Says:

      Absolutely! The good news to come out of this trend will be if nonprofits stop leaping blindly into building ownership, which is so often a disaster. Without the tax subsidy, it should be clearer when the only way to make the numbers work is to make ridiculous projections of rental income to be generated by the new building. Therefore it should happen less often. Or at least one can hope!

  2. Connie Says:

    Good God, tell me that’s not true! What do you think we need to be doing to stop this and raise some awareness? Can you throw us some more links and people?

    • Nonprofiteer Says:

      The Donors Forum of Chicago has taken the lead in efforts to raise awareness about the subject, sponsoring a panel to discuss it back in May. So your best bet if you think a concerted effort is in order is to check in at the Donor’s Forum site and see what, if anything, they’re doing about the property-tax exemption issue on an ongoing basis.

      Unfortunately, as we know, the nonprofit community is often too busy putting out fires to notice the accelerant that’s being spread around to start the next conflagration. The Illinois coalition of human services providers trying to secure adequate state funding–not to mention payment of already-due state bills–probably hasn’t had time to get to this next threat to its work, but it might be worth Googling them and giving them a heads-up.

  3. wecaer Says:

    The tax exempt charitable status of the YMCA of Metropolitan Chicago would appear to be jeopardized by the YMCA choosing to refocus their corporate programming from urban affordable SRO housing to state-of-the-art fitness centers catering to a more affluent clientele – a discretionary niche market need more than adequately served by commercial health clubs.
    While YMCA urban SRO housing can rightfully be tax exempt, the case for a tax-exempt YMCA fitness clubs is dubious at best as the YMCA is in direct competition with local, taxable, for-profit commercial health clubs.

    • Nonprofiteer Says:

      The YMCAs offer scholarships for membership and for camps; these may help to bolster their ability to argue that the Ys engage in charity and public-interest work. But you’re correct that the greater the similarities with for-profit health clubs, the more difficult it will be for the agencies to make their own case for charitable exemption.

  4. Of water bills, credit unions and self-help « The Nonprofiteer Says:

    […] also seems to be following the lead of the Illinois courts which, as previously noted, are re-examining the nonprofit status of several of the state’s hospitals.  The […]

  5. Individual Says:

    Individual…

    […]Are you a tax-exempt charity? Sure about that? « The Nonprofiteer[…]…

  6. Property taxes on nonprofits: the never-ending story | The Nonprofiteer Says:

    […] on a poorly-kept secret: often those "charities" are for-profit businesses in sheep's clothing.  As the Nonprofiteer pointed out at the time of the Illinois Supreme Court decision requiring Provena…, there's no inherent reason why an exemption for charities need apply to all nonprofits.  If […]

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