Opinion ID: 2004530
Heading Depth: 3
Heading Rank: 2

Heading: Factor Four

Text: Factor fourwhether the income received from gifts and donations and charges to users produces a profit to the charitable institution, N. Star Research Inst., 306 Minn. at 6, 236 N.W.2d at 757 is largely irrelevant and should not be applied in this case. To the extent that this factor includes income from gifts and donations, it is actually contradictory to factor two. Factor two suggests that the more the organization is supported by donations and gifts, the more likely the organization is charitable. Factor four seems to suggest that the more the organization is supported by donations and gifts, the less likely the organization is charitable. Id. Because a common characteristic of a traditional charity is that it is supported by donations and gifts, and only that characteristic enables the organization to charge rates below cost, factor four should be eliminated from the North Star test. Our case law has recognized that the question of profit is not particularly relevant to a charity, so long as the profit cannot inure to individual benefit. Thus, in Brotherhood of the Church of Gethsemane, one of the cases relied on in North Star, we said: That patients who are able to pay are charged for hospital services according to their ability, and that the county pays for such services rendered to those who are a legal county charge, are facts of no importance upon the question as to the character of the institution as one of purely public charity; for the fact still remains, that, notwithstanding all receipts from such sources, the hospital is established, maintained, and conducted without profit or a view to profit, and that, on the whole, it is operated at a loss, which is necessarily made up by private contributions. 27 Minn. at 462, 8 N.W. at 596. In Assembly Homes, Inc., another cased relied on in North Star, we expressed this view even more forcefully: Nor does the fact that an organization claiming exemption as one of purely public charity operates at a profit derived from charges made to its patients nullify it status as an institution of purely public charity if under its charter its operations are intended for the benefit of the public generally and thereunder none of such profits can be paid to stockholders or others. 273 Minn. at 203-04, 140 N.W.2d at 340. Viewed another way, factor four can only be reconciled with factor two if factor four excludes income from gifts and donations. Factor four would then only ask whether the revenue from the fees paid by residents exceeds operating costs. Thus, in Brotherhood of the Church of Gethsemane, we emphasized that an organization that operates without any profit, or view to profit, but at a loss which has to be made up by benevolent contribution, is a charity. 27 Minn. at 462, 8 N.W. at 596. Clearly, we did not mean to include contributions in determining whether the organization made a profit. When viewed in this way, Croixdale's operations have not generated a profit, but instead have generated operating losses, in each of the 15 historical years. And Croixdale's operations are projected to continue to generate operating losses in each of the five future years. The tax court found that Croixdale has consistently sustained operating losses for the past fifteen years, but taking into account its non-operating revenues, which include donations, investment income [from past donations], and resident activities income, [Croixdale] has had a total gain during ten of the past fourteen years. Croixdale, Inc. v. County of Washington, Nos. CX-05-3068, C5-05-3043, C3-04-1720, 2005 WL 3542887 ,  (Minn. T.C. Dec. 22, 2005). This finding is erroneous because it incorrectly includes non-operating revenue. This finding actually reinforces the proof of factor twothat is, without donations, Croixdale would have been insolvent years ago and would have closed its doors. For the fifteen years considered by the tax court, from 1990 through 2004, Croixdale's loss from operations ranged between $216,862 to $1,419,907, and totaled over $6 million. For the five years projected in Croixdale's proforma financial statements, presumably covering 2003 through 2007, Croixdale's accountants continue to project operating losses for each of the five years. In analyzing those projections, the majority mistakenly confuses cash flow with profit. As the tax court noted, the proforma projects positive cash flow during four of these five years, but this only reflects the effect on cash flow of eliminating the significant depreciation that results from having a newly constructed facility. If depreciation is included as an expense, as is required by generally accepted accounting principles (and by prudent planning for the deterioration of the facility), Croixdale's proforma shows an operating loss for each of the five years. The relevant line from the proforma is not the cash flow line, which eliminates depreciation, but the GAAP bottom line, which reports net operating income under generally accepted accounting principles. That line shows net operating losses for 2003 of $1,013,101, for 2004 of $433,337, for 2005 of $188,163, for 2006 of $83,428, and for 2007 of $23,608, totaling nearly $1,750,000. In this connection, the tax court apparently misunderstood Croixdale's testimony concerning what subsidies it provides to its residents. The tax court minimized the support provided by the Mission Benevolence Fund and missed an important point of Croixdale's pricing structure. Croixdale explained that for its assisted living residents who are on some form of government assistance, it charges only the rent and fees that will be reimbursed by the government, which is well below the base charges it would make to a resident who was not on government assistance. Croixdale's analysis showed that this shortfall in charges amounted to $193,000 per year. Croixdale explained that it expects to earn $80,000 from the investment of its Mission Benevolence Fund, which could be used to defray this shortfall, but that the additional shortfall of $113,000 will be absorbed by Croixdale through unfunded depreciation. [6] For example, even if the appropriate depreciation expense were $550,000, Croixdale's charges to residents would only recover $437,000 of that amount, leaving $113,000 unfunded. This is what accounts for the GAAP bottom line losses for all years. Essentially, Croixdale is deferring the funding of depreciation to a future period when facility replacements are required, and Croixdale is relying on its ability to do fundraising in that future period to make up for this shortfall. Finally, even if factor four had relevance, its application would require the court to make subjective judgments about how much profit is permissible, as being consistent with the charitable mission, and how much is not permissible because it is too great. The Constitution does not provide any objective standards by which to make that judgment and neither does North Star.