Opinion ID: 2572683
Heading Depth: 4
Heading Rank: 2

Heading: Charitable-purpose exemption analysis

Text: Per article IX, section 4 of the Alaska Constitution, property is exempt from taxation in Alaska if it is used exclusively for non-profit ... charitable purposes, as defined by law.... Section 4 provides in relevant part: The real and personal property of the State or its political subdivisions shall be exempt from taxation under conditions and exceptions which may be provided by law. All, or any portion of, property used exclusively for non-profit religious, charitable, cemetery, or educational purposes, as defined by law, shall be exempt from taxation. Other exemptions of like or different kind may be granted by general law. All valid existing exemptions shall be retained until otherwise provided by law. [15] Alaska Statute 29.45.030(a)(3) [16] and Fairbanks North Star Borough (FNSB) Ordinance 3.08.020 [17] are substantially similar to article IX, section 4, but do not include the as defined by law clause. A taxpayer claiming a tax exemption has the burden of showing that the property is eligible for the exemption. Furthermore, the courts must narrowly construe statutes granting such exemptions. [18] But, as the superior court observed, [t]his canon of strict construction `is an aid to, not a substitute for, statutory interpretation; the interpretation must still be a reasonable one.' [19] The borough asserts that none of TCC's properties is eligible for a charitable-purposes exemption. It ultimately founds this assertion on the assessor's factual finding that TCC is fully, or more than fully, remunerated for its services by federal and state government funding, medical insurance payments, and its investment and rental income. It asks us to read the charitable-purposes exemption in light of three proposed eligibility requirements, and thus argues that TCC's activities are not for charitable purposes because they (1) do not provide the public with a gift or significant benefit, (2) do not lessen a governmental burden, and (3) do not subsidize a socially worthy activity. [20] The borough's opening brief attributes considerable importance to the fact that government payments fund a very substantial part of TCC's services: TCC's use of its property to fulfill government contracts and perform service for which it is fully paid ... by government... does not constitute charitable use of its property. Its reply brief refines its argument in the following terms: It is not the source of the support but the amount of the support (i.e., full remuneration for services) that disqualifies TCC from charitable tax-exempt status. A heading in its reply brief states that Charity Can and Does Exist with Government Support. TCC responds that the controlling factor in determining eligibility for Alaska's charitable-purposes exemption is the property's actual use. It argues that Alaska precedent does not support the three requirements the borough proposes, and that the programs TCC conducts at its properties satisfy Alaska's charitable-purposes exemption. TCC concedes on appeal that it received about ninety percent of its funding from the federal government during the relevant tax years, but argues that the source of funding does not determine charitable-purposes eligibility in Alaska.
The relevant constitutional and statutory provisions specify that to be exempt from local taxation, property must be used exclusively for non-profit religious, charitable, cemetery, hospital, or educational purposes. [21] Our cases have interpreted these provisions to require a two-part inquiry: first, whether there is a nonprofit, charitable purpose, and second, whether the property is being exclusively used for an exempt purpose. [22] As to the first of these, we read non-profit to impose a substantive qualification that is not identical to the charitable purposes requirement, both because the constitutional delegates included the non-profit qualifier in article IX, section 4 despite the absence of that qualifier in the existing territorial exemption statute, [23] and because we interpret the words of the constitution to avoid rendering any words superfluous. [24] The non-profit qualifier modifies purposes, and the constitution does not expressly refer to the organization that owns or uses the property. In discussing eligibility, the primary exemption provisions do not refer to owner or user organizations. [25] This suggests that the focus under the primary exemption provisions is on the purpose of the use, not on the organization. We note that AS 29.45.030(c) requires that if property, otherwise eligible for exemption under subsections .030(a)(3) and (4), generates income, the organization using the property must be a nonprofit ... charitable... group[ ]. [26] We applied the predecessor of subsection .030(c) in Greater Anchorage Area Borough v. Sisters of Charity of the House of Providence , and affirmed the denial of an exemption for three income-generating floors of the owner's medical building. [27] The medical center's owner arguably had the purpose of operating a nonprofit hospital. But it received rental income from physicians who used office space on those floors to conduct their private medical practices. Because the actual users of these income-generating properties were not nonprofit charitable groups, AS 29.45.030(c) deprived the properties of any exemption they otherwise would have received under AS 29.45.030(a)(3) or (4). Thus, unlike subsections .030(a)(3) and (4) which look to the nature of the owner's purposesubsection.030(c) looks to the nature of the user. It is not clear whether subsection .030(c) would apply here. The borough does not rely on it and the assessor did not base the exemption denial on that subsection, possibly because it is not clear that subsection .030(c) applies if the group using the property is also the owner seeking the exemption, and possibly because it is not obvious that the governmental support TCC received can be considered income. Certainly there is no dispute before us about TCC's status as a nonprofit organization. The assessor found that TCC was a nonprofit organization. The borough does not take issue with this finding, and does not assert on appeal that TCC was operating in violation of the Internal Revenue Code or its own articles and bylaws. TCC's § 501(c)(3) nonprofit status for purposes of the Internal Revenue Code [28] is not necessarily determinative, although its status and corporate purposes are consistent with finding the purposes to be nonprofit. The borough does argue that TCC was not acting as a charity, but makes that argument only in context of its claim that TCC used its property for contractual, not charitable, purposes. The borough does not assert that subsection .030(c) applies here. As the borough recognizes, its argument ultimately rests on an interpretation of `charitable purposes.' Consequently, the question raised by the borough in this appeal is whether TCC was motivated by charitable purposes, not whether TCC itself was a charity. We therefore next look to the purposes for which the parcels were used. The record confirms that the assessor did not err in finding that the programs TCC conducted on those parcels generated a surplus in most years. And as to one of the parcels, the assessor found that TCC had engaged in lease activity that results in a profit to TCC with respect to the Fairbanks Community Mental Health Clinic. But we think it significant that the assessor did not find that the other disputed parcels were not used for nonprofit purposes. The fact that use of a given parcel created an operational surplus does not necessarily preclude a conclusion that the activity had a nonprofit purpose. That a given charity manages, through effective fund-raising and careful management, to generate a surplus while carrying out its charitable purposes does not necessarily deprive the charity of a property tax exemption. Our decisions have previously discussed this nonprofit qualifier only briefly, and have translated it to mean that a property generating income will not lose its exemption if payment is not sought as a result of a dominant profit motive. [29] We conclude that the nonprofit qualifier does not require us to affirm the assessor's decision denying all of TCC's exemption applications. (We will return to the question of profit motive in Part III.B.2, when we consider TCC's cross-appeal concerning exemptions for two specific parcels.) Most of our charitable-purposes tax exemption cases revolve around the second part of the analysis: whether the property is being used exclusively for a charitable purpose. We have interpreted exclusive use to require that all uses of the property be for the direct and primary exempt purpose. [30] Although the exclusive-use requirement precludes temporal apportionment if property is used for both exempt and nonexempt purposes, we recognized in Catholic Bishop that the constitution allows spatial apportionment. [31] Accordingly we have concluded that operation of a church radio station that sold commercial radio time was not an exclusive use of property for a religious or charitable purpose. [32] In so holding, we did not think it relevant that the radio station's income was used to fund missionary activities. We have also held that a hospital did not use its property exclusively for hospital purposes because it leased the property to doctors for private office space. [33] We recognized an exception to the exclusive-use requirement in City of Nome v. Catholic Bishop of Northern Alaska, in which we held that de minimis use of property for a non-exempt purpose did not preclude an exemption. [34] The exclusive-use requirement also requires analysis of how the property is actually used. The eligibility analysis in this case ultimately turns on the meaning of charitable purposes in Alaska. Noting that neither the constitution nor AS 29.45.030 defined charity or charitable, in Matanuska-Susitna Borough v. King's Lake Camp we approvingly quoted this statement as typifying the broad scope given to these terms: It is quite clear that what is done out of good will and a desire to add to the improvement of the moral, mental, and physical welfare of the public generally comes within this meaning of the word charity. To crowd out coarseness, cruelty, brutality from social man undoubtedly results in this betterment. [35] We later characterized this statement as the broad common law definition of `charity'  and observed that this definition reflects the humanitarian rationale of property tax exemptions: they are granted as an aid or encouragement to individuals, corporations, or businesses, to do something supposedly for the good of the community at large, although such an act is not itself a proper or even permissible function of the government. [36] This definition provides some guidance, but it does not purport to specify prerequisites for eligibility. It provides only a general framework for determining eligibility. Applying this framework, we have concluded that properties used for a youth summer recreational camp, [37] a youth hostel, [38] and a church radio station [39] were being used for charitable purposes. Our charitable purposes doctrine also requires analyzing whether the property sustains activities motivated by a dominant profit motive. [40] This factor parallels the nonprofit requirement discussed above. Exemption is foreclosed if there is a real profit motive in the undertaking. [41] We considered the effect of deriving income from property in King's Lake Camp and Catholic Bishop. We held that property will not lose an exemption even if payment is received for the use of the property if (1) the property is used exclusively for exempt purposes; (2) the payment is not sought as a result of a dominant profit motive; and (3) the payment is both incidental to and reasonably necessary for the accomplishment of the exempt activity and does not exceed operating costs. [42] We have applied this test in cases involving user fees, [43] rental income, [44] and donations. [45]
Neither the constitution, the statute, nor the borough's ordinance mentions source of funding as a factor controlling or bearing on the exemption right. Nor have our decisions addressed what effect receipt of government funds may have on exemption eligibility. Our property tax exemption cases have primarily turned on whether the property was actually used exclusively for an exempt purpose. [46] The superior court understood the borough to be arguing below that none of the TCC properties was exempt because the government was the source of most of the funding for TCC's programs. The superior court treated this source of funding argument as a threshold issue and held that receipt of government funding did not preclude exemption. The borough does not squarely advance a government source of funding argument here. It asserts, especially in its reply brief, that it is not arguing that substantial government funding is a complete disqualifier. It is therefore not necessary for us to consider whether the superior court erred as a matter of law in holding that it is not. The borough nonetheless argues that TCC was acting as a government contractor, and was therefore acting not to fulfill charitable purposes, but to satisfy its contractual undertakings to the government. And it argues that substantial government funding remains relevant to the charitable-purposes analysis it proposes. Courts elsewhere are split on whether substantial government funding affects eligibility for charitable-purpose exemptions. Some hold that substantial government funding precludes an exemption, and some do not. These results may turn on considerations that do not apply in Alaska. For example, in many of the jurisdictions that have held that receipt of government funding precludes a charitable-purpose exemption, the courts were bound by a statutory or constitutional framework that required the organization to be a public charity, [47] or they applied multi-factor tests valuing support provided by donations. [48] It may also be significant that some cases in which receipt of government funding rendered property ineligible, federal grant money was used to construct low-income housing and subsidize rent. [49] In contrast, many of the cases upholding exemptions despite government funding involved corporations that provided services to their beneficiaries. [50] In some jurisdictions that have adopted multi-factor tests that consider source of funding, courts have not distinguished between government funding and donations. [51] We find this latter group of cases to be more persuasive. Rather than argue that government funding is a complete disqualifier, the borough argues that TCC was a government contractor, and therefore did not act for charitable purposes. Assuming that TCC was a government contractor, we decline to hold that its government contractor status necessarily renders its property altogether ineligible for any exemption. Such a status would not necessarily be inconsistent with finding that the property was used exclusively for non-profit... charitable ... purposes. [52] In any event, the government's financial support for TCC is largely provided through the Indian Self-Determination and Education Assistance Act (the Self-Determination Act). [53] The unique relationship between the federal government and Indian tribes has long led the government to provide support to tribes for health, education, employment, irrigation, administration, and real estate services. [54] These services encompass a wide variety of activities, some of which are traditionally governmental and some of which resemble those conducted by private business. The federal government's purpose of satisfying its trusteeship responsibility is essentially charitable, i.e., is motivated by good will and a desire to add to the improvement of the moral, mental, and physical welfare of the public generally. [55] The Self-Determination Act confirms the federal government's trust responsibility. [56] The act has the purposes of improving the provision of federal services by making them more responsive to tribal needs, and improving the functioning of the tribes through increased self-government. [57] Thus, Self-Determination Act contracts are not merely conduits for federal funding that would be provided in any event. By reorganizing the services and their provision, the contracts permit tribes to improve[ ] ... the moral, mental, and physical welfare of individuals and the group. [58] We also note that TCC contends that it acts on behalf of several native villages that may be too small to administer Self-Determination Act contracts themselves. We conclude that TCC's activities in satisfying its Self-Determination Act contracts with the government are motivated by purposes that are properly characterized as charitable. This satisfies the charitable-purposes criterion for exemption in Alaska.
The borough contends that because TCC receives full compensation for its services through a combination of government contracts, third-party insurers, and participant fees and operates with a surplus, TCC's property does not qualify for a charitable exemption. Thus, it asks us to add additional factors to our charitable-purpose analysis: whether the property's use provides a gift or significant benefit, lessens a governmental burden, and subsidizes a socially worthy activity. TCC responds that Alaska's charitable exemption analysis focuses only on whether the property is used for a nonprofit and charitable purpose. Thus, TCC concludes that the borough's proposed factors are contrary to Alaska law. Our constitutional and statutory exemption provisions do not catalogue all factors that might define eligibility for charitable-purpose exemptions. [59] It is not desirable, assuming it were possible, for us to attempt to identify in context of this case all factors that should determine exemption eligibility in future disputes. We therefore decline to adopt the borough's proposed factors as comprising a comprehensive or dispositive test that would control charitable-purpose analysis. Rather, we think it is appropriate to consider any circumstance relevant to whether a particular property owner has satisfied the constitutional and statutory standard. The circumstances the borough discusses are relevant, but they are not necessarily exhaustive or controlling. The borough first argues that we should define charitable purpose to require a gift to the general public or a significant public benefit. We separately consider these alternatives. Significant public benefit. The Alaska Constitution, the Alaska Statutes, and the borough's ordinance do not precondition charitable-purpose exemption eligibility on use providing a significant public benefit. Nonetheless, our broad common law definition of charity contemplates some public benefit. That definition states, It is quite clear that what is done out of good will and a desire to add to the improvement of the moral, mental, and physical welfare of the public generally comes within the meaning of the word `charity.' [60] This concept of charityas an activity that improves public welfarereflects the public policy behind tax exemptions. We noted generally in Sisters of Providence in Washington, Inc. v. Municipality of Anchorage that exemptions are granted as the quid pro quo for non-profit contributions of services and aid to society in general. [61] Charitable activities provide a public benefit whether or not the beneficiaries are indigent. [62] Programs that serve only a portion of the community can also add to the improvement of the ... welfare of the public generally. [63] Thus, in McKee v. Evans , we upheld an educational-purpose exemption for property used for a vocational training program for union apprentices. [64] We held there that educational-purpose tax exemptions require a substantial public benefit. [65] We observed that the general public is clearly benefited both by the increased opportunity for Alaskans to obtain vocational training not otherwise available, and by the increased quality of service from a skilled trade. [66] We therefore conclude that a use providing a public benefit indicates that the property is being used for a charitable purpose. Gift to the general public. The borough also argues that charity requires a  gift to the general public. (Emphasis added.) In support of its argument, the borough cites King's Lake Camp, which quoted Lord Camden, an eighteenth-century chancellor of England, who defined charity as  [a] gift to a general public use, which extends to the poor as well as to the rich. [67] The borough defines gift as something bestowed voluntarily and without compensation. It argues that a gift to the community simply requires that ... some material gap exists between what TCC receives and what it gives. It also contends that [i]t is not the source of the support but the amount of the support (i.e., full remuneration for services) that disqualifies TCC from charitable tax-exempt status. Thus, the borough argues that because TCC receives full compensation for its services through government funds and other receipts, it should not qualify for an exemption. The exemption provisions in the constitution, statutes, and ordinances do not precondition exemption eligibility on whether the property supports programs that are fully funded from such outside sources as the government. We have never interpreted charitable purpose to require, as the borough proposes, a material gap between what the charity gives and what the charity receives. Rather, our decisions have recognized that the existence of a gap between what the beneficiary pays and the value of the services the beneficiary receives could be evidence of a charitable purpose. We held that operating a youth hostel that provided temporary lodging for travelers for a low daily fee was a gift to the general public, because we concluded that although some who stay at the Hostel are not needy and could pay more, no one is turned away if the fees are not paid. [68] Although providing services free of charge is evidence of a charitable purpose, we have not explicitly conditioned charitable purpose eligibility on whether the property supports programs that are free to those who cannot pay. Thus, we have held that properties supporting programs that charge a user fee were exempt, as long as the user fee is not inspired by a dominant profit motive or does not exceed operating costs. [69] Our charitable-purpose exemption cases have not required that there be a material gap between what TCC receives and what it gives. The borough argues that TCC does not provide a gift to the community because even if the beneficiary is not paying TCC for its services, the government is compensating TCC for the services it provides. Thus, the borough concludes that TCC's service is not gratuitous and not a gift to the community. The borough's argument implies that only entities whose receipts do not cover all of their operating costs are eligible for charitable-purpose exemptions. We hold that whether a nonprofit organization receives outside funding allowing it to provide services at reduced cost or no charge to the community does not determine whether property is being used for a charitable purpose. Our cases establish that receipt of payments or compensation for using the property is not fatal to a charitable-purpose exemption. [70] An otherwise exempt property that generates revenue will not lose its exemption if (1) payment is not sought as a result of a dominant profit motive; (2) payment is both incidental to and reasonably necessary for the accomplishment of the exempt activity; and (3) payment does not exceed operating costs. [71] Lessening a governmental burden. The borough argues next that charitable-purpose eligibility should require the lessening of a governmental burden. It contends that by receiving substantial government funding for activities the government is obligated to perform, TCC does not lessen a governmental burden. [72] The borough argues that charitable tax exemptions are justified because charitable entities perform functions that governmental institutions would otherwise be obligated to perform. Our constitution and statutes do not mention lessening of a governmental burden as a factor in charitable-purpose analysis, nor do our cases. Although we generally acknowledge that tax exemptions are granted to compensate those who give nonprofit contributions to the general public, [73] we have never conditioned tax exemption eligibility on whether an organization reduces a governmental burden by either providing services the government would otherwise have to perform or supporting its services without government funding. In McKee v. Evans , we granted an educational-purpose exemption for property used for electrician apprenticeship training. [74] We considered there whether relieving a governmental burden was relevant to educational-purpose analysis under article IX, section 4 of the Alaska Constitution and former AS 29.10.336(a). [75] We rejected an argument that school properties qualifying for the educational-purpose exemption must provide programs similar to those offered at state institutions. The rationale for this [proposed] limitation is that only such school properties as relieve some substantial educational burden from the state should receive rights of tax exemption. Although this quid pro quo reasoning has superficial appeal in a period of financial crisis for local government, we find it unconvincing. [76] We also concluded that it was within the legislature's province to decide whether eligibility for an educational-purpose exemption should require a lessening of governmental burden: In Alaska the power of deciding what types of education are to be publicly supported... by tax exemption, is vested with the legislature. AS 29.10.336 in no way delimits the term educational purposes and we see no justification for this court to give to that term anything other than its ordinary meaning. [77] The borough reasons that because TCC receives substantial and direct government funding, its programs do not lessen a governmental burden. The borough argues that because TCC receives most of its funding from the government, the government is already assuming a large burden. Thus, it claims, TCC need not receive further subsidy in the form of a tax exemption. But as the borough elsewhere concedes, receipt of some government funding is not necessarily inconsistent with a charitable purpose. We decided above that government funding is not necessarily determinative. And precluding tax exemptions if government funding is substantial potentially encourages trivial and arbitrary attempts to determine what precise amount or percentage of support renders property ineligible for a charitable exemption. The borough acknowledges that the mere existence of some governmental subsidy or other direct governmental support does not automatically destroy eligibility. But it contends that because TCC receives most of its funding from government, TCC is merely a government contractor, not a charity. Whether an organization is a government contractor may be relevant to whether it has a dominant profit motive or a nonprofit purpose, but it does not conclusively establish that the property is not being used for a charitable purpose. The borough's contention seems ultimately to stand on an argument it claims it is not makingthat government funding is a complete disqualifier. In a related argument, the borough argues that charitable exemptions should indirectly subsidize socially worthy activities. It asserts that the practical effect of tax exemptions is to make all taxpayers indirect subsidizers of the institution receiving the exemption. Thus, the borough argues that there is no need for local taxpayers to indirectly subsidize an organization that already receives government funding. It claims that granting an exemption to programs that are already funded by the government shifts part of the cost of providing the service from one government to another. The borough's shifting-the-tax-burden argument raises policy questions that are of little help to courts applying the constitutional and statutory exemption provisions. Moreover, government property is not subject to borough taxation anyway, [78] so whether the government directly operates a local program or subsidizes it would seem to have little effect on the local tax base. And because programs like TCC's broadly benefit many borough residents, it is not obvious that there is anything inappropriate about transferring to local residents some of the cost (the loss of some property tax revenues) of conducting these programs. But to the extent granting these exemptions shifts some federal tax burden to local property owners, that effect does not convince us that we should interpret Alaska law to deny TCC the disputed exemptions. To the extent state statutes control municipal taxation of TCC's property, the legislature can address any perceived imbalance in taxpayer burdens. [79] Operating surplus. We next consider whether, as the borough asserts, TCC's operating surplus renders TCC ineligible for a charitable-purpose exemption. Our cases hold that an otherwise exempt property that generates revenue will not lose its exemption if (1) payment is not sought as a result of a dominant profit motive; (2) payment is both incidental to and reasonably necessary for the accomplishment of the exempt activity; and (3) payment does not exceed operating costs. [80] We have never decided whether an operating surplus precludes an exemption. Although we require that payment not exceed operating costs, that requirement should not disqualify property owned by successful fundraisers. We hold that an operating surplus will not preclude an otherwise valid tax exemption so long as revenue is not generated out of a dominant profit motive and revenue is allocated only to support exempt purposes. Our Part III.A.2.a discussion of the nonprofit qualifier also pertains here. That TCC conducted its charitable programs while achieving an operating surplus in the applicable tax years does not make TCC ineligible for any exemption for those years. It makes little sense to endorse a rule that would encourage charities to operate at a deficit just to ensure tax exemption eligibility. Although we decline to treat as dispositive the circumstances the borough finds controlling, we have considered them to the extent they are relevant to the charitable-purposes inquiry that determines this appeal. We conclude that they do not render TCC's properties altogether ineligible for exemption. B. TCC's Cross-Appeal: Did the Superior Court Err in Denying Exemptions for the Fifth Floor (Used for Community Service Programs) and Sixth Floor (Used for Administration) and Apportioning TCC's Attorney's Fees?