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Michigan Supreme Court Clarifies Eligibility for Charitable Property Tax Exemption
This week the Michigan Supreme Court in Baruch SLS Inc v Township of Tittabawassee (MSC Docket No 152047) clarified how the factors are to be considered in determining whether real property is exempt from taxation. Charities are designed to benefit […]
This week the Michigan Supreme Court in Baruch SLS Inc v Township of Tittabawassee (MSC Docket No 152047) clarified how the factors are to be considered in determining whether real property is exempt from taxation.
Charities are designed to benefit society or a specific group of people. Its purpose may be educational, humanitarian, or religious, and its benevolence may reach beyond giving relief to the indigent, extending to the promotion of happiness and the support of many worthy causes. The law favors charities because they promote goodwill and lessen the government's burdens. They are therefore ordinarily exempt from paying income or property taxes – or so one would think.
Taxation is the rule and exemption is the exception. Complicating matters further, there is no statutory definition of a "charity" for property tax exemption purposes. Further, assessment practices vary widely across Michigan as cities and townships have not recovered from the "Great Recession" and continue to face pressure on municipal revenue. Communities tend to deny property tax exemption claims arguing that the organization is either not charitable or affiliated with for-profit operations that are only marginally tied, if at all, to their charitable mission.
More than 70 charities from around the state are appealing local property tax assessments before the Michigan Tax Tribunal, up from 42 last year. The issue in most of these disputes is what criteria should constitute a charitable organization and whether all of the properties they own and operate should be exempt.
A 2006 Michigan Supreme Court case, Wexford Medical Group v City of Cadillac, laid out six factors for assessing whether an organization is "charitable." In 2008 Michigan Supreme Court in Liberty Hill Housing Corp v City of Livonia, further clarified Wexford. But there has been wide disagreement in the assessing community and in the courts as to whether some or all of the Wexford factors must be met and how they relate to one another. As a result, some charities have prevailed before the Tax Tribunal and Court of Appeals, while others have not.
On Wednesday, June 28th, the Michigan Supreme Court in Baruch, clarified the application of the Wexford factors. The Court explained that when evaluating whether an organization offers its charity on a nondiscriminatory basis (the third Wexford factor), the key question is whether the restrictions or conditions imposed by the organization bears a "reasonable relationship" to a permissible charitable goal under the fourth Wexford factor. A permissible charitable goal includes bringing people's minds or hearts under the influence of education or religion; relieving people's bodies from disease, suffering, or constraint; assisting people to establish themselves for life; erecting or maintaining public buildings or works; or otherwise lessening the burdens of government. If a reasonable relationship exists, the third Wexford factor is satisfied.
The court also instructed that its "reasonable relationship" test should be applied broadly to prevent unnecessarily limiting the restrictions an organization may choose to place on its services. Further, the organization's restriction and its charitable goal need not be the most direct or obvious, and any reasonable restriction that is implemented to further a charitable goal that passes Wexford's fourth factor is acceptable.
The Baruch decision neither expands nor contracts the historical factors for granting property tax exemptions, but makes the language clearer and hopefully more predictable for assessors and charitable organizations alike. Hopefully, the Court's recent decision will provide for greater consistency in exemptions statewide. In clarifying the third Wexford factor, the ability of some charitable groups to qualify for an exemption could dramatically change.
Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.
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