DATELINE: March 18, 2008, Chicago
You will be hard pressed to find a definition for charity in the Internal Revenue Code. Most efforts to define charity are vague or circular. In the past, vagueness has worked to the advantage of those seeking classification and subsidy as charities. But vagueness can cut both ways. The recent experience of the MacDowell Colony is a perfect example. This was a case involving state property tax exemption.
As taxes become harder to raise and demands for governmental services go...
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unabated, more members of the sector should expect to find themselves in the same position that MacDowell found itself.
Located in New Hampshire, MacDowell operates an artist-in-residence program on 450-acres of land in The Town of Petersburgh. The program operates throughout the year in three separate four-month long sessions. The program is open to professional and emerging artists who complete the application process. Selection is based on talent, with no consideration being given to the artist's financial condition—in effect making selection to the program a merit scholarship. In 2005, 246 artists, including one New Hampshire resident, were selected from an applicant pool numbering 1,765.
In 2005 MacDowell sought property tax exemption for 420 of its 450 acres. The Town of Petersburgh denied exemption, taking the position that MacDowell was not eligible as a public charity for the exemption because: (1) it provides benefits only to "a very limited and insubstantial group"; (2) "it has complete discretion over who will receive its benefits"; and (3) it has "failed to meet the statutory requirement that residents of New Hampshire [be] admitted to a charity's benefits."
The New Hampshire Supreme Court was asked to consider the dispute between McDowell and the town. On March 14, 2008, it issued its opinion, concluding that MacDowell was in fact a charity, qualifying for exemption from property tax exemption. The good guys won.
The court rejected the argument that MacDowell only provides benefits to "a very limited and insubstantial group." It found that by supporting the artistic process, MacDowell helps arts throughout the world, and in a broader sense, the general public.
The town next argued that MacDowell's service is room, board, and a studio, which is entirely consumed by the creative artists invited to the Peterborough property. The court said this argument misses the mark. In the court's view, providing room, board, and studio is simply the means by which McDowell accomplishes its purpose of promoting the arts. Once again, the court noted that MacDowell's promotion of the arts benefits the general public.
The town next argued that it is the artists who benefit the general public, not MacDowell. That led the town to further argue that MacDowell should not be permitted to ride the coattails of the artists. The court responded that McDowell's mission is not to create art, but to promote it.
Not to be dealt a quick defeat, the town next argued that because MacDowell's application and admission procedure gave it complete discretion over who will receive its benefits that MacDowell is not subject to an enforceable obligation to be charitable. Here the court turned to MacDowell's charter, which requires MacDowell to use its property to promote the arts, and more specifically, make the property a place for work and companionship of students in the arts. Further, MacDowell is obligated to use any funds of the corporation to fulfill this purpose. Once again, MacDowell prevailed.
Finally, the town argued that it failed to meet the statutory requirements for exemption because it only admitted one New Hampshire artists as a resident in 2005. The court finally made the points we would have made from the outset. The presence of the artists in the community provided significant benefits to the community. The trial court had observed:
Colony Fellows participate in and contribute to promoting the arts in Peterborough by donating works to the Peterborough library, or offering to judge poetry contests. While it is true that Colony Fellows have the option of engaging in such activities in Peterborough, such artistic contributions occur only because MacDowell maintains its artist-in-residence program in Peterborough.
The New Hampshire Supreme Court agreed.
Now in the death throws, the town argued that if the art created produces public benefits, then the artists must account for those profits—in other words the profits must be turned over to McDowell. But the court accepted MacDowell's argument that the prohibition against private inurement applies to McDowell, not the artists. With that, the court upheld MacDowell's claim that it was exempt from property taxation.
Overall, we find the Town of Peterborough's arguments to be wooden and short-sighted. But there is a lesson here for charities across the country. This case demonstrates just how desperate local taxing authorities are for revenue. Other charities should expect similar charities. The smart organizations will have a discussion with their counsel about what steps they should take to ward off potential attacks on exemption. Garlic cloves won't fight off the public vampires who are looking for red, sweet, and warm blood.
Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.
THE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NONPROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL.
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