District Court Blesses “Flow-Through” Charitable Status in Property Tax Exemption; Grants Exemption

On September 11, 2019, the District Court for Linn County determined that an Iowa nonprofit corporation, which is wholly owned by charitable institutions, is exempt from property tax under Iowa Code § 427.1(8). 

In this case, Dickinson Law’s SALT team argued that the charitable nature of each of the Iowa nonprofit corporation’s members should “flow through,” or be attributed, to the nonprofit corporation. The Cedar Rapids Board of Review disagreed, arguing that, as a separate legal entity from charitable institutions, the charitable nature should not “flow through” to the Iowa nonprofit corporation. The District Court disagreed with the Board, and, after analyzing the three prongs of 427.1(8), ultimately granted the Iowa nonprofit corporation’s property tax exemption.  

Exemption Under Iowa Code § 427.1(8)

A property is exempt from property tax under Iowa Code § 427.1(8) if three requirements are met. The property must:

1. Be operated by a charitable, benevolent, or religious institution or society;
2. Be used solely for their appropriate objects; and
3. Not be operated with a view for pecuniary profit.

Operated by Charitable Institution

The most interesting, and disputed, issue in this case was whether a group of charitable institutions can form a new entity, with the charitable nature of the institutions flowing through to the new entity.

In this case, the Iowa nonprofit corporation conceded that it was not, itself, a charitable institution. Rather, the nonprofit corporation argued that the charitable nature of all of its owners should flow through, or be attributed, to the separate entity created by the charitable owners. The Iowa nonprofit had substantial authority for this position, including American College Testing Programs, Inc. v. Forst, 182 N.W.2d 826 (Iowa 1970), in which the Iowa Supreme Court stated it “do[es] not quarrel with” “the proposition that an activity which would be exempt if performed by an exempt institution is also exempt when several qualifying institutions act in concert.”

Despite this authority, the Cedar Rapids Board of Review argued against the flow-through concept,  that the plain language of the statute did not allow for such flow-through treatment. Additionally, the Cedar Rapids Board of Review argued that, as a separate legal entity, the Iowa nonprofit corporation chose to obtain the benefits and drawbacks of creating such entity; one such drawback, according to the Board of Review, is the inability to qualify for the property tax exemption under Iowa Code § 427.1(8). 

Apparently failing to see the merits in the Cedar Rapids Board of Review’s arguments, the District Court did not address the Board’s arguments. Relying on American College Testing Programs, Inc. the District Court held that:  

qualifying organizations may work in concert consistent with their charitable or  benevolent goals at a mutually owned property and fulfill the first of three elements Iowa Code section 427.1(8).

Solely for Their Appropriate Objects

Whether a property is used solely for the appropriate objects of the charitable institution depends on whether the use by the charitable institution is consistent with a charitable goal. 

In this case, the charitable purpose of the Iowa nonprofit corporation was reducing health care.  The Iowa nonprofit pursued that goal by pooling the resources of its members. The Iowa nonprofit corporation used the property for payroll, human resources, and other administrative tasks, which if not performed by the nonprofit corporation, would be performed by each individual member. The District Court noted that “where nonprofits would, and could, otherwise perform the same services consistent with their charitable or benevolent mission on their own tax exempt properties they may concentrate those services in another location and continue acting in a manner consistent with their charitable mission.” Thus, in this case, the Iowa nonprofit corporation used the property in a manner consistent with its charitable goals even though there was no gratuitous or reduced-cost health care provided at the property. 

View for Pecuniary Profit

“Pecuniary profit” refers to monetary gain which inures to the benefit of private individuals and is not simply an excess of income over expenses. Companies need not run in the red to satisfy the pecuniary profit test.

In this case, the court found that any profits from the Iowa nonprofit corporation are distributed to its members. Moreover, the court found “significant and persuasive” the fact that each of the Iowa nonprofit corporation’s members enjoys a property tax exemption on property that is directly owned and used by each of the members. According to the court, “[t]his evidence reflects that each of the property tax assessors relative to the members . . . is convinced that the member . . . is entitled to a property tax exemption.” Because each member does not operate with a view for pecuniary profit, and all profit is of the Iowa nonprofit flow to the members, the court concluded that the property was not used for pecuniary profit.

Takeaway

Although the qualification for property tax exemption in Iowa Code § 427.1(8) is fact intensive, the above District Court ruling indicates that, in some situations, 1) groups of charitable, religious, or educational institutions can band together and maintain their charitable status for purpose of property taxes and 2) the actual use test can be satisfied without providing charitable, religious, or educational care at the property that is being claimed as exempt.