The Case of Under the Rainbow Child Care Center vs. Goodhue County

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A rogue decision from the Minnesota Supreme Court may be the latest salvo to undermine nonprofit property tax exemptions. In Under the Rainbow Child Care Center v. Goodhue County, the justices decided that “(a)n organization that does not provide goods or services free or at considerably reduced rates as a substantial, not just an incidental, part of its operations is not exempt from payment of real property taxes as an institution of purely public charity.”

Normally, in Minnesota, courts have relied on six factors to determine if a nonprofit could be eligible for tax exemptions: “(1) whether the stated purpose of the undertaking is to be helpful to others without immediate expectation of material reward; (2) whether the entity involved is supported by donations and gifts in whole or in part; (3) whether the recipients of the “charity” are required to pay for the assistance received in whole or in part; (4) whether the income received from gift and donations and charges to users produces a profit to the charitable institution; (5) whether the beneficiaries of the “charity” are restricted or unrestricted and, if restricted, whether the class of persons to whom the charity is made available is one having a reasonable relationship to the charitable objectives; (6) whether dividends, in form or substance, or assets upon dissolution are available to private interests.” (cited from North Star Research Institute v. County of Hennepin in the Rainbow decision).

In this instance, the Minnesota Supreme Court elevated factor #3 and concluded that it was much more important than, potentially overriding all of the others. Essentially, the Court is digging into the legal status of nonprofits, deciding that for property tax exemption, it won’t just rely on the organization’s exempt purposes under state and federal law, but question just how nonprofit the nonprofit organization is, and answer that question based on standards outside statutorily articulated definitions.

These attacks on nonprofit property tax exemptions come from various sources—municipalities eager to reduce the number of properties paying less than full taxes due to exemptions (religious as well as nonprofits), critics who find some nonprofits operating in ways that raise questions of their “nonprofitness” (the dubious charitable activities of some hospitals are a case in point), business leaders who might perceive nonprofit activities as competition with their for-profit activities, and opponents of sham nonprofits created by for-profits in order to sneak into tax abatements or exemptions (for example, for-profit developers masquerading as nonprofits to qualify for affordable housing-oriented tax exemptions). But leaving the determination of charitable property tax exemptions to the discretionary decision-making of local tax assessors and the courts is one odd way of doing it.

In other states, the decision isn’t such a legal crapshoot. Typically—or logically—most states permit real property tax exemptions for property that is owned by a nonprofit corporation or association and used for carrying out the exempt purposes of the organization. In the Rainbow case, the organization’s tax exempt purpose is to operate a day care program, the building in question is a day care facility, it’s hard to question the tax exemption unless the court believes that Rainbow, notwithstanding its state and federal nonprofit status, is something less than a nonprofit with this particular property.

Proposals to remove or reduce Minnesota tax exemptions have been raised from time to time, especially when state or local government are under fiscal pressure, so since 1989, the Minnesota Council of Nonprofits (MCN) has conducted public opinion polling through the Minnesota Center for Survey Research to gauge public attitudes toward charitable tax exemptions. They say that in five surveys over 15 years, a high percentage of adults have agreed when asked the following question: Do you agree or disagree that nonprofit organizations should be free from paying sales or property taxes? In the most recent survey, in 2004, approximately 90% agreed with the statement (64% strongly agreed and 27% somewhat agreed).

What’s the answer here? The facts behind the specific circumstances of Under the Rainbow’s day care program are, in a way, beside the point. We don’t know whether, underlying this decision, is a judicial concern about undefined property tax exemptions in Minnesota or simply the grievances of the day care center’s clients about the quality of service of potentially for-profit-like organizational assiduousness chasing down lower income families for unpaid day care fees. But the principle of the case is important. The Rainbow decision should be a warning shot across the bow of all nonprofits across the nation:

We need better state statutes defining nonprofits for the purposes of property tax exemptions in order to circumvent the problem of rogue assessors and courts (Note: do realize that assessors are under constant pressure to increase ratables, not to exempt them).

We need active local and state advocacy by nonprofits educating assessors, the courts, and the public that real property used in furtherance of a charity’s official, approved charitable purposes should be eligible for property tax exemptions.

At the same time, we should be educating nonprofits that own property (less than 10% of all nonprofits) to make sure that their lands and buildings are used for purposes that clearly fall within their exempt mission and purposes, and for property uses outside of their charitable missions, they should be subject to “payment in lieu of taxes” (PILOTS), or other taxes.

We should disabuse the public of the notion that nonprofits should operate deeply in the red with annual operating deficits in order to demonstrate their charitable bona fides. Charitable purpose and intent should not equate with running a failing operation.

And at the same time, all nonprofits should be on guard against sham charities whose charitable purposes, if they exist in any way beyond paper, really aren’t reflected in their property usage. Nonprofit hospitals that provide less charitable service and community benefit than some of their for-profit brothers and sisters—while controlling lots of exempt property—don’t help the arguments of tiny day care centers like Under the Rainbow (the nonprofit’s total revenue according to its 990 in 2006 was $540,000).

Under the Rainbow isn’t simply a case of whether this nonprofit’s property gets a tax exemption or a reduced payment in lieu of taxes from the town fathers in Red Wing, Minnesota. It is a battle over what constitutes a legitimate nonprofit and who gets to make that determination.

In response, the Minnesota Council of Nonprofits has launched a “Charitable Tax Exemption Education Campaign” to reverse the effects of the Rainbow decision (, and formed a coalition that will support a more balanced legislative definition to restore the longstanding scope of “purely public charity.”