Published in the NH Business Review (3/17/2017)
Charitable entities---schools, churches, fraternal organizations--- are largely dependent upon private financial contributions for their existence. In New Hampshire, those private donations amount to just 1.85 % of the state’s taxpayers adjusted gross income, or a total of just under $550 million.
While this may look like a lot of money in the aggregate, New Hampshire’s giving as a percentage of income is about the lowest in the United States. Understandably, most charities in the state are constantly looking to do more with less. One place prudent charitable organizations look to increase their income is from rent generated by the facilities they own and maintain. This could, however, have unintended negative consequences.
In New Hampshire, RSA 72:23, governs the taxation of real property. That statute provides that all taxed real property must be taxed uniformly. It also provides that some property is exempt from the real property tax. Included as exempt are the buildings and structures owned by governmental entities, churches, non-profit schools (with limitations on the value of the real estate that is tax exempt), and other charitable organizations to the extent any such property is occupied and used for the organization’s charitable purpose.
The theory behind exempting the real property occupied and used by charitable organizations is that they each serve a public purpose that fortifies the community. Taxation would increase the burden on the charitable organization, making it costlier for the entity to advance the community’s interest. Since government exists to foster the public good, taking resources from others in the same line of work would not be an efficient way to allocate (or reallocate) resources.
What happens, however, when, say, a church leases the offices it is no longer using to a small, struggling start-up, maybe a publisher of philosophical literature? The lease allows the church to collect some rental income that helps supplement its dwindling pledge income and helps out a worthy business. Not a problem, right? Unfortunately, it could lose the church its exemption for at least the property that is being occupied and used by an entity intent on making a profit. Renting the space to a for-profit institution, or to a private party for their private use, invalidates the tax-exempt character of the property.
The result would be otherwise if the church leased its property to an entity that would itself qualify as exempt, e.g., another charitable organization, non-profit educational institution, religious organization etc. This scheme of tax exemption assures private parties do not benefit from the exemption designed to benefit only charitable organizations, but allows charitable organizations to share space with other similarly purposed entities.
New Hampshire’s Supreme Court recently addressed this issue. The Court considered Durham’s taxation of parking spaces the Episcopal Church’s leased out to University of New Hampshire students when those spaces were not otherwise necessary for church’s business. To be exact, the church leased out 24 of its 37 spaces to students with stipulations that their cars had to be out of the lot during the time set for church services and meetings.
The Court found that since those 24 spaces were predominantly used by the students for their private purposes, and that the Church’s corresponding use of those same spaces was “slight, negligible or insignificant” the leased spaces had lost their tax-exempt character. The Episcopal Diocese argued that the real estate was being used to raise funds for the Church’s mission and that the spaces would otherwise sit vacant. The Court found that argument to be too attenuated, reasoning, in essence, that the statute refers to the use of the property, not the application of the income from the use of the property.
This case is a reminder to charitable organizations to be careful when allowing other entities to use their property in return for rent/contributions and the like. It may be a great way to generate needed income from an underutilized asset. It may also trigger a tax liability that could consume that new found income.
Scott Harris, a director in the Litigation Department of McLane Middleton, can be reached at 603-628-1459 or firstname.lastname@example.org.