Low-income Housing and the Charitable Exemption

• Jurisdiction: Nebraska,United States
• Citation: Vol. 34
• Publication year: 2022

34 Creighton L. Rev. 47. LOW-INCOME HOUSING AND THE CHARITABLE EXEMPTION

Creighton Law Review

Vol. 34

RONALD R. VOLKMER(fn+)

I. INTRODUCTION

In the recently decided case of Pittman v. Sarpy County Board of Equalization,(fn1) the Supreme Court of Nebraska, in a unanimous opinion, held that the Tax Equalization and Review Commission properly denied tax exempt status to Mercy Crestview Village ("Mercy"), the owner of an apartment complex located in Sarpy County, Nebraska.(fn2) While there were procedural issues raised by the appeal of this case to the supreme court,(fn3) the focus of this article will be upon the ruling of the Pittman court that the use of the property by the applicant was not "charitable" under the governing laws of the State of Nebraska pertaining to real property tax exemption. More particularly, this article will scrutinize and re-examine the Pittman court's re-affirmation of the "well established" rule that, as stated by the court, "[l]ow-income housing is not a charitable use of property."(fn4)

Even accepting the facts in the Pittman case at face value, indicating the applicant's "exclusive use of the property [was] to provide low-income housing,"(fn5) the author believes that there are cogent and compelling reasons why the court should have reached the exact opposite conclusion. This is not an area of law where the court is unduly constrained by the language of the Nebraska Constitution or the Nebraska statutes. It is true, that under the principle of stare decisis the Pittman court was, to some, and perhaps a great extent "governed" by prior case law, that the espoused principle was regarded as "well established."(fn6) However, none of the members of the Nebraska SupremeCourt joining in the Pittman decision had ever before decided the issue before the court, namely, whether the provision of low-income housing constitutes a charitable use of property.(fn7) While the current members of this court have displayed a willingness to re-examine precedent and overrule relatively recent decisions,(fn8) the Pittman court was content to bow obeisantly to the well established rule without a hint of indecision. Given this approach and attitude, and even accounting for the fact-sensitive nature of tax exemption cases, the prognosis for a future court decision to depart from the "well-established" rule does not appear promising.

By its broad assertion that the provision of housing for low-income persons is not a charitable use, the Pittman court seems to rule out the possibilities of nuanced distinctions. It may well be that the supreme court is ill-equipped to make the types of nuanced distinctions that need to be made. If the law is to change, it may well be that the legislative forum is more appropriate. This article will explore that avenue in light of the federal government's approach to the issue of tax exempt status for non-profit entities providing low-income rental housing. Given the fact that the Nebraska Legislature has, within the past fifty years, shown a willingness to address the issues of the availability and affordability of housing,(fn9) it would be appropriate for the Nebraska Unicameral to take the lead in changing the existing law.

II. NEBRASKA LAW OF REAL PROPERTY TAX EXEMPTION

Section 2 of Article VIII of the Nebraska Constitution provides, in relevant part, that:

The Legislature by general law may classify and exempt from taxation property owned and used exclusively for agriculturaland horticultural societies and property owned and used exclusively for educational, religious, charitable, or cemetery purposes, when such property is not owned or used for financial gain or profit to either the owner or user[.](fn10)

The implementing statute states, in relevant part, that:

(1) The following property shall be exempt from property taxes:

(c) Property owned by educational, religious, charitable, or cemetery organizations and used exclusively for educational, religious, charitable, or cemetery purposes, when such property is not (i) owned or used for financial gain or profit to either the owner or user, (ii) used for the sale of alcoholic liquors for more than twenty hours per week, or (iii) owned or used by an organization which discriminates in membership or employment based on race, color, or national origin. . . . For purposes of this subdivision, charitable organization shall mean an organization operated exclusively for the purpose of the mental, social, or physical benefit of the public or an indefinite number of persons . . . .(fn11)

The statute thus creates a two-tier test: (1) the applicant must be what the Nebraska Department of Revenue regulations refer to as a "qualifying organization";(fn12) (2) the property must be used exclusively for an exempt purpose.(fn13) The last sentence of the statute quoted above addresses the first qualification - the organizational test as applied to a "charitable organization." The organizational test and the user test tend to blend together, but the Rules and Regulations of the Department of Revenue illustrate that the two qualifications are conceptually distinct.(fn14)

The discussion and analysis of the Pittman case and its predecessors will demonstrate that the organizational test gets subordinated to the user test. This is understandable inasmuch as a finding by the court that the use of the property in question was not "charitable" inexorably leads to the conclusion that the property does not satisfy the constitutional and statutory test. Since this article focuses upon the Pittman proposition that "low-income housing is not a charitable useof property," the first test relating to the status of the organization as a "charitable organization" will not be dwelt upon extensively. As might be expected there is abundant Nebraska case law interpreting the term "charitable" in the context of claimed charitable use by entities performing all manner and means of claimed charitable work. Before a selective review of this body of law is undertaken, a more expansive look at the meaning of "charitable" will be undertaken in the context of the English common law and general law in the United States.

III. THE MEANING OF "CHARITABLE" AS HISTORICALLY UNDERSTOOD

It was in the context of the developing law of charitable trusts that the English Chancery courts were first presented with the fundamental question of "[w]hat constitutes a charitable use of property?" On the charitable trust side the inquiry was directed at the purposes for which the trustee held the property.(fn15) In other words, if the trustee were holding the property for a charitable purpose, then it could be said that the use of the property (by the trustee) was charitable in nature.(fn16) As the law of charities evolved, the "organizational" qualification developed as the law of non-profit corporations developed.(fn17) In the area of tax law, the status of the non-profit corporation as a "charitable" entity became a recurrent issue in a variety of tax contexts, primarily in the area of tax exempt status under various tax laws.(fn18) While the tax statutes might very well have created a separate body of law defining "charities," by the time the issue of charitable tax exemption started emerging, there was an existent body of developed charitable trust law that provided basic tests and rules as to whether property was being held for a charitable purpose. Even in the esoteric body of law known as the Rule Against Perpetuities, a "charitable" exemption developed and courts were once again left with the task of defining what constitutes a "charity."(fn19)

What appears to be the most influential definition of "charity" is the definition of Judge Gray of the Supreme Judicial Court of Massachusetts, articulated in 1867:

A charity, in the legal sense, may be more fully defined as a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds or hearts under the influence of education or religion, by relieving their bodies from disease, suffering or constraint, by assisting to establish themselves in life, or by erecting or maintaining public buildings or works or otherwise lessening the burdens of government.(fn20)

A more open-ended definition of charity, one that has been quoted in decisions of the Nebraska Supreme Court in tax exemption cases, provides:

Charity is defined as being something more than mere almgiving or relief of poverty and distress, and it has been given a significance broad enough to include practical enterprises for the good of humanity operated at a moderate cost to those who receive its benefits.(fn21)

Judge Gray's classic definition of a charity includes a listing of charitable purposes. The law of charitable trusts, going back to 1601, has consistently focused upon the concept of a charitable purpose.(fn22) Unlike the law of private trusts, the property need not be held for the benefit of certain and definite beneficiaries.(fn23) However, for the trust to be charitable it is essential that the property be held for purposes considered "charitable."(fn24) It is at this point that the law of charitable trusts takes definite shape as the courts of equity started articulating what purposes were deemed charitable.

In the United States, a convenient starting point for the discussion of what constitutes a charitable purpose is...