with Sound Practices
Be ready to prove benefit
to the community
by Kathryn M. Vanden Berk
f your agency is tax exempt, you enjoy exemptions in the past few years, which has contracted funds, both public and private,
a number of advantages that arise sent shock waves through the legal commu- and your reliance on private philanthropy
from your good standing in the nity that serves exempt clients.3 We are has greatly diminished.
community. Let’s count the number scrambling to help our clients re-interpret Unfortunately, many of you take it for
of preferential tax treatments. their traditional missions, charitable pro- granted that sales tax and property exemp-
grams, funding streams and payment poli- tions granted long ago—when every dollar
You are exempt from paying income tax. cies. Some of the lessons learned can help spent was a dollar that had been donated—
You most likely are also exempt from you tighten your practices and inoculate will continue into the future. They may not.
paying sales tax and property taxes. your agencies from losses such as these. States that are struggling with increased
You qualify for tax-exempt bond legal responsibilities and fewer funds are
financing. A Brief History now looking at property and sales tax
Your donors can take charitable If your organization existed at the begin- exemptions, and asking themselves whether
deductions for the contributions they ning of the last century, most of its funding the benefit to the communities you serve
make to your organizations. would have come from churches, civic is equal to the exemptions they have
organizations, and individuals. State pro- bestowed upon you.
You may be aware already that these grams were modest, at best. Federal In other words, you need to be able to
traditional benefits are being eroded. funding was unheard of until the 1930s. For prove, at any time, that the value of your
Perhaps you have been asked to pay a this reason, state and local governments programs to the community equals or
“voluntary” contribution toward municipal eased the charity’s financial burden by exceeds the value of your tax exemptions.
services in lieu of property tax. Perhaps exempting them from paying sales and How can you do this?
your reduced-price water service has been property taxes.
eliminated. You may have heard that a local In the last half of the 20th century, begin- Criteria for Exemptions
hospital or nursing home’s property tax ning with programs such as Medicaid and
exemption has been revoked. Aid to Dependent Children, the federal Relieving a Burden of Government
In some states, laws have been passed government entered the arena. Federal pro- When I am seeking an exemption for
that require exempt entities to provide grams have evolved over time, as have state any sort of public welfare organization, the
charity care at least equal in value either to and local programs that wrap around criterion that I focus on is known as “reliev-
the organization’s state and local tax subsi- them. Most of you are adept at capturing ing a burden of government.”
dies, or a percentage of their net revenue.1 government funds, and many of you tap Typically we demonstrate in our applica-
Others are pending.2 into private insurance dollars as well. tion that, without the presence of this
In my home state of Illinois, several large The net result is that many of you are now organization, the government would have
nonprofits have lost their property tax funded (sometimes almost entirely) by to provide the care directly that its intend-
32 A L L I A N C E F O R C H I L D R E N & FA M I L I E S M A G A Z I N E S P R I N G 2 0 0 7
ed beneficiaries need.4 The value of the in-kind donation is ENDNOTES
Most of you can demonstrate easily that expressed as income during the period the 1. Texas requires nonprofit hospitals to spend at least
your programs and services are equivalent services were provided, and an equal four cents of every dollar of net revenue on charity
care and another penny in some way that benefits
in every way to those that your state, coun- amount is recorded as an expenditure dur- the community. In calculating that amount,
ty, or local welfare departments provide. ing that same period. hospitals can include charity care as well as short
falls from reimbursements on government pro-
Your contractual arrangements with these The amount of in-kind services can grams such as Medicaid. The law is controversial.
government agencies are proof that the often be stunning to those who have never See “Are hospitals doing enough charity care?”
taken the trouble to tabulate them in the Fort Worth (Texas) Star-Telegram, July 30, 2006.
services they purchase from you are 2. In Illinois, the attorney general proposed the Tax
services that they are legally obligated to past. The value of in-kind services can be Exempt Hospital Responsibility Act, that mandates
provide and would provide if you were not many thousands, if not millions of dollars.6 Illinois taxexempt, nonprofit hospitals to provide
charity care in an amount equal to eight percent
there to do it for them. If you have volunteers who provide special- of the hospital’s total annual operating costs
ized services such as reading enrichment, (as reported each year in the hospital’s most
recently settled Medicare cost report).
Removing Barriers to Service foster care respite, etc., be sure to docu- 3. In Illinois, a hospital lost its property tax exemption
If private philanthropy allows you to ment the time involved and the monetary when the Illinois Department of Revenue conclud-
ed that waived billings constituted only .723
remove additional barriers to your programs value of that service. percent of its annual revenues. The administrative
and services, you can build a stronger case judge noted that the charity care “is so seriously
insufficient that it simply cannot withstand the
for being a true charity and further separate Remember Your Exempt Roots constitutional scrutiny required to justify a proper-
your organization from those that are mere- If you are a tax exempt charity, it means ty tax exemption.” It also cited overly aggressive
attempts to collect money from poor and
ly commercial contractors. that, once upon a time, you successfully uninsured patients.
To be on the safe side, I suggest that you demonstrated to the Internal Revenue 4. Relevant factors look to such questions as whether
the activity is an integral part of a larger govern-
make it clear that providing charitable sub- Service that you met two important tests. mental program, or is acted jointly with a
sidies to ensure access is an established pol- First, that you are organized as an exempt governmental unit, and the amount of government
funding involved. “IRS Exempt Organizations
icy of your organization. When I draft entity. Second, that you are operated as an Determinations Manual,” Section 3, Sub. 220.127.116.11.1
bylaws for my service clients, I routinely exempt entity. The organizational test is (02231
insert a provision that confirms a policy of satisfied by a review of corporate docu- 5. “Statement No. 116 of the Financial Accounting
Standards Board.” See a summary of FASB 116 at
waiving fees where the client cannot afford ments—your articles of incorporation and http://www.fasb.org/st/summary/stsum116.shtml.
to pay. Please note that the offer of charity bylaws, and your conflict-of-interest 6. In 1999, the Illinois Department of Revenue
refused to grant a property tax exemption to La
care is not wide open, but is based upon the policies. The operational test is satisfied by Leche League International’s new headquarters.
organization’s financial ability to provide a review of your day-to-day operations. The department considered the League to be noth
ing more than a commercial publishing house, as
it. [See the sidebar for suggested language.] In this changing fiscal environment, in its financial statements reflected cash transactions
If you do not have an active fundraising order to continue to qualify for property involved in the League’s publishing activities and
nothing more. At an administrative hearing, we
program, I suggest that you seriously con- and sales tax exemptions, you must return presented evidence that a year’s worth of in-kind
sider putting one together. [Editor’s Note: to your exempt roots. It really is as simple donations of time by physicians, nurses, and lacta-
tion consultants could be valued in the millions of
Contact Mary Riordan of the Alliance as that. dollars. Revenues from breastfeeding manuals and
Member Services Division at (800) 221- pamphlets were only a small part of the organiza-
tion’s actual work. The department reversed its
3726, ext. 3678 or firstname.lastname@example.org decision and exempted the organization from pay-
to learn more about the Alliance’s Resource ing some $78,000 in annual property taxes.
Sample bylaw provision to
Development Services program.] Kathryn Vanden Berk practiced
express policy of
charitable services: law for nine years before serving
Providing In-Kind Services as the president of two residen-
One way exempt organizations stand tial treatment centers for
Waiver or Reduction of Fees. children. Now practicing in
out is by providing valuable services by
This corporation is organized exclusively Chicago, she focuses on nonprofit
unpaid volunteers. Documenting in-kind
for charitable and educational purposes start-ups, corporate and tax law,
donated services on your financial state- and employment issues. She
under [Illinois] law, and shall strive
ments offers you the opportunity to serves as adjunct faculty at sev-
to make its charitable services and
demonstrate charity in a way that is often eral Chicago universities, and is a member of the
programs available to its intended Advisory Board of the Axelson Center for
overlooked by your accounting firms.
beneficiaries without undue obstacles Nonprofit Management at North Park University.
Nonprofit GAAP (Generally Accepted
to access. It shall be a general policy She authored a handbook on starting nonprofits
Accounting Principles)—specifically, FASB that is available from the Nonprofit Financial
that any fees or charges associated
1165—provides the means to recognize Center, Chicago, and a chapter in the Illinois
with charitable services and programs
certain types of contributed services. attorney’s handbook Not-for-Profit Corporations,
shall be waived or reduced in accor- 2004 Ed., Illinois Institute of Continuing Legal
Specifically, this applies where the services
dance with each recipient’s ability to Education. In 2004 she authored “Retooling
rendered require specialized skills, are pro-
pay and the corporation’s ability to Employment Standards for the Future,” a
vided by individuals possessing those skills,
subsidize such fees or charges. publication of the First Nonprofit Educational
and would typically need to be purchased if Foundation, Chicago.
not provided by way of contribution. She can be reached at (312) 558-1690 or at
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