MINNEAPOLIS PERSONAL INJURY ATTORNEY  
attorney Michael E. Douglas Attorney at Law
  Personal Injury Attorney
  St. Paul Workers Compensation Lawyer work comp attorney
 > About Me
   :: My Commitment
   :: Our Community
   
 > Legal Practice Areas
  twin cities comsumer lawPersonal Injury
   :: Traffic Accidents
   :: Medical Malpractice
   :: Social Security Disability
   :: Premises Liability
   :: Wrongful Death
   :: Dog Bite
   :: Back/Spinal/Neck Injuries
   :: Whiplash
   :: Defective Medical Devices
   :: Defective Drugs
  Minnesota Personal InjuryWorkers Compensation
  St. Paul personal injuryConsumer Law
   :: Debt Collection
   :: Repossessions
   :: Foreclosures
   :: Loan, Credit, Banking
   :: Arbitration Agreements
   :: Deception and Fraud
   :: Auto Fraud / Lemon Law
   :: Warranties
   :: Predatory Lending
   
 > Contact Us
   :: Contact Us
 

Law Offices of Michael E. Douglas
P.O. Box 251551
Woodbury, Minnesota 55125-6551
   

 Saint Paul Lawyer
 
 mdouglas@injurylawtwincities.com

 

Under the Rainbow Child Care Center v. County of Goodhue: TAX - no tax exemption; what's a charity; market rates; dissent

1
STATE OF MINNESOTA
IN SUPREME COURT
A07-468
Tax Court Anderson, Russell A., C.J.
Dissenting, Hanson, Page, and Meyer, JJ.
Under the Rainbow Child Care Center, Inc.,
Respondent,
vs. Filed: December 6, 2007
Office of Appellate Courts
County of Goodhue,
Relator.
S Y L L A B U S
An 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.
Payments made by a governmental entity for goods or services provided to one of
its citizens are not considered donations for purposes of determining whether the entity
providing the goods or services is exempt from payment of real property taxes as an
institution of purely public charity.
Reversed.
Considered and decided by the court en banc without oral argument.
2
O P I N I O N
ANDERSON, Russell A., Chief Justice.
In this case, we review the final order of the Minnesota Tax Court exempting real
property owned by respondent Under the Rainbow Child Care Center, Inc. (Rainbow),
from payment of real property taxes assessed in 2004 and 2005. The tax court concluded
that Rainbows property qualified for tax exemption because Rainbow is an institution of
purely public charity under Article X, Section 1 of the Minnesota Constitution and Minn.
Stat. 272.02, subd. 7 (2006), applying the six factors listed in North Star Research
Institute v. County of Hennepin, 306 Minn. 1, 6, 236 N.W.2d 754, 757 (1975). On
certiorari to this court, relator Goodhue County asserts that the evidence did not establish
that Rainbow is an institution of purely public charity. We agree and reverse the tax
court.
Rainbow is a state-licensed child care center in Red Wing, established as a sole
proprietorship in 1994 by Michelle Finholdt, Rainbows executive director. Rainbow
was incorporated in 1995 as a nonprofit corporation under Minn. Stat. ch. 317A (2006).
Rainbows articles of incorporation state that Rainbows mission is to provide care [for]
children away from their homes and that Rainbow is organized exclusively for
charitable, scientific, literary, or educational purposes. Rainbow has not realized a profit
during any year of its existence.
Tuition must be paid for each of the children enrolled in Rainbow. Rainbow based
its child care rates on the average rates charged by other day care centers in Goodhue
3
County. According to a comparison of rates charged by child care centers in Red Wing
prepared by Goodhue County, Rainbows 2006 weekly rates were higher than the two
other child care centers in Red Wing for infants, toddlers, and preschool children.
Rainbows weekly rate was lower than that of one center but higher than the rate of the
other center for school age children. The tax court found that Rainbows tuition rates
were at or just below market rates.
Rainbow directed families who had difficulty paying tuition to Goodhue County
Social Services, and Rainbows clients included children whose families received child
care assistance payments from Goodhue County, from Pierce County, Wisconsin, and
from the Prairie Island Tribal Community. Families that received child care assistance
from the counties or from the Prairie Island Tribal Community were charged the same
tuition as families that did not receive assistance. Although Rainbows executive director
testified that Rainbow wrote off several thousands of dollars in unclaimed childcare
payments every year, Rainbow offered no scholarships and had in the past pursued
collection efforts against families that did not pay.
The tax court found that all of the North Star factors were satisfied by Rainbow
except the third factor. Based on this evaluation of the factors, the tax court concluded
that Rainbow was entitled to exemption from property taxes assessed in 2004 and 2005 as
an institution of purely public charity under Minn. Stat. 272.02, subd. 7.
I.
Rainbow claims it is exempt from payment of real property taxes as an institution
of purely public charity. Article X, Section 1 of the Minnesota Constitution requires that
4
[t]axes shall be uniform upon the same class of subjects but exempts from taxation
public burying grounds, public school houses, public hospitals, academies, colleges,
universities, all seminaries of learning, all churches, church property, houses of worship,
institutions of purely public charity, and public property used exclusively for any public
purpose. (Emphasis added.) Minnesota Statutes 272.02, subd. 7, echoes this
provision, exempting from taxation [i]nstitutions of purely public charity.
Because tax exemptions are an exception in derogation of equal rights, all
property is presumed to be taxable, and the taxpayer bears the burden of proving
entitlement to an exemption. Camping & Educ. Found. v. State, 282 Minn. 245, 250, 164
N.W.2d 369, 372 (1969); see also Croixdale, Inc. v. County of Washington, 726 N.W.2d
483, 487 (Minn. 2007). Furthermore, exemptions from property tax liability must be
strictly construed. E.g., Camping & Educ. Found., 282 Minn. at 250, 164 N.W.2d at 372.
We have also observed:
As the burdens of government should be borne by all the citizens in equal
proportions, no property should be exempt from taxation in the absence of
clear and explicit legislation authorizing the same, and in the construction
of a law exempting property from taxation, courts will indulge no
presumption that will extend the exemption beyond the plain requirements
of the law itself.
St. Peters Church, Shakopee v. Bd. of County Commrs, 12 Minn. 395, 397-98 (Gil. 280,
282) (1867). We must therefore construe the purely public charity exemption narrowly
and take care to avoid extending the exemption under Minn. Stat. 272.02, subd. 7,
beyond the plain requirements of the law itself.
5
We may review any final order of the tax court on the ground that the tax court
lacked jurisdiction or committed an error of law or that its order was not justified by the
evidence or in conformity with the law. Manpower, Inc. v. Commr of Revenue, 724
N.W.2d 526, 528 (Minn. 2006) (citing Minn. Stat. 271.10, subd. 1 (2006)). We will
affirm the tax court when, after an independent review of the record, there is sufficient
evidence in the record upon which the tax court could have reasonably based its
conclusion. Care Inst., Inc.-Maplewood v. County of Ramsey, 576 N.W.2d 734, 738
(Minn. 1998). As a result, we give great deference to the tax courts determination
whether an organization qualifies as a purely public charity, so long as that determination
is reasonably supported by the evidence. Id. We review the tax courts legal conclusions
de novo. Nw. Racquet Swim & Health Clubs, Inc. v. County of Dakota, 557 N.W.2d 582,
586 (Minn. 1997).
In this case, the tax court analyzed the six factors listed in our decision in North
Star:
(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.
N. Star, 306 Minn. at 6, 236 N.W.2d at 757. The tax court found that Rainbow satisfied
all of the factors except factor three and concluded that Rainbow qualified as an
6
institution of purely public charity. As we will explain, we conclude that an entity cannot
be an institution of purely public charity without satisfying North Star factor three, and
therefore we reverse.
But first we add a note of caution against overly rigid reliance on the six North
Star factors. Due in no small part to our own opinions, the North Star factors have come
to be viewed as a multi-part test to be used in determining whether an organization is an
institution of purely public charity. But we did not identify the six factors in North Star
as the parts of a multi-faceted test. Rather, we simply explained that these were some of
the factors we had assessed in previous cases when evaluating organizations which were
engaged in charitable undertakings in the traditional sense. N. Star, 306 Minn. at 5-6,
236 N.W.2d at 756-57. And, as pointed out recently by Justice Hanson, we did not
indicate in listing the factors in North Star that they had all been used in combination in
any of those previous cases. Croixdale, 726 N.W.2d at 492 (Hanson, J., concurring).
Significantly, we found the six factors unhelpful in North Star itself, explaining that
[t]here are distinctive characteristics of North Star which make its situation so different
from those of charities in the traditional sense that reference to general statements made
in our previous cases are of limited value. N. Star, 306 Minn. at 7, 236 N.W.2d at 757.
Thus, it should be apparent that North Star did not establish six mandatory elements that
must be considered and satisfied in every charitable exemption case.
We explained the appropriate approach to the North Star factors in a
contemporaneous case, Mayo Foundation v. Commissioner of Revenue, 306 Minn. 25,
236 N.W.2d 767 (1975). In Mayo Foundation, the Commissioner argued that our prior
7
cases established seven prerequisites for granting tax exempt status as a charitable
institution. Id. at 35-36, 236 N.W.2d at 772-73. We rejected the Commissioners rigid
approach, explaining:
The factors identified by the commissioner are comparable to those
set forth in the North Star Research case, and we agree that they are
appropriate for the consideration of charitable status. However, the
significant difference between the approach advocated by the commissioner
and the one which we adopt lies in our view of the weight to be given to the
individual factors. The general language of our definitional statements and
the identification of factors in our prior cases are only guides for analysis.
Each case must be decided on its own particular facts and it is not essential
that every factor mentioned in our decisions be present before an institution
qualifies for exemption.
Id. at 36, 236 N.W.2d at 773 (emphasis added). We have reiterated in subsequent cases
the methodology described in Mayo Foundation: that the North Star factors are intended
to serve only as guidelines, e.g., Cmty. Meml Home at Osakis, Minn., Inc. v. County of
Douglas, 573 N.W.2d 83, 86 (Minn. 1997); that not all factors must be satisfied to qualify
for the exemption, e.g., Croixdale, 726 N.W.2d at 488; and that each case must be
decided on its own facts, e.g., Chateau Cmty. Hous. Assn v. County of Hennepin, 452
N.W.2d 240, 242 (Minn. 1990).
Nevertheless, we have referred to all six North Star factors in virtually every
subsequent case in which the charitable exemption was at issue, and we have recently
described the factors as a six-factor test, Croixdale, 726 N.W.2d at 488. As a result, we
may have created the impression that all six factors must be examined in every case
addressing the charitable exemption issue. But as North Star itself illustrates, that is not
true. In the circumstances of a particular case, one or more of the North Star factors may
8
not be helpful in assessing whether an organization is an institution of purely public
charity, and if that is true, those factors need not be analyzed. And if other analytical
tools are more helpful in identifying whether an organization is an institution of purely
public charity, those tools should be utilized.
The other side of this coin is that although we have often stated that not all of the
North Star factors must be satisfied in order to qualify for the exemption, some of the
factors are, indeed, essential. For example, regardless of the status of the other factors,
we cannot envision an organization qualifying as an institution of purely public charity if
it makes available to private interests either dividends, in form or substance, or assets
upon dissolution, and thus fails to satisfy North Star factor six. N. Star, 306 Minn. at 6,
236 N.W.2d at 757. Here, the tax court found that Rainbow satisfied all the North Star
factors except factor three, which examines the extent to which the recipients of the
charity are required to pay for the assistance received in whole or in part. Id. at 6, 236
N.W.2d at 757. Relying on our statements that not every factor must be satisfied, the tax
court concluded that even though factor three was not satisfied, Rainbow qualified as an
institution of purely public charity.
Despite our statements that not all the North Star factors must be satisfied in order
to qualify for the exemption, in applying those factors we have never found an
organization that did not satisfy factor three to be an institution of purely public charity.
The factor three inquiry, the extent to which the recipients of the charity are required to
pay for the assistance received, tests for a value that is fundamental to the concept of
charitythat is, whether the organization gives anything away. Because this is a core
9
characteristic of an institution of public charity, we now clarify that the third factor must
be satisfied if an organization is to be deemed an institution of purely public charity.
We must not lose sight of the fact that both the constitutional provision and the
statute that we are applying authorize a tax exemption for institutions of purely public
charity. Minn. Const. art. X, 1; Minn. Stat. 272.02, subd. 7. Although we have not
developed a precise and all-encompassing definition of the term charity, we have
frequently relied on the following description, which, significantly, defines charity as a
gift:
The legal meaning of the word charity has a broader significance
than in common speech and has been expanded in numerous decisions.
Charity is broadly defined as a gift, to be applied consistently with existing
laws, for the benefit of an indefinite number of persons by bringing their
hearts under the influence of education or religion, by relieving their bodies
from disease, suffering, or constraint, by assisting them to establish
themselves for life, or by erecting or maintaining public buildings or works,
or otherwise lessening the burdens of government.
Junior Achievement of Minneapolis, Inc. v. State, 271 Minn. 385, 390, 135 N.W.2d 881,
885 (1965) (emphasis added) (internal quotation marks omitted). We explained further in
Junior Achievement that not even every gift with a beneficent purpose necessarily
qualifies as charity for these purposes: it is not safe to say as a universal rule that any
gift which tends to promote mans well-being is a charity. Id. at 390, 135 N.W.2d at 885
(emphasis added). We then quoted a Massachusetts decision that explained:
It has come to be recognized that new objects must be added in order to
comprehend within the class of charities a wide variety of gifts which
represent a wholly generous and unselfish devotion of wealth to uses which
benefit the public generally or whole classes of the public and from which
the donor derives no personal advantage.
10
Id. at 391, 135 N.W.2d at 885 (emphasis added) (quoting Boston Chamber of Commerce
v. Assessors of Boston, 54 N.E.2d 199, 202 (Mass. 1944)). Although each of these
statements addressed the breadth of purposes that a charity may serve, the common
thread was another elementone that is inherent in the common understanding of
charity: that charity is a gift. Absent the element of a gift, we fail to see how an
endeavor can be fairly characterized as a charity.
By examining the extent to which the recipients of the charity are required to
pay for the assistance received in whole or in part, factor three assesses whether the
organizations operation confers a gift. N. Star, 306 Minn. at 6, 236 N.W.2d at 757.
Therefore, if factor three is not satisfied, the organization cannot be found to be an
institution of public charity. See SHARE v. Commr of Revenue, 363 N.W.2d 47, 52
(Minn. 1985) (although discussing other North Star factors, stating that SHAREs
charitable exemption claim is defeated by application of factor three because SHARE
provides no service without a fee).
Because the constitutional provision and the statute at issue here limit the
exemption to institutions of purely public charity, it is not sufficient that an organization
serves a worthwhile purpose, or even that it does so on a nonprofit basis. For example, in
SHARE the organizations purpose was to improve the availability and accessibility of
quality of health care and health services, and it operated on a nonprofit basis, satisfying
North Star factors one, four, and six. Id. at 51. We held that satisfaction of those three
factors does not itself qualify an institution as a purely public charity. Id.
11
This point illuminates the fundamental difference between our analysis and that of
the dissent. The dissent believes that the essence of a charity lies in the nature of the
service provided and therefore, the question of whether an organization is a charity
depends primarily on the nature of the service it provides. In contrast, we understand
the essence of charity, as defined in our cases, to be the provision of the service as a gift
to the recipient. The dissent instead sees the extent to which the recipients are charged
for the service simply as a matter of the mechanism for funding the service, which has
limited materiality to the question of whether the organization is a charity. This primary
emphasis on purpose and the concomitant marginalization of the gift factor allow the
dissent to conclude that Rainbow could be deemed a purely public charity based simply
on finding that (a) Rainbows objectives qualify as traditionally charitable, (b) it is
organized so that no individual can profit from ownership of its assets, and (c) it does
not offer its services only to a select and favored few.1 This analysis would, in essence,
hold that serving a worthwhile purpose and operating on a nonprofit basis is sufficient to
exempt an organization from taxation as a purely public charity. This interpretation of
charity would expand the tax exemption far too broadly, for several reasons.
1 Although the dissent explains that the tax court found Rainbow also satisfies the
other North Star factors, except factor three, and would affirm on that basis, the dissent
states that the analysis could end with the findings described in the text and tax
exemption should be recognized.
12
First, this expansive view of charity is contrary to the vast majority of our cases
applying the exemption. The dissent relies on a passage in North Star in which we
stated:
The tendency of our decisions has been to sustain exemption where
these traditionally charitable objectives are being furthered, so long as no
individual profits from ownership of the charity are realized and so long
as the undertaking is not a subterfuge by which the needs of a select and
favored few are accommodated.
306 Minn. at 6, 236 N.W.2d at 757. Although this language does, indeed, suggest
reference to charitable objectives and lack of individual profits as bases for applying
the exemption, the dissent extracts too much from this lone passage that is, because we
did not rely on it in deciding North Star, only dicta. Limiting the inquiry to an entitys
objectives and the nonprofit nature of its operations is not supported by the cases on
which the passage presumably relies. No case is cited directly in support of the passage,
either in North Star or by the dissent in this case. In North Star, the passage followed
immediately the recitation of the six North Star factors, which in turn followed a listing
of several charitable undertakings in the traditional sense and citations to cases in
which they had been addressed. Id. at 5-6 & nn.4-8, 236 N.W.2d at 756-57 & nn.4-8. Of
the five cases cited, only one could be said to lack the element of a charitable gift. See
Assembly Homes, Inc. v. Yellow Medicine County, 273 Minn. 197, 140 N.W.2d 336
(1966), discussed below. Moreover, in numerous cases since North Star we have
declined to exempt from taxation as purely public charities organizations that merely had
traditionally charitable objectives and operated without profit to any individuals. See, for
example, SHARE, 363 N.W.2d at 53 (Although providing low cost health care on a non13
profit basis is certainly worth encouraging, we are unable to conclude that it satisfies the
requirements of that narrow charitable exemption.), and cases discussed below.2
Beyond its incompatibility with the actual rulings in our cases applying the
charitable tax exemption, the dissents broad interpretation of charity is contrary to the
principle that tax exemptions must be construed narrowly. See, e.g., Camping & Educ.
Found., 282 Minn. at 250, 164 N.W.2d at 372. Far from being narrow, this interpretation
of charity would have expansive consequences in two obvious respects. First, any
enterprise that serves a beneficial purpose and operates on a nonprofit basis would enjoy
exemption from property taxes as a purely public charity. Indeed, the dissents view
would grant exemption from payment of property taxes to virtually any organization
exempt from payment of federal income taxes under I.R.C. 501(c)(3) (2000).3 If the
legislature had intended all organizations exempt from payment of federal income taxes
under I.R.C. 501(c)(3) also to be exempt from payment of real property taxes, it could
have so provided, as it did with regard to state income taxation. See Minn. Stat. 290.05,
2 The dissent states that the six-factor North Star test was developed to provide
guidance in determining whether activities that were not traditionally viewed as being
charitable could nevertheless qualify as charitable, perhaps implying that the alternative
objectives plus nonprofit test is therefore the test appropriate for traditional charities.
But as explained above, the six factors were listed in North Star as factors assessed in
cases of traditional charities, and the court went on to conclude that the factors were
inapplicable to the task of evaluating a non-traditional entity such as North Star.
3 Section 501(c)(3) exempts from payment of income taxes those entities organized
and operated exclusively for religious, charitable, scientific, testing for public safety,
literary, or educational purposes, or to foster national or international amateur sports
competition * * *, or for the prevention of cruelty to children or animals, no part of the
net earnings of which inures to the benefit of any private shareholder or individual.
14
subd. 2 (2006) (providing exemption from state income and franchise taxes for
organizations exempt from federal income taxation under Subchapter F of the Internal
Revenue Code, which includes section 501(c)(3)). That it has not done so indicates that,
in the legislatures view, there is a difference between an entity that qualifies for
exemption from payment of federal income taxes because it does good works and from
which its owners do not personally benefit, and an entity that qualifies for exemption
from payment of property taxes as an institution of purely public charity. We have never
treated an organizations tax-exempt status for federal income tax purposes as
determinative of our inquiry. See, e.g., SHARE, 363 N.W.2d at 50 (determinations of tax
exemption for purposes of federal and state income taxation are not controlling on the
issue); Rio Vista Non-Profit Hous. Corp. v. County of Ramsey, 277 N.W.2d 187, 189
(Minn. 1979).
The second broad consequence of the dissents interpretation of charity would be
that a charitable enterprise could charge the same for its services as a for-profit
competitor and nevertheless enjoy exemption from property taxation, as long as no
profits inured to the benefit of members of the organization. This result flies in the face
of our observation that North Star factor three is intended to assess whether people will
benefit from the organizations activities to an extent greater than if the organization were
merely providing a service as part of the private market. Skyline Pres. Found. v. County
of Polk, 621 N.W.2d 727, 733 (Minn. 2001).
The legislature and governor, not this court, should make the policy judgments
that determine the scope of tax exemptions. See State v. N. Star Research & Dev. Inst.,
15
294 Minn. 56, 80, 200 N.W.2d 410, 425 (1972) (We unhesitatingly concede that the
legislature, rather than this court, should determine the policy of this state with regard to
the exemption, if any, from taxes that corporations such as North Star should be given.).
The dissent criticizes our focus on requiring a gift in order to find that an organization
provides charity as diluting the goal of tax exemption. In the dissents view, [t]hat goal
is to encourage charitable services because, as we observed in North Star, people will
benefit in an economic sense from [a] charitable undertaking. We note that people
benefit most from a charitable undertaking when they are not required to pay full value
for the benefit received. Moreover, in our view the goal of the purely public charity
exemption is to encourage and make more economically viable precisely the form of
charity that confers benefit without demanding full payment. The legislature may, of
course, choose to encourage other forms of economically or otherwise publicly beneficial
endeavors by providing various forms of tax incentives, and it has done so. See, e.g.,
Minn. Stat. 272.02, subd. 13 (2006) (exempting from property taxation property used
to provide emergency shelter for victims of domestic violence). But merely because an
endeavor provides economic or other social benefit does not make it a charity. And, once
again, those tax policy choices are appropriately left to the political branches.
It is, thus, inherent in the concept of charity that there is a giftthat is, the
services, goods, or whatever is conceived as the charitable benefit must be provided to
16
the recipients of the charity without requiring them to pay full value for it.4 Nevertheless,
the expanded legal definition of charity that has evolved in the context of tax exemptions
does not require that the charitable benefit be provided to all recipients entirely free of
charge. Therefore, the third North Star factor has been refined to require that the charity
be provided free of charge, or at considerably reduced rates. Cmty. Meml Home, 573
N.W.2d at 87 (emphasis added). And the considerably reduced rates requirement has
been described as meaning considerably less than market value or cost. Id.
4 The position we take here is not unique. For example, the Pennsylvania Supreme
Court limited the definition of purely public charity to an entity that, among other things,
[d]onates or renders gratuitously a substantial portion of its services. Hosp. Utilization
Project v. Commonwealth, 487 A.2d 1306, 1317 (Pa. 1985). The Pennsylvania
legislature subsequently incorporated this requirement into one of the statutory criteria
for an institution of purely public charity. 10 Pa. Cons. Stat. Ann. 375(d)(1) (2007).
The Oregon Supreme Court similarly held that one of the required elements of a
charitable institution exempt from payment of property taxes is that the organizations
performance must involve a gift or giving. Sw. Or. Pub. Defender Servs., Inc. v. Dept
of Revenue, 817 P.2d 1292, 1296 (Or. 1991). In Utah County v. Intermountain Health
Care, Inc., the Utah Supreme Court observed that an entity was exempt from property
taxes only if it meets the definition of a charity or if its property is used exclusively for
charitable purposes. 709 P.2d 265, 269 (Utah 1985). An essential element of charity
is an act of giving. Id. The Utah court then adopted the following identifying features
of a gift: either * * * a substantial imbalance in the exchange between the charity and
the recipient of its services or * * * the lessening of a government burden through the
charitys operation. Id. The Illinois Supreme Court similarly required that an entity
exempt from payment of property taxes as a charitable institution, among other
requirements, dispense[] charity to all who need and apply for it, * * * not provide gain
or profit in a private sense to any person connected with it, and * * * not appear to place
obstacles of any character in the way of those who need and would avail themselves of
the charitable benefits it dispenses. Methodist Old Peoples Home v. Korzen, 233 N.E.2d
537, 542 (Ill. 1968).
17
Utilizing this standard, we held in Rio Vista that a private nonprofit entity
providing housing to moderate and low income people was an institution of purely public
charity entitled to the exemption. 277 N.W.2d 187, 192 (Minn. 1979). In Rio Vista, the
corporation offered two rent levels, a basic level and a higher fair market level, but
almost all of the tenants paid the basic rent and none was wealthy enough to pay the fair
market rent. Id. at 188. Similarly, in Worthington Dormitory, Inc. v. Commissioner of
Revenue, a community-based nonprofit organization provided rental housing for students
at the local community college. 292 N.W.2d 276, 278 (Minn. 1980). This court reversed
the ruling of the tax court that the organization was not a purely public charity for tax
exemption purposes. Id. at 277. The court concluded that the students paid less than cost
for the housing they received and that it was doubtful that the students paid market
rents, because they paid substantially less than the charges at comparable state-operated
dormitory facilities. Id. at 281.
While granting the exemption to organizations that charged considerably less than
market prices, we have consistently denied the exemption from property taxes to entities
that charged recipients of their charity substantially market rates, even where some fees
were discounted or forgiven. In Chateau Community Housing, the organization seeking
the charitable exemption provided student and faculty housing on a nonprofit basis. 452
N.W.2d 240, 243 (Minn. 1990). We found that Chateau provided no scholarships or rent
assistance to needy students, that students were evicted for nonpayment of rent, and that
in contrast to the discounted rental rates in Rio Vista and Worthington, Chateau charged
rents comparable to private housing and considerably higher than university-owned
18
housing. 452 N.W.2d at 243-44. As a result, we affirmed denial of the purely public
charity exemption. Id. at 244.
Similarly, in SHARE, we affirmed denial of the purely public charity exemption to
a health maintenance organization. 363 N.W.2d 47, 48 (Minn. 1985). The HMO,
SHARE, provided no services without a fee, except for a one-time short-term project, and
had no policy to provide substantial discounts to those for whom cost of treatment would
be an unreasonable burden. Id. at 52. Rather, HMO membership would be discontinued
if an individual could not pay the full monthly fee. Id. In addition to assessing the other
North Star factors, we declared that SHAREs charitable exemption claim is defeated by
application of factor threewhether recipients of the charity are required to pay for the
assistance in whole or in part. Id. The fact that some of the HMO members were
participants in Medicare whose fees were largely paid by that federal program did not
change our assessment. Id. at 49, 52-53.
In Chisago Health Services v. Commissioner of Revenue, we affirmed the tax
courts rejection of the purely public charity exemption for a health clinic that furnished
outpatient services at market level fees. 462 N.W.2d 386, 387 (Minn. 1990). We
explained that the clinic claimed to have an open door policy, but all patients were billed
for medical services, and the clinic simply wrote off the bills as uncollectible if a patient
was unable to pay. Id. at 388. The clinic accepted payment at reduced rates from
Medicare and Medicaid, but we declined to view the discounted payments as an
extension of charity to the patients by the clinic. Id. at 388, 391. Rather, we agreed with
the tax courts ruling that there was no difference between those Medicare and Medicaid
19
discounts and the business discounts negotiated by HMOs and health insurers with other
public and private clinics and hospitals. Id. at 391. Likewise, we endorsed the tax
courts conclusion that writing off a small number of uncollectible accounts was not
charity but merely a business practice similar to that of other health care providers. Id.
Community Memorial Home was another case in which we affirmed the tax
courts denial of the purely public charity exemption for an organization that charged
essentially market rates. 573 N.W.2d 83, 85, 87 (Minn. 1997). Community Memorial
Home involved an assisted living facility that attempted to satisfy factor three by showing
that it lost money each year. Id. at 87. We rejected that argument, pointing out that the
losses could be caused by numerous factors. Id. The facility also relied on the fact that it
accepted grant payments from the county for some residents at less than full rent, but we
remarked that the facility had not shown that acceptance of referrals from Douglas
County is anything more than a business decision to fill empty rental units. Id. at 88.
We concluded that [t]he record is devoid of evidence demonstrating that [the
organizations] intended purpose is to provide housing and services for the economically
disadvantaged or that it will continue to do so in the future. Id.
In summary, these cases establish that to qualify for the exemption from property
taxes as an institution of purely public charity an organization must provide its charity
to recipients free of charge or at considerably reduced rates. Moreover, it is not sufficient
to provide free or reduced-rate goods or services on such a small scale that they are
merely an incidental part of the organizations operations. Nor will free or reduced-rate
goods or services that are provided primarily for business purposes be adequate. The
20
organization must demonstrate that its intended purpose is to provide a substantial
proportion of its goods or services on a charitable basis. If the organization does not
operate on these terms, it is indeed not an institution of purely public charity and cannot
qualify for tax exemption on that basis.
We now apply these principles to the case at hand. The tax court found that
Rainbow did not satisfy factor three, and we agree. We differ with the tax court in two
respects, however. First, the tax courts finding that Rainbows tuition was at or just
below market rates is not supported by the evidence. Second, and more importantly,
because we hold, for the reasons discussed above, that satisfaction of the third North Star
factor is essential to qualify as a purely public charity, the tax courts conclusion that
Rainbow qualified as an institution of purely public charity despite failing to satisfy
factor three is an error of law.
We first address the tax courts factual finding that Rainbows tuition was at or
just below market rates. The memorandum accompanying the tax courts findings of
fact and conclusions of law lists child care rates that the court characterizes as
representative of the child care rates in Goodhue County as of July 1, 2006. It was
against these representative rates that the court compared Rainbows rates and
concluded that Rainbows rates were at or just below market rates. But these
representative rates come from an exhibit introduced by the county that in fact lists the
21
maximum child care rates that Goodhue County is authorized to pay.5 Rainbows child
care rates are indeed generally less than the countys maximum authorized rates.6 But
there is no evidence that the maximum authorized rates are actual market rates.7
A different exhibit lists the actual rates charged by child care centers in Red Wing
in 2006. According to that exhibit, Rainbows 2006 weekly rates were generally higher
than the rates of the other Red Wing child care centers. Rainbows weekly rates were
higher than both of the other child care centers in Red Wing for infants, toddlers, and
5 Minnesota Statutes 119B.09, subd. 1 (2006), requires the state to make child
care services available to families who need child care to find or keep employment or to
obtain the training or education necessary to find employment and who qualify
financially. Minnesota Statutes 119B.13, subd. 1(e) (2006), authorizes the
Commissioner of Human Services to set out on a county-by-county basis the maximum
rates that may be paid for child care from program funds. Under section 119B.13, subds.
1(e) and (f), the county pays the child care providers full charges up to the maximum;
the parent is responsible for payment of the providers charges in excess of the maximum
the county will pay.
6 For example, Goodhue Countys maximum daily rate in 2006 for full-day infant
child care was .82, but Rainbows rate was .00. Similarly, Goodhue Countys
maximum rate in 2006 for weekly toddler child care was 1.58, but Rainbows rate
was 7.00.
7 The dissent concludes that the countys maximum authorized rates are actually
below market rates because [w]hen Rainbow commenced operations at the subject
property in 2003, the maximum rates had been frozen by legislative action at 2002
levels. Rainbow provided no evidence and there is none in the record of the relationship
between the countys maximum rates and actual rates charged other than the evidence
concerning the other two child care centers in Red Wing. There is, then, no basis in the
record from which the dissents conclusion can be drawn. Regardless of how the
countys maximum authorized rates were set, the record is clear that rates at the three
competing child care centers in Red Wing were significantly less than the countys
maximum authorized rates across all categories of care. Again, compared to the only
market of which there is any evidence in this record, the countys maximum authorized
rates are not below market rates.
22
preschool children, who constituted 55 of Rainbows 70-child licensed capacity. For
school age children, Rainbows weekly rates were lower than those of one center, but
higher than those of the other. But school age children occupied only 15 of Rainbows
70 licensed spots. Thus, when Rainbows rates are compared to actual market rates, the
tax courts finding that Rainbows rates were at or just below market rates during the
years in question is not supported by the evidence. Rather, Rainbows weekly rates were
for the most part above market rates.
The dissent questions whether there is sufficient evidence in this case to establish
the market for child care services in Red Wing. But the burden fell squarely on
Rainbow, as the entity seeking the exemption, to prove that its rates were substantially
less than either market or cost and therefore the burden fell squarely on Rainbow to
provide evidence of the market against which its rates should be compared. The
evidence Rainbow offered of market rates for child care were its own and those of the
two other child care centers located in Red Wing. Rainbows executive director testified
that Rainbow sets its child care rates [s]o we are running average with everybody else in
the area.
The dissent argues that the only true market rates are those that would be
charged by a for-profit corporation and, because there were no for-profit child care
centers in Red Wing County, there is no evidence of a true market rate. Noting that the
other two child care centers in Red Wing are, like Rainbow, nonprofit organizations, the
dissent raises what could be legitimate questions in the proper case about measuring
against the market if the market comprised entirely charitable enterprises. But even
23
assuming a more appropriate market rate would be that charged by for-profit entities, the
evidence presented by Rainbow as to the market shows that it comprises three
nonprofit entities, of which Rainbows weekly rates are generally the highest.8 Rainbow
met its burden to show what the market rates were by comparing its rates to its
competitors, but did not meet its burden to show its rates were substantially below those
market rates.
The dissent further posits that, regardless of whether Rainbows child care rates
are less than market rates, Rainbow still satisfies North Star factor three because its child
care rates are less than its costs. The dissent opines that [t]here is no dispute that
Rainbows rates are below cost, because it has operated at a loss in every year of its
existence. But we have rejected a bright line test that would equate simply operating at
a loss with operating a charity. We held that the fact that an entity operates at a loss is
not sufficient to satisfy the third North Star factor, Community Memorial Home, 573
N.W.2d at 87, because revenues may not cover costs for a variety of reasons, not
necessarily because the facility intends to charge a below-cost rent. Care Inst., Inc.-
Roseville v. County of Ramsey, 612 N.W.2d 443, 449 (Minn. 2000). There is no evidence
in this record that Rainbow deliberately charged below-cost rates during the years at
8 The dissent suggests that comparison to other providers rates should take into
account differing cost levels. For example, noting that Rainbow is larger than its two
competitors, the dissent concludes, [a]s a result, one would expect that Rainbow would
have greater space and staff needs, with correspondingly greater insurance costs. But
Rainbow introduced no evidence of greater space or staff needs or the presumed
associated greater costs.
24
issue. Indeed, the record before usconsisting of little more than Rainbows federal tax
information returnsis not sufficient to support any conclusions as to why Rainbow
operates at a loss.
Further, even if we were to accept that Rainbows rates are below cost, precedent
requires Rainbows rates to be considerably less than cost as a means of proving that
[rates] were established for the stated charitable purpose rather than for purely business
reasons. Croixdale, 726 N.W.2d at 488. The dissent presents a comparison of
Rainbows revenues and operating expenses in an effort to demonstrate that Rainbows
rates are sufficiently below cost to meet the factor three test, but the dissents
comparison is flawed. For Rainbows operating expenses, the dissent relies on total
expenses reported by Rainbow on its federal tax information returns for the years at
issue. Indeed, that is the only evidence of expenses in the record before us. But for
Rainbows revenues from rates, the dissent relies on a schedule prepared by Rainbow
for the purpose of arguing that it received substantial contributions (in the form of
government payments, gifts, and volunteer labor) in the years in question as a percentage
of total enrollment billed. There was no testimony at trial as to how total enrollment
billed was calculated or what it includes or excludes. We think a more appropriate
comparison for this purpose is between Rainbows total expenses, as reported on its
federal tax information returns, and program service revenue, as reported on those
same federal tax information returns. That comparison shows that Rainbows rates were
not significantly less than cost in the years at issueand, in fact, were in one instance
more than cost:
25
2003 2004 2005
Program Service Revenue 5,627 8,457 3,821
Total Expenses 0,390 0,930 5,211
Excess (Deficit) for the Year (,763) ,527 (,390)
Excess (Deficit) as a Percentage
of Program Service Revenue
(3.55%) 1.54% (2.29%)
These results are consistent with an organization that is a nonprofit under both Minn.
Stat. ch. 317A and I.R.C. 501(c)(3), but not with an organization that is so organized
and operated that its commercial activities are subordinate to or incidental to any possible
charitable activities. Mayo Found., 306 Minn. at 36, 236 N.W.2d at 773.
Turning to the larger issue of whether Rainbow qualifies as an institution of purely
public charity, the case before us fits the pattern of the cases in which the exemption has
been denied, especially the Chisago Health Services and Community Memorial Home
cases. Rainbow sets its rates at or above market level and charges all the recipients of its
services at those rates. Rainbow makes no accommodations for those who are unable to
pay the full rates. The tax court found that Rainbow offers no scholarships and retains
the right to dismiss a child in the event that families are unable to afford fee payments,
findings that Rainbow does not challenge.9 It is clear that, as the tax court correctly
9 The dissent cites testimony of Rainbows executive director that Rainbow
provided services to some children for no or lower fees and wrote off several thousands
of dollars in unclaimed child care payments every year. Without further explanation or
evidentiary support, which is entirely absent, there is no way to know the actual
circumstances of those write-offs. The write-offs could be based merely on uncollectible
billings, which this court refused to consider as charity in Chisago Health Services, 462
(Footnote continued on following page.)
26
concluded, Rainbow does not satisfy the third North Star factor. It is equally clear that
Rainbow does not provide any services on a charitable basis and cannot therefore qualify
as an institution of purely public charity.
Rainbows acceptance of government payments for some of its clients does not
change this conclusion. It is true that more than 20% of the fees received by Rainbow are
paid by county or tribal governments for families that cannot afford to pay the full rates
themselves. But our cases make it clear that the receipt of government payment of fees
on behalf of some of the client families does not transform Rainbows fee-for-services
operation into a charity. In Community Memorial Home and Chisago Health Services,
we did not consider even the acceptance of discounted rates paid for participants in
government programs as evidence of a charitable endeavor. Cmty. Meml Home, 573
N.W.2d at 87; Chisago Health Servs., 462 N.W.2d at 391. Rather, in Community
Memorial Home we looked to the purpose of the organization and found no evidence of
overall intent to serve the disadvantaged on a charitable basis. Cmty. Meml Home, 573
N.W.2d at 88; see also Chisago Health Servs., 462 N.W.2d at 391-92.10
(Footnote continued from previous page.)
N.W.2d at 391. Moreover, even if the write-offs represented lowered rates for low
income families, several thousands of dollars is hardly indicative of a purpose to
provide services on a charitable basis when compared to Rainbows annual program
services revenues in excess of 0,000.
10 In contrast, in Rio Vista, where government rent subsidies for some families
appear to have been considered by the court in making its determination, the overall
purpose of the corporation was to provide housing to people of low to moderate means,
and the overall rental rate structure was well below market value. 277 N.W.2d at 188,
191-92.
27
Here, the same is true of Rainbow. Although Rainbow accepted government
payments, it offered no discount for participants in the government programs. Therefore,
this did not represent charity provided by Rainbow to these families, because Rainbow
was fully compensated for the services it provided. As in Community Memorial Home,
there is no evidence that Rainbows intended purpose was to provide day care to the
economically disadvantaged; rather, Rainbows purpose was to provide day care to those
who could pay, either on their own or through government subsidy.
We are aware of only one caseAssembly Homesin which the purely public
charity exemption was granted to an organization that charged a market rate fee to all and
some of those fees were paid by government programs. 273 Minn. 197, 140 N.W.2d 336
(1966). In Assembly Homes we held a nursing home was exempt from property taxation
as a purely public charity, even though we found that its rates, which were paid for some
patients by county welfare boards and the U.S. Veterans Administration, were similar to
the rates charged generally in the State of Minnesota by nursing homes. Id. at 201, 204,
140 N.W.2d at 339, 341. The case predated North Star, so there was no discussion of the
North Star factors, and it is not entirely clear which characteristics determined the courts
ruling. It is noteworthy that the court quoted and apparently relied on a case in which it
stated, It is not thereby meant that the institution must dispense charity or that it may not
charge a fee for services rendered. Assembly Homes, 273 Minn. at 204, 140 N.W.2d at
341 (quoting State v. Browning, 192 Minn. 25, 29, 255 N.W. 254, 256 (1934)). But the
Browning case involved the public hospital tax exemption, not the purely public charity
exemption. 192 Minn. at 26, 255 N.W. at 254. Some of the courts language in
28
Assembly Homes suggested that all that was necessary to qualify for the purely public
charity exemption was to serve a public, benevolent purpose on a nonprofit basis. To the
extent that Assembly Homes stood for the proposition that an organization can be a purely
public charity without providing goods or services free or at considerably reduced rates
or can qualify for the exemption merely by serving a benevolent purpose on a nonprofit
basis, it has been implicitly overruled by numerous subsequent cases discussed above,
and today it is explicitly overruled to that extent.
In summary, there must be a substantial charitable, or gift, component to an
organizations operation in order to qualify as an institution of purely public charity.
That means the organization must provide a substantial proportion of its goods or
services free or at considerably reduced rates. For that reason, if an organization does not
satisfy the third North Star factor, it cannot qualify for tax exemption as an institution of
purely public charity.
Applying these principles to this case, we hold that the tax court erred as a matter
of law in concluding that Rainbow qualified for tax exemption as an institution of purely
public charity during the years at issue despite failing to satisfy the third North Star
factor. Because Rainbow did not prove that it provided child care services free or at
substantially less than market rates or cost during 2004 and 2005, it was not an institution
of purely public charity during those years and its property was not exempt from taxation.
We therefore reverse the tax courts decision.
29
II.
Because Rainbow failed to meet a threshold condition for qualification as an
institution of purely public charity, we need not address any other aspects of the tax
courts decision. However, we address the tax courts treatment of payments made to
Rainbow by various counties and by the Prairie Island Tribal Community in order to
provide guidance to the tax court and to the parties in future cases, particularly in light of
the dissents view that those payments could be treated as donations.
Rainbow received payments from various counties for care of children whose
families qualified for child care assistance. Rainbow also received payments from the
Prairie Island Tribal Community for care of children of its members. The tax court
characterized these payments, amounting to at least 20% of Rainbows operating
resources in each of the tax years in question, as public donations and concluded on
that basis that factor two of the North Star analysis weighed in favor of status as an
institution of purely public charity. Because these payments were made for services
rendered by Rainbow to qualifying families, they should not have been classified as
donations or contributions to Rainbow.
More than 40 years ago, in Assembly Homes, we held a nursing home to be
exempt from property taxes as an institution of public charity whose charges for services
are paid for by individual patients, by county welfare boards, and by the U.S. Veterans
Administration. 273 Minn. at 204, 140 N.W.2d at 341. But we did not explicitly
characterize the payments from the county and federal governments as donations or gifts.
30
In Rio Vista, we again addressed the status of an entity that received government
payments. In that case, which involved a nonprofit corporation established to provide
low-rent housing to families with low and moderate incomes, there were two different
types of government payments. Rio Vista, 277 N.W.2d at 188. First, the facility was
constructed under a federal housing program known as section 236, under which the
federal government guaranteed the construction loan. Id. Rio Vista made the principal
payments on the loan and interest payments at the rate of one percent; the federal
government paid to the lender the difference between the interest rate charged by the
bank (seven percent) and the interest paid by Rio Vista. Id. Second, the federal
government subsidized the rents of qualifying low-income tenants. Id. at 188-89. We
agreed that the government assistance provided to Rio Vista qualified as donations,
noting that Rio Vista owed its very existence to the governments guarantee and
funding of the low-interest construction loan and significant rent assistance. Id. at 190-
91. We stated that [t]he fact that the donor is the Federal Government and not a private
institution does not preclude a determination that Rio Vista is supported in part by
donations. Id. Again, we did not distinguish between the governments interest subsidy
and its rent subsidy.
But since Rio Vista, we have declined, both explicitly and implicitly, to classify
government payments as donations when, like the rent subsidies in Assembly Homes
31
and Rio Vista, they are direct payments for goods or services.11 In Chisago Health
Services, the health care clinic argued that it was exempt from payment of property taxes
in part because it received 26 percent of its revenues from Medicare and Medicaid
payments, monies the clinic argued should be counted as donations. 462 N.W.2d at 391.
We declined to extend the Rio Vista rationale to treat the governments payments as
donations, noting that the governments payments under the Medicare and Medicaid
programs are more accurately characterized as payments for services rendered, not as
donations. Id. In SHARE, the fees charged by the health maintenance organization to its
members covered by Medicare were largely paid by the Federal Health Care Financing
Administration, but we did not characterize the federal agencys payments as donations,
although federal grants awarded to the HMO to establish a health care program for lowincome
patients were treated as support from donations. 363 N.W.2d at 49-51. In
Community Memorial Home, the rents of more than half of the nursing homes residents
were paid, in whole or in part, through grant programs administered by the county. 573
N.W.2d at 85. Again, we did not treat the countys payments as donations. Id. at 87
(concluding that the taxpayer had not sustained its burden of proof to show that it was
supported by charitable donations despite accepting payments to care for county residents
at less than market rates because the decision to do so appears to be a business decision
designed to reduce the number of empty rental units).
11 In addition, we note that after Rio Vista the legislature amended the charitable tax
exemption provision to expressly state that government rent assistance and financing
assistance provided for low-income housing are not gifts or donations to the owner. See
Minn. Stat. 272.02, subd. 7 (2006).
32
To the extent any uncertainty remains as to the appropriate treatment of
government payments, we hold that when the government pays directly for goods or
services on behalf of one of its citizens, the payment is not considered a gift or donation
for purposes of determining whether the entity providing the goods or services is exempt
from property taxation as an institution of purely public charity.
Reversed.
D-1
D I S S E N T
HANSON, Justice (dissenting).
I respectfully dissent. I would affirm the well-reasoned decision of the tax court
and hold that Rainbow qualifies for tax exempt status as an institution of purely public
charity under Minn. Const. art. X, 1 and Minn. Stat. 272.02, subd. 7 (2006).
I appreciate the caution stated by the majority that we are not to apply an overly
rigid reliance on the six North Star factors, and I agree with the majoritys criticism of
some of our past cases for having done so. But I am disappointed that, ultimately, the
majority does not heed that caution and, instead, regresses to a strict application of just
one of the six North Star factorsrelying on some of the very decisions that have
fostered confusion.
More specifically, I do not agree that North Star factor threewhether the
recipients of the charity are required to pay for the assistance received in whole or in
parttrumps all other factors. N. Star Research Inst. v. County of Hennepin, 306 Minn.
1, 6, 236 N.W.2d 754, 757 (1975) To the contrary, I believe that the question of whether
an organization is a charity depends primarily on the nature of the service it provides and
only secondarily on the type of funding mechanisms it uses to support that service.
Because factor three addresses only one of many funding mechanisms that may be used
by a nonprofit organization, it has limited materiality to the question of whether the
organization is a charity.
Even if we were, for the first time, to give factor three such overwhelming
importance, I believe that the majority has incorrectly applied that factor by focusing only
D-2
on market rates and not cost. First, I do not believe that any true market rates can be
determined for Goodhue County. Second, our cases allow the taxpayer to prove factor
three on the basis of either market or cost, and Rainbow has proven that its rates are well
below cost.
1. How should the North Star factors be used?
As I argued in the concurring opinion in Croixdale, Inc. v. County of Washington,
the six factor test of North Star was designed to provide guidance in determining whether
activities that were not traditionally viewed as being charitable could nevertheless qualify
as charitable. 726 N.W.2d 483, 492 (Minn. 2007) (Hanson, J., concurring). In North
Star, we observed that, although an assessment of organizations that deal with traditional
charitable undertakings could be made by use of the six factors,
[t]he tendency of our decisions has been to sustain exemption where these
traditionally charitable objectives are being furthered, so long as no
individual profits from ownership of the charity are realized and so long
as the undertaking is not a subterfuge by which the needs of a select and
favored few are accommodated.
N. Star, 306 Minn. at 6, 236 N.W.2d at 757.
There is no doubt that the objectives of Rainbow qualify as traditionally
charitable. In North Star we identified traditional charitable undertakings as including
education of young people and the promotion of the moral and educational welfare of
youth. Id. at 5-6, 236 N.W.2d at 756-57. Rainbows articles of incorporation state that
Rainbow is organized exclusively for charitable, scientific, literary, or educational
purposes within the meaning of section 501(c)(3) of the Internal Revenue Code and that
the specific purposes of Rainbow are to provide care of children away from their home
D-3
within the meaning of section 501(k) of the Internal Revenue Code. One Rainbow
witness expanded on these purposes by explaining that Rainbow is engaged in providing
for healthy development of young children so that they can be successful in school and
later in life and providing a safe environment for children to be in when the[ir] parents
are working. That witness also explained that the government placed a high value on
child care services, because a small investment in child care assistance to low income
families will produce a high social and economic return, allowing the parents to have
consistency of employment, pay taxes, and contribute to the community, while assuring
parents that their children are safe and are engaged in appropriate developmental
activities. From this I conclude that Rainbow is surely providing services that are
traditionally regarded as charitable.
Further, Rainbow is organized so that no individual can profit from ownership of
its assets. Although persons in control of some nonprofits may have abused the nonprofit
status by extracting excessive salaries and benefits, that clearly has not occurred at
Rainbowwhere the Executive Director drew a salary of only ,000 in 2005.1
Although Rainbow has acquired some assets, those assets may only be used for the
benefit of its charitable services and, on dissolution, they could not go to benefit any
individual but must be transferred to another tax-exempt charity. And although some
nonprofits may have also abused their nonprofit status by offering their services to only a
1 The Executive Directors salary in 2003, the first year at the subject property, was
,000 and in 2004 was ,000.
D-4
select and favored few, that clearly has not occurred at Rainbowwhere the public is
welcome on a nondiscriminatory basis, with no restrictions on who can use the services.
In fact, a significant percentage of the parents whose children are served at Rainbow are
low income and qualify to receive county assistance. Although Rainbow works with low
income parents to help them obtain public assistance, it also provides service to some
children with no or lower fees. The statement in the tax court decision and the majority
opinion that Rainbow offers no scholarships may be semantically true, but the
uncontradicted testimony of Rainbows Executive Director was that Rainbow has taken
children without payment or for payment lower than the going rate, and that Rainbow
writes off several thousands of dollars in unclaimed child care payments every year.
Under North Star, the analysis could end right there and tax exemption should be
recognized. But the tax court did not end the analysis there. The court made a thorough
and reasoned review of all of the North Star factors. The tax court found that Rainbow
was a nonprofit corporation that is exempt from federal and state income taxes; has not
realized a profit in any year; meets its expenses by multiple funding mechanisms that
include fees, grants, fundraisers, cash and in-kind donations of labor, and government
payments; pays reasonable, non-excessive compensation to its employees; provides
services to the general public, including low income families; uses its resources to
provide benefits equally to all of the users of its services; and provides a service that has
been recognized by the state as being importantincreasing the availability of affordable
child care services for low income families. The tax court found that Rainbow satisfied
D-5
all but factor three and granted tax exemption.2 The tax courts decision is persuasive
and should be affirmed.
The majority opinion considers only factor threewhether the recipients of the
service pay a feeto be fundamental to the concept of charity. But, as North Star
established years ago, the essence of a charity lies in the nature of the service provided,
not in the funding mechanisms used to support that service.3 The payment of fees for a
charitable service is but one funding mechanism. Indeed, many charities are well advised
to increase the portion of their funding that is self-supporting so they can avoid both the
uncertainty of private donations and the time and effort required to obtain them.
Rainbows Executive Director testified that it limited its requests for private donations to
two annual fundraising events because it was concerned that it not burn out [its]
participants because there are so many fundraisers [for] schools and extracurricular
programs and it hoped to reduce the time spent fundraising so that it could maximize the
time spent serving the children.
By focusing only on the fact that a charity charges a fee, the majority dilutes the
goal of tax exemption. That goal is to encourage charitable services because, as we
observed in North Star, people will benefit in an economic sense from [a] charitable
2 As discussed below, I conclude that the tax court applied factor three too narrowly
and that factor three was also met. But even if factor three was not met, the grant of tax
exemption is appropriate based on the other five factors.
3 Even the countys witness, a former assessor, acknowledged that the charity that
low income families receive from Rainbow is the service it provides.
D-6
undertaking that, among other things, provides an education that will enable a young
person to add more to the well-being of a society than one who is not so advantaged.
306 Minn. at 7, 236 N.W.2d at 757. A charitable undertaking can only contribute to the
well-being of society if it has adequate funding to support its operations. From this
perspective, it should not matter whether that funding is in the form of fees, grants,
private donations, public payments or some combination of these. The states legitimate
concern with the use of fees for part of the funding is that it not produce excessive
earnings, support excessive compensation, or enable the organization to serve a select and
favored few. The record does not provide any basis for having those concerns about
Rainbow.
2. What are considerably reduced rates?
The majority opinion states that a charity must provide a substantial proportion of
its goods and services to recipients free of charge or at considerably reduced rates.
The majority opinion then reduces that principle to a simple formula that compares
Rainbows published rates to the rates of two other child care centers to establish a
market rate.
None of our prior decisions gives such prominence to factor three. Instead, our
decisions recognize factor three as only one part of a multipart test. Further, those cases
have identified two alternative measures to satisfy factor threemarket or cost. E.g.,
Croixdale, Inc., 726 N.W.2d at 494. We have generally framed factor three in terms of
whether recipients receive services at a rate considerably less than market value or cost.
D-7
Cmty. Meml Home at Osakis, Minn., Inc. v. County of Douglas, 573 N.W.2d 83, 87
(Minn. 1997) (internal quotation marks omitted).
There is no dispute that Rainbows rates are below cost, because it has operated at
a loss in every year of its existence. Further, I would conclude that Rainbows rates are
also below the market value of its services.
A. What are market rates?
We must be candid about the artificiality of any determination of market rates
for Goodhue County. Rainbow provides services in Red Wing, where only three child
care centers had been licensed on the assessment dates for the tax years in question.4
This is a small sampling for establishing a market. Further, all three are nonprofit, taxexempt
organizations. This raises several questions about the validity of determining
market rates by simply comparing the rates of other child care centers. For example, if
all three were to charge equal rates, would all three be denied tax exemption because
none could meet the majoritys requirement that its rates be considerably below
market? And, should the market rate be based on the actual rates charged by
nonprofit organizations, which (like Rainbow) typically operate at low cost, benefiting
from volunteer labor and donations to cover part of their expenses? If one nonprofit
organization is able to subsidize its rates by private donations, do those subsidized rates
nevertheless represent the market? Can we say that a rate is at market if it does not
recover even the low nonprofit operating expenses, the organization operates at a loss,
4 A fourth center was added in 2006, after those tax assessments.
D-8
and the organization can only stay in operation because it receives private donations to
make up the shortfall in operating income?
Perhaps the true market rates are those that would be charged by a for-profit
corporation. But Red Wing did not have any for-profit child care centers and thus there
is no evidence of a true market rate.
Finally, any comparison of rates of other providers should make adjustments for
the differing cost levels incurred by each operation and, perhaps more importantly,
differences in the type and quality of the services each provides. Rainbow is slightly
larger than one of the day care centers and nearly twice as large as the other. And the
next largest center has the benefit of being located in a church facility. As a result, one
would expect that Rainbow would have greater space and staff needs, with
correspondingly greater insurance costs.
Further, Rainbows staff is capable of providing a greater range of services. As
the Executive Director of the Child Care Resources Referral Program testified, Rainbow
has both English- and Spanish-speaking staff, whereas the other two centers have only
English-speaking staff. He confirmed that this was an important factor with the growing
Hispanic population. Further, he explained that Rainbows staff has training and
experience to serve a greater range of special needs. This witness also emphasized that
Rainbows infant care program is larger, being licensed for up to 16, while each of the
other two were only licensed for up to 8. He explained that there is always a shortage of
infant care because it is more expensive to provide and brings in less revenue due to the
higher ratio of care givers to each infant.
D-9
Given these differences between the type and quality of the services provided, the
rates of the other two centers cannot fairly be said to represent the market rate for
Rainbow. Even so, Rainbows rates compare favorably to them. Its hourly and daily
rates are at or below the other two in every age category. Although its weekly rates are
somewhat higher in some categories, this only reflects a difference in the degree of
discount given to parents who are able to commit to full weeks.
The majority does recognize that Rainbows rates are less than the countys
maximum authorized rates but questions whether the tax court was correct in concluding
that the countys maximum rates represent actual market rates. I conclude that the
countys maximum authorized rates are actually below market rates and that this would
support the conclusion that Rainbows rates were well below market.
The maximum rates for Goodhue County provided in the record are those effective
July 1, 2006. Those rates were established through a rather tortured process. When
Rainbow commenced operations at the subject property in 2003, the maximum rates were
frozen at 2002 levels. Act of June 5, 2003, ch. 14, art. 9, 34, 2003 Minn. Laws 1st
Spec. Sess. 1751, 2137-38. Those rates remained frozen at 2002 levels through June 30,
2005. Id. Then, in 2005, the legislature set the maximum rates for the period July 1,
2005, through December 31, 2005, for counties like Goodhue at the greater of the 100th
percentile of the rates shown in a 2002 provider rate survey or the rates identified in
Department of Human Services Bulletin No. 03-68-07. Act of July 14, 2005, 1st Spec.
Sess., ch. 4, art. 3, 1, 2005 Minn. Laws 2454, 2525-26 (codified at Minn. Stat.
119B.13, subd. 1(a) (Supp. 2005)). Commencing January 1, 2006, the maximum rates
D-10
were increased to the lesser of the 75th percentile for like-care arrangements in the
county or the previous years rates for like-care arrangements increased by 1.75 percent.
Id. In 2006, the legislature increased the maximum rates in counties like Goodhue to the
rates for like-care arrangements in the county effective January 1, 2006, increased by six
percent. Act of June 2, 2006, ch. 282, art. 2, 2, 2006 Minn. Laws 1194, 1197 (codified
at Minn. Stat. 119B.13, subd. 1(a) (2006)). From this history, I would conclude that the
maximum rates for 2003 through 2006 were well below the market rate.
In any event, Rainbows rates compare favorably to the maximum rates authorized
for 2006, with the most relevant comparisons being the full day and weekly rates:
MAXIMUM RATES
RAINBOWS RATES
PERCENTAGE
OF
MAXIMUM
Infant Hourly $ 5.40
Full Day $ 49.82
Weekly $ 167.48
$ 5.50
$ 34.00
$ 142.00
102%
68%
85%
Toddler Hourly $ 4.31
Full Day $ 43.14
Weekly $ 151.58
$ 4.50
$ 30.00
$ 127.00
104%
70%
84%
Preschool Hourly $ 4.31
Full Day $ 43.14
Weekly $ 146.28
$ 4.25
$ 29.00
$ 121.00
99%
67%
83%
School Age Hourly $ 4.24
Full Day $ 34.98
Weekly $ 143.10
$ 4.00
$ 27.00
$ 112.00
94%
77%
78%
Based on all of the comparisons noted above, I would conclude that the tax court
understated the case when it found that Rainbows rates were at or just below market
D-11
rates. I would conclude that Rainbows rates were considerably below market and,
accordingly, that Rainbow satisfied factor three.
B. Are Rainbows rates below cost?
Because of the difficulties in determining market rates, our decisions have turned
to an alternative measure: are the rates below cost? This alternative measure does not
present the difficulties inherent in the comparison between organizations that offer
somewhat different services and have different costs.
It seems counter-intuitive to suggest that Rainbows rates might be either above
market or above cost where it has operated at a loss for its entire existence. Should a
provider be expected to nevertheless reduce its rates, operate at an even greater loss, and
hope that it will be able to make up the larger shortfall by private donations? Because the
evidence shows that Rainbow pays reasonable salaries and incurs appropriate operating
expenses, the fact that its rates still do not cover its costs suggests that the rates are
sufficiently below cost to meet the factor three test.
More specifically, the comparison of Rainbows operating income (loss) is as
follows:
2003 2004 2005
Revenue from Rates 6,863 8,073 6,644
Operating Expenses 0,390 0,930 5,211
Net Operating Income (Loss) (,527) (,857) (,567)
These calculations include in revenue the payments made by Goodhue County; the
Prairie Island Tribal Community; Pierce County, Wisconsin; and the Minnesota Food
D-12
Program. According to our case law, these payments are more appropriately treated as
contributions. See, e.g., Rio Vista Non-Profit Hous. Corp. v. County of Ramsey, 277
N.W.2d 187, 191 (Minn. 1979) (holding that the rent assistance paid by the federal
government should be treated as a donation for the second factor of the North Star
test); Assembly Homes, Inc. v. Yellow Medicine County, 273 Minn. 197, 140 N.W.2d 336
(1966) (granting tax exemption to a nursing home even though the resident care was paid
for primarily by the county and the Veterans Administration). This is especially true of
the Minnesota Food Program, which does not reimburse for fees charged to parents, but
instead for the cost of meals served.
Taking the Food Program payments out of revenues would increase the losses in
each year by another ,000. Taking all government payments out of revenues would
increase losses by another ,376 in 2003; 7,614 in 2004; and 1,663 in 2005.
Using this alternative measure, Rainbows rates were considerably below cost and
satisfy factor three of the North Star test.
PAGE, Justice (dissenting).
I join in the dissent of Justice Hanson.
MEYER, Justice (dissenting).
I join in the dissent of Justice Hanson.
 

 
 
 

  What day were you injured?

  / /


  What caused your injuries?
Traffic/Bicycle Accident
Work-Related Injury
Wrongful Death
Dog Bite
Slip and Fall
Other:


  How have your injuries affected

  your life?

 


  What kinds of medical care
  professionals have you seen?

 


  What has your treatment cost?

 

  Is Insurance Involved?
My insurance may cover
        this.

Someone else's insurance
        may cover this.

I already filed a claim.
I rejected a settlement
        offer.

I accepted a settlement
        offer.

  Were there any witnesses?
Bystanders Witnessed This.
Police Responded and Filed
        a Police Report

Police Responded but Did
        Not File a Police Report


 

 

          By visiting this page or clicking the
  "submit" button above, you agree
  that you have read and accept this   "disclaimer".
 
Copyright © Michael E. Douglas, Attorney at Law, Saint Paul MN. All Rights Reserved.
Minnesota Law Firm representing Personal Injury, Car / Auto Accident, Workers Compensation, Medical Malpractice, Social Security Disability claims.
Dedicated to Injured Workers, Victims of Negligence, Car Accidents, Victims of Fraud, and those in need of legal assistance.