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Afton Historical Society Press v. County of Washington: TAX - error not exempting non-profit from real property taxes

Tax Court Page, J.
Afton Historical Society Press,
vs. Filed: December 13, 2007
Office of Appellate Courts
County of Washington,
Tax court erred in concluding that property owned by a nonprofit publishing house
and used to publish books on a contract basis at a profit, to publish books sold at
substantially less than cost, and to publish books donated to schools was not exempt from
real property taxes.
Considered and decided by the court en banc without oral argument.
PAGE, Justice.
In this case, we review the final order of the Minnesota Tax Court denying an
exemption from payment of real property taxes assessed in 2003, 2004, and 2005 for
property owned by Afton Historical Society Press (Afton), a publishing house. Afton
sought the exemption as an institution of purely public charity under Minn. Stat.
272.02, subd. 7 (2006). The tax court, applying the six factors we set forth in North
Star Research Institute v. County of Hennepin, 306 Minn. 1, 6, 236 N.W.2d. 754, 757
(1975), denied Afton the exemption for the tax years in question. We reverse.
Afton is a Minnesota nonprofit corporation under Minn. Stat. ch. 317A that
publishes books about Minnesota history and culture. Its articles of incorporation require
it to be operated exclusively for charitable and educational purposes. Aftons mission
statement states:
The Afton Historical Society Press publishes regional books that
explore and celebrate Minnesota culture and history. All of our books,
including our books for young people, adhere to high standards of
scholarship, literary value, design, and production.
We seek out the largest possible local, national, and international
audience for our books through wholesale and retail outlets.
We provide books and curriculum packages free-of-charge to
schools and public libraries through donor programs, including our Booksfor-
Schools program.
We also promote and extend the reach of our publications with
author programs and events, museum exhibitions, and public television
Afton typically creates and develops the idea for the book, finds an author, editor, and
illustrations for the book, raises the necessary funding, ushers the book through all stages
of the publishing process, and publicizes and markets the book upon completion.
Afton sells its books through its catalog, through the internet, and by working with
book distributors that market its books to libraries and retailers, although the price Afton
sets for each book covers less than half of the cost of publication. Afton also publishes
learning and activity books on various topics that, along with other Afton publications,
are donated to schools in Minnesota through its Books-for-Schools program. Afton also
produces a number of books on a contract basis. Revenues from these contract
publishing ventures are used to support Aftons general operations. During the years in
question, Aftons revenues from book sales and contract publishing were less than half of
its costs. To make up the difference, Afton solicited donations from a variety of
individuals and organizations. Some of these donations were designated for specific
publishing projects and the Books-for-Schools program; others were made to cover
Aftons general operating expenses.
Based on the record as a whole, and recognizing that property tax exemptions are
to be strictly construed, the tax court concluded that Afton was not an institution of
purely public charity exempt from real property taxation under Minn. Stat. 272.02,
subd. 7.
Because all property is presumed to be taxable, the taxpayer bears the burden of
proving entitlement to an exemption. Croixdale, Inc. v. County of Washington, 726
N.W.2d 483, 487 (Minn. 2007). Exemptions from property tax liability for institutions of
purely public charity are to be strictly construed. Am. Assn of Cereal Chemists v. County
of Dakota, 454 N.W.2d 912, 914 (Minn. 1990). Nevertheless, as we observed in
Christian Business Mens Committee of Minneapolis, Inc. v. State, 228 Minn. 549, 559,
38 N.W.2d 803, 811 (1949):
Although it is a general rule that constitutional provisions exempting
property from taxation are to be strictly construed, such provisions, though
not subject to extension by construction or implication, are to be given a
reasonable, natural, and practical interpretation in the light of modern
conditions in order to effectuate the purpose for which the exemption is
We review tax court decisions to determine whether the courts decisions are
supported by the evidence and in conformity with the law. Bond v. Commr of Revenue,
691 N.W.2d 831, 835 (Minn. 2005). 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). We review the tax courts legal
determinations de novo. Intergenerational Living and Health Care of Eagan, LLC v.
County of Dakota, 693 N.W.2d 412, 419 (Minn. 2005).
The tax court analyzed this case using the six factors set out 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 gifts 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.
306 Minn. at 6, 236 N.W.2d at 757 (citations omitted). The tax court recognized that an
entity that qualifies as an institution of purely public charity need not satisfy every North
Star factor. Mayo Found. v. Commr of Revenue, 306 Minn. 25, 36, 236 N.W.2d 767,
773 (1975). Nevertheless, based on the record as a whole, the tax court found that Afton
satisfied only North Star factors one, four, and six, and was not exempt from taxation as
an institution of purely public charity. As we explain below, we conclude that the North
Star analysis is not appropriate in this case because Afton used the property in question
for both charitable and commercial purposes. We apply instead the test we used in
Christian Business Mens Committee, which permits commercial use of otherwise
exempt property so long as that commercial use is incidental to the charitable use. 228
Minn. at 561, 38 N.W.2d at 812. Because Aftons use of its real property for commercial
purposes was incidental to its use for charitable purposes, we conclude that the property
qualifies for exemption during the years in question.
We first address the tax courts application of North Star in this case. The tax
court applied the North Star factors to Afton based on the following language from our
opinion in Maplewood: Resolution of a given case under Minn. Stat. 272.02, subd.
1(6), requires an analysis of the facts of that case in light of the North Star factors with
each case being decided on its own merits. 576 N.W.2d at 738.
That language from Maplewood, however, must be understood in the context of
that case. In that case, Maplewood, an assisted living facility, argued that it was entitled
to an exemption from property taxes because a nursing home was found to be exempt in
Assembly Homes,1 an assisted living complex was found to be exempt in Inter-Faith,2
1 Referring to Assembly Homes, Inc. v. Yellow Medicine County, 273 Minn. 197,
140 N.W.2d 336 (1966).
2 Referring to Inter-Faith Social Services, Inc. v. County of Carlton, 376 N.W.2d
687 (Minn. 1985).
and because an organization related to it was found to be exempt by the tax court in Care
Institute, Inc.-Roseville.3 576 N.W.2d at 738. That is, Maplewood argued it was
entitled to an exemption based not on its own merits but under the doctrine of stare
decisis. Id. at 737. We rejected Maplewoods stare decisis argument with the
observation that each case must be decided on its own merits. Id. at 738. We did not
intend to dictate the rigid application of the six North Star factors in every case. Indeed,
doing so would have been contrary to our oft-repeated instructions that the North Star
factors are only guides for analysis, e.g., Mayo Found., 306 Minn. at 36, 236 N.W.2d at
773, and that each case must be decided on its own facts, e.g., Chateau Cmty. Hous.
Assn, Inc. v. County of Hennepin, 452 N.W.2d. 240, 243 (Minn. 1990).
We therefore reiterate the comments we made in Under the Rainbow: if one or
more of the North Star factors are not helpful in assessing whether an organization is an
institution of purely public charity, those factors need not be analyzed, and if other
analytical tools are more helpful than the North Star factors, they should be used instead.
Slip op. at 8.
Although we reject the tax courts notion that the North Star factors must be
applied to Afton, that does not answer the question of whether the North Star factors
should be applied to Afton. The North Star factors were drawn from cases dealing with
organizations which were engaged in charitable undertakings in the traditional sense
care for the sick, the aged, and the infirm; education of young people, hospital care for
3 Referring to Care Institute, Inc.-Roseville v. County of Ramsey, 612 N.W.2d 443
(Minn. 2000).
the poor; facilities to promote the moral and educational welfare of youth; institutions for
religious education. 306 Minn. at 5-6, 236 N.W.2d at 756-57. Our post-North Star
decisions dealing with such entities as assisted living facilities,4 low-income and student
housing,5 and health care6 have all employed the North Star analysis. Arguably, each of
these cases has involved, in the language of North Star, an entity engaged in charitable
undertakings in the traditional sense and perhaps we therefore have not been confronted
with a case in which the North Star approach is not useful.
But we did not apply the North Star factors to North Star itself, and therefore our
understanding of when the North Star analysis may not be helpful should begin there.
North Star was a contract research organization that performed applied research for
government agencies and private corporations on a cost-plus basis. 306 Minn. at 4, 236
N.W.2d at 756. Upon completion, the research work project became the property of the
client requesting it. Id. We noted two distinctive characteristics of North Star which
make its situation so different from those of charities in the traditional sense that
reference to the North Star factors was of limited value. Id. at 7, 236 N.W.2d at 757.
4 Croixdale, Inc. v. County of Washington, 726 N.W.2d 483 (Minn. 2007); Care
Inst., Inc.-Maplewood; Care Inst., Inc.-Roseville v. County of Ramsey, 612 N.W.2d 443
(Minn. 2000); Community Memorial Home at Osakis, Minnesota, Inc. v. County of
Douglas, 573 N.W.2d 83 (Minn. 1997).
5 Worthington Dormitory, Inc. v. Commr of Revenue, 292 N.W.2d 276 (Minn.
1980); Rio-Vista Non-Profit Hous. Corp. v. Ramsey County, 277 N.W.2d 187 (Minn.
6 SHARE v. Commr of Revenue, 363 N.W.2d 47 (Minn. 1985).
First, we noted that a public benefit is not the immediate objective of the undertaking.
Id. at 8, 236 N.W.2d at 758. That is, North Stars
concern is not to develop knowledge in the abstract, with possible indirect
benefit to private enterprise, but instead to apply research tools to the
particular problems of a particular business enterprise for the specific
purpose of developing data or processes which can be turned into a profit
for the beneficiary of the information.
Id. at 7, 236 N.W.2d at 757-58. We acknowledged that the public could benefit from the
research conducted by North Star, but any such public benefit would be indirect. Id. at
8, 236 N.W.2d at 758. In contrast, the public benefit from more traditional charitable
activities is more tangible:
Persons relieved from poverty and illness and the restraints of old age
demand less of, and contribute more to, the economic well-being of a
community than do those who are not so relieved. A person who receives
the benefits of an education, whether theoretical or practical, may add more
to the well-being of a society than one who is not so advantaged. It has
been recognized that religious education and training add to the moral
strength of a community.
Id. at 7, 236 N.W.2d at 757.
Second, we noted that information developed as a result of [North Stars]
research is not made available to the public generally or to industry generally, and
therefore North Stars research did not have a public purpose in a sense comparable to
such purposes as the relief of poverty and sickness, the general dissemination of
knowledge, and the encouragement of religion, science, and the arts. Id. at 8, 236
N.W.2d at 758. Indeed, we characterized this aspect of North Stars work as the critical
one. Id.
Here, we conclude that one of Aftons activitiesits contract publishing work
is, like the contract research performed by North Star, so different from those of
charities in the traditional sense, id. at 7, 236 N.W.2d at 757, that reference to the North
Star factors is of limited value in evaluating it. During the years at issue, Afton published
several books under contract with particular organizations and individuals. The
organization or individual paid Afton (or solicited others to make contributions to Afton)
to publish the book and, significantly, upon completion all or virtually all of the copies of
the book typically went to the contracting individual or organization.
Like North Stars contract research, Aftons contract publishing directly benefited
only the entity who contracted for publication of the particular book; any public benefit
was, in the words of North Star, an indirect one and * * * not the immediate objective of
the undertaking. Id. And, like North Stars contract research, the books published by
Afton under contract typically were not made available to the public generally. Id. As
a result, Aftons contract publishing was neither a public purpose nor a charitable use
of its property. Rather, Aftons contract publishing must be viewed as a commercial
activity. Because the North Star factors derive from cases involving traditionally
charitable activities, their application to commercial activities is, as we indicated in North
Star, of limited value. The tax court therefore erred as a matter of law in analyzing the
status of Aftons real property using only the six North Star factors.
When in the past we have been faced with property used for both commercial and
arguably charitable purposes, we have applied a test very different from North Star. In
Christian Business Mens Committee, we considered the status of a multi-story building
owned and used by a nonprofit organization. 228 Minn. at 551, 38 N.W.2d at 807. The
organizations use of its property was mixed. The first floor of the building was rented to
commercial tenants, and we held that portion of the property was not exempt from
property taxation. Id. at 555-58, 38 N.W.2d at 809-10. But the second and third floors of
the building were used for meetings conducted by various clubs and societies, as a
restaurant serving both staff and the general public, and as a drop-in child care centerin
other words, for both commercial and charitable purposes. Id. at 552-53, 38 N.W.2d at
We first concluded that the Christian Business Mens Committee itself qualified as
an institution of purely public charity, noting that the organization was a Christian
laymens organization dedicated to the unselfish purpose of teaching and exemplifying
the gospel by precept and by a beneficent service extended to all members of the public
without regard to race or creed. Id. at 554-55, 38 N.W.2d at 808. We then observed:
An institution of purely public charity enjoys tax exemption only with
respect to propertyand not with respect to the income therefrom
presently, exclusively, and directly applied to, and actually used in, the
promotion of its charitable purposes; but such property may in part, without
loss of the tax-exemption privilege, be devoted to activities which of and by
themselves are normally commercial, such as the operation of a restaurant
and similar services, if such restaurant or other services are subordinate to,
and are reasonably necessary in meeting a need integrated with, its purely
charitable programsuch as providing reasonably satisfactory
accommodations for the institutions personnel and charitable activities
clienteleand such tax-exemption privilege is not lost although such food
or other services are incidentally and without deliberate design made
available to the general public.
Id. at 561, 38 N.W.2d at 812 (second emphasis added). We therefore held that the
presence of the restaurant did not prevent the second and third floors of the property from
qualifying for a tax exemption because the commercial food service was incidental to
petitioners charitable activities and * * * reasonably necessary in the furtherance of its
purely charitable program and has not been operated for the purpose of deriving a
profit. Id. at 561, 38 N.W.2d at 812.
We applied the same approach in Mayo Foundation, apparently the only other
case we have decided that presented both charitable and commercial use of the same
property. We acknowledged that the Mayo entities were engaged in commercial
activities, namely, the private practice of medicine. 306 Minn. at 38, 236 N.W.2d at 774.
In fact, during the years at issue in that case, the income generated by the Mayo Clinics
private practice of medicine constituted the principal source of income of the Mayo
Foundation. Id. at 29, 236 N.W.2d at 769. But the Mayo entities also conducted
extensive charitable work during the years at issue funded by revenues from the private
practice of medicine, including operating the Mayo Graduate School of Medicine, id. at
28, 236 N.W.2d at 769, providing medical care regardless of the financial circumstances
of the patient, id. at 30, 236 N.W.2d at 770, providing free medical care for patients at the
Rochester State Hospital, id. at 30-31, 236 N.W.2d at 770, and providing free surgical
treatment for patients at other state hospitals and state penal institutions, id. at 31, 236
N.W.2d at 770. We concluded that the Mayo entities were institutions of purely public
charity, despite their commercial practice of medicine, because their commercial
activities were incidental to and inextricably interwoven with their educational and
research activities, id. at 38, 236 N.W.2d at 774, which we characterized as charitable
activities in the traditional and strict sense, id. at 36, 236 N.W.2d at 773.
Therefore, when real property is used for both commercial and arguably charitable
purposes, the commercial use of the property will not prevent the property from being
exempt from property taxation as an institution of purely public charity if the commercial
use is incidental to and reasonably necessary in furtherance of the entitys charitable
Applying these principles, we first consider whether Aftons use of the property
for other than contract publishing was charitable during the years at issue. We conclude
that the tax court erred in concluding that it was not. As we held in Under the Rainbow,
if an organization is to be deemed an institution of purely public charity, it must
necessarily demonstrate that it provides a substantial proportion of its goods or services
to recipients free of charge or at considerably less than either market value or cost. Slip
op. at 28. Here, the tax court found that Aftons Books-for-Schools program did not
satisfy this test because Afton itself received payment for the donated books from another
source. But the focus of the test is on the beneficiaries of the proposed charity and, as the
tax court found, the schools and students who benefited from Aftons Books-for-Schools
program received the books free of charge. When an organization provides goods or
services free of charge, the organization will necessarily have received the means to
provide those goods or services from another source.
In this case, Afton solicited donations in order to fund a portion of the Books-for-
Schools program. In some cases, the donor indicated a preference for the recipient of the
donated materials; in other cases, the recipient was chosen by Afton. That a donor has
earmarked or restricted its donation does not change the analysis of whether the
beneficiaries of the charity receive goods or services free or at substantially reduced cost.
The tax court therefore erred in not considering Aftons Books-for-Schools program in its
evaluation of North Star factor three.
We also conclude the tax court erred in its finding with respect to Aftons sales of
books to the general public. As the tax court found, Afton regularly sells its books to the
general public at a fraction of their cost. Afton prices its books substantially below cost
because doing so is an integral part of Aftons charitable purpose, thus its book sales
satisfy the threshold test. Considering the proportion of Aftons books that are donated to
schools free of charge and sold to the public at a loss, we conclude that Afton provides a
substantial proportion of its goods free of charge or at considerably less than cost.
In addition, Aftons articles of incorporation limit its operation to charitable and
educational purposes. Its corporate mission statement similarly calls for it to provide
books and curriculum packages free of charge to schools and public libraries. It did not
earn a profit in any of the years at issue and its assets are not available to private interests
upon dissolution. Afton is therefore an institution of purely public charity.
Finally, we consider whether Aftons commercial use of the property for contract
publishing is, in the language of Christian Business Mens Committee, not for the
purpose of deriving a profit and also subordinate to, and * * * reasonably necessary in
meeting a need integrated with, its purely charitable program. 228 Minn. at 561, 38
N.W.2d at 812 (emphasis omitted). Aftons contract book sales met this test during the
tax years at issue. First, Aftons contract publishing was conducted for the purpose of
contributing to payment of Aftons general overhead expenses, rather than to generate a
profit for Afton as a whole. Considering that Aftons expenses generally exceeded its
revenue, such contract publishing was reasonably necessary in attempting to meet
Aftons general overhead expenses. Second, Aftons contract publishing was subordinate
to its general trade publishing in terms of the number of books published in the years at
The tax court therefore erred in denying Afton an exemption from payment of real
property taxes assessed in 2003, 2004, and 2005. Because each tax year must be
evaluated individually, our holding is limited to taxes assessed in those years.


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