Property Tax Exemptions for Charitable Organizations
By: Philip C. Pires and Jason A. Buchsbaum
Connecticut law provides for a number of tax exemptions from municipal property taxes, including a charitable tax exemption set forth at Conn. Gen. Stat. § 12-81(7). To take advantage of this tax exemption, the charitable entity must timely file with the assessor where the property is located a Tax Exempt Application (M3), which is also known as a “quadrennial report.” These reports must be filed every four years. Most recently, non-profits were required to file their quadrennial reports by November 1, 2021 to claim a tax exemption on the October 1, 2021 through October 1, 2024 Grand Lists.
As with all tax exemption statutes, Conn. Gen. Stat. § 12-81(7) is strictly construed against the property owner. Simply being a Section 501(c)(3) organization is not sufficient to qualify for a property tax exemption. The assessor's analysis is required to go well beyond federal tax exemption status. The assessor must consider various factors to determine whether an entity is entitled to a charitable property tax exemption, including the corporate purpose of the entity and whether the entity uses the property exclusively for a charitable purpose. If the assessor denies your exemption application, you have the right of appeal to the Board of Assessment Appeals and the Superior Court.
Three-Part Analysis to Determine if an Organization is “Charitable”
Conn. Gen. Stat. § 12-81(7) requires that the organization seeking an exemption be organized exclusively for charitable purposes, which involves a three-part analysis, and use the property at issue exclusively to carry out those purposes.
First, and most importantly, the court will determine if an entity is organized exclusively for charitable purposes by evaluating the entity’s organizational documents. Exclusivity is material. Thus, the organizational documents should not include both a charitable purpose and a non-charitable purpose.
Once the entity's purpose is determined, the court will then evaluate whether that purpose is charitable. This factor is interpreted broadly. For example, in one case, the court determined that the provision of long-term health care and spiritual support to the elderly in a non-profit, non-discriminatory manner, without regard to individual financial circumstances, is a charitable purpose.
Second, the court will consider whether a charitable entity is entirely self-supporting, rather than being supported by charitable contributions. An entirely self-supporting entity is not exempt for municipal tax purposes. Thus, an entity must be structured in such a way that it is intended to function with the aid of at least some private charitable support and must seek out and receive such support. The court will analyze each situation to determine whether an entity's receipt of outside financial support, including volunteer in-kind services, warrants an exemption. An entity should carefully organize itself so that it will rely on, or at least seek out, outside support, and the assessor should determine whether it is entirely self-supporting.
The final factor considered is whether the entity relieves a state or municipal burden “by pursuing a publicly mandated moral obligation” in exchange for the privilege of receiving a municipal tax exemption. The entity need not completely relieve the state or municipality of its obligation to satisfy this factor.
The Property Must Be Used Exclusively for the Non-Profit’s Charitable Purpose
Once an assessor determines that an entity is organized exclusively for charitable purposes, a further inquiry is required to determine whether the entity uses the municipal property at issue exclusively to carry out those charitable purposes. This is a fact-intensive inquiry, based on a strict construction of the statutory requirement of exclusive use.
Though exclusive use is required, a non-charitable use that is necessary for the entity to carry out its charitable purpose will not defeat a tax exemption. Further, incidental, occasional non-charitable use is also unlikely to defeat a tax exemption.
Conn. Gen. Stat. § 12-88 provides the assessor with the ability to grant a partial exemption. If it is determined that the entire property is not exclusively used to carry out the charitable purpose, a tax exemption can be granted only for that portion of the property that is exclusively used for charitable purposes. The portion of property claimed to be exempt must be physically separate from the rest of the property.
A charitable entity, to the extent it carries out any activity that is not necessary or incidental to its charitable purpose, should segregate that activity to a separate portion of the property so that it is not in jeopardy of losing its ability to claim a municipal tax exemption.
Today, tax assessors are carefully scrutinizing tax-exempt entities and re-evaluating whether they qualify for a municipal property tax exemption as a charitable organization. This trend is likely to continue, especially as municipal budgets are being stretched to their limits. Accordingly, entities claiming a tax exemption must be diligent and should re-examine their organizational documents to ensure compliance with Conn. Gen. Stat. § 12-81(7). Entities should also carefully structure their corporate operations so that they do not lose their tax exemption.
If your organization is contemplating filing a quadrennial report or has been denied a tax exemption by a tax assessor or a Board of Assessment Appeals, we encourage you to consult with one of our experienced tax appeal attorneys.