State Tax Snapshot: University of Michigan “Charity Dorm” Denied Charitable Use Exemption

Last week, the Michigan Court of Appeals upheld the Michigan Tax Tribunal’s denial of a charitable-institution property tax exemption to Telluride Association Inc., a nonprofit organization that operates a “self-governing scholarship house” associated with the University of Michigan, on the grounds that Telluride provided its charitable services discriminatorily.

After applying the Michigan Supreme Court’s standards for determining whether an organization is a charitable institution, the court of appeals stated that Telluride failed to meet one of the six factors; namely, that it chose who would receive its services, rather than serving any person who needs the type of charity being offered. Specifically, the court took issue with the fact that Telluride selects its scholarship recipients through a “highly subjective” application process, where candidates submit essays and Telluride House members then select which community service projects to support.

The court acknowledged that there was no evidence that Telluride actually discriminated against any specific class of persons, but noted that the standard for equal protection and qualifying for a tax exemption are not the same. The court emphasized that Telluride was not required to serve all members of the Ann Arbor community, but that once they partnered with nonprofit organizations in the community, they could not choose further which groups of people to serve.

While the court properly applied the supreme court’s factors, one might argue that a charitable nonprofit organized to provide charity, and that actually does so, should be eligible for a property tax exemption, especially where the organization takes its role seriously, using applications and interviews to ensure that its resources are provided prudently.  The opinion states that during the tax years at issue, Telluride had students that participated in programs focused on improving literacy, and fighting hunger, homelessness, and poverty. The decision, however, seems to suggest that a charity must focus on one area, rather than trying to tackle multiple different societal issues, because the latter would inevitably require choosing where money and services are distributed.

The decision also comes at a time when more and more charities are being scrutinized for failing to live up to their charitable purposes. For example, MSN reported in April that Cathy’s Kids, a cancer-research charity founded by NBA player Lamar Odom and his wife, Khloe Kardashian, had not used any of their $2.2 million to fund cancer research, instead organizing youth basketball programs. The San Francisco Chronicle likewise noted that several charities organized to help victims of the September 11th attacks “spent huge sums on themselves,…cannot account for the money they received,…have few results to show for their spending,…and have yet to file required income tax returns.”

With that context, it makes sense that states would want to closely examine charitable organizations to prevent abuse of property tax exemptions. However, should an organization that actually provides the charity it was set up to provide be given the benefit of the doubt when it comes to property tax exemptions?

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