United States: The Hebron Academy Property Tax Case: What It Means For Maine Not-For-Profit Organizations

Last Updated: June 6 2013
Article by Barbara J. McGuan

The recent Maine Supreme Court ruling affirming Hebron Academy's tax-exempt status for property taxes may provide a sense of relief for many other Maine not-for-profit (NFP) organizations, but the case serves as a reminder that local taxes continue to be hotly contested and raise complex questions—for both municipalities and NFP organizations.

Question: Did Hebron Academy owe property tax on its rental facilities?

The court case addressed the question of whether the private prep school could receive a local tax abatement for property tax on facilities it rents to outside groups. Hebron Academy held that its not-for-profit tax-exempt status extended to the facility rentals. The Town of Hebron argued that Hebron Academy's for-profit use of some of the facilities (especially the ice arena and accommodations for wedding parties and summer camps) ran counter to Hebron Academy's not-for-profit status. 

Answer: No. Hebron retains its tax exemption

The Maine Supreme Court ruled that these rental activities constitute a "de minimis" portion of the school's budget and that they are incidental to Hebron Academy's primary function as an educational institution. 

What does this mean for other organizations who rent their facilities?

This case illustrates an increasing tension in today's economy, pitting some cities against not-for profit organizations. Many NFPs are looking for means of generating income, including fees for renting out their facilities. At the same time, local municipalities are seeking new sources of tax revenue, including payments from NFPs in lieu of property taxes and fees for use of city infrastructure. Some cities are creating more stringent standards for applicants for tax-exempt status. Hospitals and universities with large campuses or endowments are seen as particular targets, but social services and arts organizations are increasingly concerned about retaining their tax-exempt status, which is designed, in part, to recognize what they give to their local communities.

Before this ruling, some NFPs feared they could lose their exemption from property taxes if they, too, rented out facilities. As it stands now, the Hebron Academy case rules that de minimis property rentals that do not interfere with an NFP's primary purpose will not threaten an organization's tax-exempt status.

Words and definitions to watch

For NFPs such as schools, churches, and hospitals looking to this case to determine their own status in regard to local property tax, the main areas of dispute involved the interpretation of the phrases "literary and scientific institution," "sole use," and "de minimis." 

1. Charities, literary and scientific institutions must prove themselves worthy of the names

The property tax exemption law refers to real estate and personal property of charities and scientific and literary institutions "owned and occupied" and used "solely" for the purposes of the organization. In general practice, hospitals, churches, and educational institutions fall under the umbrella of "literary and scientific institution," but Hebron Academy's status as a "literary and scientific institution" was one of the points challenged by the Town of Hebron. The Maine Supreme Court justice in this case affirmed the school's status.

2. The definitions of "incidental" and "de minimis" income may lie in the eye of the beholder

While some believe this is now settled law, we take the cautionary view that the definitions of "incidental" and "de minimis" could continue to be an issue. The type of incidental use of property that is necessary to the operation of an organization's central purpose, such as a fee parking lot for a hospital, seems easier to determine. But the "de minimis" uses—meaning they are not necessary to the institution but also do not distract from its mission—remain more subjective.

3. Primary use of the property counts more than a dollar amount

The financial determination of "de minimis" may be relative to an organization's overall operating budget. At Hebron Academy, the for-profit income made up one percent of the school's budget, but this percentage is not definitive. It may matter more whether the income from the rental activities would be substantial enough to affect decision making or the operation of other facets of the organization. In the case of Hebron Academy, the justice decided that the non-school use of facilities did not interfere with the primary (if not "sole") use of the school's property as an educational institution. For some, this raises questions about how "sole use" will be defined in future cases. It is clear, however, that incidental or "de minimis" uses of property must not interfere with an organization's primary tax-exempt purpose. 

In our opinion, this ruling still does not provide a bright line as to when fees and income-generating property exceed the threshold of "de minimis" and, in fact, the fight over exemptions from property taxes is one that is being waged in other states and municipalities all across the country, as local and state budgets continue to be strained.

According to Jennifer Chandler, a Vice President at The National Council of Nonprofits, "the Council includes this issue among its 'Top Ten' policy issues faced by charitable nonprofits. Whether or not a public charity in Maine will be vulnerable to a property tax exemption challenge will likely turn on the extent of the relationship—both in terms of finances and mission—between an organization's commercial (for-profit) activities and its public benefit activities."

We continue to recommend that you work with an advisor to determine your total tax exposure. If you have any questions about your income sources and your organization's tax-exempt status or other not-for-profit issues, please contact Barb McGuan or your BerryDunn advisor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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