The Supreme Judicial Court (SJC) recently provided important guidance for determining whether a Massachusetts organization is properly classified as a nonprofit entity for exemption from local property tax. In New Habitat v. Tax Collector of Cambridge, the SJC articulated a new standard for determining whether an entity is entitled to a local property tax exemption, balancing the extent of the organization’s “traditionally charitable” purposes and methods against factors that might otherwise weigh against charitable status (such as high fees or limited numbers of beneficiaries). Understanding this new standard is of significant importance to anyone involved in the Massachusetts nonprofit, property taxation, and philanthropy sectors.
I. Background
This case arose out of a dispute between the charitable organization New Habitat and the City of Cambridge. New Habitat’s stated mission is to “provide long-term housing for persons with acquired brain injury” and to promote the well-being of its residents through educational and health programs. Located in a residential neighborhood in Cambridge, New Habitat has space for up to four residents; each resident is required to pay fees of approximately $17,000 per month, in addition to a refundable $150,000 entrance fee.
Although New Habitat qualified for federal tax-exempt status as a publicly supported charity described in Internal Revenue Code section 501(c)(3), the City of Cambridge contended that the substantial fees charged by New Habitat to its limited number of wealthy residents meant that New Habitat did not qualify for a property tax exemption under Mass. Gen. Laws c. 59, § 5. The City therefore assessed property taxes on New Habitat in three consecutive years. When New Habitat brought suit to recover these tax payments, the Superior Court agreed with the City that New Habitat did not qualify for a property tax exemption, and granted summary judgment to the City. The SJC granted New Habitat’s petition for direct appellate review.
II. The SJC Decision
In New Habitat v. Tax Collector of Cambridge, the SJC focused on three key questions: 1) the extent to which the charging of a fee restricted charitable status, 2) the extent to which the small number of beneficiaries restricted charitable status, and 3) the extent to which the wealth of the beneficiaries restricted charitable status.
The SJC began by outlining existing Massachusetts case law, which defines a charitable organization as one whose “dominant purpose” is for the “public good,” including the relief of “disease, suffering, or constraint.” The Court also reiterated several “nondeterminative factors” it has employed when determining whether an organization qualifies as “charitable.” These factors include whether the organization provides low-cost or free services, whether it charges fees, the number of potential beneficiaries, and whether the organization limits its services to individuals with certain qualifications or conditions.
The Court then established the fundamental framework for its analysis, articulating a standard that balances these factors against the organization’s charitable aims. The SJC held that “the closer an organization’s dominant purposes and methods are to traditionally charitable purposes and methods, the less significant these factors will be in our determination of the organization’s charitable status.” Applying this “traditionally charitable” standard to the New Habitat facts, the SJC held that “New Habitat has purposes and methods close to traditionally charitable ones,” observing that New Habitat cares for the injured and provides long-term assistance to disabled residents.
With this standard in mind, the SJC turned first to the question of the substantial fees charged by New Habitat. The Court held that for “traditionally charitable” entities, where a fee is “not unreasonable” in relation to the service provided and helps to “advance the organization’s charitable purpose,” the fact that the organization charges fees for its services “plays a less significant role in our determination of its charitable status” - even if those fees are, in the Court’s own words, “substantial.” Further underscoring this point, the SJC also expressly overruled any previous cases that could be read to imply that organizations could be denied Massachusetts charitable status solely on the basis of the size of the fees they charged.
Turning next to the question of whether the small number of beneficiaries disqualified New Habitat from charitable status, the SJC applied the same “traditionally charitable” standard as it did for fees. Finding that “the number of an organization’s beneficiaries [is] less significant the closer its dominant purposes and methods are to traditionally charitable [ones],” the SJC held that New Habitat’s “traditionally charitable” purposes - as well as its unrebutted evidence that head injury patients were best served in residences with small numbers of individuals - meant that the limited number of beneficiaries did not preclude New Habitat from charitable status.
Finally, the SJC turned to the question of the relative wealth of the New Habitat beneficiaries. The City of Cambridge argued that because New Habitat’s residents could afford alternative living arrangements, the New Habitat facility did not directly avert the possibility that the beneficiaries would become dependent on the government. Thus, the City argued that New Habitat should not qualify as a charity. The SJC disagreed here as well, noting that the test for charitable status does not depend on the wealth of the beneficiaries, and declaring that such a requirement would be unworkable in practice.
III. Analysis
With New Habitat, the SJC has not only substantially rebalanced the factors for determining whether or not an organization is eligible for Massachusetts charitable status, but has done so in a manner that appears to expand greatly the range of eligible entities. Prior to New Habitat, an organization would have been highly unlikely to obtain charitable status in Massachusetts if it charged high fees for its services, or had limited beneficiaries. (Indeed, under factual circumstances similar to those in New Habitat, the Minnesota Supreme Court recently concluded that a nonprofit daycare center that charged “market rate” tuition was not entitled to a property tax exemption under Minnesota law.) Under the New Habitat standard, however, the SJC has now placed much greater emphasis on whether an organization can demonstrate that it has “traditionally charitable” purposes. Thus, it appears that New Habitat provides both very small entities — as well as entities with highly specialized missions — with substantial new legal support should they decide to pursue state charitable status and the accompanying property tax exemption.