It’s tax season again. Every April, most Americans begrudgingly turn their attention to their tax obligations. April’s tax significance isn’t limited to one’s federal income tax return, however, April 1 marks the deadline for filing an application for exemption from Oregon property tax.
The state of Oregon imposes a property tax on all real and personal property located in the state. Yet the state also grants an exemption from property tax to certain organizations, including charities. Of course, to qualify for the exemption, a charity must satisfy certain requirements. Specifically, the organization must be a “charitable institution” under Oregon law.
To be classified as a charitable institution, the organization must meet three requirements. First, the charity must have a charitable purpose. Historically, the Oregon Tax Court has found that a charity has a charitable purpose if its articles of incorporation and bylaws so state. In recent years, however, that standard has shifted to require that the charity be organized for a purpose that is something more than “cultural enrichment.” It is unclear exactly where the line will be drawn to separate cultural enrichment and charity, or if such a line will be drawn at all. In the meantime, charities should look closely at the charitable purposes stated in their articles and bylaws and be prepared to defend those purposes as charitable.
Second, the charity must perform activities in furtherance of its charitable purpose. Most charities clearly satisfy this element. Indeed, this element is mostly an exhortation to do the activities that you claim to be doing.
Finally, the charity’s activities must include an element of giving, such that the public at large receives a benefit. This element is perhaps the most difficult to substantiate without forethought and planning. The “giving” conducted by the charity can be thought of as the amount of benefit derived by the public from the charity’s operations. The charity’s giving is often composed of outright grants, scholarships, pro bono services, or even the work of its volunteers rendered to the organization. This giving is often quantified as the ratio of the organization’s giving to income or giving to revenue. Generally, if the charity’s giving is less than half its income, the organization’s status as a charitable institution may be suspect.
In addition to being classified as a charitable institution, the organization must actually use the property in pursuit of a charitable purpose. Although this element does not present an obstacle for most organizations, there is bad news for organizations buying and holding real property: real property is not deemed to be used for charitable purposes until the organization begins constructing improvements!
An additional hurdle for many deserving organizations arises when the organization leases its property from a third party. Leased property is still eligible for the property tax exemption, assuming that the charity uses the property in a way consistent with the exemption. Yet although leased property is generally eligible for exemption, the exemption will apply only if the rent charged under the lease is below market and the benefit of the exemption inures to the charity rather than the landlord. Proving that rent is, in fact, below market requires more than a self-serving statement to that effect. Rather, the charity must produce proof, usually in the form of the property’s rental history or the rent charged at comparable properties. Finally, a landlord’s attempt to wrest the benefit of tax exemption from a charity will not benefit either party, even if obtained in exchange for reduced rent or some other benefit to the charity; indeed, such an attempt will only defeat the claim for exemption.