A Minnesota court ruling could cost you your non-profit status

A December court decision in Minnesota could cost some Jewish non-profits their tax-exempt status, according to philanthropy experts.

The Minnesota Supreme Court ruled this winter that the Rainbow Child Care Center in Red Wing was no longer exempt from paying property taxes as a 501c3 because it did not provide discounts on tuition to anyone based on financial need.

The New York Times reported that this ruling “sent tremors” through the non-profit world, as the case could set precedent for other states to look into the possibility of taking away the tax-exempt status of mega-wealthy institutions such as hospitals and universities. But Jewish non-profits also could run into trouble, say Fundermentalist sources, as they turn increasingly to a fee-for-service model in an attempt to gain financial solvency.

The idea behind tax exemptions is that a non-profit should provide some sort of service that is beneficial to the greater society that the government does not provide -– be it a social welfare, religious service, educational, political or some other service that is for the greater good of society. The exemptions encourage the existence of these non-profits and in effect save the government the burden of having to provide the services on its own.

While the federal government decides which organizations are exempt from paying income tax, state governments decide on property-tax exemptions. According to the Times, property-tax exemptions cost local governments some $8 billion to $13 billion per year.

The Rainbow Child Care Center, while it provides a public service, charges its clients. The Minnesota court ruled, essentially, that Rainbow, which does not give scholarships based on financial need, was not providing a service for the public good and was essentially operating as a for-profit entity.

This could be a real problem for Jewish organizations – and especially for Jewish community centers, said Marc Stern, the lead counsel for the American Jewish Congress, in an interview with the Fundermentalist.

“In some states, you’re not a little pregnant,” Stern says. “There are very few JCC health centers that give away anything. Does that mean that the whole JCC system could lose its tax exemption?”

The decision could also force entities such as Jewish camps and Jewish family service organizations to look seriously at whether they are providing enough services free of charge or at discounts, Stern said.

These organizations should take a warning from the 1992 Pennsylvania court case in which several Jewish camps lost their tax-exempt status on all but a portion of their property because it was deemed that the camps were not purely public charities.

In general, the federal and local governments are clamping down on non-profits, NYU’s Richard Marker tells the Fundermentalist.

Some of that, says Marker, is purely because “we are seven and a half years into the administration of an administration which believes that the only good tax is no tax and that if there is money to be spent it should be spent on wars,” which leads to a reduction of local human services.

But, he says, there is a very real question: Should Harvard, with a $35 billion endowment, receive the same tax breaks as a small soup kitchen?

The trouble is that it is easier for the government to set precedent for the Harvards of the world – which have millions of dollars to spend on top-notch lawyers – by going after the Rainbow Child Care Centers of the world – which don’t.

The interesting part of the problem, however, is that nonprofits may have dug this hole for themselves.

The Jewish federation system was set up in part to help charities cover their end-of-the year deficits. “[The federations] would be connected with [the organizations] and after they did their best jobs, they would cover their deficit,” Marker says.

But the Jewish nonprofit world has turned more to private funding, and private donors increasingly want to see organizations boast financial surpluses as a sign of being well run.

“There is increasingly pressure for nonprofits to move toward fee-for-service,” Marker says, “because funders are saying to them, ‘We wan you to be as independent as you can’ because the responsible nonprofit is one the maximizes its income source.’”

The Fundermentalist has seen this fee-for-service model increasingly adopted by the public charities in the Jewish world as well. United Jewish Communities chairman Joe Kanfer has said that the UJC, with a mandate from the federations it serves to cut the organization’s budget, will increasingly offer some of its consulting services for a fee. And the executive vice president of the American Jewish Joint Distribution Committee, Steve Schwager, told the Fundermentalist this week that the JDC will most likely turn more and more to the fee-for-service model on the ground in the former Soviet Union, where some of the Jews who were receiving JDC services for free can afford to pay for them.

Stern, of the AJCongress, tells the Fundermentalist that he is thinking about organizing some sort of Jewish organizational response to the ruling against Rainbow and to help prepare Jewish organizations for increased scrutiny. But, he says, he tried to do the same in 1992 and got little backing from the Jewish world.

“The attitude was why raise questions by sticking your head up,” he said.

(One personal note from the Fundermentalist. It is my official recommendation that the Jewish Community of Manhattan on the Upper West Side start offering scholarships to those who work for Jewish not-for-profits, such as JTA. Some of us are tired of having to go to Crunch because it is $70 a month cheaper than the J, and we’d also love to start playing basketball again.)

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