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Fairbanks North Star Borough v. Dena' Nena' Henash (04/02/2004) sp-5792
Fairbanks North Star Borough v. Dena' Nena' Henash (04/02/2004) sp-5792
Notice: This opinion is subject to correction before
publication in the Pacific Reporter. Readers are
requested to bring errors to the attention of the Clerk
of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501, phone (907) 264-0608, fax (907) 264-0878,
e-mail corrections@appellate.courts.state.ak.us.
THE SUPREME COURT OF THE STATE OF ALASKA
FAIRBANKS NORTH STAR )
BOROUGH, ) Supreme
Court Nos. S-9849/10029
)
Appellant/Cross-Appellee, ) Superior Court No. 4FA-99-
1858 CI
)
v. ) O P I N I O N
)
DENA' NENA' HENASH a/k/a ) [No. 5792 - April 2, 2004]
TANANA CHIEFS CONFERENCE, )
INC., )
)
Appellee/Cross-Appellant. )
________________________________)
Appeal from the Superior Court of the State
of Alaska, Fourth Judicial District,
Fairbanks, Richard D. Savell, Judge.
Appearances: A. Rene' Broker, Assistant
Borough Attorney, for Appellant/Cross-
Appellee. Michael J. Walleri, Law Offices of
Michael J. Walleri, Fairbanks, for
Appellee/Cross-Appellant.
Before: Fabe, Chief Justice, Matthews,
Eastaugh, Bryner, and Carpeneti, Justices.
EASTAUGH, Justice.
MATTHEWS, Justice, dissenting.
I. INTRODUCTION
Tanana Chiefs Conference, Inc. (TCC), also known as
Dena' Nena' Henash, is a regional Native nonprofit corporation
that uses its properties in the Fairbanks North Star Borough to
provide health, social, community development, and similar
services throughout Interior Alaska. When TCC sought charitable-
purposes tax exemptions for some of its properties, the borough
assessor denied TCC's applications, finding that TCC's programs
were largely funded by government contributions and that TCC's
receipts usually exceeded the cost of operating its programs.
TCC appealed and the superior court reversed, ruling that six of
TCC's parcels were wholly or partially exempt. The borough and
TCC both appeal. We conclude that TCC's properties were not
altogether ineligible for charitable-purpose exemptions, and that
the assessor should have granted most of TCC's exemption
applications. We therefore affirm the decision of the superior
court.
II. FACTS AND PROCEEDINGS
Tanana Chiefs Conference is a regional Native nonprofit
corporation organized under the Alaska Native Claims Settlement
Act.1 It represents forty-three Interior Alaskan Native
communities and qualifies for exemption from federal income tax.2
TCC owns several properties in the Fairbanks North Star Borough,
including the six-story TCC building, the TCC Annex (the BESCO
building), and the Paul Williams House. Among other things, TCC
offers medical services and conducts lands management, tribal
government assistance, and natural resources programs at these
properties.
Village councils select forty-three representatives for
TCC's board of directors, which elects a nine-member executive
board. The corporation has five major divisions: Administration
and Finance, Planning and Development, Health Services, Native
Services, and Subregional/Village Programs. TCC's programs are
funded largely through its contracts with the federal and state
governments. These contracts support TCC's dental and eye
services, mental health services, community services for women
and children, economic and business support for members of the
community, and sanitation maintenance training. TCC's base
funding comes from contracts with the Bureau of Indian Affairs
and the Indian Health Services under the Indian Self-
Determination Act, 25 U.S.C. 450 et seq.
In 1996, 1997, and 1998 federal and state government
sources provided about ninety percent of TCC's program funds.
The remainder of TCC's funding came from what TCC calls "self-
generated money," including interest and investment income,
rental income, and program income from third-party insurers,
Medicare, and Medicaid.
Real property exclusively used for "non-profit . . .
charitable purposes" is exempt from municipal property tax in
Alaska.3
In March 1997 TCC filed ten appeals with the borough
assessor seeking exemptions from real property taxation for the
BESCO building, the Paul Williams House, and five floors of the
TCC building. TCC sought these tax exemptions on the ground it
used these properties to provide services for "charitable
purposes." TCC acknowledged that some of its property is
taxable, and only sought exemption for the tax lots in dispute
here. The assessor denied tax-exempt status for each parcel in
July 1997 and declined to apportion the space for any of the
parcels between exempt and non-exempt uses.
TCC appealed the assessor's denial to the superior
court, which remanded to the assessor for further proceedings
because the court held that the assessor had not made specific
findings of fact. On remand, the assessor conducted a hearing
and entered findings of fact and conclusions of law. The
assessor again denied TCC's exemption requests for each parcel.4
TCC again appealed the assessor's decision to the superior court.
In a thoughtful memorandum decision issued November 17,
2000, Superior Court Judge Richard D. Savell thoroughly reviewed
the record, the assessor's findings and conclusions, and the
pertinent constitutional and statutory provisions and case law.
The superior court first rejected the borough's argument and the
assessor's conclusion that receipt of government funding
precluded any exemption. The court then examined the use of each
contested parcel to determine its eligibility for tax exemption.
Concluding that the assessor's denials as to six of the disputed
parcels lacked a reasonable legal basis, the superior court
reversed in whole or in part the assessor's rulings as to those
parcels. The superior court then awarded TCC about forty percent
of its attorney's fees.
The borough argues on appeal that no part of TCC's
properties should be exempt from taxation. It therefore asks us
to reverse those parts of the superior court decision that found
some of TCC's parcels to be tax-exempt. TCC's cross-appeal asks
us to reverse the superior court decision to the extent it
affirmed the assessor's denial of TCC's exemption applications
for two of the parcels. TCC's cross-appeal also argues that the
superior court erred by failing to award TCC full reasonable
attorney's fees; it argues alternatively that TCC should receive
seven-eighths of its attorney's fees.
III. DISCUSSION
A. Fairbanks North Star Borough's Appeal: Was TCC Entitled to
Any Exemption for a Charitable Purpose?
1. Standard of review
Because the superior court, as the intermediate
appellate court, did not conduct a trial de novo on appeal, and
made no findings of fact of its own,5 we independently review the
decision of the borough assessor.6 The borough asserts that its
"argument ultimately rests on an interpretation of `charitable
purposes.' " It asks us to interpret the charitable-purposes tax
exemption to be inapplicable if the property owner receives "full
compensation for its services through a combination of government
contracts, third-party insurers, and participant fees, and . . .
consistently earns more income than it expends . . . ." This
argument requires us to interpret the Alaska Constitution, the
Alaska Statutes, and case law. As to this argument, we
consequently review the assessor's decision under the
"substitution of judgment test" and do not defer to the
assessor's administrative expertise.7 To the extent the
borough's arguments require review of the assessor's factual
findings, we apply the "substantial evidence" standard of review.8
The main question involved in this case is one of law
to which "we apply our independent judgment and adopt the rule of
law that is most persuasive in light of precedent, reason, and
policy."9
Taxpayer exemptions are strictly construed against the
taxpayer and in favor of the taxing authority.10 The burden of
proving eligibility for an exemption is on the taxpayer.11 The
policy underlying the rule of strict construction and the burden
of proof is:
All property is benefited by the security and
protection furnished by the State, and it is
only just and equitable that expenses
incurred in the operation and maintenance of
government should be fairly apportioned upon
the property of all.[12]
Boards of equalization may spatially apportion exempt
from nonexempt uses of a building and tax the nonexempt space.
In all contested cases boards of equalization are required to
make findings of fact sufficient to explain the reason for their
decisions.13 Such findings are reviewed deferentially and will be
affirmed if they are supported by substantial evidence.14
2. Charitable-purpose exemption analysis
Per article IX, section 4 of the Alaska Constitution,
property is exempt from taxation in Alaska if it is "used
exclusively for non-profit . . . charitable purposes, as defined
by law . . . ." Section 4 provides in relevant part:
The real and personal property of the State
or its political subdivisions shall be exempt
from taxation under conditions and exceptions
which may be provided by law. All, or any
portion of, property used exclusively for non-
profit religious, charitable, cemetery, or
educational purposes, as defined by law,
shall be exempt from taxation. Other
exemptions of like or different kind may be
granted by general law. All valid existing
exemptions shall be retained until otherwise
provided by law.[15]
Alaska Statute 29.45.030(a)(3)16 and Fairbanks North
Star Borough (FNSB) Ordinance 3.08.02017 are substantially similar
to article IX, section 4, but do not include the "as defined by
law" clause.
"A taxpayer claiming a tax exemption has the burden of
showing that the property is eligible for the exemption.
Furthermore, the courts must narrowly construe statutes granting
such exemptions."18 But, as the superior court observed, "[t]his
canon of strict construction `is an aid to, not a substitute for,
statutory interpretation; the interpretation must still be a
reasonable one.' "19
The borough asserts that none of TCC's properties is
eligible for a charitable-purposes exemption. It ultimately
founds this assertion on the assessor's factual finding that TCC
is fully, or more than fully, remunerated for its services by
federal and state government funding, medical insurance payments,
and its investment and rental income. It asks us to read the
charitable-purposes exemption in light of three proposed
eligibility requirements, and thus argues that TCC's activities
are not for charitable purposes because they (1) do not provide
the public with a gift or significant benefit, (2) do not lessen
a governmental burden, and (3) do not subsidize a socially worthy
activity.20 The borough's opening brief attributes considerable
importance to the fact that government payments fund a very
substantial part of TCC's services: "TCC's use of its property to
fulfill government contracts and perform service for which it is
fully paid . . . by government . . . does not constitute
charitable use of its property." Its reply brief refines its
argument in the following terms: "It is not the source of the
support but the amount of the support (i.e., full remuneration
for services) that disqualifies TCC from charitable tax-exempt
status." A heading in its reply brief states that "Charity Can
and Does Exist with Government Support."
TCC responds that the controlling factor in determining
eligibility for Alaska's charitable-purposes exemption is the
property's actual use. It argues that Alaska precedent does not
support the three requirements the borough proposes, and that the
programs TCC conducts at its properties satisfy Alaska's
charitable-purposes exemption. TCC concedes on appeal that it
received about ninety percent of its funding from the federal
government during the relevant tax years, but argues that the
source of funding does not determine charitable-purposes
eligibility in Alaska.
a. How we analyze exemption claims
The relevant constitutional and statutory provisions
specify that to be exempt from local taxation, property must be
used exclusively for "non-profit religious, charitable, cemetery,
hospital, or educational purposes."21 Our cases have interpreted
these provisions to require a two-part inquiry: first, whether
there is a nonprofit, charitable purpose, and second, whether the
property is being exclusively used for an exempt purpose.22
As to the first of these, we read "non-profit" to
impose a substantive qualification that is not identical to the
"charitable purposes" requirement, both because the
constitutional delegates included the "non-profit" qualifier in
article IX, section 4 despite the absence of that qualifier in
the existing territorial exemption statute,23 and because we
interpret the words of the constitution to avoid rendering any
words superfluous.24
The "non-profit" qualifier modifies "purposes," and the
constitution does not expressly refer to the organization that
owns or uses the property. In discussing eligibility, the
primary exemption provisions do not refer to owner or user
organizations.25 This suggests that the focus under the primary
exemption provisions is on the purpose of the use, not on the
organization.
We note that AS 29.45.030(c) requires that if property,
otherwise eligible for exemption under subsections .030(a)(3) and
(4), generates "income," the organization using the property must
be a "nonprofit . . . charitable . . . group[]."26 We applied the
predecessor of subsection .030(c) in Greater Anchorage Area
Borough v. Sisters of Charity of the House of Providence, and
affirmed the denial of an exemption for three income-generating
floors of the owner's medical building.27 The medical center's
owner arguably had the purpose of operating a nonprofit hospital.
But it received rental income from physicians who used office
space on those floors to conduct their private medical practices.
Because the actual users of these income-generating properties
were not nonprofit charitable groups, AS 29.45.030(c) deprived
the properties of any exemption they otherwise would have
received under AS 29.45.030(a)(3) or (4). Thus, unlike
subsections .030(a)(3) and (4) - which look to the nature of the
owner's purpose - subsection .030(c) looks to the nature of the
user.
It is not clear whether subsection .030(c) would apply
here. The borough does not rely on it and the assessor did not
base the exemption denial on that subsection, possibly because
it is not clear that subsection .030(c) applies if the "group"
using the property is also the owner seeking the exemption, and
possibly because it is not obvious that the governmental support
TCC received can be considered "income." Certainly there is no
dispute before us about TCC's status as a nonprofit organization.
The assessor found that TCC was a nonprofit organization. The
borough does not take issue with this finding, and does not
assert on appeal that TCC was operating in violation of the
Internal Revenue Code or its own articles and bylaws. TCC's
501(c)(3) nonprofit status for purposes of the Internal Revenue
Code28 is not necessarily determinative, although its status and
corporate purposes are consistent with finding the purposes to be
nonprofit.
The borough does argue that TCC was not acting as a
charity, but makes that argument only in context of its claim
that TCC used its property for "contractual," not "charitable,"
purposes. The borough does not assert that subsection .030(c)
applies here. As the borough recognizes, its "argument
ultimately rests on an interpretation of `charitable purposes.' "
Consequently, the question raised by the borough in
this appeal is whether TCC was motivated by "charitable
purposes," not whether TCC itself was a "charity."
We therefore next look to the purposes for which the
parcels were used. The record confirms that the assessor did not
err in finding that the programs TCC conducted on those parcels
generated a surplus in most years. And as to one of the parcels,
the assessor found that TCC had engaged in lease activity that
"results in a profit" to TCC with respect to the Fairbanks
Community Mental Health Clinic. But we think it significant that
the assessor did not find that the other disputed parcels were
not used for nonprofit purposes. The fact that use of a given
parcel created an operational surplus does not necessarily
preclude a conclusion that the activity had a nonprofit purpose.
That a given charity manages, through effective fund-raising and
careful management, to generate a surplus while carrying out its
charitable purposes does not necessarily deprive the charity of a
property tax exemption.
Our decisions have previously discussed this nonprofit
qualifier only briefly, and have translated it to mean that a
property generating income will not lose its exemption if payment
is "not sought as a result of a dominant profit motive."29
We conclude that the nonprofit qualifier does not
require us to affirm the assessor's decision denying all of TCC's
exemption applications. (We will return to the question of
profit motive in Part III.B.2, when we consider TCC's cross-
appeal concerning exemptions for two specific parcels.)
Most of our charitable-purposes tax exemption cases
revolve around the second part of the analysis: whether the
property is being used exclusively for a charitable purpose. We
have interpreted "exclusive use" to require that all uses of the
property be for the "direct and primary" exempt purpose.30
Although the exclusive-use requirement precludes temporal
apportionment if property is used for both exempt and nonexempt
purposes, we recognized in Catholic Bishop that the constitution
allows spatial apportionment.31 Accordingly we have concluded
that operation of a church radio station that sold commercial
radio time was not an exclusive use of property for a religious
or charitable purpose.32 In so holding, we did not think it
relevant that the radio station's income was used to fund
missionary activities. We have also held that a hospital did not
use its property exclusively for hospital purposes because it
leased the property to doctors for private office space.33 We
recognized an exception to the exclusive-use requirement in City
of Nome v. Catholic Bishop of Northern Alaska, in which we held
that de minimis use of property for a non-exempt purpose did not
preclude an exemption.34 The exclusive-use requirement also
requires analysis of how the property is actually used.
The eligibility analysis in this case ultimately turns
on the meaning of "charitable purposes" in Alaska. Noting that
neither the constitution nor AS 29.45.030 defined "charity" or
"charitable," in Matanuska-Susitna Borough v. King's Lake Camp
we approvingly quoted this statement as typifying the "broad
scope" given to these terms:
It is quite clear that what is done out of
good will and a desire to add to the
improvement of the moral, mental, and
physical welfare of the public generally
comes within this meaning of the word
"charity." To crowd out coarseness, cruelty,
brutality from social man undoubtedly results
in this betterment.[35]
We later characterized this statement as "the broad common law
definition of `charity' " and observed that this definition
reflects the "humanitarian rationale" of property tax exemptions:
they are granted "as an aid or encouragement to individuals,
corporations, or businesses, to do something supposedly for the
good of the community at large, although such an act is not
itself a proper or even permissible function of the government."36
This definition provides some guidance, but it does not purport
to specify prerequisites for eligibility. It provides only a
general framework for determining eligibility. Applying this
framework, we have concluded that properties used for a youth
summer recreational camp,37 a youth hostel,38 and a church radio
station39 were being used for charitable purposes.
Our "charitable purposes" doctrine also requires
analyzing whether the property sustains activities motivated by a
"dominant profit motive."40 This factor parallels the nonprofit
requirement discussed above. Exemption is foreclosed if there is
a "real profit motive" in the undertaking.41
We considered the effect of deriving income from
property in King's Lake Camp and Catholic Bishop. We held that
property will not lose an exemption even if payment is received
for the use of the property if (1) the property is used
exclusively for exempt purposes; (2) the payment is not sought as
a result of a dominant profit motive; and (3) the payment is both
incidental to and reasonably necessary for the accomplishment of
the exempt activity and does not exceed operating costs.42 We
have applied this test in cases involving user fees,43 rental
income,44 and donations.45
b. Source of funding and "government contractor"
status
Neither the constitution, the statute, nor the
borough's ordinance mentions source of funding as a factor
controlling or bearing on the exemption right. Nor have our
decisions addressed what effect receipt of government funds may
have on exemption eligibility. Our property tax exemption cases
have primarily turned on whether the property was actually used
exclusively for an exempt purpose.46
The superior court understood the borough to be arguing
below that none of the TCC properties was exempt because the
government was the source of most of the funding for TCC's
programs. The superior court treated this "source of funding"
argument as a threshold issue and held that receipt of government
funding did not preclude exemption.
The borough does not squarely advance a government
"source of funding" argument here. It asserts, especially in its
reply brief, that it is not arguing that substantial government
funding is a complete disqualifier. It is therefore not
necessary for us to consider whether the superior court erred as
a matter of law in holding that it is not.
The borough nonetheless argues that TCC was acting as a
government contractor, and was therefore acting not to fulfill
charitable purposes, but to satisfy its contractual undertakings
to the government. And it argues that substantial government
funding remains relevant to the charitable-purposes analysis it
proposes.
Courts elsewhere are split on whether substantial
government funding affects eligibility for charitable-purpose
exemptions. Some hold that substantial government funding
precludes an exemption, and some do not. These results may turn
on considerations that do not apply in Alaska. For example, in
many of the jurisdictions that have held that receipt of
government funding precludes a charitable-purpose exemption, the
courts were bound by a statutory or constitutional framework that
required the organization to be a public charity,47 or they
applied multi-factor tests valuing support provided by donations.48
It may also be significant that some cases in which receipt of
government funding rendered property ineligible, federal grant
money was used to construct low-income housing and subsidize
rent.49
In contrast, many of the cases upholding exemptions
despite government funding involved corporations that provided
services to their beneficiaries.50 In some jurisdictions that
have adopted multi-factor tests that consider source of funding,
courts have not distinguished between government funding and
donations.51 We find this latter group of cases to be more
persuasive.
Rather than argue that government funding is a complete
disqualifier, the borough argues that TCC was a "government
contractor," and therefore did not act for charitable purposes.
Assuming that TCC was a government contractor, we decline to hold
that its government contractor status necessarily renders its
property altogether ineligible for any exemption. Such a status
would not necessarily be inconsistent with finding that the
property was used exclusively for "non-profit . . . charitable
. . . purposes."52
In any event, the government's financial support for
TCC is largely provided through the Indian Self-Determination and
Education Assistance Act (the Self-Determination Act).53 The
unique relationship between the federal government and Indian
tribes has long led the government to provide support to tribes
for health, education, employment, irrigation, administration,
and real estate services.54 These services encompass a wide
variety of activities, some of which are traditionally
governmental and some of which resemble those conducted by
private business. The federal government's purpose of satisfying
its trusteeship responsibility is essentially charitable, i.e.,
is motivated by "good will and a desire to add to the improvement
of the moral, mental, and physical welfare of the public
generally."55 The Self-Determination Act confirms the federal
government's trust responsibility.56 The act has the purposes of
improving the provision of federal services by making them more
responsive to tribal needs, and improving the functioning of the
tribes through increased self-government.57 Thus, Self-
Determination Act contracts are not merely conduits for federal
funding that would be provided in any event. By reorganizing the
services and their provision, the contracts permit tribes to
"improve[] . . . the moral, mental, and physical welfare" of
individuals and the group.58 We also note that TCC contends that
it acts on behalf of several native villages that may be too
small to administer Self-Determination Act contracts themselves.
We conclude that TCC's activities in satisfying its Self-
Determination Act contracts with the government are motivated by
purposes that are properly characterized as charitable. This
satisfies the charitable-purposes criterion for exemption in
Alaska.
c. Other possible factors
The borough contends that because TCC receives full
compensation for its services through a combination of
"government contracts, third-party insurers, and participant
fees" and operates with a surplus, TCC's property does not
qualify for a charitable exemption. Thus, it asks us to add
additional factors to our charitable-purpose analysis: whether
the property's use provides a gift or significant benefit,
lessens a governmental burden, and subsidizes a socially worthy
activity. TCC responds that Alaska's charitable exemption
analysis focuses only on whether the property is used for a
nonprofit and charitable purpose. Thus, TCC concludes that the
borough's proposed factors are contrary to Alaska law.
Our constitutional and statutory exemption provisions
do not catalogue all factors that might define eligibility for
charitable-purpose exemptions.59 It is not desirable, assuming it
were possible, for us to attempt to identify in context of this
case all factors that should determine exemption eligibility in
future disputes. We therefore decline to adopt the borough's
proposed factors as comprising a comprehensive or dispositive
test that would control charitable-purpose analysis. Rather, we
think it is appropriate to consider any circumstance relevant to
whether a particular property owner has satisfied the
constitutional and statutory standard. The circumstances the
borough discusses are relevant, but they are not necessarily
exhaustive or controlling.
The borough first argues that we should define
"charitable purpose" to require "a gift to the general public or
a significant public benefit." We separately consider these
alternatives.
Significant public benefit. The Alaska Constitution,
the Alaska Statutes, and the borough's ordinance do not
precondition charitable-purpose exemption eligibility on use
providing a "significant public benefit." Nonetheless, our broad
common law definition of charity contemplates some public
benefit. That definition states, "It is quite clear that what is
done out of good will and a desire to add to the improvement of
the moral, mental, and physical welfare of the public generally
comes within the meaning of the word `charity.' "60 This concept
of charity - as an activity that improves public welfare -
reflects the public policy behind tax exemptions. We noted
generally in Sisters of Providence in Washington, Inc. v.
Municipality of Anchorage that "exemptions are granted as the
quid pro quo for non-profit contributions of services and aid to
society in general."61
Charitable activities provide a public benefit whether
or not the beneficiaries are indigent.62 Programs that serve only
a portion of the community can also "add to the improvement of
the . . . welfare of the public generally."63 Thus, in McKee v.
Evans, we upheld an educational-purpose exemption for property
used for a vocational training program for union apprentices.64
We held there that educational-purpose tax exemptions require a
"substantial public benefit."65 We observed that "the general
public is clearly benefited both by the increased opportunity for
Alaskans to obtain vocational training not otherwise available,
and by the increased quality of service from a skilled trade."66
We therefore conclude that a use providing a public
benefit indicates that the property is being used for a
charitable purpose.
Gift to the general public. The borough also argues
that charity requires a "gift to the general public." (Emphasis
added.) In support of its argument, the borough cites King's
Lake Camp, which quoted Lord Camden, an eighteenth-century
chancellor of England, who defined charity as "[a] gift to a
general public use, which extends to the poor as well as to the
rich."67 The borough defines "gift" as something "bestowed
voluntarily and without compensation." It argues that "a gift to
the community simply requires that . . . some material gap exists
between what TCC receives and what it gives." It also contends
that "[i]t is not the source of the support but the amount of the
support (i.e., full remuneration for services) that disqualifies
TCC from charitable tax-exempt status." Thus, the borough argues
that because TCC receives full compensation for its services
through government funds and other receipts, it should not
qualify for an exemption.
The exemption provisions in the constitution, statutes,
and ordinances do not precondition exemption eligibility on
whether the property supports programs that are fully funded from
such outside sources as the government. We have never
interpreted charitable purpose to require, as the borough
proposes, a "material gap" between what the charity gives and
what the charity receives.
Rather, our decisions have recognized that the
existence of a gap between what the beneficiary pays and the
value of the services the beneficiary receives could be evidence
of a charitable purpose. We held that operating a youth hostel
that provided temporary lodging for travelers for a low daily fee
was a "gift to the general public," because we concluded that
"although some who stay at the Hostel are not needy and could pay
more, no one is turned away if the fees are not paid."68
Although providing services free of charge is evidence
of a charitable purpose, we have not explicitly conditioned
charitable purpose eligibility on whether the property supports
programs that are free to those who cannot pay. Thus, we have
held that properties supporting programs that charge a user fee
were exempt, as long as the user fee is "not inspired by a
dominant profit motive" or does not exceed operating costs.69
Our charitable-purpose exemption cases have not
required that there be a "material gap" between what TCC receives
and what it gives. The borough argues that TCC does not provide
a gift to the community because even if the beneficiary is not
paying TCC for its services, the government is compensating TCC
for the services it provides. Thus, the borough concludes that
TCC's service is not gratuitous and not a gift to the community.
The borough's argument implies that only entities whose receipts
do not cover all of their operating costs are eligible for
charitable-purpose exemptions.
We hold that whether a nonprofit organization receives
outside funding allowing it to provide services at reduced cost
or no charge to the community does not determine whether property
is being used for a charitable purpose. Our cases establish that
receipt of payments or compensation for using the property is not
fatal to a charitable-purpose exemption.70 An otherwise exempt
property that generates revenue will not lose its exemption if
(1) payment is not sought as a result of a dominant profit
motive; (2) payment is both incidental to and reasonably
necessary for the accomplishment of the exempt activity; and (3)
payment does not exceed operating costs.71
Lessening a governmental burden. The borough argues
next that charitable-purpose eligibility should require the
lessening of a governmental burden. It contends that by
receiving substantial government funding for activities the
government is obligated to perform, TCC does not lessen a
governmental burden.72 The borough argues that charitable tax
exemptions are justified because charitable entities perform
functions that governmental institutions would otherwise be
obligated to perform.
Our constitution and statutes do not mention lessening
of a governmental burden as a factor in charitable-purpose
analysis, nor do our cases. Although we generally acknowledge
that tax exemptions are granted to compensate those who give
"nonprofit contributions" to the general public,73 we have never
conditioned tax exemption eligibility on whether an organization
reduces a governmental burden by either providing services the
government would otherwise have to perform or supporting its
services without government funding. In McKee v. Evans, we
granted an educational-purpose exemption for property used for
electrician apprenticeship training.74 We considered there
whether relieving a governmental burden was relevant to
educational-purpose analysis under article IX, section 4 of the
Alaska Constitution and former AS 29.10.336(a).75 We rejected an
argument that school properties qualifying for the educational-
purpose exemption must provide programs similar to those offered
at state institutions.
The rationale for this [proposed] limitation
is that only such school properties as
relieve some substantial educational burden
from the state should receive rights of tax
exemption. Although this quid pro quo
reasoning has superficial appeal in a period
of financial crisis for local government, we
find it unconvincing.[76]
We also concluded that it was within the legislature's province
to decide whether eligibility for an educational-purpose
exemption should require a lessening of governmental burden:
In Alaska the power of deciding what types of
education are to be publicly supported . . .
by tax exemption, is vested with the
legislature. AS 29.10.336 in no way delimits
the term "educational purposes" and we see no
justification for this court to give to that
term anything other than its ordinary
meaning.[77]
The borough reasons that because TCC receives
substantial and direct government funding, its programs do not
lessen a governmental burden. The borough argues that because
TCC receives most of its funding from the government, the
government is already assuming a large burden. Thus, it claims,
TCC need not receive further subsidy in the form of a tax
exemption.
But as the borough elsewhere concedes, receipt of some
government funding is not necessarily inconsistent with a
charitable purpose. We decided above that government funding is
not necessarily determinative. And precluding tax exemptions if
government funding is "substantial" potentially encourages
trivial and arbitrary attempts to determine what precise amount
or percentage of support renders property ineligible for a
charitable exemption.
The borough acknowledges that the mere existence of
some governmental subsidy or other direct governmental support
does not automatically destroy eligibility. But it contends that
because TCC receives most of its funding from government, TCC is
merely a government contractor, not a charity. Whether an
organization is a "government contractor" may be relevant to
whether it has a dominant profit motive or a nonprofit purpose,
but it does not conclusively establish that the property is not
being used for a charitable purpose. The borough's contention
seems ultimately to stand on an argument it claims it is not
making - that government funding is a complete disqualifier.
In a related argument, the borough argues that
charitable exemptions should "indirectly subsidize socially
worthy activities." It asserts that the practical effect of tax
exemptions is to "make all taxpayers indirect subsidizers of the
institution" receiving the exemption. Thus, the borough argues
that there is no need for local taxpayers to indirectly subsidize
an organization that already receives government funding. It
claims that granting an exemption to programs that are already
funded by the government shifts "part of the cost of providing
the service from one government to another."
The borough's "shifting-the-tax-burden" argument raises
policy questions that are of little help to courts applying the
constitutional and statutory exemption provisions. Moreover,
government property is not subject to borough taxation anyway,78
so whether the government directly operates a local program or
"subsidizes" it would seem to have little effect on the local tax
base. And because programs like TCC's broadly benefit many
borough residents, it is not obvious that there is anything
inappropriate about transferring to local residents some of the
cost (the loss of some property tax revenues) of conducting
these programs. But to the extent granting these exemptions
shifts some federal tax burden to local property owners, that
effect does not convince us that we should interpret Alaska law
to deny TCC the disputed exemptions. To the extent state
statutes control municipal taxation of TCC's property, the
legislature can address any perceived imbalance in taxpayer
burdens.79
Operating surplus. We next consider whether, as the
borough asserts, TCC's operating surplus renders TCC ineligible
for a charitable-purpose exemption. Our cases hold that an
otherwise exempt property that generates revenue will not lose
its exemption if (1) payment is not sought as a result of a
dominant profit motive; (2) payment is both incidental to and
reasonably necessary for the accomplishment of the exempt
activity; and (3) payment does not exceed operating costs.80
We have never decided whether an operating surplus
precludes an exemption. Although we require that payment not
exceed operating costs, that requirement should not disqualify
property owned by successful fundraisers. We hold that an
operating surplus will not preclude an otherwise valid tax
exemption so long as revenue is not generated out of a dominant
profit motive and revenue is allocated only to support exempt
purposes. Our Part III.A.2.a discussion of the nonprofit
qualifier also pertains here. That TCC conducted its charitable
programs while achieving an operating surplus in the applicable
tax years does not make TCC ineligible for any exemption for
those years. It makes little sense to endorse a rule that would
encourage charities to operate at a deficit just to ensure tax
exemption eligibility.
Although we decline to treat as dispositive the
circumstances the borough finds controlling, we have considered
them to the extent they are relevant to the "charitable-purposes"
inquiry that determines this appeal. We conclude that they do
not render TCC's properties altogether ineligible for exemption.
B. TCC's Cross-Appeal: Did the Superior Court Err in Denying
Exemptions for the Fifth Floor (Used for Community Service
Programs) and Sixth Floor (Used for Administration) and
Apportioning TCC's Attorney's Fees?
1. Standard of review
TCC's cross-appeal argues that the superior court erred
by denying exemptions for portions of the fifth and sixth floors
of the TCC building. In denying exemptions for those parcels,
the superior court relied on the assessor's findings of fact and
conclusions of law. As to the fifth floor, the superior court
implicitly invoked the reasonable basis standard of review and
held that it could not conclude that the assessor's decision
lacked a legal and factual basis. As to the sixth floor, the
court apparently drew its independent conclusions about whether
TCC's administrative activities supporting both exempt and
nonexempt programs satisfied the requirement that the property be
used "exclusively" for charitable purposes.
We conclude that the substantial evidence standard
controls review of the assessor's rulings with respect to both
the fifth and sixth floors to the extent the rulings involve
findings of fact. We apply the substitution of judgment standard
in reviewing the assessor's legal conclusions.81
2. Fifth floor
The fifth floor of TCC's main building housed various
community programs providing family services, Indian child
welfare, self-governance, planning, village government credit and
finance, and employment services. The assessor denied an
exemption for the family services programs because the programs
"appear to be fully funded by the state and federal government."
The assessor also found that the village government services and
credit and finance activities did not qualify as activities
"adding to the moral, mental, and physical welfare of the public
generally." The assessor found that these latter programs
involved "attempts to economically benefit certain businesses . .
. ." The assessor consequently denied an exemption for the
entire fifth floor.
Having determined that receipt of government funding
was not a valid factor in analyzing eligibility for a charitable-
purpose exemption, the superior court held that only the fifth
floor family services and employment programs, which were funded
by state and federal government, qualified for exemption. The
superior court determined that thirty percent of the fifth floor
was used for these programs. The remainder was subject to
taxation. (The superior court calculated this spatial allocation
after reviewing an exhibit and finding that 3,500 square feet of
the 11,570 square-foot fifth floor were used for exempt purposes.
Neither TCC nor the borough asserts on appeal that the court
erred by making this calculation rather than remanding to the
assessor.)
As to the remaining seventy percent of the fifth floor,
the superior court upheld the assessor's conclusion that this
portion of the property was used for business loan programs and
village government services and therefore did not qualify for
exemption. In the words of the superior court, those programs
are "geared more toward providing assistance to governmental and
tribal entities in the performance of what are traditional
government services."
TCC argues that the superior court erred by denying an
exemption for the portions of the fifth floor used for these
services. It asserts that the fifth floor programs that were
denied an exemption by the superior court "add to the moral,
mental and physical welfare of the public generally." It
contends that other courts have identified community programs
promoting environmental health, agriculture, housing, economic
and community development, and self-governance as charitable
activities. It further argues that community services are just
as charitable as "individual-based" services.
TCC also contends that programs that perform
"traditional government services" are not ineligible for a
charitable-purpose exemption, and that government services may
promote charitable purposes. In support, it cites Southwestern
Oregon Public Defender Services, Inc. v. Department of Revenue,
in which the Oregon Supreme Court held that a nonprofit
organization providing legal services to indigent criminal
defendants, a typical government service, was engaged in
charitable activity.82 TCC further notes that in states that
require a charity to lessen a governmental burden, charities must
provide a traditional governmental service to qualify for a
charitable exemption.
The borough responds that the disputed programs do not
"add to the moral, mental, and physical welfare of the public
generally." It contends that these programs provide distinctly
government and political services and are therefore not conducted
for charitable purposes. It argues that the functions TCC
performs, such as constitution and ordinance drafting, licensing,
and other legislative duties, are political governmental
activities, not charitable activities.
The borough also states that not all government
functions qualify as charitable, and that expanding the
definition of charitable purposes to include all government
functions would render the separate government exemption
superfluous. The borough concludes that the term "charitable
purpose" must be construed narrowly.
We do not disagree with TCC's contention that property
used to provide "traditional government services" is not
necessarily ineligible for exemption. But that was not the only
basis for the assessor's ruling. Rather, he ruled that these
services "do not involve activities adding to the moral, mental,
and physical welfare of the public generally. Instead, they
involve attempts to economically benefit certain businesses
(Credit and Finance), provide for economic development of certain
areas (Planning), and technical assistance to tribal entities
like drafting ordinances and constitutions (VGS)." We cannot say
that these findings and conclusions lack a legal and factual
basis. And whether or not these are traditional government
services, it is not evident that they necessarily have
"charitable purposes." In the words of the superior court,
"narrowly construing the exemption and holding TCC to its high
burden," we cannot say that the assessor erred by failing to
exempt the parcels used for these purposes.
3.
Sixth floor
In granting an exemption for only thirty-four percent
of the sixth floor, the superior court held that the
administrative offices supported both exempt and nonexempt
activities and that "[n]onexempt activities include[d] fund-
raising, lobbying, and political activity, as well as economic
development and commercial loan programs."
TCC first argues that fund-raising should not deprive a
charity of a tax exemption. It reasons that fund-raising is
necessary for a charity's survival and is directly incidental to
and vitally necessary to a charity's activities. TCC also argues
that a nonprofit entity which receives rent or income should not
be disqualified from receiving an exemption.
The borough argues that fund-raising is not a
charitable-purpose activity. In support, it cites Evangelical
Covenant Church of America v. City of Nome, in which we held that
a church radio station that sold commercial radio time to raise
money for church activities was not exclusively using the
property for charitable purposes.83 We there noted: "It matters
not that only a part of the radio time was sold and used for
commercial purposes and that the profits derived from the sale of
commercial radio time were used to further the missionary work of
Covenant Church."84
TCC responds that operating the radio station in
Evangelical Covenant Church differed from TCC's fund-raising
efforts because it claims the radio station was a "charitable
feeder" activity. TCC defines a "charitable feeder" activity as
"commercial activity conducted by a non-profit entity in which
the profit from the enterprise is used to support and fund the
charitable activity." TCC argues that there is a distinction
between commercial feeder activity and its solicitation of
donations and grants, which it characterizes as "passive fund-
raising." It argues that the appropriate test is whether the
activity is necessary and incidental to carrying out a charitable
purpose.
Although we recognize that fund-raising can be for
charitable purposes, it loses its eligibility for exemption if it
is used to support both exempt and nonexempt services, i.e., if
it is not conducted exclusively for a charitable purpose.85 The
assessor found that the administrative services supporting exempt
and nonexempt programs were not used exclusively for charitable
purposes. The superior court relied on that finding in
classifying the fund-raising as nonexempt when the court
spatially apportioned the sixth floor to determine the part
entitled to exemption. It did not commit legal error in doing
so. TCC has not demonstrated on appeal that the facts compel
application of either of the recognized exceptions to the
"exclusive use" rule.86 We consequently discern no error in the
superior court's spatial apportionment on the basis of the fund-
raising activity.
TCC next argues that the superior court should not have
classified TCC's lobbying activities as nonexempt. It reasons
that a nonprofit agency should not be denied a charitable purpose
exemption because it "conducts activity that is unpopular or
perceived as political . . . ." It also contends that seeking to
effectuate a change in the law or in government is no basis for
denying a charitable-purpose exemption.
The borough applied the rule, extant in some
jurisdictions, that denies charitable exemptions for property
used for lobbying.87
Given the findings and conclusions of the assessor that
TCC's administrative functions serve both exempt and nonexempt
purposes, we conclude, for the reasons we discussed in
considering TCC's fund-raising activities, that the superior
court committed no error in spatially apportioning the sixth
floor on this basis and in rejecting TCC's contention that more
of the sixth floor should have been exempt.
Finally, TCC argues that economic development programs
satisfy a charitable purpose because they contribute to the
welfare of the public generally. TCC further argues that private
economic development programs, including those lending money to
private businesses, achieve charitable purposes. It focuses its
discussion on its credit and finance program, which TCC contends
"receives funding from the federal and state governments and re-
lends the funds to aid business development." TCC argues that
the lending program promotes the physical welfare of individuals
and rural communities by making financing available "which would
otherwise not be available." TCC also notes that because it does
not charge for these lending services, the program does not have
a dominant profit motive.
The borough responds that because economic development
encourages the "production, development and management of
material wealth," it does not fulfill a charitable purpose. The
borough argues that lending money to for-profit businesses that
compete in the marketplace is not charity. The borough also
argues that Alaska law does not recognize exemptions for property
used for commercial activity of any sort.
We cannot conclude that the assessor's findings and
conclusions on this point lack a legal and factual basis. The
superior court did not err by failing to find that the area
devoted to community economic development was also exempt. That
TCC did not charge for its re-lending activity may well mean that
it had no dominant profit motive, but it does not compel a
conclusion that the activity itself was for charitable purposes.88
C. Attorney's Fees
The superior court found that TCC was entitled to tax
refunds for 1997, 1998, and 1999 and consequently awarded TCC
attorney's fees of $11,384.50 under authority of AS 29.45.500(a).89
This was about forty percent of TCC's actual attorney's fees.
The parties on appeal agree that this percentage apparently
corresponded to the percentage of area of the TCC property the
superior court held to be exempt.
TCC invokes AS 29.45.500(a) and argues that because the
court held that TCC was entitled to tax refunds, the court erred
by failing to award TCC the fees it actually incurred and by
failing to make fact findings supporting the limited award. TCC
observes that the court rejected the borough's contention that
all of TCC's properties were ineligible for an exemption.
We agree with the borough's responsive contention that
AS 29.45.500(a) only entitled TCC to an award of those attorney's
fees it incurred with respect to its successful refund efforts.
This is consistent with our case authority concluding that the
statute permits an apportionment of fees based on the taxpayer's
success.90
TCC alternatively argues that it was error to base the
fee reduction on the court's spatial apportionment of the
disputed properties; TCC asserts that it prevailed on seven of
the eight tax parcels in dispute, and that it therefore should
have recovered seven-eighths, or 87.5%, of its actual attorney
fees.
But we conclude that the superior court did not abuse
its discretion in this case by choosing to apportion the fees
based on the area it held to be exempt. That method seems at
least as fair as apportioning by parcel, a method that arguably
might be unfair if parcels significantly differ in size. And TCC
does not argue that there is any significant difference in the
per-square-foot tax valuations of the parcels, a circumstance
that might bear in a given case on the fairness of the
apportionment method the court applied here.
We finally observe that no findings of fact are
required for an award of attorney's fees in this situation. It
is evident how the court calculated the fees, and TCC does not
argue that the method the superior court applied cannot be
discerned and therefore cannot be reviewed on appeal.
IV. CONCLUSION
For these reasons, we AFFIRM the superior court's
memorandum decision of November 17, 2000.
MATTHEWS, Justice, dissenting.
I dissent from today's opinion for reasons that can be
summarized as follows. One necessary element of the term
"charitable" as used in our tax-exemption statute is that the
activity in question must entail a gift to the public. This
implies two requirements: first, that the services in question
must be given, rather than paid for; and second, that the "gift"
have its source in the private sector. Since TCC's services are
paid for rather than given, and since they are paid for by the
government, they are not charitable. In the paragraphs that
follow I will explain these points in more detail.
At the outset I will briefly describe TCC and its
activities.91 TCC is a large and apparently well run nonprofit
corporation incorporated under the Alaska Nonprofit Corporation
Act. Its members consist of most of the Athabascan villages in
the Yukon and Kuskokwim River drainages. Among its stated
purposes is "to promote the common welfare of the Natives of
Alaska and their physical, economic and social well being."92 TCC
provides health, social, and economic services to Alaska Natives
and villages in its region. These services are funded by federal
and state government contracts and grants. TCC also receives
revenue from interest on contract and grant funds and from
billing private and public insurers.
For its fiscal year ending September 30, 1998, TCC's
total revenues were $51,791,385. Of that $46,178,114 came from
federal grants and contracts, and $5,091,073 came from state
grants and contracts. TCC is able to charge the government for
the costs of operating the buildings used in carrying out its
activities. These costs include property taxes. In some cases
TCC is allowed to collect twice for health services that it
provides - once under its contracts with the federal government
and again from public or private health insurers. TCC provides
some health services, such as glasses and orthodontia, that are
not directly paid for by the government. The surplus generated
from collecting twice must be used to provide health services.
It covers the cost, and then some, of these services. TCC
currently has an accumulated surplus of over $27,000,000. TCC
does not rely on donated funds or services.
The statute that governs this case is AS
29.45.030(a)(3) and (c). In relevant part it provides:
(a) The following property is exempt
from general taxation:
. . . .
(3) property used exclusively for
nonprofit religious, charitable, cemetery,
hospital, or educational purposes;
. . . .
(c) Property described in (a)(3) . . .
of this section from which income is derived
is exempt only if that income is solely from
the use of the property by nonprofit
religious, charitable, hospital, or
educational groups. . . .
Since TCC derives incomes from the property that it
claims as exempt, both subsections (a)(3) and (c) apply. Thus,
the property must be used for charitable purposes and TCC must be
a charitable group for an exemption to be granted.
Under Alaska law, exemptions from property taxation
must be construed narrowly so that to the extent possible all
taxpayers will share equally in the cost of local government.93
For the same reason the burden is placed on the taxpayer to prove
that it is eligible for an exemption.94
What then is the meaning of the terms "charitable
purpose" as used in AS 29.45.030(a)(3) and "charitable group" as
used in AS 29.45.030(c)? Clearly, more than merely a nonprofit
purpose or a nonprofit group is required, because "nonprofit" is
a requirement separate from "charitable" under these subsections.95
Our case law establishes that the term has two essential
elements. First, charity is "that [which] is done out of good
will and a desire to add to the improvement of the moral, mental,
and physical welfare of the public generally."96 Second, charity
must entail "a gift to the general public."97
In Sisters of Providence in Washington, Inc. v.
Municipality of Anchorage, we approved of a quid pro quo
rationale as the justification for charitable and other related
exemptions: "exemptions are granted as the quid pro quo for
nonprofit contributions of services and aid to society in
general."98
The gift to the public requirement means that services
provided by an organization claiming charitable status must be
based at least in part on donations of funds, property, or labor.
To be charitable, services must be given, rather than paid for.
This, in turn, means that they must be based, in a substantial
way, on donations.99 Further, the donations must be from the
private sector. Under the quid pro quo model that justifies tax
exemptions for contributions of services to the public,
government partially pays for charitable services in the form of
a tax exemption. But this model breaks down when government has
already fully paid for the services in question. When the
government through contracts and grants supplies the "quid" for
services, the additional consideration that would be supplied by
a tax exemption is not required.100 There are many cases decided
in other jurisdictions that reflect these points. I will
summarize some of them here, quoting language that is applicable
to the present case.
One instructive case is County Board of Equalization of
Utah County v. InterMountain Health Care, Inc.101 Here the Utah
Supreme Court recognized, as we have, that "the element of gift"
is "crucial to the meaning of charity."102 The Utah court also
recognized that exemptions are founded on a quid pro quo
rationale: "These exemptions confer an indirect subsidy and are
usually justified as the quid pro quo for charitable entities
undertaking functions and services that the state would otherwise
be required to perform."103 In applying the gift to the public
test to a nonprofit hospital, the court found that there was no
gift because the value of services provided to the patients was
equal to the income received from government programs, insurance
companies, and patients receiving care. "Collection of such
remuneration does not constitute giving, but is a mere reciprocal
exchange of services for money."104 The hospitals at issue donated
only a few services, valued at less than one percent of their
revenues, and they received little or no support from
nongovernmental gifts, donations, or endowments.105 The court
concluded that it could not find on the record presented "the
essential element of gift to the community, either through the
nonreciprocal provision of services or through the alleviation of
a government burden . . . ."106
Another case that illustrates the required
characteristics of a charitable organization is Waterbury First
Church Housing, Inc. v. Brown.107 Here a nonprofit housing
corporation rented apartments to elderly tenants at below-market
rates with assistance from the federal government. The Supreme
Court of Connecticut ruled that the corporation was not a
charitable organization because it did not rely in any
substantial way on gifts or gratuities from private sources. The
court stated "that an essential characteristic of a charitable
organization, besides a charitable purpose, is that it achieve
its purpose `through the means of funds derived from the
gratuities of the benevolent.' "108 Observing that an "exempt
organization's income [must] be based to some measurable extent
on `sums coming from private sources which are spent for the
public weal,' " the court concluded that this test was not met
since the organization was not "the beneficiary of any gifts from
private sources, and the only funds which it has to distribute
consist of rental income from its tenants and the federal
subsidies which it receives."109 The court found error in the
approach of the trial court that had looked only to the purpose
of the organization's activities "without considering whether it
achieves its charitable purposes through the use of charitable
funds."110
Parker v. St. Stephen's Urban Development Corp., Inc.111
is another case involving a nonprofit corporation that
participated in federally subsidized housing programs. The
corporation rented apartments to low-income tenants at below-
market rates. It was supported by a combination of federal money
and tenant rental payments and operated on a break-even basis.
The New Jersey court held that the corporation was not engaging
in "charitable purposes" under the New Jersey charitable immunity
statute. The court reached this conclusion because the
corporation did not rely on charitable contributions: "Equally
important is the absence from defendant's operation of fund-
raising activities and charitable contributions."112 The court
made it clear that government funding is not charitable funding:
Indeed, by the very nature of its operation,
defendant contravenes one of the footings of
charitable status - undertaking acts by which
the government is relieved pro tanto from a
burden it would otherwise have to perform.
It is the government which pays defendant's
mortgage interest, supplies mortgage
insurance, and subsidizes the tenants
sufficient to meet its operating expenses,
including the remaining mortgage payments.
Defendant was not created to lessen the
burden on government but to obtain as much
funding from the government as possible and
to operate the project exclusively with that
funding.[113]
The court went on to state that government funding per se is not
a disqualifying factor. What is required though is significant
support through charitable contributions:
This is not to suggest that defendant's
activities are not salutary or that its
operation with federal funds deserves our
disapprobation. Nor is it to suggest that an
actual charity which receives a measure of
support from the government would be
prohibited from claiming immunity. The
inquiry in each case should focus on the
essence of the entity itself. If a nonprofit
corporation is performing a charitable
service and is essentially supported through
charitable contributions, the fact that it
happens to receive some government support
would not alter its nature as a charity for
immunity purposes.[114]
In Housing Southwest, Inc. v. Washington County, the
Supreme Court of Idaho addressed the question whether a private
nonprofit corporation that owned federally subsidized low-income
housing facilities for senior citizens was entitled to a
charitable tax exemption.115 The trial court had held that the
federal rent subsidy revenue received by the corporation could be
considered "a donation."116 The supreme court disagreed. The
court explained the importance of the donation factor to the
rationale underlying exemptions:
[T]he requirement of donations is an
important factor, because charitable
donations reduce the cost of the service
provided, either to the public generally as
direct beneficiaries of the service or to
taxpayers who would otherwise bear the
burden.[117]
The Idaho court observed that federal subsidies do not satisfy
the donations requirement because they do not reduce the cost of
the services to taxpayers who would otherwise bear the burden of
providing them. Instead, they are the cost to the taxpayers:
Housing Southwest argues that, because it
provides housing to low-income senior
citizens and disabled persons based on need
it is meeting a need that might otherwise be
met by government. This argument is circular
in that the need Housing Southwest meets is
in fact being met by government through tax-
supported FHA subsidies.[118]
The court explained that if federal subsidies qualified as
donations and thus qualified the corporation distributing the
subsidies for tax exemption "the burden is merely shifted from
one group of taxpayers to another, and government is not relieved
from an obligation it would otherwise have."119
In my judgment TCC fails the gift to the public test.
The services that it provides are fully paid for. They are not
gifts or contributions because TCC does not rely in any
substantial way on donations of funds, property, or labor.
Further, since TCC's services are funded by the government, the
quid pro quo relationship that justifies charitable exemptions
does not apply. If TCC's services were considered a gift, they
would have to be considered a gift from the public because the
public pays for them. Granting a tax exemption to TCC is not
justified under the quid pro quo model because the government has
already paid for the services TCC provides. As in the Housing
Southwest case,120 the main effect of an exemption will be to shift
part of the burden of supporting TCC's programs from one group of
taxpayers to another - here, primarily, from all those who pay
taxes to the federal government to Fairbanks North Star Borough
taxpayers.
In reaching these conclusions I do not suggest that the
receipt of government funds means that a nonprofit service
provider is necessarily ineligible for a charitable exemption.
Nor do I believe that such an organization is disqualified from
charitable status because it receives income from those to whom
it provides services. What is required by the gift to the public
test is that in a substantial way the services provided be based
on private donations. Because this essential element of the
concept of charity was not shown by TCC to be present, I would
reverse the decision of the superior court.
_______________________________
1 43 U.S.C. 1601-1629 (1971).
2 26 U.S.C. 501(c)(3) (2002) (exempting from federal income
taxation "[c]orporations, and any community chest, fund, or
foundation, organized and operated exclusively for . . .
charitable . . . purposes").
3 See Alaska Const. art. IX, 4; AS 29.45.030(a)(3). See
also Fairbanks North Star Borough Ordinance (FNSB) 3.08.020(F).
4 On remand, the borough assessor made these findings, among
others:
4. TCC does not generally receive
donations or use volunteers. Generally,
except for some minor local grant funding,
all of TCC's revenues used to operate its
programs come from federal and State of
Alaska contracts and grants. TCC operates
some programs under non-refundable compacting
agreements with the federal government.
TCC's other programs are funded through cost-
reimbursable contracts with both the federal
government and the state of Alaska. Indirect
administrative and other costs not charged
directly to a particular program are paid
through an indirect cost allocation system at
previously negotiated rates. If the
negotiated rate results in either over-
funding or under-funding of the indirect
costs in one year, those costs are recovered
or refunded to the grantor by adjusting the
next year's indirect rate.
5. By the end of the 1998 fiscal year,
TCC accumulated a total fund balance of over
27 million dollars. With the exception of
its lease activities, TCC primarily
accumulates this money by depositing the
difference between what TCC receives from the
government and its actual expenditures. This
fund balance in leaner years covers funds
that a program overspent or costs that the
government disallows.
6. In addition to money received
directly from governmental entities, TCC
generates program income by billing third
party insurance companies, including Medicaid
and Medicare for services originally funded
by the government. This program income
generally may be spent by TCC only for that
program and for that type of service. TCC
uses this income to supplement its services
largely in the health area. This income
provides the largest source of what TCC calls
"self-generated" money.
7. TCC also generates income by
investing annually approximately 30 million
dollars in federal program sums paid in
advance. TCC is permitted by federal law to
earn interest on federal money. In addition,
TCC receives interest income by investing
payroll, leave, and other accounts originally
funded by program funds (federal or state
dollars). All of this income is designated
on TCC's financial statements as interest and
investment income.
5 Cf. Alaska R. App. P. 609; City of Nome v. Catholic Bishop
of N. Alaska, 707 P.2d 870, 875 (Alaska 1985).
6 CH Kelly Trust v. Municipality of Anchorage, Bd. of
Equalization, 909 P.2d 1381, 1382 (Alaska 1996).
7 Catholic Bishop, 707 P.2d at 876 (citing Earth Res. v.
State, Dep't of Revenue, 665 P.2d 960, 965 (Alaska 1983)).
8 Id.
9 Ketchikan Gateway Borough v. Ketchikan Indian Corp., 75 P.3d
1042, 1045 (Alaska 2003) (quoting State, Dep't of Transp. & Pub.
Facilities v. Sanders, 944 P.2d 453, 456 (Alaska 1997)).
10 Sisters of Providence in Washington, Inc. v. Municipality of
Anchorage, 672 P.2d 446, 447 (Alaska 1983).
11 Catholic Bishop, 707 P.2d at 877.
12 Id. at 879 (quoting Animal Rescue League v. Bourne's
Assessors, 37 N.E.2d 1019, 1021 (Mass. 1941)).
13 City of Nome, 707 P.2d at 875.
14 Balough v. Fairbanks N. Star Borough, 995 P.2d 245, 254
(Alaska 2000).
15 (Emphasis added.) After 1923 Alaska municipalities could
assess property taxes subject to this statutory exemption: "[A]ll
property used exclusively for religious, educational, charitable
purpose . . . shall be exempt from taxation." Ch. 97, 12, SLA
1923. Identical language in the territory's codified statutes,
16-1-35, Alaska Compiled Laws Annotated (ACLA) 1949, described
Alaska's charitable-purposes exemption as it stood in 1956, when
Alaska's constitutional delegates approved the language contained
in article IX, section 4 of the Alaska Constitution. Among other
changes they made to the language of the pre-statehood statutory
exemption, the delegates added the "non-profit" qualification and
the "as defined by law" clause. Alaska Const. art. IX, 4.
16 AS 29.45.030 provides in pertinent part:
(a) The following property is exempt from
general taxation:
. . . .
(3) property used exclusively for
nonprofit religious, charitable, cemetery,
hospital, or educational purposes.
(Emphasis added.)
17 FNSB Ordinance 3.08.020(F) exempts property from taxation if
it is "used exclusively for nonprofit religious, charitable,
cemetery, hospital, or educational purposes."
18 Greater Anchorage Area Borough v. Sisters of Charity of
House of Providence, 553 P.2d 467, 469 (Alaska 1976); McKee v.
Evans, 490 P.2d 1226, 1230 (Alaska 1971).
19 In support of that proposition the superior court cited
Sisters of Providence v. Municipality of Anchorage, 672 P.2d 446,
447 (Alaska 1983) (quoting McKee, 490 P.2d at 1230 n.18).
20 The borough's appellate briefs often refer to the exemption
as one for "charitable use." We assume that the borough is using
that phrase as shorthand for the charitable-purposes exemption,
and is not attempting to recast the constitutional test, which
requires that the property be exclusively used for "charitable
purposes." For consistency, we will use the phrase "charitable
purposes," per article IX, section 4 of the Alaska Constitution.
21 Alaska Const. art. IX, 4; AS 29.45.030(a)(3).
22 McKee, 490 P.2d at 1231.
23 See supra note 15.
24 We interpret statutory language to avoid superfluity.
Municipality of Anchorage v. Repasky, 34 P.3d 302, 312 n.80
(Alaska 2001). This principle also applies to constitutional
interpretation. Cf. Hootch v. Alaska State-Operated Sch. Sys.,
536 P.2d 793, 801 (Alaska 1975) ("The general rule in
constitutional construction is to give import to every word and
make none nugatory.").
25 Alaska Const. art. IX, 4; AS 29.45.030(a)(3).
26 AS 29.45.030(c) provides:
Property described in (a)(3) or (4) of this
section from which income is derived is
exempt only if that income is solely from use
of the property by nonprofit religious,
charitable, hospital, or educational groups.
If used by nonprofit educational groups, the
property is exempt only if used exclusively
for classroom space.
27 Greater Anchorage Area Borough v. Sisters of Charity of the
House of Providence, 553 P.2d at 472.
28 See supra note 2.
29 Catholic Bishop, 707 P.2d at 889.
30 Id. at 879; Evangelical Covenant Church v. City of Nome, 394
P.2d 882, 883 (Alaska 1964).
31 Catholic Bishop, 707 P.2d at 881.
32 Evangelical Covenant Church, 394 P.2d at 885.
33 Greater Anchorage Area Borough v. Sisters of Charity, 553
P.2d at 472 (holding three floors rented to doctors in private
practice of medicine not exempt, because floors' use by owner to
support nonprofit hospital was not exclusive and floors' actual
use was not charitable).
34 707 P.2d 870, 880 (Alaska 1985).
35 439 P.2d 441, 445 (Alaska 1968) (quoting Old Colony Trust
Co. v. Welch, 25 F. Supp. 45, 48 (D. Mass. 1938)).
36 Catholic Bishop, 707 P.2d at 888 n.37 (quoting Holbrook &
O'Neill, California Property Tax Trends: 1850-1950, 24 S. Cal. L.
Rev. 252, 272 (1951)).
37 King's Lake Camp, 439 P.2d at 445-46.
38 Catholic Bishop, 707 P.2d at 891.
39 Id. at 890-91.
40 See id. at 888-89; King's Lake Camp, 439 P.2d at 444.
41 King's Lake Camp, 439 P.2d at 444 (holding that charging
user fees to defray operational expenses did not establish that
there was "any real profit motive").
42 Catholic Bishop, 707 P.2d at 889; see also King's Lake Camp,
439 P.2d at 444-45.
43 King's Lake Camp, 439 P.2d at 444-45.
44 Catholic Bishop, 707 P.2d at 892.
45 Id. at 890-91.
46 See id. at 881 (holding in part that Alaska Constitution and
AS 29.53.020 require spatial apportionment between exempt and non-
exempt purposes); Sisters of Charity, 553 P.2d at 472 (holding
that nonprofit hospital that rented out part of its property for
private office space did not exclusively use its property for
hospital purposes); King's Lake Camp, 439 P.2d at 445 (holding
that property used to operate recreational camp was used for
charitable purpose and that charging nominal user fees did not
divest property of tax exemption); Evangelical Covenant Church,
394 P.2d at 883 (holding that church radio station, which sold
commercial radio time, did not qualify for religious purpose tax
exemption because property was not used exclusively for religious
purposes - regardless of whether income derived from station-
funded church activities).
47 See, e.g., G.D.L. Plaza Corp. v. Council Rock Sch. Dist.,
526 A.2d 1173, 1177-78 (Pa. 1986) (holding that nonprofit housing
corporation that received substantial federal government funding
was not "maintained by public or private charity" as required by
Pennsylvania statute and did not qualify for exemption); Parker
v. St. Stephens Urban Dev. Corp., 579 A.2d 360, 364 (N.J. Super.
App. Div. 1990) (holding that nonprofit housing corporation that
received all of its funding from government did not qualify as
charity in tort action under Charitable Immunity Act).
48 See, e.g., Hous. Southwest, Inc. v. Washington County, 913
P.2d 68, 72 (Idaho 1996) (holding that nonprofit low income
housing corporation that received federal subsidies did not
qualify for exemption in part because it did not receive support
from donations); Supervisor of Assessments of Baltimore City v.
Har Sinai W. Corp., 622 A.2d 786, 791-92 (Md. Spec. App. 1993)
(holding that nonprofit housing corporation that received federal
government subsidies but no donations did not qualify for
exemption).
49 See supra note 48.
50 See, e.g., S. Jersey Family Med. Ctrs., Inc. v. City of
Pleasantville, 798 A.2d 120, 131 (N.J. Super. App. Div. 2002)
(upholding exemption for community health care facility that
received majority of its federal funding for services rendered
and not through grants); State Dep't of Assessments & Taxation v.
N. Baltimore Ctr., 743 A.2d 759, 772 (Md. Spec. App. 2000)
(holding that facility used for providing indigent mental health
services and that received most of its funding through government
funds and minimal donations qualified for tax exemption).
51 See, e.g., Yorgason v. County Bd. of Equalization of Salt
Lake County, 714 P.2d 653, 660 (Utah 1986) (holding that whether
low income housing was subsidized through government or private
donor did not dictate different result as long as there is gap
between what beneficiary pays and value of what beneficiary
receives); Franciscan Tertiary Province of Missouri v. State Tax
Comm'n, 566 S.W.2d 213, 226 (Mo. 1978) (holding that purpose for
which property is used is determinative, that factors such as
donations are only relevant if they indicate institution's
purpose, and that federal subsidies have same effect as
charitable contributions from private sector).
52 Alaska Const. art. IX, 4.
53 25 U.S.C. 450.
54 See, e.g., Snyder Act of Nov. 2, 1921, 25 U.S.C. 13.
55 King's Lake Camp, 439 P.2d at 445 (quoting from Old Colony
Trust Co. v. Welch, 25 F. Supp. 45, 48 (D. Mass. 1938)).
56 25 U.S.C. 450(a) ("the Federal government's historical and
special legal relationship"); 25 U.S.C. 450n ("Nothing in this
subchapter shall be construed as . . . (2) authorizing or
requiring the termination of any existing trust responsibility of
the United States with respect to the Indian people."); see also
25 U.S.C. 451 (authorizing Secretary of Interior to "accept
donations of funds and other property for the advancement of the
Indian race" and to "use the donated property in accordance with
the terms of the donation in furtherance of any program
authorized by other provision of law for the benefit of
Indians").
57 25 U.S.C. 450(a)(1); 25 U.S.C. 450a(a).
58 Old Colony, 25 F. Supp. at 48.
59 For a comprehensive list of states employing multi-factor
tests for charitable exemptions, see North Baltimore Center, 743
A.2d at 768 n.3.
60 King's Lake Camp, 439 P.2d at 445 (quoting Old Colony, 25
F. Supp. at 48).
61 672 P.2d 446, 451 (Alaska 1983).
62 King's Lake Camp, 439 P.2d at 446 (holding that recreational
camp constituted use for charitable purpose).
63 City of Nome v. Catholic Bishop of N. Alaska, 707 P.2d 870,
890 (Alaska 1985) (holding that radio station whose programming
focused on Native issues benefited general public).
64 490 P.2d 1226 (Alaska 1971).
65 Id. at 1230.
66 Id. at 1231.
67 See King's Lake Camp, 439 P.2d at 446 (emphasis added).
68 Catholic Bishop, 707 P.2d at 891.
69 See, e.g., King's Lake Camp, 439 P.2d at 443 (holding that
camp that charged nominal user fees still qualified for exemption
even though camp did not absorb cost of those who could not
afford it, and instead passed this cost to the user groups).
70 Id.
71 Catholic Bishop, 707 P.2d at 889; see also King's Lake Camp,
439 P.2d at 444-45.
72 TCC indicates that federal funds constitute approximately
ninety percent of its funding. It argues that the rest of its
expenses are covered by "self-generated" funds, including
investment, interest, and rental income.
73 See Sisters of Providence in Washington, Inc. v.
Municipality of Anchorage, 672 P.2d 446, 451 (Alaska 1983).
74 490 P.2d 1226, 1229-30 (Alaska 1977).
75 Former AS 29.10.336(a), recodified as AS 29.45.030(a).
76 McKee, 490 P.2d at 1229-30.
77 Id. at 1230.
78 Irwin v. Wright, 258 U.S. 219, 288 (1922).
The rule established by the decisions of this
court is that, by virtue of its sovereignty
and the constitutional power of Congress to
dispose of and make all needful rules and
regulations respecting the territory or other
property belonging to the United States, no
state can tax the property of the United
States within its limits.
Id.
79 The Alaska Constitution also addresses charitable
exemptions. Alaska Const. art. IX, 4. Federal law may also
limit taxation of tribal property. See Ketchikan Gateway Borough
v. Ketchikan Indian Corp., 75 P.3d 1042 (Alaska 2003), which
concerned a federal preemption question not raised by the parties
in the present case.
80 City of Nome v. Catholic Bishop of N. Alaska, 707 P.2d 870,
889 (Alaska 1985); see also Matanuska-Susitna Borough v. King's
Lake Camp, 439 P.2d 441, 444-45 (Alaska 1968).
81 Catholic Bishop, 707 P.2d at 876.
82 817 P.2d 1292, 1296 (Or. 1991).
83 394 P.2d 882 (Alaska 1964).
84 Id. at 885.
85 City of Nome v. Catholic Bishop of N. Alaska, 707 P.2d 870,
875 (Alaska 1985).
86 Exceptions have been recognized to the exclusive-use
requirement:
[W]e acknowledge two very narrow exceptions
to the "exclusive use" rule. The first
excepts de minimis uses. We foresee, as have
other courts, that application of the
"exclusive use" rule could be "so literal and
narrow that it defeats the exemption's
settled purpose. . . . Second, we
acknowledge an exception under AS
29.53.020(a)(3) for property used for
purposes directly incidental to and vitally
necessary for the exempt use of other
property.
Catholic Bishop, 707 P.2d at 879-80.
87 The borough cites these cases as examples: Michigan United
Conservation Clubs v. Lansing Township, 342 N.W.2d 290, 296
(Mich. App. 1983); Minnesota State Bar Ass'n v. Commissioner of
Taxation, 240 N.W.2d 321 (Minn. 1976).
88 TCC has raised no contention in this case that federal law
preempts state law and consequently precludes taxation of any of
the properties at issue here. Cf. Ketchikan Gateway Borough v.
Ketchikan Indian Corp., 75 P.3d 1042 (Alaska 2003).
89 AS 29.45.500(a) provides:
If a taxpayer pays taxes under protest, the
taxpayer may bring suit in the superior court
against the municipality for recovery of the
taxes. If judgment for recovery is given
against the municipality, or, if in the
absence of suit, it becomes obvious to the
governing body that judgment for recovery of
the taxes would be obtained if legal
proceedings were brought, the municipality
shall refund the amount of the taxes to the
taxpayer with interest at eight percent from
the date of payment plus costs.
90 Kenai Peninsula Borough v. Port Graham Corp., 871 P.2d 1135,
1140-41 (Alaska 1994) ("In light of today's decision, this award
must be vacated and the court must make such further adjustments
as will be necessary to reflect the fact that Port Graham is
entitled to a refund of taxes only for 1988.").
91 Ordinarily appeals from the placement of property on
municipal assessment rolls are heard administratively by the
municipal board of equalization. AS 29.45.190, .210. In the
present case the parties agreed to bypass the board of
equalization. Instead, formal hearings were held before the
borough tax assessor, who entered written findings of fact and
conclusions of law. TCC agreed that the assessor's findings of
fact should be reviewed deferentially, just as those of a board
of equalization would be. Unless otherwise indicated, the
factual summary in this and the following paragraph are taken
from findings of fact of the assessor.
92 Article III(e), Articles of Incorporation.
93 Greater Anchorage Area Borough v. Sisters of Charity of
House of Providence, 553 P.2d 467, 469 (Alaska 1976).
94 Ketchikan Gateway Borough v. Ketchikan Indian Corp., 75 P.3d
1042, 1045 (Alaska 2003). "All property is benefitted by the
security and protection furnished by the State, and it is only
just and equitable that expenses incurred in the operation and
maintenance of government should be fairly apportioned upon the
property of all." Id. (quoting Nome v. Catholic Bishop of
Northern Alaska, 707 P.2d 870, 877 (Alaska 1985)).
95 Our constitutional framers recognized that self-sustaining
nonprofit groups would not necessarily come within the ambit of
the word "charitable." In debating the need to include nonprofit
cemeteries within the list of uses that are exempt from taxation,
one delegate stated: "If you strike this [inclusion of
cemeteries] I presume that you will make them subject to
taxation, if and when the local government unit or the state ever
imposed a tax, unless they were covered under the word
`charitable,' and I'm pretty sure most of them are not
charitable, they are just self-sustaining, nonprofit groups."
Constitutional Minutes, page 2329, statement of V. Rivers. The
amendment that sought to delete cemeteries was defeated. The
main opponent of the amendment, Delegate McLaughlin, observed
that nonprofit cemeteries, though not run "under religious or
charitable auspices" nonetheless provide "a definite public
service." Minutes 2329.
96 Catholic Bishop, 707 P.2d at 890 (quoting Matanuska-Susitna
Borough v. King's Lake Camp, 439 P.2d 441, 445 (Alaska 1968)).
97 Id. at 891 (quoting King's Lake Camp, 439 P.2d at 446). We
first approved of the dual definition of charitable status
including the element of "a gift to a general public use" in the
1968 King's Lake Camp decision. Our only subsequent case that
concerned properties claimed to be exempt under the term
"charitable" as used in AS 29.45.030 was the 1985 Catholic Bishop
decision. We found that the radio station and the youth hostel
involved in that case satisfied the gift to the general public
test. 707 P.2d at 890-91.
98 672 P.2d 446, 451 (Alaska 1983). This is the generally
accepted rationale for granting charitable tax exemptions. Erika
King, Tax Exemptions and the Establishment Clause, 49 Syracuse L.
Rev. 971, 981 (1999) ("The most common explanation for religious
and charitable tax exemptions in the modern world is the `social
benefit' theory, sometimes labeled the `public benefit theory' or
the `quid pro quo theory.' ").
99 Legal commentators have referred to this as "the donative
theory" of charitable tax exemption. See Mark A. Hall & John D.
Columbo, The Charitable Status of Nonprofit Hospitals: Toward a
Donative Theory of Tax Exemption, 66 Wash. L. Rev. 307, 389-405
(1991). The authors of this article list numerous cases
demonstrating that donations are essential to charitable status.
Id. at 400-01, especially notes 331 & 332.
100 In speaking of the "aid or encouragement" that exemptions
supply for those who would act for the good of the community we
have only referred to actors in the private sector as the targets
of such incentives: "Exemptions are granted `as an aid or
encouragement to individuals, corporations, or businesses, to do
something supposedly for the good of the community at large
. . . .' " Catholic Bishop, 707 P.2d at 888 n.37 (quoting
Holbrook & O'Neill, California Property Tax Trends: 1850-1950,
24 S. Cal. L. Rev. 252, 272 (1951)).
101 709 P.2d 265, 269 (Utah 1985).
102 Id. at 272.
103 Id. at 268.
104 Id. at 274.
105 Id.
106 Id. at 278.
107 367 A.2d 1386 (Conn. 1976).
108 Id. at 1389.
109 Id. at 1390.
110 Id. at 1391.
111 579 A.2d 360 (N.J. App. 1990).
112 Id. at 365.
113 Id. (citation omitted).
114 Id. at 366 (citation omitted).
115 913 P.2d 68 (Idaho 1996).
116 Id. at 70.
117 Id. at 71-72.
118 Id. at 72.
119 Id. at 72-73. A number of other cases have taken similar
positions declining to treat the administration of government
funded programs as charitable. Clark v. Marian Park, Inc., 400
N.E.2d 661 (Ill. 1980) (rent payments and federal subsidies do
not constitute public or private charity); Dow City Senior
Citizens Housing, Inc. v. Board of Review of Crawford County, 230
N.W.2d 497 (Iowa 1975) (government has already assumed large
share of burden through loan subsidies, exemption statute should
not be applied to put additional burden on local property
taxpayers); Supervisor of Assessment of Baltimore City v. Har
Sinai West Corp., 622 A.2d 786 (Md. App. 1993) (federal
government subsidies are not considered donations); G.D.L. Plaza
Corp. v. Council Rock Sch. Dist., 526 A.2d 1173 (Pa. 1987)
(organization was not charitable for purposes of exemption where
all income came from federal government and rent paid by
tenants); Yakima First Baptist Homes, Inc. v. Gray, 510 P.2d 243
(Wash. 1973) (rent subsidies are not public donations). There is
also contrary authority represented by the cases cited in
footnotes 50 and 51 of the opinion of the court. But of the four
jurisdictions represented there, only Utah is like Alaska in that
it requires that charitable purposes include an element of a gift
to the public, and the Utah court found that this element was
present. Yorgason v. County Bd. of Equalization of Salt Lake
County, 714 P.2d 653, 659 (Utah 1986) ("the Tower provides a gift
to the community . . . Episcopal Management Corporation has made
and continues to make substantial contributions of both money
. . . and services . . . ."). In any event, in light of the
numerous authorities rejecting the view that government funding
is equivalent to private charitable donations, our rule of narrow
construction (as well as logic) counsels against adoption of this
view.
120 See supra at page 47-48.
