Letting Judges Define Nonprofits–A Very Bad Idea

When I first heard about the case Under the Rainbow Day Care Center v. County of Goodhue ruled on by the Minnesota Supreme Court recently, I thought this case had broad and profound implications for the nonprofit sector. I then read an article by Rick Cohen, The Case of Under the Rainbow Child Care Center vs. Goodhue County in the Nonprofit Quarterly, in which he stated “the Rainbow decision should be a warning shot across the bow of all nonprofits across the nation.” I was further convinced this is a critical issue for the entire nonprofit sector.

The specifics of the case are outlined in the Minnesota Supreme Court’s ruling. As you may know, 501(c)(3) status is ruled by the Internal Revenue Service but sales and property tax exemptions are applied for separately at the state level. Under the Rainbow had applied for exemption when they moved into a new building. The county assessor ruled that Under the Rainbow met the six criteria for property tax exemption but that decision was overturned by the higher court. See the Minnesota Council of Nonprofits’ FAQ’s about Charitable Tax Exemptions in Minnesota for the listing of the criteria and other pertinent information.

What the Court did was elevate one of the criteria as more important than the other criteria, which had not previously been the case. This criterion was whether the recipients of the “charity” are required to pay for the assistance received in whole or in part. The ruling stated “there must be a substantial charitable, or gift, component to an organization’s operation in order to qualify as an institution of purely public charity. That means the organization must provide a substantial proportion of its goods or services free or at considerably reduced rates.” The Court did not define ”substantial proportion” for these purposes. Also, there is no clear guidance as to what percentage of a charity’s goods or services must be given away or sold at “substantially less than fair market value.” A second, more disturbing ruling by the Court was that public support through vouchers, public grants or other contracts was considered earned as opposed to contributive income. This is an essential point when we consider sources of revenue and how we calculate public support for our work.

Many in the nonprofit field recognize that the growing revenue base for nonprofits is earned income. This income supports the charitable work of the nonprofit or is reinvested in the organization’s sustainability efforts to continue to fulfill their missions. Rick Cohen rightly stated in his article that this case is “a battler over what constitutes a legitimate nonprofit and who gets to make that determination.” In the case of the Minnesota Supreme Court’s actions they grossly overstepped the bounds of their legitimate authority in determining what is a legitimate nonprofit. We must all support the work of our colleagues at the Minnesota Council of Nonprofits as they battle the issue that may likely set the stage for broad re-definition of charity and nonprofits.