Does My Organization Meet the Six Factors

A charitable organization is expected to satisfy all 6 factors. Nonprofits that are granted 501(c)3 status have already met and agree to factors #1, 4, and 6. No problems there! At the same time, the law recognizes the wide range of types of nonprofit activity. Some nonprofits simply don’t meet all the factors, and there are options for dealing with that. If your nonprofit doesn’t meet the factors identified as #2, 3, or 5 above, you have the right to make your case to the assessor and provide “reasonable justification” for why you don’t meet a factor but are still a charitable organization worthy of the exemption.

As you read the following explanation of the factors, keep track of your organization’s characteristics using this chart:

Does your organization meet factor 1? If an organization’s Articles of Incorporation state that the organization is incorporated for a charitable purpose and it has received a 501(c)(3) determination letter, then the organization’s undertaking is to be helpful to others with immediate expectation of material reward – it satisfies factor one. Check the chart and note that you have the supporting documents. Supporting Documents: Articles of Incorporation; Federal IRS 501(c)(3) determination letter

Do you meet factor 2? That is, are you supported by material donations, gifts, or government grants in order to provide a service to people in the community, the public? This factor is a bit more nuanced than the first and contains a few terms that need definitions.

• The word material is intended to mean that you get a meaningful level of such support relative to your organization’s particular circumstances. “Material” is understood to mean more than “some” and less than “substantial.” This allows your organization to make a case for what is reasonable in your unique circumstances.
• The words government grants refer to a “a written instrument or electronic document defining a legal relationship between a granting agency and a grantee when the principal purpose of the relationship is to transfer cash or something of value to the grantee to support a public purpose.” If your organization receives a grant to provide a community service, something that benefits people in the community, the public, then you meet this factor.

Some nonprofits don’t rely on financial support from donations and grants; they have diversified streams of income such as earned income, rental income, or endowment income. Explaining that donations and grants are not needed is one way to provide justification for not needing to meet this factor. Supporting documents: Organizational Form 990s; financial statements; annual fundraising reports.

Move along to assess whether or not you meet factor 3: This factor is met if an organization either 1) provides benefits and services at reduced or no cost; and/or 2) alleviates the burdens of government. 

Regarding the first requirement, many nonprofit organizations provide services and programs for free or reduced cost. Some organizations do this through scholarship programs for classes, events or daycare services. Some organizations may charge beneficiaries based on a sliding scale for medical or dental services, or even let patrons determine how much they can contribute for a performance, show or exhibit. Many organizations host free events or seminars, allow free access to museum or educational space on set days every month or provide a free space to emerging artists or other nonprofits to host events. Some organizations travel to schools or community centers to conduct free trainings or teach classes related to their mission. When applying for property tax exemption, consider and list and quantify the various concrete, documented ways the applying organization benefits the community for free or reduced cost. 

Some organizations such as group homes and long-term care facilities may be prohibited from providing services for free or reduced cost. These organizations are required to charge rates set by the state and cannot deviate from them. This would be an example of organizations that may not meet factor three but which have a reasonable justification for failing to satisfy the requirement. Supporting Documents: Annual Report with program highlights and statistic related to free and reduced cost goods/services provided; payment policies for services; scholarship announcements; public accessibility plan and report. 
 
Regarding the second requirement, many nonprofit organizations provide benefits or services that, in the organization’s absence, the government might otherwise perform.  These organizations “alleviate a burden of government.” Organizations that have been granted the property tax exemption on this basis must meet a high burden of proof. For an organization to meet this part of the requirement, it would be wise to present objective evidence that the government aims to provide these services—be it through the existence of a government program that provides the services, the conclusions of a government study or report, or legislative action addressing the challenge those services seek to meet. Minnesota Supreme Court rulings on this subject have been inconsistent, but have permitted exemption for organizations that provide, for example: healthcare, research, education, housing, workforce development, cultural preservation, recreation, and entertainment.

Factor 4: Factor four relates to the restriction against private inurnment, i.e. personal financial gain. If an organization has received an IRS 501(c)(3) determination letter, the organization will generally satisfy this factor because it does not have profits that benefit any “shareholder” or other individual. As long as surpluses and reserves are not distributed to private interests, a nonprofit will properly satisfy factor four. The next two factors are easy for most 501(c)(3) organizations. Supporting Documents: Articles of Incorporation; Federal IRS 501(c)(3) determination letter

Factor 5: Factor five relates to who an organization serves. The statute requires that the beneficiaries served cannot be unreasonably restrictive in relation to the organization’s charitable mission. Supporting Documents: Articles of Incorporation; Federal IRS 501(c)(3) determination letter

And the last is easy; as a 501(c)(3) you are already covered by other statutes that require that your assets transfer so a similar charitable organization if you dissolve or make gifts:

Factor 6: Factor six relates again to the non-distribution requirement to which all 501(c)(3) organizations must adhere. The IRS requires that if a 501(c)(3) organization dissolves, its assets must be distributed for an exempt purpose. Supporting Documents: Articles of Incorporation; Federal IRS 501(c)(3) determination letter

Ready, set, apply!

Department of Revenue guidelines state that initial applications for exemption are due to the assessor in the district where the property is located on or before February 1 of the assessment year in which the exemption is first sought. Check your county assessor’s website for more specific property tax exemption application requirements and deadlines. 

What’s Next? You have reviewed your qualification for property tax exemption and presented your best case to the assessor. Now the county assessor will make a determination on the organization’s property tax-exempt status. If an assessor needs additional information related to the application, the Minnesota Department of Revenue recommends that the assessor allow for up to 60 days to receive the additional information. The assessor must consider all documentation provided by the applicant.

 

Appeal Options: Upon review of a property tax exemption application, the assessor should respond in writing. The letter should clearly outline the rationale for the assessor’s determination. If the property tax exemption is denied, and you think that this is an inappropriate determination, you have the following options: 

• Review Board. An organization may consider contacting the Minnesota Department of Revenue for review by an advisory Review Board. The Review Board is made up of the Department of Revenue, the Minnesota Association of Assessing Officers, and the Minnesota Council of Nonprofits. The goal of the Review Board is to help create consistency and set norms in assessment practices statewide. The Board reviews the facts of the organization in relation to the questioned factor. The review board will issue a written response to the assessor and the institution, outlining its advisory opinion as to whether or not the organization meets the requirements for property tax exemption. The written opinion is non-binding and advisory to the county assessor,
• Minnesota Tax Court. The organization may ultimately appeal the exemption denial to Minnesota Tax Court. A nonprofit petitioner must file an appeal by April 30th of the year in which the taxes become payable. If notice of exemption denial is not given until after February 28th of the year the tax is payable, the organization has 60 days from the date of mailing of the notice to initiate an appeal.