It’s no secret that income and sales taxes are often full of exemptions and deductions. We’ve noted before that, by exempting some items from taxation, the rates on everything else get pushed up. For instance, we found that the federal income tax system only taxes about half of all income—effectively doubling taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rates on the half that is taxed.
In New Hampshire, the town of Epsom was searching for new revenue, as governments often do. They zeroed in on the state’s property tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. for “charitable organizations,” and assessed an assisted living facility and skilled nursing facility.
The case, ElderTrust of Florida Inc. v. Town of Epsom (N.H. Jan. 18, 2007), raised the hard question: what is a “charitable organization”? The company operated nursing homes and hospitals, and all fees collected were used for these purposes. It did, however, have a parent for-profit company who held the mortgage to the land, to whom it paid rent, and hired another for-profit company to manage the facilities. It was thus hard to say whether it was non-profit or for-profit.
In what it called a “close case,” the New Hampshire Supreme Court ruled for ElderTrust, although it essentially pleaded with the Legislature to give more guidance through a statutory change.
This case teaches two main points. First, exemptions and deductions can distort business decisions as companies restructure themselves to qualify. The state’s exempting charities is a nice gesture, but non-charities are certainly benefiting. Second, tax statutes often use vague words open to interpretation, which creates uncertainty and instability. When legislatures do not instruct sufficiently, courts are faced with the choice of opening the deduction up to everyone who conceivably qualifies, or narrowly withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. it from all but clear cases.
(Click here for more on the case by New Hampshire practitioner Coleen Penacho.)
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