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Education Reporter

When is a Nonprofit Not a Nonprofit?
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Daycares, universities, group homes, and other service providers that now qualify as nonprofits face an uncertain future as multiple levels of government question their tax-exempt status. The New York Times reports (5-26-08) that the Minnesota Supreme Court recently ruled a small daycare in Red Wing, Minnesota must pay property taxes because it is not a true nonprofit. According to the court, the daycare cannot qualify as a charity because it charges all families, rich or poor, the same rates for child care, and because its rates are no lower than those of its competitors. 95% of the center's budget comes from fees paid by families or by the government on families' behalf. "The extent to which the recipients of the charity are required to pay for the assistance received tests for a value that is fundamental to the concept of charity — that is, whether the organization gives away anything," the court's decision declared. According to the court's definition of what it means to "give away anything," 300 to 500 of Minnesota's 3,400 nonprofits could lose their tax-exempt status, said the director of the state's Council of Nonprofits.

Governments have also challenged the nonprofit status of some universities, especially those with large endowments. Massachusetts is considering a 2.5% annual tax on universities with endowments over $1 billion. The proposed tax primarily targets Harvard University's $35 billion endowment, the nation's largest by far.

Also in Massachusetts, local assessors attempted to tax Smith College in Northampton because it is a women's college. By the assessor's reasoning, the school should not qualify as a nonprofit because it practices sex discrimination against men.

The federal government has also raised questions about the tax-exempt status of some nonprofit organizations, especially hospitals, universities, and churches. Federal tax exemption means nonprofits pay no federal tax on incoming funds. The Senate Finance Committee is now investigating six evangelical ministries to reevaluate whether they qualify as tax-exempt nonprofits. Congress has also considered laws that would require universities to make minimum payouts from their endowments, in the form of scholarships or other charitable donations. (New York Times, 5-26-08)

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