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October 4, 2021

Despite state Supreme Court ruling, tax exemptions for nonprofits hardly a settled issue

HBJ PHOTO | ZACHARY VASILE Middletown-based Gilead Community Services is the operator of a Cromwell group home at the center of a state Supreme Court case that ultimately upheld the nonprofit’s tax-exempt status.

A long-simmering dispute between the town of Cromwell and two nonprofit organizations over their exemption from local property taxes has ended in a ruling those close to the case say gives nonprofits the financial breathing room they need to survive, but also raises difficult and unsettled questions about the ability of municipalities to raise much-needed revenues.

In a decision released Sept. 1, the Connecticut Supreme Court upheld a ruling from a lower court holding that, based on the facts available, a property connected to the two nonprofits, Rainbow Housing Corp. and Gilead Community Services Inc., did in fact qualify for a charitable exemption, even if an aspect of the services they provide includes housing, which is sometimes not exempt from taxes under state statutes.

Middletown-based Gilead provides services for individuals with mental illnesses. Rainbow Housing owns and manages Gilead’s real estate assets, including a group home in Cromwell known as Valor Home, which became the center of the tax-exemption case.

Photo | Contributed
Gian-Carl Casa.

“It’s a significant victory for nonprofits and group homes in general,” Gian-Carl Casa, president and CEO of the statewide nonprofit association The Alliance, said of the ruling.

Casa said he hopes the decision will check and maybe reverse the recent trend of municipalities assessing property taxes against nonprofits, mostly in cases where there was no change in use of the properties in question.

Nonprofits must apply to renew their tax-exempt status on a four-year schedule, and a 2018 survey conducted by the alliance found that 41 Connecticut towns had denied tax exemptions during the most recent quadrennial renewal period. Casa said he expects that number to be even higher after 2021, another renewal year.

“Four or five years ago there was a discussion among assessors,” he said. “And their new position has been, essentially, ‘Take us to court.’ Not every municipality does this, but each year it seems like more and more municipalities try this.”

In some cases, nonprofits that could not afford a lengthy legal fight opted to pay their tax bills, but with the Gilead ruling now on the books, those organizations may enjoy a new level of protection against unexpected assessments from the towns and cities they operate in.

“Clearly this is an attempt to raise revenues,” Casa said. “And I understand the unfairness of the fact that municipalities have to rely so heavily on property taxes. But ultimately nonprofits are exempt because they save the government money.”

But Proloy K. Das, an attorney with Hartford law firm Murtha Cullina who argued Cromwell’s case before the state Supreme Court, said the broader issue of tax exemptions for housing-related nonprofits is hardly settled, mainly because the factual record in the Valor Home case won’t necessarily apply to other tax disputes, and because additional information proffered by Gilead could have pushed the court in a different direction.

Proloy K. Das

“This maintains the status quo,” Das said.

More cases moving forward

Under Connecticut statutes, real property owned by charitable organizations is generally exempt from taxation, but there’s an exception for housing subsidized, in full or in part, by federal, state or local governments.

There’s also an exception to the exception, which gives temporary housing tax-exempt status. The exact definition of “temporary housing” as it applied to Valor Home became the central issue in the state Supreme Court case.

Attorneys representing Cromwell argued that, because the state Department of Mental Health and Addiction Services helps fund Valor Home, the town was justified in trying to collect taxes on its property. They also pointed out that housing at the group home is not limited to a finite length of time, which suggests the housing is not actually temporary.

Lawyers for Rainbow and Gilead claimed the housing offered to Valor Home patients is transitional and impermanent, as they are receiving treatment while living there and leave when they’re finished. The nonprofits acknowledged that the length of a resident’s stay is “entirely dependent on the individual’s treatment progress.”

The court ultimately ruled that because relevant state legislation does not attach a time limitation to the word “temporary,” it could not guess at the proper meaning and would consider the services offered by Gilead to constitute, essentially, “temporary housing.”

But Das pointed out that one justice noted the court’s decision might have been different if it learned that patients were staying at the group home for years, or that they had used its address to register to vote, which would be signs that their residence there was not impermanent.

Many similar cases were put on hold when the Supreme Court took up the Gilead dispute, Das noted, but now they’re moving forward again, and there’s a chance a case with a more developed factual record could come before the justices.

“I wouldn’t be surprised if it ended up before the Supreme Court again, or if it ended up changed by the legislature,” he said.

Rock and a hard place

Many towns and cities have been facing a steady decline in state financial support in recent years, a reality that has forced them to look for revenues elsewhere, including through increased taxes on their own residents, or a reevaluation of the exempt status held by charitable groups. Barring a fix at the state level, the problem seems unlikely to be solved through any one court case.

“It’s a tough policy question,” Das said. “The municipalities are losing out on revenue from these state-funded entities, but of course you still want those entities to be able to do their work. The question is, how do you balance those needs?”

Michael Marafito, an attorney with Hartford-based law firm Pullman & Comley, filed an amicus brief on behalf of Rainbow Housing. Though on the opposite side of the case, he agreed with Das that the ruling is not the last word on every tax exemption case involving a nonprofit.

Michael Marafito

“It’s very fact-intensive, fact-specific, so it’s hard to make generalizations from this one case,” Marafito said.

Still, many nonprofits are “breathing a sigh of relief,” he explained.

“The decision added some clarity,” Marafito said. “It gives these groups the ability to continue to put their resources toward their missions instead of having to worry about budgeting for property taxes.”

At the same time, however, the circumstances surrounding the lawsuit will likely further increase the level of scrutiny assessors will apply to nonprofit organizations in the future.

Charitable groups will have to take extra care when completing their tax exemption application, he noted, to ensure their position is as strong as possible.

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