• Limited liability companies controlled by a charity are not eligible for property tax exemption
  • April 17, 2007 | Authors: Michael J. Cooney; Jeffrey W. Sacks
  • Law Firms: Nixon Peabody LLP - Rochester Office ; Nixon Peabody LLP - Boston Office
  • The Massachusetts Appellate Tax Board (the ATB) has held that the owner of real property seeking a charitable exemption must be a corporation or a trust. In a decision issued March 20, the ATB has held that nursing home facilities operated by sole-member limited liability companies (LLCs) are not eligible for the charitable real property tax exemption because the Massachusetts real estate exemption statute specifies that the owner of the property must be a trust or incorporated. According to the ATB, as “unincorporated organizations,” LLCs are ineligible.

    The ATB rejected arguments that the substance of the LLCs’ activities as charities should qualify the entities for real estate tax exemption and focused instead on their organizational form in a “plain-language” reading of the statute. In doing so, the ATB refused to follow the clear precedent of treating sole-member LLCs as “disregarded entities” for federal and state income tax purposes.

    These cases interpreted the specific provisions of the Massachusetts real estate tax exemption. Unless overturned on appeal or by the legislature, they suggest that significant caution must be used by charities in the ownership of charitable assets through LLCs. To assure exemption for real estate owned and operated by a charity in Massachusetts, the charity must establish an appropriate trust or use the corporate form of ownership under M.G.L. Chapter 180. In either case, the entity must secure recognition of exemption under Internal Revenue Code (Code) Section 501(c)(3), a task avoided in the use of a sole-member LLC as a disregarded entity.

    The nursing homes in question, located in Greenfield, Taunton, and Quincy, were assessed real estate and personal property taxes for 2003, 2004, and 2005 by the towns’ boards of assessors. The disputed amounts totaled more than $500,000. Each LLC paid its taxes, but filed for abatement, on the grounds that it was a “charitable organization” eligible for an exemption established by M.G.L. c. 59, § 5, cl. 3. This clause states that “personal and real property owned by . . . a charitable organization” is exempt from property tax., and requires a charitable organization to be an “institution . . . incorporated in the commonwealth” or “held in trust” for a charitable organization. All applications for abatement were denied.

    The ATB recognized that the LLCs operated on a non-profit basis and provided care exclusively to indigent elderly and infirm patients with Medicaid and/or Medicare. Each LLC had as its sole member ElderTrust of Florida, Inc. (ElderTrust), a Tennessee corporation organized for charitable purposes relating to elder care and tax-exempt under Code Section 501(c)(3). The documents governing the LLCs stated that the companies would engage only in activities that further the charitable purpose of ElderTrust. The issue was not the activities of these LLCs, however, but their choice of business form.

    On appeal, the LLCs argued that the charitable substance of their activities, rather than their organizational form, should govern the determination of their eligibility for the tax exemption. The LLCs asserted that the requirement of incorporation predates the emergence of LLCs, and encouraged a broad reading of the statute to encompass this favorable new format. The ATB rejected this functional approach in favor of a legislative solution to include the LLC form specifically. The nursing homes also sought a determination that the LLCs held the properties in “trust” for the incorporated charity from which they derived their exempt status under federal tax law. The ATB found no “intent” to create a trust relationship, and thereby rejected any ability of the corporate charity to use a disregarded single-member LLC to hold title to real property. Whether the ATB would require an actual charitable trust or a trust “relationship” under the statute is thus unclear from this decision.