State Department of Assessments & Taxation v. North Baltimore Center, Inc.

EYLER, Judge. North Baltimore Center, Inc., appellee, applied to the State Department of Assessments & Taxation, appellant, for a charitable exemption from property tax pursuant to Md.Code, Tax-Prop. § 7-202(b)(1) for the 1996-97 tax year for its building ⁵⁹¹ located at 2221-2227 North Charles Street. Appellee used the building to provide mental health care to the indigent. Appellant denied the exemption on the ground that appellee was not supported by significant charitable donations.

Appellee appealed the decision to the Property Tax Assessments Appeals Board for Baltimore City (the “Board”), which affirmed appellant’s decision. Appellee appealed to the Maryland Tax Court ■which, after a hearing, reversed the Board and granted the exemption. Appellant petitioned for judicial review in the Circuit Court for Baltimore City, which affirmed the Tax Court. Appellant appealed to this Court and inquires whether the circuit court erred in affirming the Tax Court’s grant of a charitable exemption.

Finding no error, we shall affirm. Factual Background Appellee was incorporated in 1969 and is an organization exempt from Federal income taxes under § 501(c)(3) of the Internal Revenue Code. Appellee operates a mental health center at 2221-2227 North Charles Street. Appellee purchased the building in 1996 with funds obtained through a grant from the Mental Health Administration of the State Department of Health and Mental Hygiene and funds obtained through a tax-free bond issue.

Appellee provides mental health services on an outpatient basis, mainly to indigents. 1 Appellee is regulated by the Department of Health and Mental Hygiene as a community health program provider. The Mental Health Administration contracts with mental health providers, including appellee, to fulfill its statutory ⁵⁹² obligation to provide mental health services to the indigent. Appellee is paid from state and federal government funds and receives a relatively small amount of support from charitable donations. Specifically, according to appellee’s 1996-97 financial report, it received revenues as follows: Year 1997 1996 Restated Revenues Support from the public Grants $3,874,384 $3,697,511 Medical assistance $1,825,719 $2,031,366 Medicare $ 121,045 $ 90,210 Supplemental security income $ 474,723 $ 383,972 Total Support From The Public $6,295,871 $6,202,159 Other Revenues State property acquisition grant $1,575,000 Private insurance 25,733 $ 29,965 Fees 50,762 $ 19,666 Other income 55,169 $ 12,585 Total Other Revenues $ 131,664 $1,637,216 Interest Income $ 54,305 $ 11,910 Gain From Sale of Assets $ 3,435 Total Support and Revenues ;6,485,275 $7,851,285 Appellant’s Brief at 3 (footnotes omitted) Private charitable donations were less than 1% of total revenues.

Additionally, four volunteers each worked 600-800 hours per year. At the hearing before the Tax Court, a witness for appellant, Robert E. Young, Associate Director, Taxpayer Services, Maryland State Department of Assessments and Taxation, discussed the test for determining whether an institution is charitable as set forth by the Court of Appeals in Supervisor of Assessments v. Group Health Ass’n, Inc., 308 Md. 151 , 517 A.2d 1076 (1986). In that case, the Court stated: A determination of whether an institution is charitable must include a careful examination of the stated purposes of the organization, the actual work performed, the extent to which the work performed benefits the community and the public welfare in general, and the support provided by donations. Group Health Ass’n, 308 Md. at 157 , 517 A.2d 1076 .

Mr. Young, applying that test, testified that (1) appellee’s stated purpose of “providing mental health services and a ⁵⁹³ substance abuse facility” was not a charitable purpose; (2) the actual work performed was not charitable because it was paid for out of government funds; (3) it did not benefit the general public because the government was paying a fee for service; and (4) appellee received no significant private donations. As mentioned previously, the Board affirmed. DISCUSSION The charitable exemption statute in question provides, in pertinent part, as follows: property is not subject to property tax if the property: (i) is necessary for and actually used exclusively for a charitable or educational purpose to promote the general welfare of the people of the State, including an activity or an athletic program of an educational institution; and (ii) is owned by: 1. a nonprofit hospital. 2. a nonprofit charitable, fraternal, educational, or literary organization.... 3. a corporation or trustee that holds the property for the benefit of an exempt organization. 4. a nonprofit housing corporation. Md.Code Ann., Tax-Prop. § 7-202(b)(1)(1987 Repl.Vol., 1999 Cum.Supp.).

In Group Health Ass’n , the Court of Appeals had occasion to interpret Art. 81, § 9(e)(1980), the predecessor to Tax-Prop. § 7-202 and specifically, the meaning of “charitable organization.” In doing so, the Court identified the four factors quoted above. Appellant contends that the Tax Court erred in failing to require that all four factors be met and, specifically, the fourth factor, and that this, in turn, lead the court to err in applying the first three factors. Appellant’s position is that, as a matter of law, all four factors must be met in order for an ⁵⁹⁴ organization to qualify for a charitable exemption. With respect to the fourth factor, appellant asserts that it was not met because the evidence showed very modest private donations received by appellee, constituting a very small percentage of its budget.

Additionally, relying primarily on Supervisor of Assessments v. Har Sinai W. Corp., 95 Md.App. 631 , 622 A.2d 786 (1993), appellant contends that the fourth factor cannot be met because the organization is paid with government funds. Appellant concedes that, if significant charitable contributions were made to appellee, all prongs of the test would be met. Appellee contends that the Court of Appeals in Group Health Ass’n did not set forth a bright-line rule but merely identified factors to be considered, and that no one factor is determinative. Appellee explains that, based on the evidence before the Tax Court, the first three factors were met, and this is sufficient to sustain the decision of the Tax Court.

Additionally, there was evidence that appellee did receive some income from private donations, although admittedly not substantial. Appellee concludes that, taking the evidence as a whole and applying the four factors, there was substantial evidence to support the Tax Court’s determination. Our review of the Tax Court’s decision indicates that the court was aware of the applicable law. The Tax Court considered the first three factors and stated that they were clearly met because appellee provided services “to the masses,” pointing out that appellee was required to treat all eligible persons.

The Court concluded that appellee clearly benefited the community and public welfare. We will not comment on those factors further because the fourth factor is the focus of this appeal. With respect to the fourth factor, the Tax Court clearly considered it, but its conclusion is less clear. The Tax Court acknowledged that there was evidence of some private donations to appellee but also recognized the fact that appellee’s funding came primarily from State government.

The Tax ⁵⁹⁵ Court implicitly concluded that significant private donations were not necessarily required. I. Standard Of Review The Maryland Tax Court is an administrative agency. Md.Code. Ann., Tax-Gen. § 3-102 (1988, Cum.Supp.1999); see Prince George’s County v. Brown, 334 Md. 650 , 658 n. 1, 640 A.2d 1142 (1994); Abington Ctr.

Assocs. Ltd. Partnership v. Baltimore County, 115 Md.App. 580, 589 , 694 A.2d 165 (1997). On review, a decision of the Tax Court must be affirmed if it is not erroneous as a matter of law and if it is supported by substantial evidence appearing in the record. CBS, Inc. v. Comptroller of the Treasury, 319 Md. 687, 697-98 , 575 A.2d 324 (1990); Ramsay, Scarlett & Co. v. Comptroller of the Treasury, 302 Md. 825, 834 , 490 A.2d 1296 (1985); Maisel v. Montgomery County, 94 Md.App. 31, 34 , 614 A.2d 1333 (1992) .

We may not substitute our judgment for that of the agency as to factual findings that are supported by substantial evidence. Ramsay, 302 Md. at 834 , 490 A.2d 1296 ; Rossville Vending Mach. Corp. v. Comptroller of the Treasury, 97 Md.App. 305, 312 , 629 A.2d 1283 , cert. denied, 333 Md. 201 , 634 A.2d 62 (1993). In contrast to the deferential review accorded to an agency’s factual findings, questions of law receive no deference on review.

Young v. Board of Physician Quality Assurance, 111 Md.App. 721, 726 , 684 A.2d 17 (1996), cert. granted, 344 Md. 568 , 688 A.2d 447 , and cert. dismissed, 346 Md. 314 , 697 A.2d 82 (1997). Consequently, if the Tax Court’s decision is based on a question of law, we are not bound by the agency’s interpretation. Department of Assessments & Taxation v. Consumer Programs, Inc., 331 Md. 68, 72 , 626 A.2d 360 (1993); Ahalt v. Montgomery County, 113 Md.App. 14, 22 , 686 A.2d 683 (1996); see, e.g., Roach v. Comptroller of the Treasury, 327 Md. 438 , 610 A.2d 754 (1992); Friends School v. Supervisor of Assessments, 314 Md. 194 , 550 A.2d 657 (1988). The interpretation of a statute normally presents a question of law.

Papilla v. Pockets, Inc., 119 Md.App. 78, 83 , 704 A.2d 448 (1997); Hider v. Department of Labor, Licensing & ⁵⁹⁶ Regulation, 115 Md.App. 258, 273 , 693 A.2d 17 (1997), rev’d on other grounds, 349 Md. 71 , 706 A.2d 1073 (1998); Mayor & City Council of Ocean City v. Purnell-Jarvis, Ltd., 86 Md. App. 390, 413 , 586 A.2d 816 (1991). When the Tax Court’s legal interpretation' of a statute is at issue, the substituted judgment standard applies to an erroneous conclusion of law. Rossville, 97 Md.App. at 311-12 , 629 A.2d 1283 ; see also People’s Counsel v. Maryland Marine Mfg. Co., 316 Md. 491, 497 , 560 A.2d 32 (1989).

In interpreting a statute, the following principles of statutory construction are relevant. The guiding principle is to determine and effect the intent of the Legislature. Oaks v. Connors, 339 Md. 24, 35 , 660 A.2d 423 (1995); Mayor & City Council of Baltimore v. Cassidy, 338 Md. 88, 93 , 656 A.2d 757 (1995); Abington, 115 Md.App. at 602 , 694 A.2d 165 . Ordinarily, we look to the language of the statute itself to accomplish this task.

State v. Pagano, 341 Md. 129, 133 , 669 A.2d 1339 (1996); Allied Vending, Inc. v. City of Bowie, 332 Md. 279, 306 , 631 A.2d 77 (1993); State v. Patrick A., 312 Md. 482, 487 , 540 A.2d 810 (1988). When, as here, the Legislature has not defined a statutory term, we must consider the language of the statute itself and give that language its “ordinary and natural meaning [without] resort to subtle or forced interpretations.... ” Marylandr-Nat’l Capital Park & Planning Comm’n v. Department of Assessments & Taxation, 110 Md.App. 677 , 678 A.2d 602 (1996), aff'd, 348 Md. 2 , 702 A.2d 690 (1997); see also Montgomery County v. Buckman, 333 Md. 516, 523 , 636 A.2d 448 (1994). If the statute is ambiguous, courts should consider not only the literal or usual meaning of the statutory language, but also its “meaning and effect in light of the setting, the objectives and purpose of the enactment.” Tucker v. Fireman’s Fund Ins. Co., 308 Md. 69, 75 , 517 A.2d 730 (1986); see also Kaczorowski, 309 Md. at 513, 525 A.2d 628 ; Rossville, 97 Md.App. at 314 , 629 A.2d 1283 .

We will first examine the language in the exemption statute, and to aid us in our understanding of its meaning, we will look ⁵⁹⁷ at the development and usual meaning of the term, “charitable.” II. History and Use of the Term, “Charitable” “Charitable” is a generic term. Its meaning varies widely and the concept predates tax systems. See Bruce R. Hopkins, The Law of Tax-Exempt Organizations, § 5.1 (7th ed.1998).

The common law definition of “charitable” was developed in the context of encouraging and protecting charitable trusts. The definition of the term charitable derives from an English statute — the Preamble to the Statute of Charitable Uses of 1601. See id. (citing Stat. 43 Eliz., c. 4).

Charitable trusts (or, as they were called, “uses”) were recognized and enforced by judicial decision prior to 1601, but because of the extreme poverty existing at that time, the Statute of Charitable Uses was enacted to (1) recognize and encourage contribution of private philanthropy and (2) address the prior inadequate supervision of charitable uses. See Gareth Jones, History of the Law of Charity 1532-1827, at 22 (1969). The statute was based on prior holdings of the English Court of Chancery and the experiences of early cultures and religions. See Hopkins, supra, at 86-87.

The drafters of the Statute of Charitable Uses used the following language to enumerate the purposes then recognized as charitable: [S]ome for relief of aged, impotent and poor people, some for maintenance of sick and maimed soldiers and mariners, schools of learning, free schools, and scholars in universities, some for repair of bridges, ports, havens, causeways, churches, seabanks and highways, some for education and preferment of orphans, some for or towards relief, stock or maintenance for houses of correction, some for marriages of poor maids, some for supportation, aid and help of young tradesmen, handicraftsmen and persons decayed, and others for relief or redemption of prisoners or captives, and for aid or ease of any poor inhabitants concerning payments of fifteens, setting out of soldiers and other taxes. ⁵⁹⁸ Id. (quoting St. 43 Eliz., C.4.). The enumerated charitable purposes were those commonly regarded as such in 1601, with the deliberate exception of religion, but the Statute was not intended as an exclusive list. See Jones, supra, at 120-21; see also Persons, Osborne & Feldman, Criteria for Exemption under Section 501(c)(3), IV Research Papers of the Commission on Private Philanthropy and Public Needs, at 1913 (Treasury 1977).

Court decisions thereafter interpreted the term liberally. Prior to 1700, there were several decisions that spelled out the privileges of charitable trusts, e.g., relaxed requirements for existence, the development of the cy prés doctrine, and the inapplicability of statutes of limitation to actions to enforce charitable uses. With time, however, charities fell into disfavor, . inspired primarily by a fear of ecclesiastical charities. See Jones, supra, at 105-108.

An example of disfavor was the Mortmain Act of 1736 which voided devises of land to charities (as distinguished from inter vivos transfers) and vested the land in the testator’s heirs. See id. After the Mortmain Act, charities sometimes sought to avoid the effect of the Act by calling themselves “public” bodies and not charities. The Act thus reoriented the significance of the term “charity,” and it became a limiting term.

See id. at 132-33; Mark A Hall & John D. Colombo, The Statutes of Nonprofit Hospitals: Towards a Donative Theory of Tax Exemption, 66 Wash. L.R. 307, 332-340 (1991). Courts continued to interpret the term liberally, however, presumably motivated by a desire to protect heirs. See Jones, supra, at 132-33.

As a result, the term “charitable,” as it developed in English common law, was a definable legal concept, clearly less inclusive than lay terms such as “public benefit,” “philanthropic,” or “beneficial”. See Hopkins, supra, at 87. Lord Macnaghten, in Pemsel’s Case, authored the first comprehensive judicial definition of charity: ‘Charity’ in its legal sense comprises four principal divisions: Trusts for the relief of poverty; trusts for the advancement ⁵⁹⁹ of education; trusts for the advancement of religion; and trusts for other purposes beneficial to the community, not falling under any of the preceding heads.... The trusts last referred to are not the less charitable in the eye of the law, because incidentally they benefit the rich as well as the poor, as indeed, every charity that deserves the name must do either directly or indirectly.

Commissioners for Special Purposes of Income v. Pemsel, A.C. 531, 583 (1891). Those four divisions were in essence adopted in the Restatement of Trusts and are generally recognized as charitable in American law today. See Hall & Colombo, supra, at 334-36. American colonists carried with them the English tradition of active private philanthropy.

Public and private actions often were intertwined: [The colonists] did not debate the question of public versus private responsibility . .. public and private philanthropy were so completely intertwined as to become almost indistinguishable. The law itself reflected a pragmatic approach to the solving of social problems through philanthropy. Colonial assemblies went out of their way to remove obstacles in the way of charities. The courts valuing social betterment above legal technicalities, asserted a permissive charity doctrine that supported donors’ benevolent intentions, even when the formulation of their plans was clearly imperfect.

H. Miller, The Legal Foundations of American Philanthropy 1776-1844, at xi (1961) (quoted in, James J. Fishman, The Development of Nonprofit Corporation Law and an Agenda for Reform, 34 Emory L.J. 617 , 622 (1985)). Philanthropic approaches in Colonial America were not uniform. See Note, The Enforcement of Charitable Trusts in America: A History of Evolving Social Attitudes, 54 Va. L.Rev. 436, 440-41 (1968) (discussing Colonial statutes); Wyllie, The Search for an American Law of Charity, 1776-1844, 46 Miss.

Valley Hist. Rev. 203, 204 (1959). From the beginning, the concepts of public and private charity coexisted. For example, in Boston ⁶⁰⁰ and other Massachusetts towns, public spending for poverty-relief combined with private contributions and legacies.

See Wyllie, supra, at 204-07. The typical vehicle for private philanthropic efforts was the English charitable use, which enjoyed universal approval. See id. In the immediate post-Revolutionary period, the favorable attitude toward charity continued, but the law applicable to charities reflected the general uncertainty and transition characteristic of American law in the post-Revolutionary period.

See Miller, supra, at 15. Most state constitutions were silent about charities. See id. Massachusetts, Pennsylvania, Vermont, and New Hampshire, however, gave constitutional protection to charities.

See id. at 9-10. Other states passed statutes facilitating and reaffirming the benefits of charities to the community. See id. at 16-18. The retention of English statutes and practices resulted from the general continuation of English law and precedent.

See E. Brown, British Statutes in American Law 1776-1836, at 24-26 (1964). From the beginning, most states actively encouraged the incorporation of private associations that performed vital services. Several state legislatures passed statutes permitting incorporation of charitable organizations such as churches, schools, and literary societies. See J. Blandi, Maryland Business Corporations 1783-1852, at 11 (1934); see also 1802 Md. Laws 111 ; 1798 Md. Laws 24 ; 1779 Md. Laws 9 .

These early enactments evolved into our current statutory scheme, which includes the granting of privileges to charitable organizations, e.g., tax exemptions.

III

A Charitable Organization within the Context of Federal Income Tax Federal law has provided for an exemption from income tax for charitable organizations virtually since the inception of the tax. See Boris I. Bittker & George K. Rahdert, The Exemption of Nonprofit Organizations from Federal Income Taxation, 85 Yale L.J. 299 , 301 (1976); Kenneth Liles & Cynthia Blum, Development of the Federal Tax Treatment of Charities, 39 Law & Contemp. Probs. 6 (Autumn 1975). Specifical ⁶⁰¹ ly, in 26 U.S.C. § 501 (c)(3), the income of certain organizations is exempt, including corporations “organized and operated exclusively for ... charitable ... purposes.” 2 An organization will not be considered organized and operated exclusively for “charitable purposes” unless it serves a public purpose.

See Income Tax Regs., § 1.501(c)(3) — 1(d)(1); see also Federation Pharmacy Services, Inc. v. Commissioner, 625 F.2d 804, 807-09 (8th Cir.1980). In order to operate “exclusively” for a charitable purpose, an organization must engage primarily in activities that accomplish such a purpose, and its exempt status will be lost if more than an insubstantial portion of its activities is not in furtherance of an exempt purpose. See Income Tax Regs., § 1.501(c)(3)-1(c)(1). The term “charitable” in section 501(c)(3) is given a broad common law meaning.

See Michael D. Rose & John C. Chommie, Federal Income Taxation, § 11.05 (3d ed.1998). The regulations indicate that the term “charitable” is not to be construed as limited by the separate enumeration of purposes in the statute. See id. (citing Treas.

Reg. § 1.501 (c)(3)-1(d)(2)). Other tax-exempt purposes may fall within the broad outlines of “charity” as developed by judicial decision. See 9 Jacob Mertens, Jr., Law of Federal Income Tax, § 34.21 ⁶⁰² (1999) (citing Reg. § 1.501(c)(3)-1(d)(1)(i)(b) & (2)). The essential element of a charitable institution is that the interests served are exclusively public, rather than private.

See id. (citing Reg. § 1.501(c)(3)-1(d)(1)(ii)).

IV

A Charitable Organization within the Context of State Property Tax Exemption Statutes. State property tax exemptions for charitable organizations and other organizations pursuing charitable purposes have existed since colonial times. See Douglas M. Mancino, Income Tax Exemption of the Contemporary Nonprofit Hospital, 32 St. Louis U. L.J. 1015 , 1016 n. 1 (1988). Many states take into account the level of donative support an organization receives in determining whether it, or an activity, is charitable.

See, e.g., Rio Vista Nonr-Profit Hous. Corp. v. Ramsey County, 277 N.W.2d 187 (Minn.1979). It may be sufficient if at least a portion of the capital cost of acquiring the