South Portland Wins Tax Exemption Case
(from Maine Townsman, February 2003)
by Mary Kahl, Corporation Counsel, City of South Portland

In January of 1998, Credit Counseling Centers, Inc., d/b/a/ CCCS, applied to South Portland Tax Assessor Elizabeth Sawyer for a charitable exemption from taxation on real and personal property pursuant to 36 M.R.S.A. 652(1)(A). This statute states that real and personal property is exempt from taxation when it is "occupied or used solely for their own purposes by benevolent and charitable institutions incorporated by this State. Such an institution may not be deprived of the right of exemption by reason of the source from which its funds are derived or by reason of limitation in the classes or persons for whose benefit such funds are applied."

This statutory exemption from taxation is strictly applied because it contravenes the general constitutional requirement that all property owners must contribute their fair and equitable share to the tax burden. The property owner claiming an exemption must show that its organization falls "unmistakably within the spirit and intent of the act creating the exemption." City of Bangor v. Rising Virtue Lodge, No. 10, 73 Me. 428, 433 (1882). (On a practical basis, for every tax exemption that's granted, other taxpayers in the municipality must make up the loss of revenue with an incremental increase in their own tax obligation.)

CCCS Organizational Structure and Operations
CCCS presented the following facts in support of its application for a tax exemption:
The organization was formed in 1971 by members of Maine's financial and business community to provide credit counseling and debt management services and consumer educational programs. It is a local affiliate of the National Foundation for Credit Counseling (NFCC), a Maine nonprofit corporation and a nonprofit entity recognized under Internal Revenue Code 501(c)(3) for federal income tax purposes. Initially, CCCS operated out of leased premises in the City of Portland. While CCCS never paid any personal property taxes in Portland, the City never rendered an official determination regarding its claimed tax-exempt status. Before April 1, 1998, CCCS purchased real property in the City of South Portland. CCCS did not own any real property in the State of Maine other than the property in South Portland.

CCCS's property in South Portland is used as its central headquarters for its business throughout Maine. Its services include educational seminars, financial counseling and debt management programs. Fees are charged for all services.

CCCS's primary business activity is assisting debtor clients with repayment plans to creditors. At an initial budget counseling session, CCCS analyzes the financial position of the debtor. Debtors break down into three approximately equal categories: those who do not need Debt Management Plans (DMPs), those who do not qualify for DMPs, and those who are placed in DMPs.

Approximately one-third of debtors receiving budget counseling services from CCCS are in a strong enough financial position that they do not need debt management services and therefore receive nothing beyond the initial counseling services. A second segment of approximately one-third of the people seeking assistance from CCCS is carrying too much debt in proportion to income to be helped by CCCS and therefore is not assisted by CCCS. The debtors in this group receive a "road map" advising them to take such actions as getting a second job, selling property, seeking addiction counseling or pursuing relief through bankruptcy. This is the end of their association with CCCS unless their situation changes.

The third segment of approximately one-third of the debtors seeking budget counseling from CCCS - the middle third that is neither too deeply in debt nor whose finances are too easily restructured - is placed into DMPs. In a DMP, CCCS negotiates a repayment plan between the creditors and the debtor. CCCS therefore acts as a conduit of funds from the debtor to the creditors for a fee.

None of CCCS's services or activities is funded by charitable gifts or donations. Funding comes from member organizations, creditors, and the debtor clients. NFCC affiliates have returned a minimum of $1.6 billion nationally from debtors to creditors each year since 1996. During the years 1995-1999, the total funds returned to client creditors from client debtors by CCCS were $8,801,264 (1995), $9,877,179 (1996), $11,933,638 (1997), $13,146,614 (1998) and $16,715,565 (1999).

CCCS receives voluntary "fair share contributions" from most creditors of a percentage of debts paid to the creditors through CCCS. The current average "fair share" contribution is 8.5-9%. Fair share contributions from creditors are essential to CCCS being able to pay its annual operating expenses. In 1998, fair share fees paid by creditors provided approximately twice the revenue of debtor client fees to CCCS, with approximately 60% of CCCS's funding in Maine coming from fair share contributions of creditors. NFCC and CCCS have acknowledged that NFCC affiliates play a "dual role" in helping both consumers and creditors.

Applying the Law to the Facts
What is a "charity" under Maine law? The Law Court, in Johnson v. South Blue Hill Cemetery Ass'n, 221 A.2d 280, 287 (Me. 1966), has provided the following definition:
Charity has been more fully defined as being "a gift" applied:

" . . . for the benefit of an indefinite number of persons, either by bringing their minds or hearts under the influence of education or religion, by relieving their bodies from disease, suffering, or constraint, by assisting them to establish themselves in life, or by erecting or maintaining public buildings or works or otherwise lessening the burden of government."

In reviewing a request for a charitable tax exemption, the Law Court has provided the following guidance:
"When an exemption is claimed, the court must undertake a careful examination of the facts presented to determine (1) whether the owner of the land is organized and conducting its operation for purely benevolent and charitable purposes in good faith; (2) whether there is any profit motive revealed or concealed; (3) whether there is any pretense to evade taxation; and (4) whether any production of revenue is purely incidental to a dominant purpose that is benevolent and charitable."

Cushing Nature and Pres. Ctr. v. Town of Cushing, 2001 ME 149, 17, 785 A.2d 342, 347
Assessor Sawyer summed up her problem with CCCS's request for a charitable exemption with the question, "Where's the gift?" She saw a business that was providing services that were being paid for by its two client bases, debtors and creditors. In her opinion, the business did not meet the statutory standard of being conducted exclusively for benevolent and charitable purposes. It was not, therefore, exempt from taxation under 36 M.R.S.A. 652(1)(A).

CCCS appealed her determination to the South Portland Board of Assessment Review (BAR), which agreed with the Assessor, holding that "CCCS failed to carry its burden of proof that it was organized and conducted exclusively for benevolent and charitable purposes in that significant benefits were accorded to creditors of consumers and such benefits were not merely incidental to any benevolent and charitable purpose that CCCS may have."

Following the BAR's decision, CCCS appealed to Superior Court, both taking a Rule 80B appeal from the decision of the BAR on the two tax years subject to its decision and seeking a prospective declaratory judgment that CCCS was exempt from taxation as a charitable organization. The outcome in Superior Court was mixed: the Rule 80B appeal was decided in favor of the City, but the Declaratory Judgment was decided in favor of CCCS (the seemingly contradictory results being attributed to the deference given to the BAR in the 80B appeal and the de novo nature of the Declaratory Judgment action).

The City then filed an appeal of the Declaratory Judgment action to the Law Court; CCCS cross-appealed the 80B decision. A year and a day after the oral argument, the Law Court issued its decision in favor of the City in both the Rule 80B appeal and the Declaratory Judgment action, finding that CCCS was not exempt from taxation. The Court found that "[t]he magnitude of the amounts collected for creditors clearly demonstrates that CCCS's business is not 'conducted exclusively for benevolent and charitable purposes' . . . CCCS is a thriving organization that provides a significant and very valuable public service to creditors and debtors. CCCS has not shown, however, that it comes 'unmistakably within the spirit and intent' of the charitable exemption statute."

AUTHOR'S NOTE: A final note on legal representation of the City: while I was involved from the Assessor's initial decision-making process through the Law Court oral argument, three other attorneys provided invaluable assistance at various stages of the case. Adrian Kendall, of Norman, Hanson & DeTroy, acted as counsel to the BAR for its hearing, since I was counsel to the Assessor, who was a party before the Board. In Superior Court, MMA sponsored the participation of William Plouffe, of Drummond Woodsum & MacMahon, as co-counsel for the City in the Declaratory Judgment trial. And at the Law Court, MMA Staff Attorney Richard Flewelling filed an amicus brief supporting the City's argument.