Kentucky Business / Corporate Law:
The Kentucky Supreme Court recently addressed the issue of whether a local non-profit community development organization, which bought property, made improvements, and sold it in order to facilitate economic growth, was a charitable organization for taxing purposes. The Floyd County Property Valuation Administrator wanted to tax a piece of property which the Prestonsburg Industrial Corporation had recently purchased from the city for $1 and a portion of the proceeds after resale. In Hancock v. Prestonsburg Industrial Corporation, __________ S.W.3d __________ the Court determined that it was not a “purely public charity” and was therefore subject to state taxation.
Section 170 of the present Kentucky Constitution exempts from taxation, "institutions of purely public charity," and the real estate they own. We are being asked to consider a non-traditional definition of "institutions of purely public charity," namely, whether economic development for job creation can qualify a private, nonprofit corporation as an institution of purely public charity.4 The Kentucky Constitution, section 170, provides, among other things, that [*5] "institutions of purely public charity" shall be exempt from taxation. As a general principle, such provisions granting tax exemption must be strictly construed, as it is a well-settled principle that taxation is the rule and exemption the exception. Banahan v. Presbyterian Housing Corp., 553 S.W.2d 48, 51 (Ky. 1977).
Our predecessor Court has held that the word "purely" as used in this section modifies "charity." Iroquois Post No. 229 v. Louisville, 309 S.W.2d 353, 355 (Ky. 1958). By interpreting "purely" as a modifier of "charity," the Court has limited the tax exemption to organizations that are "wholly altruistic in the end to be attained, and that no private or selfish interest should be fostered under the guise of charity." Preachers' Aid Soc. v. Jacobs, 235 Ky. 790, 32 S.W.2d 343, 344 (Ky. 1930).
According to our case law, "charity" includes activities which reasonably better the condition of mankind. Commonwealth ex rel. Luckett v. I.W. Bernheim Found., 505 S.W.2d 762 (Ky. 1974). [*6] Consistent with Bernheim, in Banahan this Court reaffirmed that the test for determining whether a "charity" is entitled to such an exemption was still the test as announced in Iroquois Post: "First, the institution must itself be a charity and the income from its property must be used to further its charitable purpose; secondly, the property must be employed for a purely charitable purpose." Banahan, 553 S.W.2d at 51 (quoting Iroquois Post, 309 S.W.2d at 354). Moreover, Banahan also endorsed the rule announced in Iroquois Post that in order for property to be employed for a purely charitable purpose, "charity must actually be dispensed there or it must provide 'necessary quarters for an organization whose prime aims and functions . . . [are] of an actively charitable nature."' Banahan, 553 S.W.2d at 51 (quoting Iroquois Post, 309 S.W.2d at 355). Despite the Appellees' arguments to the contrary, nothing in Bernheim or Banahan purports to overrule any precedent regarding the legal meaning of the terms "charity" or "purely public charity."5
Although a design to achieve goals beneficial to the community is common to all charitable purposes, it does not follow that all such designs constitute a "purely public charity" as defined under section 170 and our case law. Our predecessor Court has previously stated that a resulting increase in commercial activity is no more than an incidental benefit to the public, and an enterprise incidentally benefitting the public would not entitle that enterprise to a tax exemption as performing a public purpose. Barbour v. Louisville Bd. of Trade, 82 Ky. 645, 6 Ky. L. Rptr. 769 (1885). Moreover, the Court has determined that an organization fails to qualify as a "purely public charity" for the purpose of tax exemption when the charitable [*8] outcome is merely incidental and the organization's principal activities center around promoting the interests and gratifying the wishes of its own membership. Iroquois Post, 309 S.W.2d at 355.
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PIC's actual activities involve developing and marketing commercial property, activities which primarily serve and benefit the buyers or customers of PIC. In this regard, there is no evidence that PIC's buyers/customers would qualify as persons or organizations in need of charity or general public assistance.8 Neither is PIC claiming to actually create jobs, but rather it claims only the incidental benefit of bringing in new businesses, which may potentially create jobs.
Moreover, the members of PIC consist of local members of the business community, whose own interests would arguably be served by an increase in commercial and economic development in the area. Along these lines, HN7a nonprofit organization formed by businessmen to "assist in the development of the City . . . as a means to attract business and industry. . . "9 cannot be said to be a "charitable institution," as its purpose is to make the city more attractive to businesses.
Applying the Iroquois Post test, the evidence does not establish that PIC is a purely public charity or that its property is employed for a purely charitable purpose. Although "charity" is broader than activities that merely "fulfill basic human needs," Bernheim, 505 S.W.2d at 763, it is clear by the evidence of record that PIC's activities are inconsistent with a "purely public charity" as its activities are not, for the above reasons, "wholly altruistic in the end to be attained . . . [so] that no private or selfish interest should be fostered under the guise of charity." Preachers' Aid Soc., 32 S.W.2d at 344. [*12] Simply stated, commercial and economic development are the promotion of business interests and not, therefore, indicative of actions of a purely public charity.
Hancock v. Prestonsburg Industrial Corporation, __________ S.W.3d ___________.
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