October 29, 1997

To:Senator Joe Wineke and Representative Frank Urban, Co Chairs Members, Joint Survey Committee on Tax Exemptions

From: John Sauer, Executive Director and Tom Ramsey, Director of Government Relations

Subject:1997 Senate Bill 261

Senate Bill 261 would replace the property tax exemption for benevolent retirement homes for the aged with an exemption for charitable retirement homes for the aged, effective with property assessed as of January 1, 1998. To be exempt from property taxation, a charitable retirement home for the aged would have to meet all of the following conditions: 1) No part of the home’s net earnings could inure to the benefit of any shareholder, member, director or officer; 2) A substantial number of the residents would pay fees that do not fully cover the costs of providing the housing and the services they receive; and 3) The home would benefit a substantial number of persons who are legitimate objects of charity.

WAHSA members oppose SB 261 because the bill creates a property tax exemption standard of charitability solely for a single class of taxpayer and because the bill’s lack of clarity makes it virtually impossible for a retirement home for the aged to determine with certainty whether that entity will remain exempt from property taxation under SB 261.

That lack of clarity manifests itself in several ways:

  1. SB 261 fails to define “retirement home for the aged.” Would this definition apply only to unlicensed housing for the elderly, or would it also apply to residential care apartment complexes and/or community-based residential facilities (CBRF) either licensed, registered or certified under Chapter 50, Wis. Stats.? The only statutory definition we can find which approximates “retirement home for the aged” is found under s.77.54(20)(c)4, which defines “retirement home” as a “nonprofit residential facility where three or more unrelated adults or their spouses have their principal residence and where support services, including meals from a common kitchen, are available to residents.” That definition provides no clarification since it could apply to any or all of the entities listed above. To what type of entity does SB 261 apply?

  2. SB 261 fails to define a “substantial number of the residents” who pay fees “ that do not fully cover the costs” of providing the housing and the services they receive. Nor does the bill define or clarify who or what is a “substantial number of persons who are legitimate objects of charity.” To whom do these provisions apply? What is a “substantial number” of residents or persons? What is a “legitimate object of charity?” How are “costs” determined? Who will make all these determinations and how?

  3. Without further clarity to these definitions, how will a WAHSA member know if it will continue to be exempt from property taxation? And what can it do to change its operations to meet this new criteria if it does not know what the new criteria is?

As members of the joint committee are aware, an amendment which duplicates SB 261 was attached and later removed from 1997 Wisconsin Act 27, the 1997-98 State budget. What was approved by the Legislature in its final version of the budget and signed into law by the Governor was the creation of a 10-member Benevolent Retirement Home for the Aged Task Force, which was directed to “investigate the property tax exemption for benevolent retirement homes and all problems that are associated with it.” The task force is further directed to submit its report and proposed legislation to the Legislature on or before June 30, 1999.

Although WAHSA did not suggest the creation of this task force, our members support its objectives. Hopefully, it will provide a forum for our members to ask who or what the problem is that warrants a legislative response such as SB 261 and why the benevolent retirement home for the aged is the sole source of that perceived problem. Having stated that, our members have raised a pertinent question: Why proceed with SB 261, which would appear to offer a solution to a perceived problem, when the Legislature and the Governor both recently agreed to create a task force to determine if a problem exists and to offer a solution if it is determined a problem indeed does exist?

WAHSA members have other questions and concerns with SB 261:

  • As of yesterday, a fiscal note was not available for the bill. However, the fiscal impact of the similar AB 100 budget amendment indicated there would be a slight broadening of the property tax base in certain municipalities. WAHSA members would like to know: How slight and in which municipalities?

  • Does the bill’s fiscal note take into account the potential impact on the Homestead Tax Credit program? Residents of tax exempt housing are ineligible for the Homestead Tax Credit under current law. However, if that housing were to lose its tax exempt status, residents otherwise eligible for Homestead would be able to receive that credit. Under this scenario, either state costs would increase or income tax revenue would decline. In addition, if nursing homes were to be included under this provision, there also would be a fiscal impact on the Medicaid program since paid property taxes are reimbursed under the nursing home formula. If a facility were to lose its tax exempt status and be required to pay property taxes, one of two results would materialize: Either the Medicaid appropriation would have to be increased to “pay” for those paid property taxes or dollars that could and should be used by the facility to pay caregivers instead would be paid as property taxes.

  • Who would determine whether a tax exempt organization met this new charitable criteria: the Department of Revenue (DOR) or the local tax assessor? If, as we assume, it would be the local tax assessor, will we have as many different interpretations of the charitable criteria as there are taxing districts?

  • Why are we changing the tax exempt criteria solely for benevolent retirement homes for the aged? What is the justification for pursuing only one entity?

    WAHSA continues to support an exemption from federal taxation under s.501(c)(3) of the Internal Revenue Code as the requisite standard of charitability necessary to be granted an exemption from property taxation.

    Indeed, the IRS already provides a specific test for “homes for the aged” which differs from other 501(c)(3) entities for purposes of exemption from federal taxation. Under IRS Revenue Ruling 72-124, the IRS for the first time allowed a “home for the aged” to be exempt from federal taxation if the “home for the aged” otherwise qualifies for a federal tax exemption under s.501(c)(3) and if the facility operates to satisfy all three of these basic needs of aged persons: a) The need for suitable housing, which would be met if an organization provides residential facilities that are specifically designed to meet the physical, emotional, recreational, social, religious and similar needs of aged persons; b) The need for health care, which would be met if an organization either directly provides or arranges for health care services designed to maintain the physical and mental well-being of its residents; and c) The need for financial security, which would be met if an organization: 1) Maintains a policy of financial assistance which would guarantee continued residence at the facility for any resident who is no longer able to pay for services provided; 2) Provides services to its residents at the lowest feasible cost; and 3) Maintains a payment structure set at a level that is within the financial reach of a significant segment of the community’s elderly persons. The IRS continues to audit Wisconsin not-for-profit facilities to determine their compliance with these provisions.

    GENERAL CONCERNS

    Proposals similar to SB 261 have been introduced as separate bills since the 1991-93 legislative session. They have never made it out of a standing committee, possibly because proponents of modifying the property tax exemption qualifications for benevolent retirement homes for the aged have never concisely defined who it is they wish to tax (or, more fairly, determine to be ineligible for a property tax exemption) and why. Or, stated differently, why they believe certain tax-exempt organizations do not deserve that tax-exempt status. Without a clear understanding of whom the “target” is and why that entity is being “targeted,” it is difficult to raise concrete objections or potentially preferable alternatives to SB 261 or any of the other similar proposals which have been offered in the past.

    For instance, should charitability be defined solely as care or services provided to the indigent or should the community benefits provided by an entity be considered in the determination of charitability? In defining charitability, specifically in the area of benevolent retirement homes, we would respectfully request members of the Joint Survey Committee on Tax Exemptions to keep several things in mind:

    1. Please look at the whole picture. Don’t simply look at the size of an entrance fee, declare it to be excessive and rule the entity “uncharitable.” Determine what those entrance fees are being used for. Are they being used to fund the payor’s future long term care costs? Are they being used to subsidize the attached nursing home’s Medicaid losses? Are they being used to subsidize apartment residents who are no longer able to pay for the services they are being provided? Are they being used to fund community projects outside the physical confines of the facility? If the answer to any of these questions is “Yes,” does that fit within the definition of charitability? If not, should it?

    2. Make sure you know, understand and accept the impact of any changes you make. Be aware that if a facility loses its tax-exempt status, it is the resident who ultimately “pays” the property tax through rate increases. How many residents will be unable to meet those increased payments? And where will they go if the facility, which is no longer required to provide services to those who cannot pay for those services because of the loss of their tax-exempt status, decides to discharge them? Is the state and/or federal government prepared to provide these people with the housing and health care services they need? Isn’t there a possibility that by trying to pressure facilities to provide more care and services to the poor, the end result could be a retreat to providing care and services only to the wealthy? If that possibility becomes a reality, who will serve those who are disenfranchised?

    3. Why does one service provider incorporate as a not-for-profit provider while another who provides the same services incorporates as a for-profit? If you truly believe the answer is solely to take advantage of tax breaks, SB 261 might be an acceptable solution. But if you believe there are other reasons, those reasons should be identified and incorporated into any proposed modifications to Wisconsin’s tax code.

    WAHSA members support s.501(c)(3) of the IRS Code as the accepted standard of charitability because it is a known and understood test, because it would not add any administrative costs to the State and because it sets a higher standard for homes for the aged, or benevolent retirement homes. If applied solely to benevolent retirement homes, the federal 501(c)(3) standard also would result in some currently property-tax exempt benevolent retirement homes losing that tax-exempt status since they do not qualify under 501(c)(3) (specifically, condominiums or co-op structures). In other words, these organizations currently are exempt from property taxation under State statute but currently pay federal taxes because they do not meet the 501(c)(3) standard.

    Arguably, all the proposed modifications to the property tax exemption standards offered to date have had a certain degree of arbitrariness. Until WAHSA members see a proposal which is as easy to administer and understand and as fair to the provider, the resident and the taxpayer as 501(c)(3), our support for 501(c)(3) as the accepted standard of charitability for purposes of property tax exemptions will continue.



    The Wisconsin Association of Homes and Services for the Aging (WAHSA) is a statewide membership organization of not-for- profit corporations principally serving the elderly and disabled. Membership is comprised of 186 religious, fraternal, private and governmental organizations which own, operate and/or sponsor 147 not-for-profit and 49 county-operated nursing homes, 28 facilities for the developmentally disabled (FDD), 62 community-based residential facilities (CBRF), 10 licensed home health agencies, 13 residential care apartment complexes (RCAC), 99 senior housing complexes, 40 adult day care programs and over 300 community service agencies which provide programs ranging from Alzheimer’s support, child day care, hospice and homecare to Meals on Wheels.



    Wisconsin Association of Homes and Services for the Aging
    204 South Hamilton Street
    Madison, WI 53703
    Telephone: (608)255-7060 FAX:(608)255-7064