Non-profit organizations that meet IRS guidelines are exempt from paying income tax. The tax policy behind the exemption is that these types of organizations benefit the community and therefore reduce the burden on government. A similar policy is behind giving individuals a charitable deduction on their income tax returns for making gifts to charity.

This sounds reasonable; but, as always, there are problems and issues when organization are testing the limits and trying to find exceptions. The degree to which an organization relieves government of its burdens is often open to dispute.

In addition to income tax exemption, most municipalities provide an exemption from property taxes. The higher the density of non-profits in a school district, the more the rest of the property owners must shoulder the load of education. Think of a map of an urban area, and think of property tax "holes" in the footprint of every property owned by a property tax-exempt organization. The more holes, the more the burden is shifted to the rest of the property owners.

Income tax exemption is a federal matter, while property tax is a state and local matter. Laws in some states have exempted all property owned by groups like the Boy Scouts, Girl Scouts, YMCA and YWCA, regardless of each property’s use. Those not in the exempted groups have to make their own case with the local municipality to persuade them that the property’s use is of such a benevolent nature that it should surely be exempt from property tax.

Take the case of the family park built by the Jewish Community Center (JCC) in Wisconsin. It contains an outdoor swimming pool, volleyball and basketball courts, a community room and snack bar. It was denied a property tax exemption.

Wisconsin starts with the presumption that all property is taxable and then proceeds to carve out exemptions, 45 to date. Some exemptions are to all property belonging to the Scouts and the Ys, while others are extremely specific, like a dormitory run by the Methodist Church near a Wisconsin college campus and a community theater in LaCrosse.

Alan Marcuvitz, an attorney for the JCC, argued "that what appears to be purely recreational activity ‘has religious and community-building purposes.’ At the park, members observe Shabbat, attend kosher barbecues and Jewish holiday events, and play Israeli games. All of the signs in the facility are in English and Hebrew." He argued that the park qualifies under an aggregate analysis of all the JCC activities at all its locations, which advance the JCC’s mission of promoting its religious, cultural, education and social values. It was also argued that as a "benevolent association" this family park shouldn’t be taxed; and if the exact same facility were owned and operated in the same way by the YMCA, property tax exemption would be granted by state law regardless of use.

John DeStefanis, attorney for the city, argued property tax exemption not granted by state law is granted (or not) by local government depending on use and regardless of what organization owns it.

County Circuit Judge Thomas Wolfgram sided with the county and denied property tax-exempt status.

A federal question arises. Why should a YMCA fitness center be exempt and not the JCC water park? Is the JCC being denied the equal protection of the law? That is the second part of the lawsuit that will be heard later this year in the Dane County Circuit Court. In the meantime, $30,000 per year is being paid in tax pending resolution of the constitutional matter.

Jack Norman, an opponent of current Wisconsin tax law and member of the Institute for Wisconsin’s Future, is of the opinion that it is indeed unfair, but his solution would be to grant fewer exemptions from property tax, not more. Furthermore, he feels the income tax break ought to be enough to compensate for the benevolent work of a non-profit and that property tax exemptions are for the most part just not a sound public policy.

In particular, he points out, many private and for-profit corporations do good things for the community but still pay property tax or make a contribution in lieu of taxes. Mr. Norman’s hope is that all the attention the issue is attracting might cause the state legislature to think about revamping the property tax law and its host of exemptions.

We wrote earlier about the first Supreme Court ruling on Anna Nicole’s estate here  regarding the so-called "probate exception" to federal jurisdiction.

Here we go again.

A writ has been filed before SCOTUS asking that " lawyers for the late Anna Nicole Smith be allowed to start collecting on $88 million awarded her by a Santa Ana judge from her husband’s estate."

See Gerry Beyer’s post at Wills, Trusts & Estates Prof Blog discussing the writ.  Here is an excerpt:

"The writ, filed with the court [on March 9, 2009], asks in the alternative that the heirs of Smith’s husband, Texas oil tycoon J. Howard Marshall, post a bond in that amount to assure that the money is there when when the legal battle concludes. * * *

However, David Margulies, who represents the heirs of J. Howard Marshall and his son, E. Pierce Marshall * * * denied the award by U.S. District Judge David Carter in 2002 is still valid.

Margulies said the 9th U.S. Circuit Court of Appeals threw out Carter’s award, finding that he overstepped the jurisdiction of the Probate Court.

Even though the U.S. Supreme Court in 2006 found that Smith had the right to pursue a claim on her husband’s estate, it did not uphold the $88 million award, Margulies said."

Vickie Lynn MarshallThanks to Vickie Lynn Marshall your next will contest may be in federal court. You probably know her as Anna Nicole Smith – the 1993 Playmate of the Year and TV reality show star who married oil billionaire J. Howard Marshall when he was 89 and she was 26 (let me help you with the math, that’s 63 years difference in age.)  Marshall died 13 months after his marriage. Then began a lengthy battle over Anna Nicole’s claim for part of her deceased husband’s estate. 

Anna Nicole (or Vickie) claimed her husband promised her half his estate if she married him. But Marshall did not include anything in his will for Anna Nicole. The Texas Probate Court where Marshall’s will was probated ruled that Smith had no rights whatsoever to her deceased husband’s estate. (Remind me not to live in Texas.) She took her case to a bankruptcy court in California on the theory that her possible interest in her deceased husband’s estate was an asset in the bankruptcy. She accused J. Howard’s son, E. Pierce Marshall of scheming to deny her the inheritance by fraud, forgery and overreaching. She also filed counterclaims, among them a claim that Pierce had tortiously interfered with a gift she expected from J. Howard.

The bankruptcy court ruled in her favor. On appeal the 9th Circuit overturned the bankruptcy court, saying the case really belonging in Texas Probate Court citing the “probate exception.” The 9th Circuit held that the “probate exception” to federal jurisdiction should be read broadly to exclude from the federal courts’ adjudicatory authority not only direct challenges to a will or trust, but also questions which would ordinarily be decided by a probate court in determining the validity of the decedent’s estate planning instrument, whether those questions involve fraud, undue influence, or tortuous interference with the testator’s intent. The court also held that a State’s vesting of exclusive jurisdiction over probate matters in a special court strips federal courts of jurisdiction to entertain any probate related matter, including claims respecting tax liability, debt, gift, and tort

SCOTUS, in a unanimous opinion written by Justice Ruth Bader Ginsberg, overturned the ruling of the 9th Circuit. Ginsberg wrote that in general, state courts are given the authority to oversee wills and the administration of estates. In this case, however, Ginsberg said that Smith’s accusations against her husband’s son make this more than just a probate matter. See Marshal v, Marshall, 547 U.S. (2006).

Here are some excerpts from Justice Ginsburg’s opinion:

“This Court rejects the Ninth Circuit’s alternate rationale that the Texas Probate Court’s jurisdictional ruling bound the Federal District Court. Texas courts have recognized a state-law tort action for interference with an expected gift or inheritance.”

“ It is clear, under Erie R. Co. v. Tompkins, 304 U. S. 64, that Texas law governs the substantive elements of Vickie’s tortuous interference claim. But it is also clear that Texas may not reserve to its probate courts the exclusive right to adjudicate a transitory tort.”

“At issue here, however, is not the Texas Probate Court’s jurisdiction, but the federal courts’ jurisdiction to entertain Vickie’s tortuous interference claim. Under our federal system, Texas cannot render its probate courts exclusively competent to entertain a claim of that genre.”

Interestingly, the Solicitor General entered an Amicus brief supporting Anna Nicole and supporting expanded federal jurisdiction.