Fault Lines Emerge in Nonprofit Sector With New Filing Requirement

Update: A bill is heading to a full City Council vote that could upend the filing requirement. Read our update for more information on the bill. 

Reverend Terrence Griffith of the New African Baptist Church in South Philadelphia received a letter in the mail last month that took him by surprise. The letter included a list of documents that the church needed to submit to the Office of Property Assessment (OPA) by March 31 to continue to be exempt from property taxes. The letter was dated January 21, but was not received until mid-February. The church had a little more than a month to comply.

“I really didn’t even understand the purpose of the letter because it was the first time we really received a letter like that,” he said.

The First African Baptist Church is one of around 6,500 properties owned by nonprofits in Philadelphia, according to OPA. Starting this year, all of them must file the following documents by the deadline:

• the owner’s articles of incorporation and bylaws
• the owner’s IRS letter of determination of exemption under Internal Revenue Code section 501(c)(3)
• the owner’s most recent income and expense statements and its statement of assets and liabilities
• the owner’s most recently filed federal Form 990, if any
• a statement of all fundraising activities conducted by the owner
• a copy of each lease between the property owner and the lessee (if the property is leased)
• a copy of the recorded deed for the property
• an affidavit attesting to the correctness of the submitted information

These documents must be submitted annually, in accordance with a City Council ordinance passed in 2013, or the nonprofit’s property tax-exempt status could be revoked.

“The main purpose of the requirement is to certify that all nonprofit corporations owning property in the City of Philadelphia are eligible for an exemption from [property] taxes if they are currently the beneficiary of such an exemption,” wrote Mark McDonald, press secretary for the Nutter Administration, in an email.

In effect, this means the requirement is designed to weed out properties that are tax-exempt but should not be, either because the owner of the property no longer has tax-exempt status or because the property is not used towards the nonprofit’s charitable mission — not allowed under the state constitution’s definition of a “purely public charity.”

Due to complications surrounding the roll out of the Actual Value Initiative, the city-wide property value reassessment, the requirement was delayed a full year. The resource-drain of implementing AVI also led to nonprofits not being notified about the requirement until the letters were sent out, according to McDonald.

For some nonprofits, confusion quickly turned to anger.

During the last week of February, the Black Clergy of Philadelphia, of which Griffith is the president, among other religions organizations, began voicing their concerns to City Council members that the filing requirement was an undue hardship, if not illegal.

“In our opinion, this requirement is rather far reaching,” Griffith said.

Two bills have emerged in response to the outcry: one that would extend the deadline into June, introduced by Councilman David Oh, and another that would get rid of it entirely, introduced by Councilman Jannie Blackwell.

Oh and Blackwell both stressed that many religious organizations don’t have the administrative capacity of larger nonprofits, and are likely to miss the filing deadline as a result. The difference is in how they are responding to this fact. Blackwell said the annual filing requirement is simply too burdensome. Oh said he think the requirement makes sense, but he wants to provide more time.

In the meantime, OPA is in talks with City Council to extend the deadline, according to McDonald and Blackwell. A 30-day extension is also available by request.

Even if the deadline is extended, the requirement has implications beyond whether it’s a logistical barrier to nonprofits. It is one of the first attempts by the city government to create its own tool for challenging the tax-exempt status of its resident nonprofits — a power usually in the hands of the state and federal government.

With religious organizations in an uproar and City Council already looking into amending, if not reversing the law, will the requirement survive its first year?

Better Records, More Money

In 2013, a series of investigative reports by Holly Otterbein for WHYY and the Daily News found that OPA had lost key documents pertaining to dozens of tax-exempt properties. Otterbein also identified a number of owners of tax-exempt properties who had lost their nonprofit status without the city’s knowledge.

That same year, then-Councilman Bill Green (now on the School Reform Commission) began looking at ways to address the issue, and in February he introduced the bill that created the requirement. He was explicit in a number of media outlets, including Generocity.org, that the goal was to update the city’s records (potentially unearthing more situations like those discovered by Otterbein) but also to get more nonprofits to pay taxes on properties not being used for their charitable mission.

In addition, he said at the time that he anticipated the filing requirement pressuring some large nonprofit institutions to offer Payments in Lieu of Taxes (PILOT), which are essentially non-tax payments. The idea that the intent of the requirement is to target larger nonprofit institutions, such as hospitals and universities, has survived Green leaving City Council.

Griffith noted that he was given the impression from City Council members after reaching out last month that “the intent when Council passed the bill was really not to target churches, but to deal with other big nonprofits — I guess like universities — who the city believes are getting away with making profit and not paying taxes.”

Councilman Oh said he also believed the intention of the requirement, in large part, was to target larger nonprofits.

“We have many universities that don’t pay property taxes, and when they purchase a commercial piece of property — for example, a very large piece of property — it comes off the tax rolls,” Oh said. He added that the requirement would allow the city to identify when these properties are not used for a charitable purpose.

“We are a city that has a lot of universities; we are a city with a lot of churches and religious institution; we have a ton of nonprofits, and that’s all great. Except they don’t pay property taxes,” Oh said.

He added that the loss of tax revenue due to nonprofits owning large amounts of land is a real problem given that the city depends on the property tax to fund education.

For Laura Otten, director of The Nonprofit Center at LaSalle University, which researches and tracks the nonprofit sector, the intention of the requirement is also clear.

“The whole reason Philadelphia is doing this is to collect more revenue,” she said.

McDonald said that no major nonprofit institutions (such as the city’s hospitals or universities) have reached out to OPA with any kind of complaint.

Instead, the argument against the requirement is coming from religious organizations, which arguably have less to give the city in terms of revenue but much more to lose if their tax-exempt status was taken away.

Illegal? Or just inconvenient?

Otten said she has not noticed much concern over the requirement, with the exception of the recent outcry.

“Quite honestly, if you look at the list of documents that need to be provided, they’re all preexisting, and I think that most folks — I don’t know what percentage — probably are feeling pretty confident that they’re not going to have an issue.”

Project HOME, for example, which owns 17 properties around the city, has not expressed any concern over the requirement, and is prepared to submit it.

“As far as I know, it’s not something that we’re all worked up about,” said Laura Weinbaum of Project HOME.

Otten said she suspects that the reason religious organizations in particular are upset about the requirement is because they are not used to regularly submitting documents. She noted that religious entities (churches, synagogues, mosques) do not have to file any annual documents.

She added that pulling together the documents from the list shouldn’t be more difficult than applying for a grant, a common practice for nonprofits, although not necessarily for churches.

But it’s not just a matter of finding the documents for Griffith, who said his church, despite being over 200 years old, has all the required documents. He said it comes down to legal principle.

“If the [Internal Revenue Service] has granted you exemption status, and if the state exempts you, the question is, does the city have the legal authority to require churches to provide 11 documents?” He asked.

Griffith said that the Black Clergy of Philadelphia is prepared to take the issue to court, whether the deadline is extended or not.

“If you’re exempt, you’re exempt,” he said. “Nonprofits do not pay taxes. That’s the bottom line. That’s why they are nonprofits. If you want redefine what a nonprofit is, then the city needs to go to the federal government and fight that battle with the federal government.”

Otten said she is sensitive to this argument. “I understand philosophically how folks might want to protest this, because it’s yet another whittling away at this label of a tax-exempt organization.” But, she added, filing the documents themselves shouldn’t be a problem.

Next Monday, March 16, there will be a City Council hearing to discuss the issue. Griffith said the religious community will be out in full force.

Photo via Alex Vuocolo