Request By:
Mr. Clifford T. Elgin
Vice President
Harris & Co.
Starks Building
Louisville, Kentucky 40202
Opinion
Opinion By: David L. Armstrong, Attorney General; By: Charles W. Runyan, Assistant Deputy Attorney General
In OAG 84-5 we concluded that the state surcharge or tax levied on insurance premiums pursuant to KRS 136.392 did not apply to nonprofit institutions of purely public charity and education. Section 170 of the Kentucky Constitution exempts such institutions from a tax designed to raise revenue. The charitable institution is not exempt from payment of a license fee or license tax when it is exacted under the police power of the state or when it is exacted for police or regulatory purposes. See Gray v. Methodist Episcopal Church, 272 Ky. 646, 114 S.W.2d 1141 (1938).
We also concluded that nonprofit institutions would not be exempt from a city license tax on insurance premiums, since such tax is not an ad valorem or revenue designed tax.
You have an additional question. It reads: "What is the definition of 'an institution of purely public charity and education'?"
We cannot, because of the nature of the subject matter and the critical facts surrounding it, determine whether a particular organization qualifies as an institution of purely public charity and education. That is a kind of question which only the courts can answer in particular cases. We can, however, examine court decisions to determine, as nearly as is possible, some judicial standards underlying the definition.
Section 170 of the Kentucky Constitution exempts from taxation "institutions of purely public charity and institutions of education not used or employed for gain by any person or corporation . . ." (Emphasis added).
The Court held in Gray v. Methodist Church, above, that a nonstock and nonprofit making corporation, which was empowered to use all moneys from any sources to maintain a home for destitute widows and orphans of deceased members of the Methodist Episcopal Church and others who might be placed under the corporation's charge, was an institution of purely public charity, within the terms of § 170, Constitution.
In Department of Revenue v. Cent. Medical Lab, Ky.App., 555 S.W.2d 632 (1977), a nonprofit medical laboratory corporation, which was organized as a blood analysis testing facility for three nonprofit tax-exempt hospitals, and which hospitals performed services for its member hospitals which had previously been performed by hospitals as a necessary part of their operational function, was held to be a "purely public charity" as contemplated by the Constitution, and thus was exempt from sales and use taxes. Thus where services are performed exclusively for a purely charitable organization, then the organization performing those services is also a public charity. See Hospital Bureau of Standards and Supplies, Inc. v. United States, 158 F.Supp. 560, 141 Ct. C1. 91 (1958).
The old Court of Appeals, in Commonwealth, ex rel. Luckett v. I.W. Bernheim Found., Ky., 505 S.W.2d 762 (1974), in holding that the Isaac W. Bernheim Foundation, Inc., is exempt from ad valorem taxation under § 170, Constitution, pointed out that the corporation's activities included a park, nature center and nature museum, and noted that the Foundation had not carried out all of its stated purposes. The court specifically held that it was not necessary that all of its purposes be carried out, since all of its activities are of a charitable nature. Further, the court held that there is no case requiring that a charity have as its objective the fulfillment of basic human needs for food, clothing and shelter to qualify as a charity for purposes of tax exemption under § 170 of the Constitution. The court said that charity is broader than relief to the needy poor and includes activities which reasonably better the condition of mankind.
The Children's Theater in Louisville was held to be a nonprofit public charity and an institution of education exempt from sales taxation. The court noted that the Children's Theater is a Kentucky nonprofit corporation created under KRS Chapter 273. The stated purposes were to educate children in the public and private schools of the city of Louisville and environs by presenting educational plays and theatrical performances.
The test for determining whether a taxpayer is an exempt institution of education under § 170 was stated in Kesselring v. Bonnycastle Club, 299 Ky. 585, 589, 186 S.W.2d 402, 404 (1945), as whether the institution is a place where systematic instruction in any or all of the useful branches of learning is given by methods common to schools and institutions of learning.
From the above cases the following standards for determining charities exempt under § 170 emerge: (1) The corporation or institution must itself be a charity and the income from its property must be used to further its charitable purpose. (2) The property must be employed for a purely charitable purpose. It is sufficient that the ultimate effect of the use of the property is to accomplish the charitable purposes of the institution. (3) A profit corporation or institution is not a public charity. (4) The charity must be extended only to the Commonwealth of Kentucky and its people. See Banahan v. Presbyterian Housing Corp., Ky., 553 S.W.2d 48 (1977). In connection with institutions of education which would qualify as being tax exempt under § 170, there should be added to the above standards just outlined the standard that an "institution of education" is a place where systematic instruction in any or all of the useful branches of learning is given by methods common to schools and institutions of learning. See Kesselring v. Bonnycastle Club, above.