97-005354 Holiday Rotary Endowment Fund, Inc. vs. Department Of Revenue Status: Closed Recommended Order on Monday, October 26, 1998.

Summary: Taxpayer is not entitled to "charitable organization" exemption because 50% or more of its donations did not go to the specifically identified services in the statute.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

HOLIDAY ROTARY ENDOWMENT )

FUND, INC., )

)

Petitioner, )

)

vs. ) Case No. 97-5354

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

___________________________________)

RECOMMENDED ORDER

Pursuant to notice, a formal hearing was conducted in this

case on September 10, 1998, in Tampa, Florida, before Lawrence P.

Stevenson, a duly designated Administrative Law Judge of the

Division of Administrative Hearings.

APPEARANCES

For Petitioner: Larry C. Schalles, C.P.A.

Treasurer, Holiday Rotary

E ndowment Fund, Inc.

5728 Main Street

New Port Richey, Florida 34652

For Respondent: William B. Nickell

Assistant General Counsel

Department of Revenue

501 South Calhoun Street, Suite 304

Tallahassee, Florida 32399-1050

STATEMENT OF THE ISSUE

The issue presented for decision in this case is whether the

Holiday Rotary Endowment Fund, Inc. (“Holiday Endowment”) is

eligible for a consumer certificate of exemption as a charitable

institution pursuant to Section 212.08(7)(o), Florida Statutes.

PRELIMINARY STATEMENT

On or about October 13, 1997, the Department of Revenue

issued its notice of intent to deny the Holiday Endowment’s

application for a consumer’s certificate of exemption, pursuant

to Section 212.08(7), Florida Statutes. On October 24, 1997, the

Holiday Endowment timely challenged that denial with a request

for hearing. On November 7, 1997, the Department forwarded the

request to the Division of Administrative Hearings for the

assignment of an Administrative Law Judge and the conduct of a

formal hearing pursuant to Sections 120.569 and 120.57, Florida

Statutes.

On November 19, 1997, this matter was assigned to Judge

William F. Quattlebaum, who set the case for final hearing on

March 16, 1998. On January 13, 1998, the parties filed a joint

stipulation of facts. By order dated February 4, 1998, the case

was continued and ultimately rescheduled for September 10, 1998.

Due to scheduling conflicts, the case was reassigned to the

undersigned and heard on September 10, 1998.

At the final hearing, the Holiday Endowment presented the

testimony of Larry C. Schalles, its Treasurer and qualified

representative. The Department presented no witnesses.

The Holiday Endowment’s Exhibit 1 was admitted into

evidence. The Department offered no exhibits.

No transcript of the proceeding was ordered. The Holiday

Endowment filed a proposed recommended order on September 16,

1998. The Department of Revenue filed a Proposed Recommended

Order on September 22, 1998.

FINDINGS OF FACT

Based on the oral and documentary evidence adduced at the

final hearing, and the entire record in this proceeding, the

following findings of fact are made:

1. Petitioner, the Holiday Endowment, is an organization

incorporated in the State of Florida as a not-for-profit

corporation under Chapter 617, Florida Statutes. It was formed

in October 1996 by the Holiday Rotary Club of Holiday, Florida,

as a vehicle for accruing funds to contribute to the various

charities supported by the Holiday Rotary Club.

2. The Holiday Endowment is exempt from federal income tax

under Section 501(a) of the Internal Revenue Code as an

organization described in Section 501(c)(3), having obtained an

exemption letter from the Internal Revenue Service on May 30,

1997.

3. Larry Schalles, Treasurer of the Holiday Endowment,

testified that annual fundraising achieves variable results, and

that the membership of the Holiday Rotary Club seeks to attain

stability in its philanthropic endeavors by placing a portion of

its funds into the Holiday Endowment each year. Once the

endowment is built up, the interest can be used to pay for

scholarships each year, leaving the principal intact.

4. At all times relevant to this proceeding, the sole

active function of the Holiday Endowment has been to raise moneys

to establish the endowment fund. All moneys raised by the

Holiday Endowment are invested in the fund to provide

scholarships in the future. All of the Holiday Endowment’s fund

raising activities are conducted by unpaid volunteers.

5. At all times relevant to this proceeding, the Holiday

Endowment has made no expenditures of any kind.

6. The Department denied the Holiday Endowment’s

application for a certificate of exemption on the ground that the

Holiday Endowment did not qualify as a charitable institution

under the seven criteria set forth in Section 212.08(7)(o)2.b.,

Florida Statutes.

7. In particular, the Department found that the Holiday

Endowment does not expend in excess of 50% of its operational

expenditures toward qualified charitable services, meaning that

the provision of a charitable service is not the organization’s

sole or primary function. As set forth above, the Holiday

Endowment has in fact made no expenditures of any kind.

8. The Department also found that the Holiday Endowment

does not provide a reasonable percentage of services free of

charge or at a substantially reduced cost to persons unable to

pay for such service.

9. The Holiday Endowment’s response is that the exemption

should nonetheless be granted, because any expenditures it makes

in the future will be for charitable purposes.

CONCLUSIONS OF LAW

10. The Division of Administrative Hearings has

jurisdiction over the parties and subject matter of this cause,

pursuant to Section 120.57(1), Florida Statutes.

11. The Department of Revenue is the state agency charged

with enforcement of Chapter 212, Florida Statutes. The

Department’s statutory duties include the issuance of

certificates of exemption. Section 212.084, Florida Statutes.

12. The Holiday Endowment has the burden of demonstrating

its entitlement to the exemption, which must be strictly

construed against the taxpayer seeking it. Capital City Country

Club, Inc. v. Tucker , 613 So. 2d 448, 452 (Fla. 1993); Asphalt

Pavers, Inc. v. Department of Revenue , 584 So. 2d 55, 57 (Fla.

1st DCA 1991).

13. The Holiday Endowment claims that it is entitled to the

certificate of exemption as a "charitable organization" pursuant

to Section 212.08(7)(o), Florida Statutes, which provides in

pertinent part:

1. There are exempt from the tax imposed by

this chapter transactions involving:

* * *

b. Sales or leases to nonprofit religious,

nonprofit charitable, nonprofit scientific,

or nonprofit educational institutions when

used in carrying on their customary nonprofit

religious, nonprofit charitable, nonprofit

scientific, or nonprofit educational

activities, including church cemeteries....

* * *

2. The provisions of this section

authorizing exemptions from tax shall be

strictly defined, limited, and applied in

each category as follows:

* * *

b. "Charitable institutions" means only

nonprofit corporations qualified as nonprofit

pursuant to s. 501(c)(3), Internal Revenue

Code of 1954, as amended, and other nonprofit

entities, the sole or primary function of

which is to provide, or to raise funds for

organizations which provide, one or more of

the following services if a reasonable

percentage of such service is provided free

of charge, or at a substantially reduced

cost, to persons, animals, or organizations

that are unable to pay for such service:

(I) Medical aid for the relief of disease,

injury, or disability;

(II) Regular provision of physical

necessities such as food, clothing, or

shelter;

(III) Services for the prevention of or

rehabilitation of persons from alcoholism or

drug abuse; the prevention of suicide; or the

alleviation of mental, physical, or sensory

health problems;

(IV) Social welfare services including

adoption placement, child care, community

care for the elderly, and other social

welfare services which clearly and

substantially benefit a client population

which is disadvantaged or suffers a hardship;

(V) Medical research for the relief of

disease, injury, or disability;

(VI) Legal services; or

(VII) Food, shelter, or medical care for

animals or adoption services, cruelty

investigations, or education programs

concerning animals;

and the term includes groups providing

volunteer staff to organizations designated

as charitable organizations under this sub-

subparagraph; nonprofit organizations the

sole or primary purpose of which is to

coordinate, network, or link other

institutions designated as charitable

institutions under this sub-subparagraph with

those persons, animals, or organizations in

need of their services; and nonprofit

national, state, district, or other

governing, coordinating, or administrative

organizations the sole or primary purpose of

which is to represent or regulate the

customary activities of other institutions

designated as charitable institutions under

this sub-subparagraph....

14. Strictly construing Section 212.08(7)(o)2.b., Florida

Statutes, the charitable exemption is available to the Holiday

Endowment only if it satisfies two requirements: (1) it is a

designated Section 501(c)(3) nonprofit organization; and (2) its

sole or primary function is to provide, or raise funds for

organizations that provide, at least one of the seven

specifically identified services, if a reasonable percentage of

the service is provided free of charge or at a substantially

reduced cost to recipients who are unable to pay for the service.

15. Section 212.08(7)(o), Florida Statutes, does not

further define the term "sole or primary function." However, the

Department of Revenue has provided a definition in Rule 12A-

1.001(3)(g)3.e., Florida Administrative Code:

"Sole or primary function" means that a

charitable institution, excluding hospitals,

must establish and support its function as

providing or raising funds for services as

outlined in subparagraphs 1. and 2. above

[the seven services identified in the

statute], by expending in excess of 50.0

percent of the charitable institution’s

operational expenditures towards "qualified

charitable services," as defined in

subparagraph 2.a.-g., within the charitable

institution’s most recent fiscal year.

16. For the Holiday Endowment to fall within the definition

of "sole or primary function," it must show that, within its most

recent fiscal year, at least 50 percent of its expenditures

provided at least one of the seven specifically designated

services, or went to organizations that provide at least one of

the seven specifically designated services.

17. It was not disputed that the Holiday Endowment has the

required federal tax status and thus meets the first requirement

for a charitable organization. However, the Holiday Endowment

fails to satisfy the second requirement because it did not

demonstrate that 50 percent of its expenditures in its most

recent fiscal year were for providing, or for the raising of

funds for organizations which provide, at least one of the seven

designated services in Section 212.08(7)(o)2.b., Florida

Statutes. The Holiday Endowment currently provides no charitable

services. Thus, the Holiday Endowment is ineligible for the

certificate of exemption.

18. Neither party to this proceeding addressed the

applicability of either Section 212.084(6), Florida Statutes, or

its implementing Rule 12A-1.038(7)(b), Florida Administrative

Code. These provisions allow the Department of Revenue to issue

temporary exemption certificates to newly organized charitable

organizations, when a lack of historical information prevents the

applicant from qualifying immediately for an exemption

certificate.

19. Whether the Holiday Endowment would qualify for such a

temporary certificate cannot be determined from the sparse record

of this proceeding. However, nothing in that record shows that

the Department of Revenue took any steps to ascertain whether the

applicant was aware of this procedure, even when it was plain

from the application that the lack of historical expenditure

information rendered the Holiday Endowment ineligible for the

regular exemption certificate. It is suggested that the

Department of Revenue in the future provide more assistance to

similar applicants, to the end of making proceedings such as this

unnecessary.

RECOMMENDATION

Upon the foregoing Findings of Fact and Conclusions of Law,

it is recommended that the Department of Revenue enter a final

order denying the certificate of exemption sought by the Holiday

Rotary Endowment Fund, Inc.

DONE AND ENTERED this 26th day of October, 1998, in

Tallahassee, Leon County, Florida.

___________________________________

LAWRENCE P. STEVENSON

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

[phone] SUNCOM 278-9675

Fax Filing [phone]

Filed with the Clerk of the

Division of Administrative Hearings

this 26th day of October, 1998.

COPIES FURNISHED:

Larry C. Schalles, C.P.A.

Treasurer, Holiday Rotary

Endowment Fund, Inc.

5728 Main Street

New Port Richey, Florida 34652

William B. Nickell

Assistant General Counsel

Department of Revenue

501 South Calhoun Street, Suite 304

Tallahassee, Florida 32399-1050

L inda Lettera, General Counsel

Department of Revenue

204 Carlton Building

Tallahassee, Florida 32399-0100

Larry Fuchs, Executive Director

Department of Revenue

104 Carlton Building

Tallahassee, Florida 32399-0100

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within 15

days from the date of this recommended order. Any exceptions to

this recommended order should be filed with the agency that will

issue the final order in this case.