97-005687 Children`s Charity Fund, Inc. vs. Department Of Revenue Status: Closed Recommended Order on Monday, May 18, 1998.

Summary: Agy that spent 35% or less of its operating expenditures on purchasing medical equipment for handicapped children and that provided such equipment to children, regardless of their families? income, is ineligible for a tax exemption as charitable institu.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

CHILDREN'S CHARITY FUND, INC., )

)

Petitioner, )

)

vs. ) Case No. 97-5687

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

___________________________________)

RECOMMENDED ORDER

On March 19, 1998, a formal administrative hearing was held

in this case in Sarasota, Florida, before Carolyn S. Holifield,

Administrative Law Judge, Division of Administrative Hearings.

APPEARANCES

For Petitioner: Ken Bowron, Sr.

Executive Director

Children's Charity Fund, Inc.

20 11 Bispham Road

Sarasota, Florida 34236

For Respondent: Kevin J. O'Donnell

Assistant General Counsel

Department of Revenue

Post Office Box 6668

Tallahassee, Florida 32314-6668

STATEMENT OF THE ISSUE

Whether Petitioner, Children's Charity Fund, Inc., qualifies

under Section 212.08(7)(o)2.b., Florida Statutes, for a consumer

certificate of exemption as a charitable institution.

PRELIMINARY STATEMENT

On August 27, 1997, Petitioner, Children's Charity Fund,

Inc. (Children's Charity Fund), filed an application with the

Respondent, Department of Revenue (Department), for a consumer

certificate of exemption as a charitable organization. After

reviewing Petitioner's application, the Department issued a

notice on or about November 3, 1997, whereby it proposed to deny

the application. According to the Notice of Intent to Deny, the

basis of the Department's decision was that Petitioner failed to

meet the qualifications for exemption from sales and use

taxation, as set forth in Section 212.08(7), Florida Statutes.

Specifically, the Department determined that Children's Charity

Fund: (1) did not expend in excess of 50% of its operational

expenditures toward qualified charitable services and (2) did not

provide a reasonable percentage of services free of charge or at

a substantially reduced cost to persons unable to pay for such

services. Children's Charity Fund challenged the Department's

decision and timely requested a formal hearing. On December 5,

1997, the matter was referred to the Division of Administrative

Hearings to conduct a formal hearing.

At the hearing, Petitioner presented the testimony of one

witness, Kenneth C. Bowron, Sr., Executive Director, Children's

Charity Fund. Respondent presented the testimony of one witness,

David Young, Tax Specialist, Office of Central Registration,

Department of Revenue. Petitioner offered no exhibits into

evidence and the Department offered and had one exhibit admitted

into evidence.

The transcript of the proceeding was f iled on April 1, 1998.

Both parties filed proposed recommended orders.

FINDINGS OF FACT

1. Petitioner, Children's Charity Fund, is a not-for-profit

corporation and qualifies as a tax-exempt organization pursuant

to Section 501(c)(3) of the United States Internal Revenue Code.

Petitioner maintains an office in Sarasota, Florida.

2. The articles of incorporation specify that the nature of

the business to be transacted and the purpose to be promoted by

Children's Charity Fund "shall be exclusively charitable,

including raising funds in any lawful manner" for the following

purposes: (1) to educate and inform the public about the needs of

handicapped and disabled children; (2) to provide referral

services and maintain a hot-line for handicapped children; (3) to

provide services "in whatever form possible that the Board may

deem necessary" for handicapped children and their parents; and

(4) to buy medical equipment for handicapped and disabled

children.

3. The Children's Charity Fund claims entitlement to a

consumer certificate of exemption based primarily on the fourth

purpose listed in paragraph 2 above. In carrying out this

purpose, the Children's Charity Fund purchases various types of

medical equipment for handicapped and disabled children who

reside in Florida as well as in other states. The medical

equipment is provided to children who need the equipment, but

whose parents have no insurance or their requests for the

equipment have been turned down by Medicare, Medicaid, or their

insurance companies.

4. In determining which applications for medical equipment

it will approve, the Children's Charity Fund has not established

income limits for the applicant family. The circumstances of

each family are considered on a case-by-case basis and factors

other than income are also considered. To date, Children's

Charity Fund has never denied an application for medical

equipment for a handicapped or disabled child, regardless of

family income, if such equipment was needed by the child.

5. In addition to purchasing medical equipment for

handicapped and disabled children, the Children's Charity Fund

provides Christmas gifts and tickets to events organized and

promoted by the Children's Charity Fund such as charity softball

games. The Children's Charity Fund claims that these gifts and

tickets are charitable services.

6. During its most recent fiscal year, the Children's

Charity Fund spent less than 50% of its operational expenditures

on qualified charitable services. The evidence at hearing

established that during the relevant time period, Children's

Charity Fund spent less than 35% of its total operating

expenditures on qualified charitable services. This percentage

does not meet the requirements of Rule 12A-1.001(3)(g)3.e.,

Florida Administrative Code, which mandates that the organization

seeking tax exempt status as a charitable institution spend "in

excess of 50.0 percent of [its] operational expenditures toward

qualified charitable services."

7. During its most recent fiscal year, Children's Charity

Fund spent approximately 50% of its operating expenditures to pay

for fundraising activities.

CONCLUSIONS OF LAW

8. The Division of Administrative Hearings has jurisdiction

over the parties and the subject matter of this proceeding.

Section 120.57(1), Florida Statutes.

9. The Children's Charity Fund is seeking a consumer

certificate of exemption as a "charitable institution" as that

term is defined by Section 212.08(7)(o)2.b., Florida Statutes.

As an applicant, the Children's Charity Fund bears the burden of

proving its entitlement to a certificate of exemption by a

preponderance of the evidence.

10. Section 212.08(7)(o)2.b., Florida Statutes, defines

"charitable institutions" for purposes of tax exemptions. That

section provides the following:

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 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. . .

11. Section 213.06(1), Florida Statutes, authorizes the

Department to adopt such rules as are necessary to carry out the

intent and purposes of all revenue laws which it administers.

Pursuant to this authority, the Department has adopted Rule 12A-

1.001(3)(g), Florida Administrative Code. That rule provides in

relevant part the following:

1. "Charitable institutions" means only

nonprofit corporations qualified as a

nonprofit pursuant to s.501(c)(3), United

States Internal Revenue Code, 1954, as

amended, and other nonprofit entities that

meet the following requirements:

a. the sole or primary function is providing

a "qualified charitable service" as defined

in this subsection; and

b. 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.

2. "Qualified charitable service" means:

a. Medical aid for the relief of disease,

injury, or disability;

* * *

3.a. For the purpose of this subsection the

following terms and phrases shall have the

following meaning:

I. "Persons unable to pay" means persons

whose annual income is 150 percent or less of

the current Federal Poverty Guidelines or

whose uncompensated hospital charges exceed

25 percent of their annual family income for

the preceding 12 months. . .

* * *

e. "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, by

expending in excess of 50.0 percent of the

charitable institution's operational

expenditures toward qualified charitable

services as defined in subparagraph 2.a.--

g. within the charitable institution's most

recent fiscal year.

12. The provisions of law which authorize a tax exemption

must be strictly construed against the person claiming the

exemption. Asphalt Pavers, Inc. v. Department of Revenue , 584

So. 2d 55,57 (Fla. 1st DCA 1991). This is consistent with the

express language of Section 212.08(7)(o)2., Florida Statutes,

which states that "the provisions of this section authorizing

exemptions from tax shall be strictly defined, limited, and

applied in each category. . ."

13. To qualify as a charitable institution, the Children's

Charity Fund must clearly come within the purview of Section

212.08(7)(o)2.b., Florida Statutes. This requires that the

organization meet all, not part, of the criteria prescribed in

statute.

14. In this case, the Children's Charity Fund has failed to

meet its burden. While it has been established that the

organization is a nonprofit corporation, is qualified as a

501(c)(3) entity, and provides a qualified charitable service,

there are other prescribed criteria that the Children's Charity

Fund does not meet.

15. According to Section 212.08(7)(o)2.b., Florida

Statutes, and Rule 12A-1.001(3)(g), Florida Administrative Code,

quoted above in paragraphs 10 and 11, respectively, an

organization seeking an exemption as a charitable institution

must have as its "sole or primary function" to provide or raise

funds for organizations which provide a reasonable percentage of

qualified charitable services to "persons. . . that are unable to

pay for such service." Services which qualify for "charitable

services" include medical aid for disabled persons.

16. The purchase of medical equipment for handicapped or

disabled children constitutes a qualified charitable service.

However, that alone is not enough to bring the Children's Charity

Fund within the purview of the applicable statutory and rule

provisions. In this case, the Children's Charity Fund must

demonstrate that providing such service is the "sole or primary"

function of its organization and that a reasonable percentage of

such services are provided free or at a substantially reduced

cost to "persons unable to pay."

17. As defined in Rule 12A-1.001(3)(g)3.e., Florida

Administrative Code, a qualified charitable service is deemed to

be an organization's sole or primary function if that entity

spends more than 50% of its operating funds on that service, as

reflected on the audit of its most recent fiscal year. A

reasonable percentage of these services must be provided free or

at a substantially reduced cost to those who are unable to pay.

"Persons unable to pay" are individuals whose annual family

income is 150% or less of the Federal Poverty Guidelines or whose

uncompensated hospital charges exceed their annual family income

for the preceding 12 months. Rule 12A-1.001(3)(g)3.a., Florida

Administrative Code. The Children's Charity Fund does not meet

either of these criteria.

18. While the evidence established that the Children's

Charity Fund provides a qualified charitable service free of

charge, it is undisputed that providing such services is not the

agency's "sole or primary function" within the meaning of Rule

12A-1.001(3)3.e., Florida Administrative Code. To meet this

requirement, the Children's Charity Fund must demonstrate that

more than 50% of its operating expenditures is spent on providing

medical aid. Here, the Children's Charity Fund acknowledges that

during its most recent fiscal year, it spent no more than 35% of

its total operating expenditures on providing medical equipment

to handicapped and disabled children.

19. Having failed to demonstrate that providing medical aid

is its "sole or primary function," the Children's Charity Fund is

not eligible for a tax exemption as a charitable institution.

However, even if Children's Charity Fund had established that

providing a qualified charitable service was its "sole or primary

function," the agency failed to show that a reasonable percentage

of these services were provided to "persons unable to pay" as

that term is defined in Rule 12A-1.001(3)(g)3.a.I., Florida

Administrative Code. According to that rule, "persons unable to

pay" are limited to individuals whose family incomes do not

exceed specified limits--those whose family incomes are 150% or

less of the Federal Poverty Guidelines or those who have incurred

uncompensated hospital charges which exceed 25% of their annual

family income for the preceding 12-month period.

20. The Children's Charity Fund admits that it provides

medical aid in the form of medical equipment to children who

require such equipment regardless of the income levels of those

families. This fact may not necessarily preclude the

organization's qualifying for tax exempt status, if it is

established that a reasonable percentage of its qualified

charitable services are provided to "persons unable to pay" as

that term is defined in Rule 12A-1.001(3)(g)3.a., Florida

Administrative Code. Having failed to establish this, the

Children's Charity Fund has failed to meet one of the prescribed

criteria required to qualify as a "charitable institution."

21. The Children's Charity Fund argues that the above

quoted rule, which interprets "sole or primary purpose" and

"persons unable to pay" for purposes of Section 212.08(7)(o)2.b.,

Florida Statutes, is not law. In light of this position, the

Children's Charity Fund asserts that the definitions in Rule 12A-

1.001(3), Florida Administrative Code, can not properly serve as

a basis for requiring that a certain percentage of operating

expenditures be spent for proving medical services. The

organization also argues that because the rule is not law, it can

not be utilized to require the organization to provide a

reasonable percentage of its services to individuals with certain

family income limits.

22. In making the argument discussed in paragraph 21 above,

the Children's Charity Fund fails to recognize a well-established

legal principle. That principle is that agency rules promulgated

under authority of law have the force and effect of law. State

of Florida v. Jenkins , 469 So. 2d 733 (Fla. 1985). There being

no dispute as to the validity of the Rule 12A-1.003, Florida

Administrative Code, the rule has the force and effect of law.

Thus, the provisions the aforementioned rule must be applied in

determining an entity's eligibility for a tax exemption.

23. Applying the applicable statutory and rule provisions

to the Children's Charity Fund, it is clear that the agency does

not meet the prescribed eligibility criteria for a tax exemption.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of

Law, it is

RECOMMENDED that the Department of Revenue enter a final

order denying a consumer certificate of exemption to Petitioner,

the Children's Charity Fund, Inc.

DONE AND ENTERED this 18th day of May, 1998, in Tallahassee,

Leon County, Florida.

___________________________________

Carolyn S. Holifield

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 18th day of May, 1998.

COPIES FURNISHED:

Ken Bowron, Sr.

Executive Director

Children's Charity Fund, Inc.

2011 Bispham Road

Sarasota, Florida 34236

Kevin J. O'Donnell

Assistant General Counsel

Department of Revenue

Post Office Box 6668

Tallahassee, Florida 32314-6668

Linda 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.