Volunteer Center of Southern Arizona v. Staples – 11/29/2006

December 12, 2006

Arizona Court of Appeals Division Two Holds That a Nonprofit Organization May Lease Its Property to Another Nonprofit Organization Without Forfeiting Its Tax Exempt Status on the Property.

Both the Volunteer Center of Southern Arizona (the “Center”) and JobPath, Inc. are nonprofit corporations exempt from federal income tax under 26 U.S.C. § 501(c)(3). The Center owns an office building and uses two-thirds of it for its charitable activities, and leases the remaining third to JobPath. The Center sought a tax exemption for the real property pursuant to A.R.S. §§ 42-11107 and 42-11121, which create tax exemptions for property “not used or held for profit.” Although the Center qualified for the tax exemption with respect to the portion of the property it used for its own charitable purposes, the Assessor concluded that leasing property at market rates to JobPath fell outside the exemption (even though the lease proceeds went to charitable purposes and JobPath’s own use of the property would qualify it for a tax exemption if it owned the property). The Court held that under the plain language of the statutory scheme, a § 501(c)(3) organization may lease property to another § 501(c)(3) organization and qualify for the tax exemption. The Court distinguished several prior cases that were decided before the Legislature’s enactment of the language now found in Section 42-11154. It further explained that the reasoning underlying the earlier cases would not change the result because those cases focused on the actual physical use to which the property was put in evaluating the tax status of the property, and here that use is a qualifying charitable use by JobPath.
Judge Eckerstrom authored the opinion; Judges Brammer and Espinosa concurred.