PILOT Programs – The Nonprofit Property Tax

    If it walks like a duck and quacks like a duck…    

In an era of waning revenue streams and increasing demand for government services, some cash-strapped municipalities cast a longing eye at nonprofits’ real property as a missed source of revenue.  Through Payment in Lieu of Taxation (“PILOT”) programs, states and municipalities encourage – and sometimes require – nonprofits to pay what they consider the nonprofit’s “fair share.”   PILOT programs, however nicely packaged, are still essentially property taxes.  The trend toward PILOT programs in the last fifteen years should concern the nonprofit sector because of the potential for substantial financial implications, as explained herein. 


PILOT programs have long been used to compensate localities for lost property tax revenues.  Historically, both state and federal governments have utilized PILOTs to reimburse municipalities containing exempt state- and federally-owned land.[1] In addition, some large educational nonprofits for decades have made voluntary PILOT payments to municipalities to help offset their considerable use of municipal services.  For example, Harvard and MIT have made voluntary payments to the City of Cambridge, Massachusetts since 1928.[2]   

Recently, use of PILOT programs has increased dramatically.  From 2000 to 2010, eighteen states implemented PILOT programs affecting nonprofits.[3]  However, these programs have not gained universal approval; some states have expressly declined to implement PILOT programs.  Florida, for example, determined its PILOT program statute violates Florida’s constitution.[4]  The overall trend, however, favors PILOT programs for nonprofits.  Municipalities continue to pressure state legislatures to assist local communities facing tough economic realities.

End of IRS’s Health Insurance Reprieve?

Since the Affordable Care Act (ACA)’s enactment, the IRS and the U.S. Department of Labor have delivered a rather unpleasant surprise to many, namely, that it now treats employers’ reimbursement or payment of employees’ individual health insurance premiums as taxable income to such employees (also known as health reimbursement arrangements or “HRAs”).  This new rule, which essentially is an interpretation of “plan” under the ACA’s so-called market reforms, applies to small employers that are otherwise exempt under the ACA.  The interpretation constitutes an about-face from the longstanding treatment of HRAs as a pre-tax employee benefit.

Transitional relief was granted when the IRS issued a notice in early 2015, providing that employers who provided such pre-tax benefit would not owe any penalties or be required to include such benefit as taxable income – at least through June 30, 2015. Such relief was extremely helpful (even though quite late), since the penalty for noncompliance is extreme: $100 fine per employee, per day (!).  

At this point, no further tax relief for HRAs is on the horizon.  Legislative rumblings of relief developed earlier this year but failed to produce any helpful result.  Now that the U.S. Supreme Court upheld the ACA’s federal subsidy programs in its recent King v. Burwell ruling (and therefore its core elements), perhaps legislators will focus again on modifying such ACA aspects as this HRA issue.   Instituting such relief would be both consistent with the fervent opposition of many politicians and greatly welcomed by many. 

Religious Liberty After Obergefell v. Hodges

Now that that Supreme Court has determined that “[t]he Fourteenth Amendment requires a State to license a marriage between two people of the same sex,”[1] how will the Court’s decision impact religious organizations and individuals?  According to the four dissenting justices, the ruling means trouble ahead for religious organizations and individuals with conflicting religious beliefs.  In particular, the ruling portends new court battles between their constitutional religious liberty interests and developing laws that provide increasing sexual orientation and gender identity (“SOGI”) protection in areas such as employment, education, facility usage, and housing.

In Obergefell, a majority of five Justices determined that same-sex couples have a “fundamental right to marry,” arising out of liberty protections under the Due Process and Equal Protection clauses of the Fourteenth Amendment.  In so ruling, the Court reversed the Sixth Circuit Court of Appeal’s ruling[2] that states may define “marriage” as they wish.  Instead the Court sided with other federal courts that ruled unconstitutional state laws that limited marriage to unions between one man and one woman.    

Speaking for the majority, Justice Kennedy only briefly touched on religious liberty considerations, saying, “The First Amendment ensures that religious organizations and persons are given proper protection as they seek to teach the principles that are so fulfilling and so central to their lives and faiths.”  Notably, there was mention of neither religious exercise, as guaranteed under the First Amendment’s free exercise clause, nor broader protections to be recognized for faith-based organizations beyond churches.