North Star Research Institute v. Hennepin County, 45102

• Decision Date: 17 October 1975
• Docket Number: No. 45102,45102
• Citation: 236 N.W.2d 754,306 Minn. 1
• Parties: NORTH STAR RESEARCH INSTITUTE, Petitioner, Respondent, v. COUNTY OF HENNEPIN, Appellant.
• Court: Minnesota Supreme Court

Page 754

236 N.W.2d 754

306 Minn. 1

NORTH STAR RESEARCH INSTITUTE, Petitioner, Respondent, v. COUNTY OF HENNEPIN, Appellant.

No. 45102.

Supreme Court of Minnesota.

Oct. 17, 1975.

Rehearing Denied Jan. 19, 1976.

Syllabus by the Court

A nonprofit corporation which is engaged in applied research and to a significant degree makes its services available to private business enterprises who pay for the research requested by them on a cost-plus basis and acquire information as a result of the undertaking is not entitled to tax exemption as a 'purely public charity' within the meaning of former Minn.Const. art. 9, § 1, now Minn.Const. art. 10, § 1, and Minn.St. 272.02, subd. 1(6).

Gary W. Flakne, County Atty., David E. Culbert and Paul R. Jennings, Asst. County Attys., Minneapolis, for appellant.

Faegre & Benson and Hayner N. Larson and Hubert V. Forcier, Minneapolis, for respondent.

Considered and decided by the court en banc.

SHERAN, Chief Justice.

Appeal from a judgment of the Hennepin County District Court holding that respondent North Star Research Institute is exempt from personal property taxes assessed in 1968, 1969, and 1970. The trial court determined that during these years respondent was operating as a nonprofit corporation for charitable purposes within the meaning of former Minn.Const. art. 9, § 1 now Minn.Const. art. 10, § 1 ¹ and Minn.St. 272.02, subd. 1(6). ² We reverse.

The significant facts stipulated by the parties can be found in State v. North Star Research & Development Institute, 294 Minn. 56, 200 N.W.2d 410 (1972). Since the decision in that case, North Star Research and Development Institute has been renamed North Star Research Institute. The title of this case is amended to reflect the change, and the corporation will be called 'North Star' in this opinion.

North Star has failed to sustain its burden of proving entitlement to exemption. ³ In summary, we hold:

(1) To be exempt from taxation, property must be put to a use which is purely charitable and public;

(2) A significant part of the use to which the property of North Star is put involves applied research for private business enterprises engaged in business for profit;

(3) Any private business contracting with North Star to conduct research acquires an exclusive proprietary interest in the information developed, which it can use to its advantage in the market place and which, if it sees fit, it can preclude others from using by obtaining patents;

(4) The fact that a substantial part of the research is done for governmental agencies, Federal and state, does not make North Star 'purely' charitable and public;

(5) If the research done for private enterprise is so minimal in comparison to the total as to be of no legal consequence, the record fails to demonstrate it.

North Star was organized in 1963 in response to a recognized need for a center in this area capable of providing applied research services. It has functioned as a nonprofit corporation, although its capital resources came principally from the Minneapolis Area Development Corporation (a business corporation which was dissolved when its assets, valued in excess of $3,000,000 and consisting mainly of approximately 2,100 acres of real estate in Scott County, were transferred to North Star) and from other persons, including corporations, who had formed MADC. As a result of these contributions, plus an additional $800,000 given by other individuals and corporations, North Star received donated capital in excess of $4,300,000. All but a small part of the real estate has been or is being developed and marketed commercially. The 'members' of North Star, comparable in position to the shareholders in a business corporation, are 12 persons of distinction, none of whom are paid directly or indirectly for their efforts. The 'directors' of North Star, selected by the members, are educators, professional persons, representatives of the business community, and other community leaders, who serve without compensation and receive no special benefit from North Star.

The applied research produced by North Star, measured in dollars, has reached an annual level exceeding $1,000,000. Of this amount, more than half has been performed at the request of Federal and state governmental agencies, but in number the clients served are mostly private corporations. North Star's clients define the objective for the applied research to be carried out pursuant to agreement and pay a fee for the services, fixed usually at cost plus 8 percent. Of determinative significance, the research work product becomes the property of the client requesting it--an interest which may be, and in some instances has been, protected by patent application. Examples of research projects conducted at the request of business concerns by North Star include: The discovery of commercial uses for waste products; the discovery of devices to control rodents in grain storage facilities; the analysis and refinement of billing and accounting procedures; the use of ultrasound to improve the quality of sugar beet seeds; the development of a device to improve the function of a filtering system.

Given these facts, the issue becomes: Is a nonprofit corporation engaged in applied research which to a significant degree makes its services available to private enterprises, who pay for the research defined and requested by them on a cost-plus basis and acquire ownership of the information developed as a result of the undertaking, entitled to tax-exemption status under the provisions of Minnesota's Constitution and statutes?

We accept for purposes of analysis these propositions:

(1) The research facility could not function without the initial donations of capital made by persons who are concerned with the economic development of the area and who receive no significant special benefit because of the existence of the facility.

(2) For the most part, the research center realizes no profit; any profits which are generated are used to improve the research potential of North Star.

(3) The individuals who manage and control North Star do so without pecuniary reward and are motivated primarily by an interest in improving the economic climate and general well-being of the area which North Star serves.

Our decisions give us no controlling precedent or direction by clear analogy. In State v. North Star Research & Development Institute, 294 Minn. 56, 200 N.W.2d 410 (1972), the majority of the court limited their decision to a holding that North Star was a nonprofit corporation and therefore entitled to a tax exemption available to nonprofit corporations leasing real estate owned by public schools for limited periods of time. It is clear that the dissenters rejected the theory that North Star was a 'purely public charity,' but the majority reserved judgment on the question and it remains open for decision.

For the most part, the decisions of this court have dealt with organizations which were engaged in charitable undertakings in the traditional sense--care for the sick, the aged, and the infirm; ⁴ education of young people; ⁵ hospital care for the poor; ⁶ facilities to promote the moral and educational welfare of youth; ⁷ institutions for religious education. ⁸ In these cases, assessment has been made of such factors as (1) whether the stated purpose of the undertaking is to be helpful to others without immediate expectation of material reward; (2) whether the entity involved is supported by donations and gifts in whole or in part; (3) whether the recipients of the 'charity' are required to pay for the assistance received in whole or in part; (4) whether the income received from gifts and donations and charges to users produces a profit to the charitable institution; (5) whether the beneficiaries of the 'charity' are restricted or unrestricted and, if restricted, whether the class of persons to whom the charity is made available is one having a reasonable relationship to the charitable objectives; (6) whether dividends, in form or substance, or assets upon dissolution are available to private interests.

The tendency of our decisions has been to sustain exemption where these traditionally 'charitable' objectives are being furthered, so long as no individual profits from ownership of the 'charity' are realized and so long as the undertaking is not a subterfuge by which the needs of a select and favored few are accommodated. ⁹

These undertakings have one characteristic in common which serves to distinguish them from the case at hand: In none can it be said that a person or corporation gains a profit or commercial advantage as the immediate and intended direct consequence of the 'charity.'

In all of these situations except those involving religious education, where constitutional limitations apply, the activity involved is one which our state and Federal governments have historically supported with public funds. Government programs for relief of poverty, care for the sick and aged, and the education and training of young people have been long and widely accepted. It can be said with respect to activities that are traditionally 'charitable' that ultimately people will benefit in an economic sense from the charitable undertaking. Persons relieved from poverty and illness and the restraints of old age demand less of, and contribute more to, the economic well-being of a community than do those who are not so relieved. A person who receives the benefits of an education, whether theoretical or practical, may add more to the well-being of a society than one who is not so advantaged. It has been recognized that religious education and training add to the moral strength of a community.

There are distinctive characteristics of North Star which make its situation so different from those of charities in the traditional sense that reference to general statements made in our previous cases are of limited value.

For one thing, the objective of...