Question: When is a charity not a charity? Answer: When the town government is strapped for cash.

Many local governments around the country have tight budgets. The problem is particularly acute in New Hampshire, which has neither a state income tax nor a sales tax. New Hampshire localities are especially hard pressed because the local property tax must fund both state and local needs. That's why Peterborough, N.H., recently rescinded the tax-exemption for the MacDowell Colony, a charity that owns 32 artist studios on 450 acres of land and has operated on a tax-exempt basis for nearly 100 years. The colony enjoys national fame as the place where Thornton Wilder wrote “Our Town,” Aaron Copland composed “Appalachian Spring” and George Gershwin wrote the folk opera “Porgy and Bess.”

As the Peterborough selectmen looked around for extra revenue they decided to re-evaluate the tax status of several charities in town. Those deemed sufficiently charitable–those that met essential human needs, were generous or benevolent and intended to benefit the public–were left alone. The others either paid full taxes or worked out a lesser payment to the town.

The MacDowell Colony, which the city didn't deem sufficiently charitable, refused the town's offer to pay $12,000 in lieu of a full tax assessment of $160,000. The selectmen then sent the charity a bill for $50,000 and asked the court to rule that the MacDowell Colony isn't a charitable organization entitled to a property-tax exemption under state law. On the advice of counsel, the charity paid the $50,000, pending the court's ruling.

This is where we are. After nearly a century of tax-exemption, a significant local institution that enjoys national renown for nurturing the arts has lost its exemption and now has the burden of proving in court it's still a charity. The town acknowledges that state law on the meaning of “charitable” hasn't changed recently. Both parties agree that the MacDowell Colony's mission and operations haven't changed. They both know that many local residents of Peterborough, including one of the selectmen and other New Hampshire residents have been resident artists at MacDowell. Both sides know that MacDowell pays the town about $6,000 in taxes on the property it does not use for charitable purposes, and that a good portion of the $1 million the charity raises annually is spent in Peterborough.

The town's legal argument seems based entirely on its rather strained view of who is part of the “general public” that charities are supposed to serve. State law requires charities to advance “the spiritual, physical, intellectual, social or economic well-being of the general public or a substantial and indefinite segment of the general public that includes residents of the state of New Hampshire.”

The town's lawyer told reporters that while artists in residence at the colony certainly benefited from the charity, he was not willing to say that they also were members of the “general public.” In its court petition the town tried to further distinguish the MacDowell artists from the general public by citing the rule that an organization serving only its members can not be deemed a charity because it advances private rather than public interests. Apparently the town would have us believe that Aaron Copland, Thornton Wilder and the thousands of other artists who resided at MacDowell over the past century showed up in New Hampshire because they belonged to the same club.

Clearly, the only reason Peterborough is willing to publicly adopt such a tortured interpretation of the law is that it has to balance its budget. Peterborough sets a sad precedent for other cash-strapped local governments to follow. If they plan to do so, they will need better legal arguments. Meanwhile, maybe more charities could make a few payments in lieu of taxes. It would help to avoid the risk of making bad tax-exemption law in the states.

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Bruce Collins is corporate vice president and general counsel of

C-SPAN, based in Washington, D.C.