Ohio Supreme Court: Charitable-Use Exemption from Real Estate Taxes Based on Nondiscrimination, Not Quantum of Charitable Care

On June 15, 2017, the Ohio Supreme Court issued its decision in Dialysis Ctrs. of Dayton, L.L.C. v. Testa,Slip Opinion No. 2017-Ohio-4269, which provided clarity on the basis for granting or denying a charitable-use exemption from real property taxes.

The Dialysis Centers of Dayton, L.L.C. (“DCD”) owned and operated 4 dialysis centers in the Dayton area. For most of 2006, DCD was jointly owned by Miami Valley Hospital, a nonprofit entity, and several physicians.  By 2007, the physicians were no longer members of DCD, and it became wholly owned by the hospital. A single member LLC is a disregarded entity for tax purposes and its transactions would appear on the tax returns of the sole member.  In some of the centers, DCD rented a percentage of space to physicians to use as offices.

In order for a patient to be treated at one of DCD’s facilities the patient went through an intake process, where an employee of DCD would evaluate the patient’s options for paying for the treatment, with potential sources being Medicare, Medicaid and private insurance coverage. If a patient had no coverage and was indigent, the DCD employee would help the patient investigate whether he or she qualified for Medicare or Medicaid. If the patient was responsible for payment of a portion of the dialysis costs and couldn’t afford to pay that portion, the DCD employee worked with the patient to determine if he or she qualified for charitable care. Although all of the foregoing options for coverage and payment were pursued, the centers treated all patients, regardless of whether he or she could afford the treatment costs.

When the hospital took over 100% of the ownership of DCD, it adopted an operating agreement that provided that DCD’s charitable purpose included “provide services to indigent patients regardless of their ability to pay.”

When a review of DCD’s tax exemption request was conducted by the county tax department, it asked DCD to quantify what portion of its services were ‘uncompensated care’, which excluded write-off’s for bad debts. DCD quantified such treatment at 28%.

The tax commissioner subsequently denied DCD’s exemption application based upon that low percentage of ‘uncompensated care’ and in 3 of the 4 cases, also in part due to the fact that some space was leased to independent contractor physicians.

DCD appealed to the Board of Tax Appeals (“BTA”) who upheld the tax commissioner’s determination based on insufficient evidence of charitable care at the locations (i.e., quantity).  DCD then appealed to the Ohio Supreme Court (the “Court”).

The Court’s review was based on whether the BTA’s review was “reasonable and lawful.” While the BTA is responsible for determining factual issues, the Court “will not hesitate to reverse a BTA decision that is based on an incorrect legal conclusion.” (quoting, Gahanna-Jefferson Local School Dist. Bd. of Edn. v Zaino, 93 Ohio St.3d 231, 232, 754 N.E.2d 789 (2001))

The Court determined the following:

·         Because the physicians were part owners in DCD in 2006, DCD was not eligible for a charitable-use exemption in 2006.

·         In 2007, DCD was entitled to its exemption for that portion of the space at each center that is devoted to dialysis services; i.e., the space leased to the private physicians would not be exempted from real property tax.

·         The matter was remanded to the tax commissioner to conduct further proceeding to allocate between the portion leased to the physicians and the portion used for dialysis services and calculate the exemption accordingly.

The Court’s based its determination to grant the exemption on the fact that nondiscrimination, rather than quantum of charitable care, is the criterion for exemption. Proof of unreimbursed care was unnecessary. The Court stated “For purposes of Ohio’s charitable-use property-tax exemption, the provision of medical or ancillary healthcare services qualifies as charitable if those services are provided on a nonprofit basis to those in need, without regard to race, creed or ability to pay.” It further noted that in the era of insurance and governmental health care benefits, care may be paid for by third party payors without destroying charitable status.

The Court went on to state that “A crucial factor in the charitable status of property use is whether a facility is open to serve the general public—or to that part of the general public that has a special need—in order to cater to the needs of that whole segment of the public.”

For the foregoing reasons, the Court found that the excessive focus by the tax commissioner and the BTA on the quantity of charitable care was reversible error, and for tax year 2007 the facilities at issue should have been exempted from real estate taxes except for the portion leased to private physicians.
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Being a Charity Doesn't Mean You Qualify for the "Charitable Use" Property Tax Exemption in Ohio

When it comes to claiming a property tax exemption based on charitable use, merely owning the property in a 501(c)(3) nonprofit corporation is not sufficient to succeed.  On July 27, 2016, the Ohio Supreme Court issued its decision in Innkeeper Ministries, Inc. v. Testa, Slip Opinion No. 2016-Ohio-5104, in which it sided with the tax commissioner in denying Innkeeper Ministries, Inc. (Innkeeper) its tax exemption.

Innkeeper owns real property (over 71 acres) that includes two residential buildings and other recreational amenities, such as a swimming pool, basketball court, fishing ponds and a prayer walk through wooded property. Its stated mission is to provide a spiritual retreat for pastors, other church leaders and missionaries along with their spouses, which includes free meals and use of the amenities on the site.  A couple resides on the property, and act as caretakers.

While the caretakers advertise the services available at the property they had not succeeded in filling the rooms at any given time. Testimonials were provided on the mission of the organization and its use of the property, but no concrete evidence. What was missing from the record were financial information or documentation on the number of people served.

Innkeeper had applied for and was denied its property tax exemption by the tax commissioner. The Board of Tax Appeals overruled the tax commissioner, finding that Innkeeper’s “year round use of the subject property, in providing g a place of respite for the physical and spiritual renewal of Christian leaders, without charge [is] sufficiently charitable in nature to fall with the definition of charity set forth in Planned Parenthood [5 Ohio St.2d 117, 214 N.E.2d 222].”  The BTA concluded that Innkeeper used its property “in furtherance of or incidental to its charitable …purposes and not with the view to profit” within the meaning of R.C. 5709.121(A)(2).

Ohio law provides a specific tax exemption for church retreats but Innkeeper’s property does not qualify. It is not owned by a church and is subject to substantial residential use by the caretakers.  R.C. 5709.121, which contains an expanded definition of “exclusive charitable use”, residential use doesn’t defeat the exemption so long as such use is purely incidental to the charitable purposes of the property owner. However, the underlying issue is what the property owner qualifies as a “charitable institution” under that statute. In the instant case, this would require Innkeeper to show that its use of the property at issue, which is its only activity, can qualify as charitable.

The Ohio Supreme Court found that given the residential use of Innkeeper’s property, the BTA erred in not also requiring proof of the primacy of Innkeeper’s charitable hospitality.  It held that Innkeeper had the burden of proof to demonstrate that the hospitality it extended to others was primary over the personal, familial and residential use it made of the property. While the property was owned by a 501(c)(3) entity, the caretakers controlled that entity. As the court pointed out, “…the accommodation of guests at no cost in a spacious residence cannot by itself turn the residence into a charity.”

While Innkeeper provided some evidence that it advertised for guests in accordance with its mission, as stated earlier, it did not provide any other documentation. Useful documentation, which one would expect from any 501(c)(3), would have included how many responded to the advertisement, how many stayed at the property each year, how many were turned down, etc.

As evidenced by the court’s decision against Innkeeper, the use of a property by a 501(c)(3) entity as a residence without quantitative evidence of its use in connection with its stated charitable mission defeats a claim for property tax exemption in Ohio.

“30+ Year Tenants” may File for Property Tax Exemption, but Ohio Supreme Court Holds that Tenant’s Charitable Use is not Enough to Establish Exemption when Property Owner is For Profit Entity Leasing Property For Profit

“In this world nothing can be said to be certain, except death and taxes”- Benjamin Franklin

In Ohio (and other jurisdictions) there are exceptions to Mr. Franklin’s general rule.  Certain entities such as corporations and limited liability companies may live on for many years beyond the death of their officers and shareholder-members; and property used exclusively for charitable or public purposes, such as schools, churches, government buildings, hospitals, and public recreation areas may qualify as tax exempt. Colleges and universities, nature preserves, children’s homes and certain homes for the aged may also qualify. Which taxes are exempt? Owners of exempt properties do not pay any real property taxes, however, any special assessments such as sewer maintenance or street lighting must still be paid by the property owner. Tax exempt status will carry into future years, however the owner must re-apply if the use of the property changes or ownership is transferred.

As discussed last week in this Blog by my colleague Connie Carr in her article: Ohio Supreme Court re Analysis of Property Tax Exemption Under RC 5709.121, “when a property tax exemption is being considered based on the owner being a charity, it is not sufficient to show that the property owner is a 501(C)(3) tax exempt charitable institution as defined by the IRS. In Ohio, it must be shown that the ‘core activity’ of the institution qualifies as charitable for property tax purposes.”  Ms. Carr provides that “real property belonging to a charitable institution will be considered as exclusively used for charitable purposes by that institution if it (1) is used by such charitable institution for a charitable purpose or used under a lease, sublease or other contractual arrangement for charitable purposes, or (2) is made available by such institution under its direction and control and furthers or is incidental to its charitable purpose and is not intended to be for-profit.”

Before one can get an opportunity to argue whether or not their property is exclusively used for charitable purposes, however, they must first prove they are one of the parties entitled by statute to file for a tax exemption, and entitled by statute to receive one. This was the issue faced by the Ohio Supreme Court in the recent case of ShadoArt Prods., Inc. v. Testa, Slip Opinion No. 2016-Ohio-511.

In ShadoArt Prods., Inc. v. Testa, 503 South Front Street L.P. was a for-profit company, who leased its 30,000 Sq.Ft. building for a term of 30 years to appellant-tenant ShadoArt Productions, Inc. (“ShadoArt”), a 501 (c)(3) non-profit organization. In 2011, ShadoArt filed an application for exemption under Ohio Revised Code (“O.R.C.”) Sections 5709.12 and 5709.121. The tax commissioner (appellee) denied the request, and in 2014, the Ohio Board of Tax Appeals (“BTA”) affirmed the denial. In 2015, appellant appealed to the Ohio Supreme Court.

Had this case come before the court prior to 2008, it would have ended there with a quick dismissal. In fact, the application would have been rejected as tenants were not then eligible, by statute, to apply for tax exemption. In 2008, however, the Ohio General Assembly amended O.R.C. Section 5715.27 to expand the class of entities that may submit applications for various real-property-tax exemptions. (See 2008 Sub.H.B. 160), including tenants of real property with terms of 30 or more years.

So, because O.R.C. Section 5715.27 was amended to authorize tenants with terms of 30 years or more (and other parties) to file applications for exemption, they must also be entitled to receive exemption under O.R.C. Sections 5709.12 and 5709.121 (if they can prove the property is being exclusively used by them for the exempt purpose). Correct?

That was the appellant’s argument. ShadoArt reasoned that if it has standing to file an application under O.R.C. Section 5715.27, then it also must have the underlying legal right to exemption; otherwise, the 2008 amendment would be meaningless.

The Ohio Supreme Court, however, did not buy the appellant’s argument. It affirmed the BTA’s decision that held the opposite. Namely, while “ShadoArt did have standing to file an application for exemption under R.C. 5715.27… the applicable exemption statutes…. R.C. 5709.12 and R.C. 5709.121 still control a determination of whether the property itself is entitled to exemption,” and that regardless of ShadoArt’s use of the property, an exemption was not appropriate here  because the property “belonged to” 503 South Front Street, LP [a for profit entity, not ShadoArt, the 501(c)(3) tenant].

The operative word here is “belongs”. “O.R.C. Section 5709.121(A) states that if property “belong[s] to a charitable or educational institution,” then it ‘shall be considered as used exclusively for charitable or public purposes by such institution’ if it meets one of several requirements.” Appellant claimed the property belonged to Tenant by virtue of its 30 year lease, and it should then be entitled to prove its use as charitable. The Ohio Supreme Court refuted this argument by citing precedent (prior decisions), stating: “We have long held that “belonging to,” as used in R.C. 5709.12, means “owned by,” and accordingly, “it is the owner’s use of the property, not a lessee’s use that determines whether the property should be exempted.” In other words, “an entity that leases property to another must establish its charitable status based on the range of its own activities and may not rely upon the activities of a particular lessee.”

The result in ShadoArt Prods., Inc. v. Testa seems to carve out an exception from the Ohio Supreme Court’s dictum in Rural Health Collaborative of S. Ohio, Inc. v. Testa (the case discussed in Ms. Carr’s article) regarding lease-like arrangements not always resulting in a denial of a tax exemption application. Based upon the holding of ShadoArt Prods., Inc. v. Testa, a tenant who files a tax exemption application and tries to prove the property’s entitlement to the exemption based upon the tenant’s charitable use only will most certainly be denied.

Perhaps a simpler way to reconcile these cases is to say that generally speaking, (1) “a property may be exempt for charitable purposes, even if the owner is leasing the property, provided that both the lessor and lessee are charitable institutions,” and (2) a for-profit landlord who owns property and leases it to a tenant for profit cannot claim its tenant’s charitable use as its own, simply by virtue of leasing to a tenant who is using the property exclusively for charitable purposes. The only thing seems certain after analyzing all of these decisions is that there is little certainty in tax exemption cases in Ohio.

Ohio Supreme Court re Analysis of Property Tax Exemption Under RC 5709.121

One of the more confusing areas in the world of charitable use exemptions of real property from taxation in Ohio revolves around situations where the property is leased.  On February 16, 2016, the Ohio Supreme Court decided an appeal from the Board of Tax Appeals (the “BTA”) regarding its grant of an exemption from property tax under ORC 5709.121(A).

This case involved real property in Adams County, Ohio owned by appellee, the Rural Health Collaborative of Southern Ohio, Inc. (“Rural Health”), which was leased to Dialysis Clinic, Inc. (“DCI”) for purposes of operating a dialysis facility in rural Southern Ohio.  Rural Health applied for a tax exemption on the real property and was denied by the tax commissioner who relied primarily on an earlier Ohio Supreme Court decision, Dialysis Clinic, Inc. v. Levin, 127 Ohio St.3 215, 2010-Ohio-5071, 938 N.E.2^nd 329 (“Dialysis Clinic”). The BTA reversed, concluding that the property qualified under ORC 5709.121(A) because Rural Health itself qualified as a charitable institution.

The tax commissioner argued in its appeal that Rural Health did not qualify as a charitable institution and that the precedent set in the Dialysis Clinic decision prevents an exemption being granted under ORC 5709.121.

The Ohio Supreme Court update the BTA’s decision in part but vacated its decision and remanded back to the BTA to complete additional analysis under the ORC.

When a property tax exemption is being considered based on the owner being a charity, it is not sufficient to show that the property owner is a 501(C)(3) tax exempt charitable institution as defined by the IRS. In Ohio, it must be shown that the “core activity” of the institution qualifies as charitable for property tax purposes.  This determination is primarily an issue of fact so the Ohio Supreme Court will defer to the taxing authorities and refer their determination under an abuse-of-discretion standard. In this case, Rural Health has three members, all of whom are nonprofits in Southern Ohio. The BTA looked at the big picture of all of Rural Health’s activities in which the construction and leasing of the dialysis center was only one piece. The Ohio Supreme Court stated that the fact DCI’s lease generates revenue for Rural Health did not, in and of itself, prevent Rural Health from qualifying as a charitable institution, and it upheld the BTA’s determination as reasonable and lawful.

The Ohio Supreme Court the turned its attention to whether the BTA properly analyzed the exemption request under ORC 5707.121.  This provision provides that real property belonging to a charitable institution will be considered as exclusively used for charitable purposes by that institution if it (1) is used by such charitable institution for a charitable purpose or used under a lease, sublease or other contractual arrangement for charitable purposes, or (2) is made available by such institution under its direction and control and furthers or is incidental to its charitable purpose and is not intended to be for-profit.

The tax commissioner argued that the existence of the lease and other circumstances with DCI preclude a finding that Rural Health exercised ‘direction and control” over the use of the property which is required under ORC 5709.121(A)(2). The Ohio Supreme Court did not buy this argument as lease-like arrangements do not always result in a denial of the tax exemption.

However, when the BTA granted the tax exemption based upon the determination that the provision of dialysis services furthers or is incidental to Rural Health’s purposes in compliance with ORC 5709.121(A)(2), it skipped over the first half of that section. The Ohio Supreme Court found that the BTA failed to evaluate whether the “direction and control” half of that section was met. As a result it reversed the exemption and remanded the case back to the BTA to complete that evaluation.

The tax commissioner argued that it is impossible for the BTA to find in Rural Health’s favor with respect to the “direction and control” evaluation as the court’s decision in Dialysis Clinic would control and require a finding against Rural Health. The Ohio Supreme Court disagreed stating that the deference courts give to controlling precedent relates to legal principles not findings of fact and the additional evaluation required of BTA is a factual determination.

The takeaway from this case is to appreciate that the unique facts of each case matter. The evaluation of whether a property tax exemption should be granted or not is fact-specific and there often is no simple one-size-fits-all answer or shortcut that can be taken.
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