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.

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.
_____________________