Recently, the tax exemptions enjoyed by many non-profit organizations, particularly those in the health care industry, have been under increasingly close scrutiny. In particular, the extent to which health care entities provide care or services to individuals for free or at a reduced cost, has become a matter of great interest to tax authorities. The Ohio Supreme Court recently struck a blow against those efforts, affirming a decision of the Board of Tax Appeals that upheld a real property tax exemption for the administrative offices of a community health services organization. Community Health Professionals, Inc. v. Wilkins, 113 Ohio St. 3d 432, 2007-Ohio-2336.
The Property Owner. Community Health Professionals, Inc. ("CHP") provides skilled, in-home nursing care and hospice services in northwest Ohio. VNA Comprehensive Services, a related entity, provides similar services to Medicaid-eligible patients. Private Duty Services, Inc., also a related entity, provides non-skilled health services, and operates an adult day care. All three entities are organized not-for-profit and are exempt from federal income taxes under IRC 501(c)(3).
CHP sought a real property tax exemption for a small building, portions of which were leased to VNA and Private Duty at a rental equal to the cost of utilities and depreciation. All three entities used the building to house their administrative operations, and the adult day care operated by Private Duty was also conducted there.
The Law. Exemption was claimed under R.C. 5709.12 and R.C. 5709.121. R.C. 5709.12 provides an exemption for any property that is used exclusively for charitable purposes and not with a view to profit. R.C. 5709.121 provides an exemption for property that is leased by a charitable or public entity to a similar entity for charitable or public purposes, or that is otherwise used in furtherance of the owner's charitable or public purposes.
Lower Rulings. In Community Health Professionals, the Tax Commissioner found that all three entities were charitable entities under Ohio law. However, the Tax Commissioner concluded that because portions of the property was leased, it did not qualify for exemption under RC. 5709.12. That official also determined that exemption was not proper under R.C. 5709.121 because there was no evidence that services were provided for free, or on a sliding fee basis, to those who needed such relief. Therefore, the Tax Commissioner concluded the property was not used exclusively for charitable purposes.
The Board of Tax Appeals ("BTA") reversed the decision of the Tax Commissioner. CHP demonstrated that it had a policy of accepting all patients regardless of their ability to pay, and that nobody had ever been turned away for nonpayment. Also, it showed that although it occasionally generated a modest surplus of funds through its operations, there was no profit to any private entity. It acknowledged that it received payment from governmental and private third-party payers, such as insurance companies, and that it maintained a patient care fund to defray costs that were unreimbursed by the patient or a third party payer. Any sums remaining unpaid were written off. The BTA rejected the Tax Commissioner's argument that in order to obtain a charitable use exemption, the property owner had to demonstrate that it provide some pre-determined level of charitable care, without reimbursement from third parties, out of its own assets. Full text of the BTA decision.
Supreme Court Ruling. The Tax Commissioner appealed the case to the Supreme Court. There it renewed it claims that unless the property owner demonstrated some level of care that was unreimbursed by any third party, the charitable exemption was not warranted. In the view of the Tax Commissioner, a party that was compensated for its services by third parties was not charitable; rather, it was merely providing a service for hire.
The Supreme Court rejected the Tax Commissioner's arguments. First, it observed that all three entities were organized not-for-profit, and all three were exempt from federal income taxes under IRC 501(c)(3). It further observed that they were organized for charitable purposes, and there were not allegations that any of them were operating for other than their stated charitable purposes. Thus, the only issue before the Court was whether the property was used in furtherance of or incidentally to CHP's charitable purposes and not with a view to profit.
The Court concluded that using the property as administrative offices furthered the charitable purposes of all three organizations. It reiterated that no pre-determined level of charity care was necessary to establish that property was used exclusively for charitable purposes; rather, each case was to be decided on a case-by-case basis. In this case, the Court noted that entities were charitable in nature, they provided overlapping services, that they provided services to all without regard to the recipients' ability to pay for the services, and that no patients were denied service for failure to pay. Further, it observed that the requirement the profit not be used with a view to profit related to the benefit of owners of the entity, and not to whether the entity, itself, operated at an excess of revenues over expenses. Based on these factors, the Court concluded the BTA's decision granting the exemption was reasonable and lawful, and affirmed that decision.
Insights. This decision is helpful because the Court again refused to adopt an absolute level of "charitable care" necessary before a charitable exemption can be granted. Rather, the Court continued to apply a flexible test that looks to the specific circumstances of each situation. Further, it rejected the suggestion made by the Tax Commissioner during oral argument that using the property for administrative purposes did not further the owner?s charitable purposes.
However, the decision does leave room for the Tax Commissioner to try another basis for denying the exemption. The Court stated that whether some level of charitable care was provided by the property owners had a bearing on the nature of the institution, rather than on the use of the property. That is, if an entity did not provide some demonstrated level of charity care, the Court left the door open for the argument that the entity really was not a charitable institution. This Court did not address this issue in this case because the Tax Commissioner had not raised the charitable nature of CHP as an issue in its notice of appeal. It is possible, however, that in future cases the Tax Commissioner may assert such a claim. In future cases, property owners should be prepared to establish that their activities constitute charity under Ohio law.