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.2nd 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.