Ohio Tax Decision May Have Major Impact on Charity Care Standards for Hospital Real Property Tax Exemptions

Bricker & Eckler LLP
June 2006

A recent decision by the Board of Tax Appeals (“BTA”) dealt the Tax Commissioner a partial defeat in his attempts to narrow the scope of the charitable use exemption from real property taxes provided by R.C. 5709.12(B). See Community Health Professionals, Inc. v. Wilkins, B.T.A. Case No. 2004-K-689 (May 5, 2006).

R.C. 5709.12(B) provides a tax exemption for real property belonging to institutions that is used exclusively for charitable purposes. The statute, however, does not provide a definition of "charitable use"; instead, the legislature has left this determination to various courts and the BTA. Over the last several years, the Tax Commissioner has taken an increasingly narrow view of what activities are "charitable" to deny tax exemption applications by health care organizations. Although the initial challenges involved tax exemptions for medical office buildings, we are aware of several hospitals that have received similar inquiries involving their actual hospital facilities. As a result, health care organizations should carefully monitor the progress of these cases.

Community Health Professionals involved a real property tax exemption application for administrative office space owned by an organization ("CHP") that provides visiting nursing services. CHP rents space to two related organizations, each of which provides similar services. All three organizations are recognized as exempt from Federal income tax under section 501(c)(3) of the Internal Revenue Code.

Testimony before the BTA indicates that CHP provides nursing services to any member of the community without regard to their ability to pay for these services. Medicare pays for approximately 80-percent of the costs of its services, with the remainder paid for by private insurance. To the extent that CHP is not paid by either Medicare or private insurance, it foregoes collection of the remainder; this shortfall is made up from a patient care fund it created for this purpose.

CHP applied for property tax exemption under R.C. 5709.12(B) for its administrative space. Considering the application, the Tax Commissioner denied the requested exemption. Although the Tax Commissioner agreed CHP was a charitable institution, he concluded the property was not used exclusively for charitable purposes on the basis that CHP had not been able to demonstrate the amount of charitable care it provided. The Tax Commissioner also ruled that "[n]ot collecting unpaid debts incurred by hospice patients is not the same as offering charitable care on the sliding fee system."

Reviewing the evidence in this case, the BTA reversed the Tax Commissioner in part, holding that CHP's use of the property was charitable within the meaning of R.C. 5709.12(B) and granting the exemption for the portion it used, but concluding that CHP had introduced insufficient evidence about the leases with the other organizations to qualify for tax exemption for the portions of the property leased to those organizations. In reaching this conclusion, the BTA made three significant conclusions:

• First, the failure to offer a sliding fee system for services based on income is "of no consequence" to the claim for tax exemption;

• Second, "there is no absolute percentage" of services that must be rendered to persons who are unable to pay for them for an institution to make charitable use of property; and

• Finally, "although payment may, on occasion, be forthcoming from federal or state programs or private fund-raising efforts, this fact along does not diminish the nature of services provided without regard" to the ability to pay.

This decision by the BTA is significant, particularly to health care organizations seeking real property tax exemption under R.C. 5709.12(B) and who have either not heard from the Department of Taxation or received requests from the Department to quantify the amount of charity care provided. At a minimum, the decision appears to reject the Tax Commissioner's adoption of a charity care floor when considering charitable use property tax exemption applications. However, the decision leaves open the possibility that the Department may reject the use of below-market care reimbursed by Medicare and similar programs in determining the amount of charity care provided by health care organizations.

We are unsure whether the Department will appeal this decision to the Ohio Supreme Court. In the interim, the BTA also has appeals of the Tax Commissioner's adverse determinations involving tax exemptions for medical office buildings claimed by Akron General Medical Center and the Cleveland Clinic Foundation pending. We hope that these decisions further clarify the standards for tax exemption under R.C. 5709.12(B).