EXEMPT OR NOT EXEMPT?
HOSPITALS AND OTHER PROPERTY
PRESENTED BY:
MARK E. GIAQUINTA
SARAH L. SCHREIBER
EXEMPTIONS
GENERALLY
EXEMPTIONS GENERALLY

What?
 Reduce
tax obligation; or
 Eliminate

obligation to pay tax.
General rule
 Property
is taxable…except when it’s not.
IND. CODE § 6-1.1-10-16

“All or part of a building is exempt from property
taxation if it is owned, occupied, and used by a
person for educational, literary, scientific,
religious, or charitable purposes.”
EXEMPTIONS GENERALLY

Privilege, not a right
A
taxpayer must apply for an exemption
under IND. CODE § 6-1.1-11-3.
 Exemptions
are not automatic; rather, they
are granted when a taxpayer meets all
statutory requirements.
APPLYING FOR AN EXEMPTION

Application (Form 136)
 IND.

CODE § 6-1.1-11-3(a)
“Subject to subsections (e), (f), and (g), an
owner of tangible property who wishes to
obtain an exemption from property taxation
shall file a certified application in duplicate
with the county assessor of the county in
which the property that is the subject of the
exemption is located.”
APPLYING FOR AN EXEMPTION
 IND.

CODE § 6-1.1-11-3 cont’d
An exemption application which is required under this chapter shall contain the
following information:

(1) A description of the property claimed to be exempt in sufficient detail to afford
identification.

(2) A statement showing the ownership, possession, and use of the property.

(3) The grounds for claiming the exemption.

(4) The full name and address of the applicant.

(5) For the year that ends on the assessment date of the property, identification of:


(A) each part of the property used or occupied; and

(B) each part of the property not used or occupied;

for one (1) or more exempt purposes under IC 6-1.1-10 during the time the
property is used or occupied.
(6) Any additional information which the department of local government finance
may require.
APPLYING FOR AN EXEMPTION
 IND.
CODE § 6-1.1-11-4

“The exemption application referred to in section 3 of this chapter is not
required if the exempt property is owned by the United States, the state,
an agency of this state, or a political subdivision (as defined in IC 36-1-213). However, this subsection applies only when the property is used,
and in the case of real property occupied, by the owner.”

“The exemption application referred to in section 3 of this chapter is not
required if the exempt property is a cemetery.”

“The exemption application referred to in section 3 of this chapter is not
required if the exempt property is owned by the bureau of motor
vehicles commission established under IC 9-15-1.”
APPLYING FOR EXEMPTION
 IND.

CODE § 6-1.1-11-4
cont’d
“The exemption application referred to in section 3 or 3.5 of this chapter is
not required if:

(1) the exempt property is:

(A) tangible property used for religious purposes described in IC 6-1.1-10-21;

(B) tangible property owned by a church or religious society used for educational
purposes described in IC 6-1.1-10-16;

(C) other tangible property owned, occupied, and used by a person for educational,
literary, scientific, religious, or charitable purposes described in IC 6-1.1-10-16; or

(D) other tangible property owned by a fraternity or sorority (as defined in IC 6-1.1-10-24).

(2) the exemption application referred to in section 3 or 3.5 of this chapter
was filed properly at least once for a religious use under IC 6-1.1-10-21, an
educational, literary, scientific, religious, or charitable use under IC 6-1.1-1016, or use by a fraternity or sorority under IC 6-1.1-10-24; and

(3) the property continues to meet the requirements for an exemption
under IC 6-1.1-10-16, IC 6-1.1-10-21, or IC 6-1.1-10-24.”
GRANTING AN EXEMPTION

PTABOA
 Have
statutory prerequisites for exemption been met?
 If
any have not been met, exemption cannot be
granted.

If denied:
 Option
to Appeal
CHANGE IN OWNERSHIP OR USE

If, after an assessment date, exempt property is
transferred or its use has changed:
 Determine whether property is still exempt.
 Through
2015:
 Example:
If a school receives an exemption on a parcel
under IC 6-1.1-10, sells the property after March 1, and
property no longer used for exempt purpose, the
exemption is terminated for that assessment date.
 Beginning
in 2016, exemption would remain in place for
the remainder of the year despite the change in
ownership or use.
CONSTRUCTION AGAINST
TAXPAYER

The exemption statute is to be strictly construed against
the taxpayer.

Taxpayer has the burden of establishing its right to the
tax exemption.

If the taxpayer meets its burden, then the burden shifts to
the assessor to rebut the taxpayer’s evidence.
NONPROFIT/NOT-FOR-PROFIT
ORGANIZATIONS

Nonprofit organizations are not automatically
exempt.
 Nonprofit status is a state law concept.
 Nonprofit status may make an organization
eligible for certain benefits, such as state sales,
property and income tax exemptions.
 To qualify as exempt from federal income tax, an
organization must meet requirements set forth in
the Internal Revenue Code
SPECIFIC
EXEMPTIONS
HOSPITALS

Ind. Code 16-21-9-3


“As used in this chapter, ‘nonprofit hospital’ means
a hospital that is organized as a nonprofit corporation or a
charitable trust under Indiana law or the laws of any other
state or country and that is:
 (1)
eligible for tax exempt bond financing; or
 (2)
exempt from state or local taxes.”
“Generally, “[h]ospitals maintained, not for pecuniary profit,
but to relieve the destitute and deserving, are classed as
charit[able].”

See Indianapolis Osteopathic Hosp., Inc.
National Trend on HOSPITALS

BUT, nonprofit hospitals NOT ALWAYS exempt from taxation

“If an exempt hospital owns other property, that other
property does not automatically receive a charitable
purposes exemption.”


See Indianapolis Osteopathic Hosp., Inc.
A New Jersey tax court decided in June 2015 that because
Morristown (N.J.) Medical Center operates, in many ways,
like a for-profit business, it should not be exempt from
property taxes
 There,
hospital was more like a for-profit entity because it
practiced overly aggressive debt collection from poor
patients.
National Trend on HOSPITALS
Cont’d

Carle Foundation v. Cunningham Township


An Illinois Appellate Court struck down as unconstitutional Section 15-86
of the Property Tax Code, which created a procedure for granting an
exemption to a hospital if the total value of the hospital’s charitable
services exceeded the hospital’s estimated property tax liability.
May 2016

A limited partnership filed a class action lawsuit naming Northshore
University Health System and all other hospitals in IL currently exempt
from property taxes as potential class members, along with the Cook
County Clerk and Treasurer.

The lawsuit seeks payment from each of the hospitals in the amount of
taxes they would have paid had the hospitals not received an
exemption.
“Wellness Centers”


National Trend
 More and more hospitals are creating “so-called
‘wellness centers’ to promote exercise and healthy life
styles.” See Indianapolis Osteopathic Hosp., Inc.
(citing Tennessee case law).
“We feel it would be a misuse of the tax exemption
granted to charitable hospitals if every revenuegenerating venture they embarked upon automatically
benefited from the exemption, so long as that venture
could be characterized as in some way promoting
health.”

See Indianapolis Osteopathic Hosp., Inc.
IND. CODE § 6-1.1-10-16

“This section does not exempt from property tax an office or a
practice of a physician or group of physicians that is owned by a
hospital licensed under IC 16-21-2 or other property that is not
substantially related to or supportive of the inpatient facility of the
hospital unless the office, practice, or other property:

provides or supports the provision of charity care (as defined in IC 16-182-52.5), including providing funds or other financial support for health
care services for individuals who are indigent (as defined in IC 16-18-252.5(b) and IC 16-18-2-52.5(c)); or

provides or supports the provision of community benefits (as defined
in IC 16-21-9-1), including research, education, or government
sponsored indigent health care (as defined in IC 16-21-9-2).”
INPATIENT FACILITIES

The inpatient facility is not the “entire hospital,"
but that part of a hospital where "admitted
patients are provided overnight
accommodations, meals and medical
treatment."
 Methodist
Hospitals Inc. v. Lake county PTABOA, 862
N.E. 2d 335, 339 (Ind. Tax Ct. 2007).

Webster's Dictionary defines “inpatient” as “a
patient in a hospital or infirmary who receives
lodging and food as well as treatment[.]”
PHYSICIAN OWNED OFFICES

Physician offices owned by hospitals are generally
not exempt unless the office is substantially related
to or supportive of the in-patient facility of the
hospital.
 The Court will determine whether the physician
offices are separate entities from the hospital or if
they operate as one entity.
 St.
Margaret Mercy Healthcare Ctrs., Inc. v. Lake
Cnty. Prop. Tax Assessment Bd. of Appeals, Pet. Nos.
45-034-00-2-8-00001 and 45-036-00-2-8-00003, p. 18, ¶ 51
(Ind. Bd. Tax Rev. 2008).
PHYSICIAN OWNED OFFICES
Must be reasonably necessary for the maintenance of, and
not just related to, the exempt purposes of the hospital.
 “The Court notes that although the PCAs provide services that
may support Methodist's overall continuum of care (i.e., by
providing medical services to individuals from ‘[a]ll over the
entire region’ and admitting PCA patients into Methodist's
hospitals), merely demonstrating that such services are
offered, without more, does not clarify how the PCAs are
‘substantially related to or supportive of’ Methodist's inpatient
facilities…In other words, this Court will not presume that a
substantial relationship or supportive network arises merely
because two entities are engaged in the same type of
business activity.”
 Methodist Hospitals, Inc. v. Lake County PTABOA, 862
N.E.2d335 (Ind. Tax Ct. 2007).

SUBSTANTIALLY RELATED TO OR
SUPPORTIVE OF

“[Substantially related to or supportive of" means that
the property is "associated, to a considerable degree, to
a hospital's inpatient facility or that the other property
provides considerable aid to, or promotes to a
considerable degree, the interests of a hospital's
inpatient facility."

See Methodist Hospitals Inc. v. Lake county PTABOA, 862
N.E. 2d 335, 339 (Ind. Tax Ct. 2007).
FACTORS CONSIDERED TO
DETERMINE WHETHER SUBTANTIALLY
RELATED TO OR SUPPORTIVE OF

Private physician practices admitting patients to
the hospital without more is not enough to earn
tax exempt status.
 See
St. Margaret Mercy Healthcare Ctrs., Inc.
FACTORS CONSIDERED

Operating as Unified Entities?

Whether the physician offices are separate entities from the
hospital or if they operate as one entity. Standing alone,
however, the fact that the physician office and the hospital
operate as a unified entity is not enough to qualify the physician
office for exemption.
 “Methodist
asserts that the PCA medical offices are entitled
to a charitable purposes exemption for three reasons: (1)
because it uses the PCAs to provide traditional medical
services, (2) because the PCAs provide medical services as a
part of Methodist's ‘overall continuum of care[,]’ and (3)
because the PCA physicians do not use the offices ‘for
personal gain.’ …[T]he Court is not persuaded that such
assertions satisfy the statutory criteria for a charitable
purposes exemption.”

See Methodist Hospitals Inc.
FACTORS CONSIDERED

The presence of hospital negotiated employment
contracts for physicians requiring that the physicians
refer their patients to the hospital for any necessary
hospital services would weigh in favor of finding
substantial relation or support of.

“The employed physicians’ compensation is not impacted
by a patient’s inability to pay and, in fact, doctors risk
termination if they fail to provide patient services without
regard to the patient’s ability to pay or payor classification.
As a result of this policy, the physician practices provide
more care to Medicaid patients than the national average
and its employed physicians did not see as many privatelyinsured patients as their peers.”

See St. Margaret Mercy Healthcare Ctrs., Inc.
FACTORS CONSIDERED

% of Inpatient Admissions and Corresponding Revenues
Generated
 The employed physicians' referrals accounting for a certain
percentage of all inpatient admissions at the hospital and
the revenues generated from all outpatient ancillary
services may amount to substantial support.
 “St. Margaret Mercy also submitted a Consolidated
Summary of Social Accountability Expenditures that
quantified the benefits to the poor and the benefits to
the community provided by St. Margaret Mercy. The
Summary showed that the cost for the total benefits for
the year 2000 was in excess of $26 million. Id. St.
Margaret Mercy calculated the cost of those benefits to
be 11.65% of its total expenses.”

See St. Margaret Mercy Healthcare Ctrs., Inc.
FACTORS CONSIDERED

Viability of the Physician Practice and Hospital

Necessary to hospital’s viability?
 “St.
Margaret Mercy established that the physician
practices generated significant referrals to its inpatient
facilities in 2000. Moreover, the physician practices
contributed substantial revenue that supported the
inpatient facilities. In fact, the evidence suggests that
without the patient referrals and financial contribution
of the physician’s practices, St. Margaret Mercy’s
inpatient facilities may not have remained financially
viable and may not have continued to exist.”
 See
St. Margaret Mercy Healthcare Ctrs., Inc.
FACTORS CONSIDERED

Entangling and co-mingling activities with for-profit
entities


Probably not substantially related to or supportive of
Paying executives unreasonably high salaries

Probably not substantially related to or supportive of

Suggests motive is profit rather than benevolence
NOT SUBSTANTIALLY RELATED TO OR
SUPPORTIVE OF
Charity Care?
 "the unreimbursed cost to a hospital of providing, funding,
or otherwise financially supporting health care services."
 I.C. 16-18-2-52.5.
 Community Benefits?


"the unreimbursed cost to a hospital of providing charity care,
government sponsored indigent health care, donations, education,
government sponsored program services, research, and subsidized
health services."
 I.C. 16-21-9-1.
CHARITY CARE AND COMMUNITY
BENEFITS

“Although the statute does not specify a minimum
amount of charity care and community benefit
necessary to qualify for exemption, there must be some
meaningful contribution such that the taxpayer must
demonstrate that it provides ‘a present benefit to the
general public . .. sufficient to justify the loss of tax
revenue.’"
 St.
Mary’s Med. Ctr. of Evansville, Inc. v. State Bd. of
Tax Comm'rs, 534 N.E.2d 277, 279 (Ind. Tax Ct. 1989)
(aff'd. 571 N.E. 2d (Ind. 1991)).
FACTORS CONSIDERED

Charity Care Policy/Mission Statement alone
 NOT

enough
True implementation of such policy
 Requiring
a form employment contract showing that
the hospital's employed physicians are required to see
any and all patients present without regard to their
financial ability to pay
 Possibly
enough
FACTORS CONSIDERED

Indigent Care and No-Cost Community Wellness
Programs
 “Here, the Petitioner has a policy that grants indigent
allowances or hardship adjustments to patients who
are incapable of paying their personal medical care
and unable to qualify for financial assistance through
federal and state government assistance programs.
Goshen Hospital has a sliding scale fee schedule
indexed to the federal poverty guidelines for the
indigent allowances or hardship adjustments…[and]
conducts no-cost community wellness programs.”
 Goshen
Hosp. Ass'n, Inc. v. LaGrange Cnty. Assessor, Pet. No.
44-014-10-2-8-00001, p. 11, ¶ 38 (Ind. Bd. Tax Rev. 2013).
FACTORS CONSIDERED

% of Benefits Compared to Hospital’s Total
Expenses/Debt
 Just Bad Debt?
Charity generally applies to patients with a
demonstrated inability to pay for necessary
services;
Bad debt generally refers to patients that
could pay without assistance, but are
unwilling to do so.
ADDITIONAL CONSIDERATIONS

Location

Medical office close to a hospital and owned by it:
 Does
not mean the office buildings are reasonably necessary
for the maintenance of the hospital's charitable purposes.
 “Petitioners
also suggest that the close proximity of the office
buildings to the hospital greatly enhances the level of care for
the hospital's patients. There is no doubt that such a location
is convenient for the dentists and doctors. However, in order
to reach the conclusion that the office buildings are
reasonably necessary for the maintenance of St. Mary's
charitable purposes the resulting benefit from the use of the
buildings must inure to the public.”

See St. Mary's, 534 N.E. 2d at 280.
NURSING HOMES

Charitable Purposes Exemption


To qualify for a charitable purposes exemption, a taxpayer
must show “relief of human want ... manifested by
obviously charitable acts different from the everyday
purposes and activities of man in general.”
Nursing home facility with 40 apartments, a central dining
room, laundry rooms, a beauty salon, and several common
areas.

NOT exempt

Tipton County Health Care Foundation, Inc. f/k/a Tipton County
Memorial Hospital Foundation v. Tipton County Assessor, 961
N.E.2d 1048 (Tax Ct. of Ind. 2012).
NURSING HOMES CONT’D

Foundation failed to establish that public benevolence was the
reason for its operation

Mission statement on website read more like an advertisement

“The mission of Miller's ... is to be an active presence in the
communities we serve. We will specialize in delivering the highest
quality of services to those in need. We will treat all individuals
with integrity, compassion, and respect. Our goals are to enjoy
work, grow in our professional and personal lives, and make a
positive difference for those we serve.” Id.

See Tipton County Health Care Foundation, Inc. f/k/a Tipton County
Memorial Hospital Foundation.
Newest Trend in Nursing Homes

Health & Hospital Corporation (HHC)

American Senior Communities

Marion County Hospital is partnering with nursing homes all over the
state with “Management Agreements” to run the homes, and then
they are claiming “Government Exempt” (I.C. 6-1.1-11-4) for the
personal property only in the facilities.
Exemption for Other Purposes

“In order to qualify for an exemption the taxpayer must
demonstrate that its property is owned for exempt
purposes, occupied for exempt purposes, and
predominately used for exempt purposes…[W]hen a
unity of ownership, occupancy, and use is lacking (as is
the case here), both entities must demonstrate that they
possess their own exempt purposes.”
 Hamilton
County Property Tax Assessment Bd. of
Appeals v. Oaken Bucket Partners, LLC, 938 N.E.2d
654, 657 (Ind. 2010).
APPLICATION OF CHARITABLE
PURPOSES EXEMPTION

The exemption only applies to the part of the
building that is “owned, occupied, and used for
charitable purposes."

A taxpayer must also show “that the charitable
purpose is the property's predominant use.”
 Indianapolis
Osteopathic Hosp., Inc. v. DLGF,
818 N.E.2d 1009 (Ind. Tax Ct. 2004) (emphasis
added).
CHARITABLE AND/OR RELIGIOUS
PURPOSE

More on Oaken Bucket

Oaken Bucket sought a “charitable and religious purposes
exemption on the portion of its building leased to
Heartland.”

Oaken Bucket attempted to demonstrate its entitlement to
an exemption by introducing evidence that its lessee,
Heartland, was a non-denominational church using that
portion of the building for a religious and charitable
purpose.

“[A]n owner of leased property must provide evidence
that it possesses an exempt purpose separate and distinct
from the exempt purpose of its lessee.”
CHARITABLE AND/OR RELIGIOUS
PURPOSE

Hamilton County Assessor v. SPD Realty, LLC, 9 N.E.3d
773, 778 (Ind. Tax Ct. 2014).
 Court concluded that the taxpayer owned the
property for a charitable purpose and was therefore
entitled to the exemption.
 “[T]he administrative record reveals that the same
individuals that created and own New Life created
and own SPD.” There, unlike in Oaken Bucket, SPD
was “formed for the sole purpose of acquiring and
renting the subject property to New Life in furtherance
of its charitable tissue bank operations.”
EDUCATIONAL PURPOSE

Purpose of the educational exemption concerning
property taxes is to encourage non-governmental
entities to provide educational services for the public
welfare

If a property owner's use of property does not serve the
public good, the property does not qualify for the
exemption.
EDUCATIONAL PURPOSE

Travelers’ Insurance Co. v. Kent, 50 N.E. 562 (1898).

“The mere use or occupancy for school or
educational purposes of the property of a private
owner, sustaining merely the relation of lessor to a
school or seminary, does not create an exemption in
his favor.”

Despite the acceptance of this position for more than
115 years, this issue is still disputed.
EARLY CHILDHOOD EDUCATION

Johnson County PTABOA v. KC Propco LLC, 28 N.E.3d 370 (Ind. Tax
Ct. 2015).

Taxpayer may meet its burden by showing “that it provides the public
with either the same educational training that would otherwise be
furnished by our tax-supported schools or that it provides educational
courses that are related to those found in tax-supported public schools
but not necessarily provided by them.”

While “some non-educational activities did in fact occur at the
Greenwood KinderCare, …those activities did not diminish the
property's overall educational use.”
LEASE

Impact of a Lease?
 It
is not enough to lease and primarily use the property
for a religious, charitable, educational, etc. purpose.
 The
property must be owned for such purpose.
 See
Oaken Bucket; and
 See
Travelers’ Insurance.
BELOW MARKET RENT

Charging below market rent to an exempt entity does not, without
more, establish an exempt purpose on the part of the property
owner.

“[A]ssuming the evidence uncontrovertibly showed that Oaken
Bucket charged Heartland below market rent, that fact alone
would have little bearing on the question of whether Oaken
Bucket possessed its ‘own exempt purposes.’ Stated somewhat
differently, where an entity charges below market rent to a
charitable or religious organization, this may demonstrate some
indicia of the entity's beneficent motives. But more is required to
show that the entity possesses its own exempt purposes.”
 See
Oaken Bucket
FRATERNAL PURPOSES EXEMPTION

Fraternal Order of Eagles v. Morgan County PTABOA, 5
N.E.3d 1195 (Ind. Tax Ct. 2014)
Exemption for Preservation of
Natural Characteristics

IC § 6-1.1-10-16(c)(3) exempts a tract of land from property tax if it
“is owned by a nonprofit entity established for the purpose of
retaining and preserving land and water for their natural
characteristics…does not exceed five hundred (500) acres; and is
not used by the nonprofit entity to make a profit.”

Marineland Gardens Community Ass’n, Inc. v. Kosciusko County
Assessor, 26 N.E.3d 1087 (Ind. Tax Ct. 2015) (Despite being used for
recreational activities such as walking, fishing, and boating, “Marineland
did not explain how its evidence indicates that it was established for the
purpose of retaining and preserving the land and water for its natural
characteristics.”)
DARK BOX
PROBLEM
What is a “Big Box?”

A high-volume retail store that occupies a large amount
of physical space and generally offers a wide variety of
products to consumers

What is a “Dark Box?”
A
vacant big box
The Problem in a Nutshell

Indiana assessing officials want to ensure that
big-box retailers pay their fair share of taxes.

But, big box retailers continue to use vacant,
abandoned stores as comparables.

Assessing officials do not believe these vacant
abandoned stores are valid comparables.
The Debate
Big Box Position

Big Box stores are becoming
obsolete because consumers are
shifting to online shopping, and
large chains are experimenting
with smaller store designs.
Assessor Position

Consumers still spend significantly
more per month in physical stores
than online. The Census Bureau
shows that online sales represent
just 7% of total retail sales
nationwide.

While big-box retailers are
experimenting with some smaller
store designs, these retailers
continue to build 100,000+ square
foot stores.
The Debate
Big Box Position

Sales of occupied big-box stores
usually involve sale-leaseback
transactions where investors care
more about the credit-worthy
tenant than real estate.
Assessor Position

Property rights adjustments can be
made for any inadvertently
captured leased-fee
interest. Moreover, sales of
occupied stores often represent
the only sale of first-generation
big-box stores.
The Debate
Big Box Position

Fee-simple value is best reflected
by sales of dark boxes because
those properties are not
encumbered by leases.
Assessor Position

A big-box retailer’s abandonment
of a store indicates that there is
probably no market support for
that use. A failed store often results
in a change of its highest and best
use. Competitors are often
restricted from purchasing or
leasing these properties because
of deed restrictions.
The Debate
Big Box Position

The highest and best use of a
successful operating store is no
different than the highest and best
use of a dark box.
Assessor Position

If one were appraising an
operating first-generation store,
the most comparable sales would
be other successful operating bigbox stores, which are typically
represented by sale-leaseback
transactions.
The Debate
Big Box Position

Considering the business success
of an operating store is
inappropriate; therefore, dark
boxes should be used as
comparables to avoid valuing the
business.
Assessor Position

We are all familiar with that certain
store that fails over and over
again, no matter who occupies
it. The continued failure casts
doubt on the viability of that use
at that location. On the other
hand, the continued use and
success of a store would tend to
indicate that the property is
operating at its highest and best
use.
Case Law and Status

Legislative Update

IBTR Decisions

Appeals
 Kohls
 CVS
 Meijer
QUESTIONS?
CONTACT INFORMATION

Mark GiaQuinta
 [email protected]

Sarah Schreiber


[email protected]
The DLGF neither takes responsibility for nor endorses the
content of this presentation.