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Court Holds Dialysis Clinic Does Not Qualify for 'Charitable Use' Property Tax Exemption

Nonprofit Owner Does Not Meet Ohio Criteria for 'Charitable Institution'

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2009-2310.  Dialysis Clinic, Inc. v. Levin, Slip Opinion No. 2010-Ohio-5071.
Board of Tax Appeals, No. 2006-V-2389.  Decision of the Board of Tax Appeals affirmed.
Brown, C.J., and O'Connor, Lanzinger, and Cupp, JJ., concur.
Pfeifer, Lundberg Stratton, and O'Donnell, JJ., dissent.
Opinion: http://www.supremecourt.ohio.gov/rod/docs/pdf/0/2010/2010-Ohio-5071.pdf

Video clip View oral argument video of this case.

(Oct. 26, 2010) The Supreme Court of Ohio today affirmed a ruling by the State Board of Tax Appeals (BTA) that denied a “charitable use” property tax exemption sought by a Butler County kidney dialysis facility.  

In a 4-3 decision authored by Justice Judith Ann Lanzinger, the Court held that the clinic owner’s federal tax status as a nonprofit corporation, acceptance of Medicare and Medicaid reimbursements, and “bad debt” write-offs of the unpaid bills of some patients did not qualify the property owner as a “charitable institution” eligible for exemption under Ohio law. The court also found that the clinic did not qualify for tax exemption under an alternative statutory provision that allows a specific facility to be exempted if it is used “exclusively for charitable purposes.”

Dialysis Clinic Inc. (DCI) is a Tennessee-based company that operates 195 outpatient kidney dialysis clinics in 26 states, including four facilities in the Greater Cincinnati area and two others in Portsmouth and East Liverpool. DCI is exempt from federal income tax as a “nonprofit corporation” under Section 501(c)(3) of the Internal Revenue Code. 

In December 2003, DCI applied to the state tax commissioner for a “charitable use” property tax exemption for the 2004 tax year for one of its Cincinnati-area clinics, located in West Chester. The commissioner denied the requested exemption.

DCI appealed the commissioner’s determination. On review, the BTA affirmed that the West Chester clinic did not qualify for property tax exemption under either of the statutes analyzed by the commissioner. Specifically, the BTA determined that 1) DCI did not qualify as a “charitable institution” as that term is defined in Ohio R.C. 5709.121; and 2) because the West Chester clinic provided no free or charitable service, the clinic did not meet the exemption criteria set forth in R.C. 5709.12(B) for “property used exclusively for a charitable purpose.” The clinic’s owners exercised their right to appeal the BTA’s ruling to the Supreme Court.

In today’s majority decision upholding the ruling of the BTA, Justice Lanzinger wrote: “Because DCI’s core activity involves the provision of a healthcare service, DCI would qualify as a ‘charitable institution’ under R.C. 5709.121 only if it provided service ‘on a nonprofit basis to those in need, without regard to race, creed, or ability to pay.’”

The majority concluded that the BTA acted reasonably and lawfully in determining that DCI was not a charitable institution.  Justice Lanzinger noted three principal factors upon which the BTA relied in finding that DCI did not qualify as a charitable institution: 

“First, the BTA found that DCI charged all patients at the West Chester site – and most patients at its other facilities – for the services it provides. The BTA echoed the commissioner’s position that the provision of free, unreimbursed care constitutes an essential part of a tax-exemption claim for a healthcare-services provider. But to the extent that the BTA thought that DCI had to provide some threshold level of unreimbursed care, we disagree … ”

“Second, the BTA found that DCI could not base its claim on the donation of surplus revenue to kidney research, because such a claim would constitute the type of ‘vicarious exemption’ that we rejected in OCLC (v. Kinney, 1984). …  The BTA is correct. DCI may not establish its own core activity as charitable by pointing to a benefit that it confers upon another entity whose activity is charitable. ‘It is only the use of property in charitable pursuits that qualifies for tax exemption, not the utilization of receipts or proceeds that does so.’ … ”

“Third, the BTA emphasized that DCI’s indigency policy explicitly stated that it was ‘not a charity or gift to patients [and that] DCI retains all rights to refuse to admit and treat a patient who has no ability to pay.’ This statement contradicts the assertion that DCI is committed to provide services on a nondiscriminatory basis, which is an essential prerequisite for a healthcare provider to qualify property for exemption.”

Justice Lanzinger noted that, even if a nonprofit organization does not qualify as a charitable institution under R.C. 5709.121, a specific facility owned by that organization may still qualify for property tax exemption under R.C. 5709.12(B) if the facility is used “exclusively for charitable purposes.” In affirming the BTA’s ruling that the DCI facility in West Chester did not meet this alternative standard for exemption, she wrote: “Under the circumstances of this case, … the determination of DCI’s exemption claim under R.C. 5709.12(B) does not significantly differ from the evaluation of the claim under R.C. 5709.121. Nothing about the operation of the clinic in West Chester differs from the core activities of DCI that were reasonably and lawfully found not to qualify DCI as a charitable institution. The West Chester facility itself does not qualify for exemption.”

While otherwise affirming the BTA’s rationale for denying DCI’s application, the majority found that the tax commissioner and appeals board erred in holding that in order to qualify for charitable use property tax exemption, a nonprofit health care provider must show that it has provided a minimum percentage of care that is wholly unreimbursed either through private insurance or government payments provided under Medicare and/or Medicaid. Justice Lanzinger wrote:  “The denial of DCI’s exemption claim rested in part on the fact that no unreimbursed care was quantified at the West Chester facility and that the amount of such care at all at DCI’s Ohio clinics was small. In affirming the commissioner’s determination, the BTA stated that if the 1.27 percent bad-debt write-off that related to Medicare patients at its clinics were viewed as charity care, the percentage would be ‘insufficient to meet the charitable service standards required for exemption.’” 

“DCI contends that contrary to the pronouncements of the commissioner and the BTA, case law does not require a threshold amount of unreimbursed care. We agree. Because of the existence of Medicare and Medicaid, which reimburse providers for the provision of dialysis services to the indigent, few patients actually receive free care that is wholly unreimbursed. A threshold amount of unreimbursed care is not required, and the commissioner’s contrary assertion is unfounded.”

Justice Lanzinger’s opinion was joined by Chief Justice Eric Brown and Justices Maureen O’Connor and Robert R. Cupp.

Justice Terrence O’Donnell entered a separate opinion, joined by Justices Paul E. Pfeifer and Evelyn Lundberg Stratton, in which he concurred with the majority holding that there is no minimum percentage of unreimbursed care that a medical care provider must provide in order to qualify for a

property tax exemption, but dissented from the majority’s affirmance of the BTA ruling denying a charitable use exemption for DCI’s West Chester facility.

Justice O’Donnell wrote: “I disagree with the majority’s determination that the Dialysis Clinic, Inc. (“DCI”), is not entitled to the exemption on the ground that it does not provide service in a non-discriminatory manner because it reserves the right to refuse treatment to indigent patients in its effort to comply with Medicare regulations. The reservation of the right to refuse treatment is not proof that DCI denies services to indigents. To the contrary, the evidence shows that DCI provides services to all patients, irrespective of their ability to pay. Because providing service to indigent patients is a charitable act, in my view, DCI qualifies as a charitable institution and is tax exempt. Moreover, because DCI provides services at the West Chester clinic, the clinic is used exclusively for charitable purposes and the property is exempt from tax. Accordingly, I would assert that the determination by the Board of Tax Appeals (‘BTA’) denying DCI a charitable-use tax exemption was unreasonable and unlawful.”

Sean P. Callan, 513.977.8298, for Dialysis Clinic Inc.

Ryan P. O’Rourke, 614.466.5967, for State Tax Commissioner.