Workshop RR Healthcare & Non-Profit Industries Unique Tax - - PDF document

28th Annual

Tuesday & Wednesday, January 29‐30, 2019

Hya Regency Columbus, Columbus, Ohio

Workshop RR

Healthcare & Non-Profit Industries … Unique Tax Issues

Wednesday, January 30, 2019 2:00 p.m. to 3:00 p.m.

Biographical Information Jeffrey L. Stansberry, CPA, MT - Tax Manager, OhioHealth 80 E. Broad St, Columbus, OH 43215 jeffrey.stansberry@ohiohealth.com (614) 544-4336 Fax (614) 544-4470 Jeff started his career in public accounting and was at GBQ Partners for over four years. He then transitioned into industry and was at BISYS/Citi for over six years. After being in public and industry for nearly two decades, he decided to shift his focus into the tax exempt sector. For over three years, Jeff has lead up the tax department at OhioHealth, central Ohio’s largest healthcare system. Jeff is responsible for leading OhioHealth’s annual federal, state, and local tax compliance process while providing oversight and communication to the entire system of over 20,000 employees. Jeff is a graduate of The Ohio State University with a BS in Business Administration (Honor Classes) and received a Master’s in Taxation from Capital University Law School. Christopher J. Swift, Partner, Baker Hostetler LLP 1900 East 9th Street, Suite 3200, Cleveland, OH 44114-3482 cswift@bakerlaw.com 216.861.7461 Chris Swift is a healthcare and tax lawyer who counsels the healthcare industry and other businesses by guiding them through governmental, tax and regulatory issues. He keeps non-profit organizations tax-exempt, assists all taxpayers in reducing state and local taxes and finds tax and regulatory incentives to grow companies. He currently serves both as a National Co-Leader of the firm’s Healthcare Industry Team and as Coordinator of the Cleveland office’s Tax, Personal Planning and Employee Benefits Group. He served as a member of the firm’s Policy Committee from 2004 through 2009. Chris has lectured on state and local taxes to several organizations, including the Cleveland Metropolitan Bar Association, the Columbus Bar Association and the Committee on State Taxation. In 1988, he was the Chair of the Cleveland Bar Association’s State and Local Tax Institute. In 1990-91, he served as Chair of the Cleveland Bar Association’s General Tax Committee. Chris has also served as Chair of the 2008 Cleveland Tax Institute and the CMBA’s 1998 Health Law Institute. Chris is a member of the American, Ohio and Cleveland Metropolitan Bar Associations, as well as the American Health Lawyers Association. Since 1997, Chris has been listed annually in the Best Lawyers in America. He was named by Best Lawyers as “2010 Cleveland Tax Lawyer of the Year” and “2011 Cleveland Health Care Lawyer of the Year.” Both honors are bestowed upon only one lawyer per specialty in each community. Chris has been named an “Ohio Super Lawyer” for the past ten years. Carol Lalonde, CPA, Tax Senior Manager, Plante Moran, PLLC 750 Trade Centre Way, Portage, MI 49002 Carol.Lalonde@plantemoran.com 269.567.4587 Fax: 248.233.8672 Carol Lalonda is a senior tax manager spending 100% of her time focused on the taxation of higher education institutions, healthcare organizations, and other tax-exempt organizations. As the firm’s higher education tax leader, she provides tax advice on all areas of exempt organization taxation, including all aspects of the Form 990 and 990T, as well as international and state & local tax reporting. Carol has successfully, and favorably, represented numerous clients under IRS examination. She is a frequent speaker at external training seminars at the local, regional and national levels and also has regularly conduct webinars and write articles on relevant tax issues for both higher education and healthcare institutions.

Biographical Information Jeffrey L. Stansberry, CPA, MT - Tax Manager, OhioHealth 80 E. Broad St, Columbus, OH 43215 jeffrey.stansberry@ohiohealth.com (614) 544-4336 Fax (614) 544-4470 Jeff started his career in public accounting and was at GBQ Partners for over four years. He then transitioned into industry and was at BISYS/Citi for over six years. After being in public and industry for nearly two decades, he decided to shift his focus into the tax exempt sector. For over three years, Jeff has lead up the tax department at OhioHealth, central Ohio’s largest healthcare system. Jeff is responsible for leading OhioHealth’s annual federal, state, and local tax compliance process while providing oversight and communication to the entire system of over 20,000 employees. Jeff is a graduate of The Ohio State University with a BS in Business Administration (Honor Classes) and received a Master’s in Taxation from Capital University Law School. Christopher J. Swift, Partner, Baker Hostetler LLP 1900 East 9th Street, Suite 3200, Cleveland, OH 44114-3482 cswift@bakerlaw.com 216.861.7461 Chris Swift is a healthcare and tax lawyer who counsels the healthcare industry and other businesses by guiding them through governmental, tax and regulatory issues. He keeps non-profit organizations tax-exempt, assists all taxpayers in reducing state and local taxes and finds tax and regulatory incentives to grow companies. He currently serves both as a National Co-Leader of the firm’s Healthcare Industry Team and as Coordinator of the Cleveland office’s Tax, Personal Planning and Employee Benefits Group. He served as a member of the firm’s Policy Committee from 2004 through 2009. Chris has lectured on state and local taxes to several organizations, including the Cleveland Metropolitan Bar Association, the Columbus Bar Association and the Committee on State Taxation. In 1988, he was the Chair of the Cleveland Bar Association’s State and Local Tax Institute. In 1990-91, he served as Chair of the Cleveland Bar Association’s General Tax Committee. Chris has also served as Chair of the 2008 Cleveland Tax Institute and the CMBA’s 1998 Health Law Institute. Chris is a member of the American, Ohio and Cleveland Metropolitan Bar Associations, as well as the American Health Lawyers Association. Since 1997, Chris has been listed annually in the Best Lawyers in America. He was named by Best Lawyers as “2010 Cleveland Tax Lawyer of the Year” and “2011 Cleveland Health Care Lawyer of the Year.” Both honors are bestowed upon only one lawyer per specialty in each community. Chris has been named an “Ohio Super Lawyer” for the past ten years. Carol Lalonde, CPA, Tax Senior Manager, Plante Moran, PLLC 750 Trade Centre Way, Portage, MI 49002 Carol.Lalonde@plantemoran.com 269.567.4587 Fax: 248.233.8672 Carol Lalonda is a senior tax manager spending 100% of her time focused on the taxation of higher education institutions, healthcare organizations, and other tax-exempt organizations. As the firm’s higher education tax leader, she provides tax advice on all areas of exempt organization taxation, including all aspects of the Form 990 and 990T, as well as international and state & local tax reporting. Carol has successfully, and favorably, represented numerous clients under IRS examination. She is a frequent speaker at external training seminars at the local, regional and national levels and also has regularly conduct webinars and write articles on relevant tax issues for both higher education and healthcare institutions.

Healthcare Industry & Nonprofit Entities Unique Tax Issues

Jeffrey Stansberry - OhioHealth Christopher Swift - Baker Hostetler Carol Lalonde - Plante Moran

Agenda

• Federal Tax Exemption
• Choice of Entity
• Ohio Definitions
• TCJA Impacts
• Ohio Hospital Considerations
• Recent Case Law Updates

2

Impact of External Change

• Federal and State Health Care Policy

‒ EMTALA and other Safety Net Acts applicable to for-profit providers ‒ Affordable Care Act ‒ Expansion of Medicaid ‒ Schedule H of Form 990

• Correlation of Value of Tax Benefits to Level of

Charitable Care

‒ Percentage of Charitable Care is decreasing

• How Much is Enough?

3

Basis for Federal Income Tax Exemption

• Section 510(c)(3) requires that the corporation

be “organized and operated exclusively for religious, charitable, scientific . . . Or educational purposes” and that “no part of the net earnings of which inures to the benefit

• f any private shareholder or individual.”

4

Choice of Entity

• Chapter 1702 of the Ohio Revised Code (Ohio

Nonprofit Corporation Law)

• Some nonprofits are unincorporated associations,

trusts, limited liability companies, partnerships,

• r disregarded entities
• Section 501 of the Internal Revenue Code

‒ While many nonprofits are tax-exempt for federal income tax purposes under Section 501(c)(3), there are many subsections like Section 501(c)(4) ‒ Some nonprofits are taxable ‒ Some for-profit corporations are tax-exempt

5

Choice of Entity

• Different Rules for Different Taxes

‒ Federal Income Tax ‒ FUTA/SUTA

• Reimbursing Employer Status

‒ Ohio Franchise Tax ‒ Ohio Sales & Use Tax ‒ Ohio Real Property Tax ‒ Ohio Commercial Activity Tax

6

Ohio Nonprofit Corporation Definition

• Ohio Rev. Code 1702.01(C) defines “Nonprofit

Corporation” as a “corporation that is formed

• therwise than for the pecuniary gain or profit
• f, and whose net earnings or any part of

them is not distributable to, its members . . . .”

7

Ohio Public Benefit Corporation Definition

• “Public benefit corporation” is defined as a

“corporation that is recognized as exempt from federal income taxation under section 501(c)(3) . . . . Or is organized for a public or charitable purpose . . . .” Ohio Rev. Code (“ORC”) 1702.01(P).

• Sometimes the ORC piggybacks on Section

501(c)(3), but not always.

8

Healthcare Exemptions-Status

‒ Disregarded entities of a Section 501(c)(3) entity (i.e. single member LLCs) may qualify for the status exemption of its tax-exempt member. ‒ A single member LLC that operates with a nonprofit purpose shall be treated as part of the same legal entity as its member, and all assets and liabilities of that single member shall be considered to be that of the member. Filings or applications for exemptions or

• ther tax purposes may be made either by the single

member LLC or its member. ‒ Verify that LLC is organized as a nonprofit.

9

Tax Reform – Excise Tax on Compensation > $1M (Form 4720)

• Five highest compensated employees for the tax year, or any prior

year

• Deferred comp considered once it vests
• Does not include remuneration paid to licensed medical

professionals for performance of medical services

• The excise tax is paid by the organization
• Tax years beginning 1/1/18 or later (FY19 comp for FY filers)
• Calendar filers - initial due date 5/15/19 with payment with a 6

month extension

• Fiscal year end filers - initial due date 5 ½ months after fiscal year

end with payment with a 6 month extension

• Guidance available through draft 4720 and instructions
• Further regulatory guidance expected
• No estimated tax payments

10

Tax Reform – Segmentation of UBI by Trade or Business Activity (Form 990-T)

• Organizations with one or more trade or business

(T/B) subject to UBIT must calculate the tax separately for each T/B

• Tax years beginning 1/1/18 and later
• Calendar filers - initial due date 5/15/19 with

payment (with a 6 month extension)

• Fiscal year end filers - initial due date 5 ½ months

after fiscal year end with payment (with a 6 month extension)

• Notice 2018-67 provides interim guidance with

further guidance expected.

11

Tax Reform – UBIT taxation of fringe benefits

• Section 512 (c)(7) - Unrelated business taxable income
• f a tax-exempt organization shall be increased by

amounts which are paid or incurred by such

• rganization for Qualified Transportation Fringe

Benefits (“QTFs”) or for any parking facility used in connection with qualified parking for which a deduction is not allowable under this chapter by reason of Section 274.

• Section 274 - Disallows deduction for the expenses of

any qualified transportation fringe benefit provided to taxpayers’ employees (i.e. Qualified Parking and Mass Transit Pass)

12

Tax Reform – UBIT taxation of fringe benefits (cont.)

• Measurement is based on “cost,” not value –

see Section 274

• Converts an expense into income
• Applies for amounts paid or incurred after

12/31/17, regardless of the organization’s tax year

• As it relates to segmentation of UBI by trade or

business activity, not a true “unrelated business activity” per Notice 2018-67

13

Tax Reform – UBIT taxation of fringe benefits (cont.)

• Losses

‒ Notice 2018-99 provides that exactly one current year unrelated loss activity can offset Sec. 512(a)(7) UBIT from qualified transportation benefits.

• Second activity triggers Sec. 512(a)(6) basketing
• provisions. No offset available [for 512(a)(7) UBIT]

‒ NOL’s incurred prior to tax reform may be used to fully offset any 2018 UBIT including 512(a)(7) UBTI from qualified transportation benefits.

14

Tax Reform – UBIT taxation of fringe benefits (cont.)

• Notice 2018-99 released on December 10, 2018

‒ Addressed amount of qualified parking expenses treated as an increase to UBIT ‒ Key points:

• Third-party payments
• Taxpayer owned or leased parking facility

– Reserved employee parking spaces (subject to change until 3/31/2019) – Primary use of remaining parking spaces – Percentage of parking spaces reserved for nonemployee use – Reasonable allocation of remaining parking spaces

• Types of parking expenses
• Notice 2018-100 released on December 10, 2018

‒ Transition relief for 2018 estimated tax payments

15

Tax Reform – UBIT taxation of fringe benefits (cont.)

• Form 990-T

16

*******

Tax Reform – UBIT taxation of fringe benefits (examples)

• Nonprofit, located in downtown Chicago, pays

for the parking passes of employees. Parking passes are valued at $250 a month. The nonprofit is paying for 15 employees.

‒ Cost to employer is $250 a month ‒ Value to employee is $250 a month ‒ Over 12 months, the nonprofit will report $45,000

• f unrelated business income from parking

17

Tax Reform – UBIT taxation of fringe benefits (examples)

• Taxpayer owns or leases parking structure

‒ Compute Total Parking Expenses ‒ Repair & Maintenance and landscaping ‒ Utilities, insurance, property taxes & interest ‒ Snow and ice removal, trash removal cleaning ‒ No depreciation ‒ Use 4 step analysis to allocate none, some or all

• f the Total Parking Expense to UBIT

18

Tax Reform – UBIT taxation of fringe benefits (examples)

• Four Step Analysis:
• Step 1 – Calculate Percentage of Reserved

Employee Spot = all UBIT

‒ Reserved parking policy may be changed until 3/31/19 ‒ Example 40 spaces, 4 reserved. $10,000 of Parking Expenses ‒ $1,000 of UBIT = [4/40 = 10%; 10% * 10,000]

19

Tax Reform – UBIT taxation of fringe benefits (examples)

• Four Step Analysis:

‒ Step 2 – Determine the primary use of the remaining spots ‒ If more than 50% of the usage is the general public (nonemployee) then none of the remaining spots are subject to UBIT ‒ Example - 40 spaces, 4 reserved; 40 total spaces used [including the 4 reserved] 10 other space are typically used by staff and the rest are made available to the general public. 26 of 36 non-reserved spots represent nonemployee use spots. Therefore, none of the remaining spots are subject to UBIT

20

Tax Reform – UBIT taxation of fringe benefits (examples)

• Four Step Analysis:
• Step 3 – Calculate the allowance for reserved nonemployee

spots

• Only if the primary use is for employee parking

‒ Example - $10,000 of parking expenses; 40 spaces, none reserved for employees; 30 total spaces used are typically used by staff and 5 are reserved for visitors/clients ‒ Step 1 – No reserved employee spaces ‒ Step 2 – only 10 of 40 space are nonemployee; no exclusion ‒ Step 3 – 5 of 40 spaces = 12.5%; 12.5 * 10,000 – 1,250 attributable to nonemployee reserved. Maximum of $10,000 – $1,250 = $8,750 can be attributable to employee parking

21

Tax Reform – UBIT taxation of fringe benefits (examples)

• Four Step Analysis:
• Step 4 – Determine Remaining use and allocable expenses

‒ Example - $10,000 of parking expenses; 40 spaces, none reserved for employees; 30 total spaces used are typically used by staff and 5 are reserved for visitors/clients ‒ Step 1 – No reserved employee spaces ‒ Step 2 – only 10 of 40 space are nonemployee; no exclusion ‒ Step 3 – 5 of 40 spaces = 12.5%; 12.5 * 10,000 – 1,250 attributable to nonemployee reserved. Maximum of $10,000 – $1,250 = $8,750 can be attributable to employee parking ‒ Step 4 – 30/40 = 75% of the 10,000 of parking expenses or $7,500 represents the remaining use. Since $7,500 is less than $8,750, the added UBIT is $7,500

22

Basis for Ohio Commercial Activity Tax Exemption

‒ Defined by rule to be very broad. ‒ Two criteria

• Organized other than for pecuniary gain or profit
• Operates consistent with its organization

‒ Includes entities organized under ORC 1702, 1707, 1711, 1713, 1715, 1716, 1717, 1719, 1721, 1724, 1725, 1727, or 1733 ‒ Includes organizations formed for funding political campaigns ‒ Charitable lead trust is a nonprofit during the lifetime of the

• grantor. The trust loses its nonprofit status when the grantor

passes away ‒ If all owners are nonprofit organizations, distributions to these

• wners does not deprive the nonprofit status

23

Basis for Ohio Sales Tax Exemption

• Purchases by organizations exempt from

taxation under Section 501(c)(3) are generally exempt from Ohio sales and use tax. Ohio rev. Code 5739.02(B)(9) and 5741.02(C)(2).

‒ Some states like Florida and Kentucky require tax- exempt hospitals to include current federal determination letter in application.

24

Healthcare Exemptions-Status

• Purchases by Section 501(c)(3) Entities

‒ Sales of tangible personal property or services to

• rganizations exempt from taxation under section

501(c)(3) of the Internal Revenue code of 1986, and to any

• ther nonprofit organizations operated exclusively for

charitable purposes in this state, no part of the net income

• f which inures to the benefit of any private shareholder
• r individual, and no substantial part of the activities of

which consists of carrying on propaganda or otherwise attempting to influence legislation; sales to offices administering one or more homes for the aged or one or more hospital facilities exempt under section 140.08 of the Revised Code; and sales to organizations described in division (D) of section 5709.12 of the Revised Code.

25

Healthcare Exemptions-Status

• Definition of “Charitable Purposes” for Ohio

Sales & Use Tax

‒ “Charitable purposes” includes the relief of poverty; the improvement of health through the alleviation of illness, disease, or injury; the

• peration of an organization exclusively for the

provision of professional, laundry, printing, and purchasing services to hospitals or charitable institutions and the operation of a home for the aged, as defined in section 5701.13 of the Revised Code.

26

Healthcare Exemptions-Status

• Certain sales by Section 501(c)(3) Entities

‒ Sales of services or tangible personal property, other than motor vehicles, mobile homes, and manufactured homes, by organizations exempt from taxation under section 501(c)(3) of the Internal Revenue Code of 1986, or nonprofit organizations operated exclusively for charitable purposes, provided that the number of days on which such tangible personal property or services, other than items never subject to the tax, are sold does not exceed six in any calendar year. If the number of days on which such sales are made exceeds six in any calendar year, the

• rganizations shall be considered to be engaged in

business and all subsequent sales by it shall be subject to the tax.

27

Healthcare Exemptions-Status

• Purchases of building and construction

materials and services sold to construction contractors for incorporation into a building under a construction contract with a section 501(c)(3) entity when the building is used exclusively for exempt purposes.

28

Rowitz v. Testa BTA affirmed the denial of the taxpayer’s sales and use tax refund application relating to feminine hygiene products. Rowitz v. Testa, Oh. BTA No. 2017-250 (Feb. 20, 2018)

• Sales of feminine hygiene products are not

exempt under existing exemptions for “drugs,” “durable medical equipment,” or “prosthetic devices”

29

Rowitz v. Testa

• BTA did not have jurisdiction to consider if

the tax:

• Violated Equal Protection Clauses of U.S. and

Ohio Constitution law, or

• Was preempted by the FDA’s classification of

these products as medical devices

30

Handi Medical Supply v. Commissioner

• f Revenue
• The court found that 125 of 264 wound-care items qualified for

exemption as prosthetics issued under a medical prescription in Handi Medical Supply v. Commissioner of Revenue, Minnesota Tax Court, (Oct. 31, 2018).

‒ Expert testimony was sufficient to show how “dressings” fell within the prosthetic function.

• Dressings were acting to replace vital functions of the skin

‒ Items held taxable may have been eligible for exemption, but testimony did not address how these items functioned. ‒ Court decision provides a listing of all 264 items with an indication of taxable versus exempt (125 exempt, 139 taxable) and indicates that application by category was sufficient (i.e. dressing, tape, gauze, bandage, packing strips) ‒ No authority to grant exemption based on disparate treatment even if disparate treatment could be established.

31

Ready Tech-Go, LLC

• The Administrative Hearings Office found that the medical

staffing agency did not qualify for the agency exclusion from the New Mexico gross receipts tax in the Protest Decision and Order No. 18-38

‒ New Mexico imposes a tax on all sales absent an exemption ‒ Employee staffing company was denied an “Agency” exemption ‒ Implications

• “Agency” exclusion exists for other taxes (i.e. CAT). Consider recent

Willoughby Hills decision by the Ohio Supreme Court

• Contracts are of great importance
• How transactions are carried out are also of great importance
• Consider who has contractual authority and with whom
• What are the rights, and responsibilities of each person in the contract

32

South Dakota v. Wayfair

• Remote seller considerations

‒ Registration and reporting requirements ‒ Collection requirements ‒ Certificate maintenance ‒ Nexus monitoring including sales volume

• Service provider considerations

‒ Wayfair has implications beyond the traditional remote seller profile ‒ Where is the benefit of the service received? ‒ Taxability considerations

• Use Tax Considerations

‒ No direct impact for companies with only in-state sales but use tax could be affected ‒ Use tax policy and procedure review ‒ Review of out of state vendors ‒ Exemption Certificate policy

33

Historical Background on Property Tax Exemption

• Prior to New Deal, local government or

charitable organizations were responsible for alleviation of poverty and providing health care for the poor.

‒ Local governments owned and operated hospitals, requiring public expenditures

• Exemptions trace back to English Statute of

Charitable Uses of 1601.

34

Basis for Ohio Real Estate Tax Exemption

• “Real and tangible personal property

belonging to institutions that is used exclusively for charitable purposes shall be exempt from taxation . . . .” Ohio Rev. Code 5709.12(B).

• Like most states, Ohio requires both charitable
• wnership and charitable use for ad valorem

exemption.

35

Implications for Ohio Hospitals

• Real property tax exemption in Ohio for hospitals is generally governed by two sections

[Revised Code §5709.12(B) and §5709.121] employing the general law of charity for

• rganizations that use property for charitable purposes.
• Applying these laws specifically to hospitals and other healthcare organizations, the

Ohio Supreme Court has consistently found through various decisions that the property

• f charitable hospitals is exempt, even if the hospital charges for its services:

‒ “This Court has embraced an expansive view of charity that involves the provision of public benefit without regard to the ability to pay.” [Planned Parenthood Assoc. v. Tax Comm’r, 5 Ohio St.2d 117 (1966)] ‒ “The provision of medical or ancillary healthcare services qualifies as charitable if those services are provided on a nonprofit basis to those in need, without regard to race, creed, or ability to pay. An organization promoting community health will be acting charitably if it provides services without regard to race, color, creed or ability to pay. It is the use of the property rather than the fact that revenues are collected and received from property which is controlling.” [Church of God in N. Ohio v. Levin, 124 Ohio St.3d 36 (2009)] ‒ “The generation of profit by the property ‘does not remove it from the statutory category of exempt property,’ because ‘the evidence shows that the parking lot is an essential and integral part of the hospital’s function and not property used mainly for income purposes.’” [Girl Scouts-Great Trail Council v. Levin, 113 Ohio St.3d 24 (2007), citing Bowers v. Akron City Hosp., 16 Ohio St.2d 94 (1968)]

36

Implications for Ohio Hospitals

• The Ohio Department of Taxation has not been using the Provena case to attack

exemption of Chapter 140-bond financed properties under Ohio Revised Code §140.08(A).

• Therefore, the most certain way to avoid problems with Provena for OhioHealth is

to use the exemption for hospital facilities financed with Chapter 140 bonds whenever possible.

• In that regard, Ohio Revised Code §140.08(A) exempts hospital facilities from all

taxes, including real property taxes if: ‒ (i) the facilities are "hospital facilities” (a very broadly defined term), ‒ (ii) the facilities are financed in whole or in part with "obligations" issued by a "public hospital agency," and ‒ (iii) the facilities are actually used as hospital facilities.

37

Ohio Hospital Facility Exemption

• O.R.C. 140.08 provides that “hospital facilities” that are “purchased, acquired,

constructed, or owned by a public hospital agency, or financed in whole or in part by obligations issued by a public hospital agency, and used, or to be used when completed, as hospital facilities” … “shall be exempt from all taxation.”

‒ O.R.C. 140.01(E): 'Hospital facilities' means buildings, structures and other improvements, additions thereto and extensions thereof, furnishings, equipment, and real estate and interests in real estate, used or to be used for or in connection with one or more hospitals, emergency, intensive, intermediate, extended, long-term, or self-care facilities, diagnostic and treatment and out-patient facilities, facilities related to programs for home health services, clinics, laboratories, public health centers, research facilities, and rehabilitation facilities, for or pertaining to diagnosis, treatment, care, or rehabilitation of sick, ill, injured, infirm, impaired, disabled, or handicapped persons, or the prevention, detection, and control of disease, and also includes education, training, and food service facilities for health professions personnel, housing facilities for such personnel and their families, and parking and service facilities in connection with any of the foregoing; and includes any one, part of, or any combination of the foregoing; and further includes site improvements, utilities, machinery, facilities, furnishings, and any separate or connected buildings, structures, improvements, sites, utilities, facilities, or equipment to be used in, or in connection with the operation or maintenance of, or supplementing or otherwise related to the services or facilities to be provided by, any one or more of such hospital facilities”

38

Property Tax-Exemption DCD

Ohio Supreme Court reversed BTA for tax year 2007 finding that the dialysis centers were exempt under R.C. 5709.12/.121

• Nondiscrimination, rather than quantum of

charitable care, is the criteria for exemption

• In the era of insurance and governmental

health-care benefits, care may be paid for by third-party payors without destroying charitable status

39

Property Tax-Exemption DCD

Proof of specific level of unreimbursed care is unnecessary.

• Court reaffirmed prior holdings in Dialysis

Clinic, Bethesda Healthcare, and Rural Health Collaborative

• Essentially, a threshold amount of

unreimbursed care is not required to be shown

• In DCD, the facilities are open to all

referred patients in need of the services that they provide

40

Property Tax-Exemption DCD

Leased Physician Offices should be split-listed as taxable.

• Portion of the property leased to physicians

to conduct a private practice does not qualify for exemption

• Remanded to BTA to determine the status of

the leases as of the tax-lien date of January 1, 2007

• Were physicians in private practice or

employed by a tax-exempt affiliate of Miami Valley Hospital?

41

Hopewell v. Testa The BTA affirmed the Tax Commissioner’s denial of a charitable use exemption in Hopewell v. Testa, Oh. BTA Nos. 2016-878 to 880 (December 27, 2017).

• Hopewell operates a therapeutic community with a focus
• n adults with mental illness
• The Tax Commissioner found the four parcels were

primarily used for farming, noting the participation in the CAUV program

• No charity care is provided
• Use of proceeds from maple syrup harvesting to offset

costs of therapeutic program was insufficient. Use of the property, not the use of the proceeds, must be charitable.

42

Dialysis Centers of Dayton, LLC v. Testa

• Dialysis Centers of Dayton (“DCD”) owned

and operated four dialysis centers

• On August 1, 2006, Miami Valley Hospital

became the sole member

• At the time, DCD became a “disregarded

entity” for federal income tax purposes

• Prior to that time, physicians were part
• wners
• Consequently, the dialysis centers were taxable

for 2006 because the tax lien date was January 1, 2006

43 43

Step by Step Academy v. Testa The BTA reversed in part the Tax Commissioner’s denial of a charitable use exemption in Step By Step Academy v. Testa, Oh. BTA No. 2016-2125 (Feb. 20, 2018 and Feb. 23, 2018).

• Prior to purchasing the property in 2015, Step By Step

provided educational and behavioral health services to children with disabilities under a lease with OSU

• Following the purchase, Step By Step applied for real

estate tax exemption

• OSU’s prior exemption did not continue

44

Step by Step Academy v. Testa

• Tax Commissioner held that Step By Step failed to demonstrate

that it provided services without the expectation of being compensated

• Relying on Dialysis Centers of Dayton, the BTA reversed

stating that it is not important to show a particular level of charitable care

• Buildings leased to OSU for medical outpatient facilities were

taxable because of a lack of details regarding OSU’s use of the property

• Other buildings were scheduled for demolition
• An owner must be actively working toward an exempt use

and plans must be of substance and not a mere dream under the prospective use doctrine

45

Mission of Mary Cooperative v. Testa The BTA reversed the Tax Commissioner and found that the one- acre parcel was entitled to a charitable use exemption in Mission

• f Mary Cooperative v. Testa, Oh. BTA No. 2016-611 (Feb. 20,

2018).

• Taxpayer used the property for “urban agriculture” to

provide relief for the poor, distressed, or underprivileged people who lack economic and/or geographic access to fresh produce and to provide experiential education about simple living, urban agriculture, healthy eating, native land restoration and land stewardship

• Finding that the property was used for educational

purposes, the BTA noted that the sale of crops using only

• ne-twelfth of the property was only incidental to the

charitable purpose.

46

Huntington Hills Civic Assn., Inc. v. Testa The BTA in Huntington Hills, Oh. BTA No. 2017-1215 (July 23, 2018) reversed the Tax Commissioner and found that the homeowner’s association’s park (inclusive of basketball, tennis and sand volleyball courts, playground equipment, parking lots, open fields and walking trails) were exempt because the facilities were

• pen to both residents of the subdivision and the

public for use without charge. Property was exempt under R.C. 5709.12 as used “exclusively for charitable purposes.”

47

Chagrin Realty, Inc. v. Testa, Slip Opinion No. 2018- Ohio-4751 (Ohio S. Ct. November 30, 2018)

– Realty sought a charitable use property tax exemption under R.C. 5709.12 or 5709.121 – Realty was tax-exempt for federal income tax purposes as a title-holding company under IRC § 501(c)(2) – Realty’s sole purpose is to own and lease the Subject Property – Realty leased the Subject Property to a single nonprofit tenant Community Dialysis Center (“CDC”) – CDC operated a dialysis center and is the sole member of Foundation, which is tax-exempt for federal income tax purposes under IRC § 501(c)(3) – Foundation is the sole member of Realty

48

Corporate Structure

Property Tax-Exemption Chagrin Realty

Community Dialysis Center (CDC) 501(c)(3) Foundation 501(c)(3) Realty 501(c)(3) Management Company For-Profit Real Estate Lease Sole Member Management Contract 100% Shareholder Sole Member

49

• BTA rejected Realty’s contention that its

501(c)(2) federal tax status and its reliance on vicarious exemption theories qualified it as a “charitable institution”

• Realty’s use was only leasing
• The fact that Realty disburses the rental

income, less expenses, to the Foundation does not constitute a use that is “exclusively for charitable purposes”

• Focus is on the owner’s core activity

Property Tax-Exemption Chagrin Realty

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Realty’s status as a 501(c)(2) organization does not qualify it as a charitable institution under R.C. 5709.121

• Reliance on federal statutes inappropriately

conflates Ohio’s property tax exemption with inapplicable federal standards for tax-exempt charities

• Court noted that federal law standards are more

lenient than the well-developed Ohio law of charitable use

• Congress does not define the scope of charitable

use under Ohio law

Property Tax-Exemption Chagrin Realty

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Second Baptist Church of Holland v. Testa, Oh. BTA 2017-1442, 2018-107 (Sept 5., 2018) –Church sought exemption for 10,406 acres and 5,460 square foot building leased to:

• Health clinic operated by Neighborhood Health

Association of Toledo, Inc., and

• Community outreach center operated by Agape

Second Chance Corp., a church-related entity – Tax Commissioner denied public worship exemption under R.C. 5709.07

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Second Baptist Church of Holland v. Testa, Oh. BTA 2017-1442, 2018-107 (Sept 5., 2018) –BTA denied exemption under R.C. 5709.12(B); use for leasing is not exclusively for charitable purposes, even if owner does not significantly profit from rental payments under the lease –BTA affirmed Tax Commissioner’s denial of exemption under R.C. 5709.121 because property owner was a religious institution, and did not prove status as a charitable (or educational) institution

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Arbors East RE, LLC v. Franklin Cty. Bd. of Revision, 153 Ohio St. 3d 41, 2018-Ohio-1611 (Apr. 26, 2018) –BOR found 2011 sale price, minus FF&E, as value for tax year 2011, with carryover to 2012 and 2013 –Conveyance fee statement allocates entire purchase price to real estate –Taxpayer asserts a portion of the price allocable to business value of nursing home

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Arbors East RE, LLC v. Franklin Cty. Bd. Of Revision, 153 Ohio St. 3d 41, 2018-Ohio-1611 (Apr. 26, 2018)

– Court held BTA erred in rejecting allocation to FF&E without finding there was no tangible property – BTA further erred in failing to obtain and review entire record from, and relied upon by, the BOR – Real estate not intrinsic to congregate care; business value should be separated in such cases – Allocation not prohibited solely for lack of contemporaneous documentation, though such evidence would be more indicative of intent at time of sale – Remanded to complete record; determine if personal property included; and if so, separate business value based on appraisal evidence

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Property Tax: Allocation of Sale Price

Compare Cincinnati School Dist. Bd. of Edn. v. Hamilton Cty. Bd. of Revision, Slip Opinion No. 2017-Ohio-7650, (the Queen City case) –Supreme Court refused to permit allocation to goodwill because the basis for allocating some of purchase price to goodwill was not supported

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Property Tax: Allocation of Sale Price

Several points should be made about these cases:

– Purchasers should consider including allocations of the purchase price to non-taxable property in the sales documents – More attention needs to be paid to the conveyance fee statements and the recitation in those statements of the cost

• f real estate being sold

– While the taxpayer in Queen City failed in its attempt to allocate value to goodwill, like the taxpayer in Arbors East RE before the BOR, it was successful in providing a basis for excluding tangible personal property conveyed with the real estate in that the taxpayer in the proceeding below

• btained a reduction for the personal property

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Aftermath of Morristown

• In 2015, the Tax Court of New Jersey found that Morristown

Memorial Hospital (hospital) failed to meet “profit” test and qualify for property tax exemption

‒ “If it is true that all non-profit hospitals operate like the Hospital in this case, as was the testimony here, then for purposes of the property tax exemption, modern non-profit hospitals are essentially legal fictions” ‒ “Clearly, the operation and function of modern non-profit hospitals do not meet the current criteria for property tax exemption…”

• Chilton Medical Center settlement (also part of AHS)

‒ Exemption retained in exchange for a 10-year PILOT to the township ‒ School district and county get nothing ‒ Avoids lengthy and costly court battle ‒ Provision if law changes

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Eagles v. Hendricks County

• The court held that the Indiana Board properly denied

property tax exemption to the local chapter of the Eagles under both the fraternal benefit association exemption and the charitable purposes exemption in Whitelick Indiana Aerie Fraternal Order of Eagles, Inc.

• v. Hendricks County Property Tax Assessment Board of

Appeals, Tax Court of Indiana, (Sept. 1, 2017)

‒ Being a local chapter of a fraternal society was a primary reason for being precluded from the exemption ‒ Chartable exemption requires exclusive or predominate use for chartable purposes and must be shown by evidence

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Questions?

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Contact information

Jeffrey L. Stansberry, CPA, MT Tax Manager, Corporate Finance Ohio Health Jeffrey.Stansberry@ohiohealth.com Chris Swift Partner Baker Hostetler Cswift@bakerlaw.com Carol Lalonde Tax Associate Plante Moran Carol.Lalonde@plantemoran.com

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