Chagrin Realty, Inc. v. Testa (Slip Opinion)

[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as
Chagrin Realty, Inc. v. Testa, Slip Opinion No. 2018-Ohio-4751.]
NOTICE
This slip opinion is subject to formal revision before it is published in an
advance sheet of the Ohio Official Reports. Readers are requested to
promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65
South Front Street, Columbus, Ohio 43215, of any typographical or other
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the opinion is published.
SLIP OPINION NO. 2018-OHIO-4751
CHAGRIN REALTY, INC., APPELLANT AND CROSS-APPELLEE, v. TESTA, TAX
COMMR., APPELLEE AND CROSS-APPELLANT.
[Until this opinion appears in the Ohio Official Reports advance sheets, it
may be cited as Chagrin Realty, Inc. v. Testa, Slip Opinion No.
2018-Ohio-4751.]
Taxation—Charitable-use real-property exemption—Property owner does not use
property “exclusively for charitable purposes” under R.C. 5709.12(B) and
does not qualify as a charitable institution under R.C. 5709.121 based on
its own activities and sole use of property, which is to lease it—Board of
Tax Appeals’ decision affirming tax commissioner’s denial of exemption
affirmed.
(No. 2017-0469—Submitted September 25, 2018—Decided November 30, 2018.)
APPEAL and CROSS-APPEAL from the Board of Tax Appeals, No. 2011-2523.
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Per Curiam.
{¶ 1} In this case, appellant and cross-appellee, property owner Chagrin
Realty, Inc., challenges a decision of the Board of Tax Appeals (“BTA”) affirming
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appellee and cross-appellant tax commissioner’s denial of a charitable-use
property-tax exemption for the subject property. The BTA found that Chagrin
Realty did not qualify for that exemption under R.C. 5709.12 or 5709.121, because
Chagrin Realty’s sole purpose is to own and lease the subject property. We affirm
the decision of the BTA.
I. FACTS AND PROCEDURAL HISTORY
{¶ 2} Chagrin Realty is an Ohio nonprofit corporation exempt from federal
income tax under section 501(c)(2) of the Internal Revenue Code, 26 U.S.C.
501(c)(2) (granting exemption to “[c]orporations organized for the exclusive
purpose of holding title to property, collecting income therefrom, and turning over
the entire amount thereof, less expenses, to an organization which itself is exempt
under this section”). Chagrin Realty leases the property at issue to a single
nonprofit tenant, the Community Dialysis Center (“CDC”). The CDC operates a
hemodialysis facility on the property and is the sole member of the Leonard C.
Rosenberg Foundation (“Foundation”). The Foundation enjoys section 501(c)(3)
status and is the sole member of Chagrin Realty. See 26 U.S.C. 501(c)(3) (granting
federal-income-tax exemption to “[c]orporations * * * organized and operated
exclusively for religious, charitable, scientific, testing for public safety, literary, or
educational purposes”).
{¶ 3} The Centers for Dialysis Care, Inc., is a for-profit management
company that contracts with the CDC and employs all personnel who work for the
CDC. The CDC wholly owns this for-profit management company.
{¶ 4} Chagrin Realty disburses the rental income from the property lease,
less expenses, to the Foundation; the monthly base rental payment is approximately
$24,959.52, which equals $299,514.24 annually.
{¶ 5} Chagrin Realty filed an application for real-property-tax exemption
relating to the subject property for tax years 2003, 2004, and 2005. The tax
commissioner determined that Chagrin Realty did not satisfy the requirements for
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exemption under R.C. 5709.12 or 5709.121 and denied the application. Chagrin
Realty appealed to the BTA.
{¶ 6} The BTA rejected Chagrin Realty’s contention that its 501(c)(2)
federal tax status and its reliance on vicarious-exemption theories qualified it as a
“charitable” institution. Because Chagrin Realty’s use of the property consisted of
only leasing it, the BTA determined that Chagrin Realty did not satisfy the
requirements of R.C. 5709.12 or 5709.121 and affirmed the tax commissioner’s
final determination denying the exemption.
{¶ 7} The BTA issued its decision in April 2014. Nearly three years later,
in March 2017, Chagrin Realty filed a motion asking the BTA to reissue its April
2014 decision, alleging that its counsel had recently discovered that the BTA had
sent its decision to Chagrin Realty at an incorrect address. The BTA granted the
motion.
{¶ 8} Chagrin Realty appealed to this court from the reissued decision. The
tax commissioner cross-appealed, challenging the BTA’s authority to reissue its
decision. On July 24, 2017, we ordered Chagrin Realty to show cause why the
appeal should not be dismissed on those grounds. See 150 Ohio St. 3d 1402, 2017-
Ohio-6912, 78 N.E.3d 904. On November 1, 2017, we determined that Chagrin
Realty had shown cause why the appeal should not be dismissed. 151 Ohio St. 3d
1423, 2017-Ohio-8371, 84 N.E.3d 1061. Thus, we have already resolved the
jurisdictional issue raised in the tax commissioner’s cross-appeal.
II. ANALYSIS
{¶ 9} The central issue before us is whether Chagrin Realty qualifies for the
charitable-use property-tax exemption under R.C. 5709.12(B) and 5709.121(A)
because it is a 501(c)(2) organization that holds and leases property and distributes
the lease proceeds to a separate corporation that itself is exempt from federal
taxation.
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{¶ 10} On appeal, we must determine whether the BTA’s decision is both
“reasonable and lawful.” R.C. 5717.04. We defer to the BTA’s factual findings
“if they are supported by reliable and probative evidence, and we afford deference
to the BTA’s determination of the credibility of witnesses and its weighing of
evidence subject only to an abuse-of-discretion review on appeal.” HealthSouth
Corp. v. Testa, 132 Ohio St. 3d 55, 2012-Ohio-1871, 969 N.E.2d 232, ¶ 10; see also
Rural Health Collaborative of S. Ohio, Inc. v. Testa, 145 Ohio St. 3d 430, 2016-
Ohio-508, 50 N.E.3d 486, ¶ 24, citing Dialysis Clinic, Inc. v. Levin, 127 Ohio St. 3d
215, 2010-Ohio-5071, 938 N.E.2d 329, ¶ 31-35 (affirming BTA’s determination of
property owner’s charitable status after concluding that that determination was
“reasonable and lawful”). But we “will not hesitate to reverse a BTA decision that
is based on an incorrect legal conclusion.” Gahanna-Jefferson Local School Dist.
Bd. of Edn. v. Zaino, 93 Ohio St. 3d 231, 232, 754 N.E.2d 789 (2001).
A. The scope of the charitable-use exemption under R.C. 5709.12(B) and
5709.121(A)
{¶ 11} R.C. 5709.12(B) provides that “[r]eal and tangible personal property
belonging to institutions that is used exclusively for charitable purposes shall be
exempt from taxation.” Under R.C. 5709.12(B), any institution, whether charitable
or not, “may qualify for a tax exemption if it is making exclusive charitable use of
its property.” Cincinnati Community Kollel v. Testa, 135 Ohio St. 3d 219, 2013-
Ohio-396, 985 N.E.2d 1236, ¶ 23.
{¶ 12} R.C. 5709.121(A) expands the meaning of R.C. 5709.12(B)’s phrase
“used exclusively for charitable purposes” to include situations in which property
ownership and property use do not coincide. ShadoArt Prods., Inc. v. Testa, 146
Ohio St. 3d 263, 2016-Ohio-511, 55 N.E.3d 1065, ¶ 36. R.C. 5709.121(A) provides
that “[r]eal property and tangible personal property belonging to a charitable or
educational institution * * * shall be considered as used exclusively for charitable
or public purposes * * * if it meets” one of the requirements specified by that
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statute. Thus, although R.C. 5709.121(A) itself does not create any exemption,
ShadoArt Prods. at ¶ 41, it links certain property uses to R.C. 5709.12(B)’s
exclusive-charitable-use exemption, id. at ¶ 36.
{¶ 13} “Special treatment under R.C. 5709.121 depends on the owner’s
qualifying as a ‘charitable or educational’ institution.” Dialysis Clinic, 127 Ohio
St.3d 215, 2010-Ohio-5071, 938 N.E.2d 329, at ¶ 22. To determine whether a
property owner qualifies as a charitable institution, we must examine the owner’s “
‘core activity.’ ” Rural Health, 145 Ohio St. 3d 430, 2016-Ohio-508, 50 N.E.3d
486, at ¶ 23, quoting Dialysis Clinic at ¶ 30. And the activity we review must relate
to the property owner’s actions; an owner cannot establish its status as a charitable
institution by relying on the activities of a lessee or another related institution.
Northeast Ohio Psych. Inst. v. Levin, 121 Ohio St. 3d 292, 2009-Ohio-583, 903
N.E.2d 1188, ¶ 11; see also First Baptist Church of Milford, Inc. v. Wilkins, 110
Ohio St. 3d 496, 2006-Ohio-4966, 854 N.E.2d 494, ¶ 15.
{¶ 14} Because Chagrin Realty admits that its sole use of the property is
leasing it and leasing has not been found to constitute a use that is “exclusively for
charitable purposes,” the property does not qualify for exemption under R.C.
5709.12(B). See Northeast Ohio Psych. Inst. at ¶ 11, 14-15. Thus, Chagrin Realty
must qualify for the charitable-use exemption, if at all, under R.C. 5709.121(A).
See Northeast Ohio Psych. Inst. at ¶ 11, 14-15; First Baptist Church of Milford at
¶ 15-16; Community Health Professionals, Inc. v. Levin, 113 Ohio St. 3d 432, 2007-
Ohio-2336, 866 N.E.2d 478, ¶ 17-18.
B. The BTA reasonably and lawfully found that Chagrin Realty is not a
charitable institution
{¶ 15} As its sole proposition of law, Chagrin Realty argues that the BTA
erred in finding that it is not a charitable institution under R.C. 5709.12 and
5709.121. Chagrin Realty emphasizes that it was organized for the sole purpose of
holding title to property and collecting rental income for the benefit of the
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Foundation, without a view toward profit. Chagrin Realty urges us to put substance
over form and focus on its relationship with its parent (the Foundation) and the
support that it provides to the Foundation.
1. We must examine Chagrin Realty’s “core activities”
{¶ 16} “The determination whether a property owner qualifies as a
charitable institution under R.C. 5709.121 requires examination of the ‘core
activity’ of the institution and determining whether that activity qualifies as
charitable for property-tax purposes.” Rural Health, 145 Ohio St. 3d 430, 2016-
Ohio-508, 50 N.E.3d 486, at ¶ 23, quoting Dialysis Clinic, 127 Ohio St. 3d 215,
2010-Ohio-5071, 938 N.E.2d 329, at ¶ 30. Chagrin Realty argues that its activities
should be viewed in conjunction with the activities of the Foundation, because
Chagrin Realty was organized for the sole purpose of holding title to property and
collecting rental income for the benefit of the Foundation.
{¶ 17} Under the caselaw we discussed above, Chagrin Realty cannot
establish its charitable status by relying on the activities of related entities. See also
OCLC Online Computer Library Ctr., Inc. v. Kinney, 11 Ohio St. 3d 198, 201, 464
N.E.2d 572 (1984). The BTA acknowledged the close relationships among Chagrin
Realty, the CDC, and the Foundation but found that Chagrin Realty is itself a
separate legal entity and that Chagrin Realty may not rely on vicarious exemption
to establish its charitable status. See Agley v. Tracy, 87 Ohio St. 3d 265, 268, 716
N.E.2d 951 (1999) (“A corporation is an entity separate and apart from the
individuals who compose it; it is a legal fiction for the purpose of doing business
[emphasis sic]”); Northeast Ohio Psych. Inst., 121 Ohio St. 3d 292, 2009-Ohio-583,
903 N.E.2d 1188, at ¶ 14. The BTA acted both reasonably and lawfully in
determining that Chagrin Realty did not qualify for the charitable-use exemption
“based on its own activities and use of the property,” BTA No. 2011-2523, 2014
WL 2708168, *2 (Apr. 29, 2014).
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{¶ 18} Chagrin Realty also argues that its income-producing lease, the
proceeds of which inure to the benefit of the Foundation, supports its claimed
charitable status. But this fact does not establish Chagrin Realty’s status as a
charitable institution because “ ‘[i]t is only the use of property in charitable pursuits
that qualifies for tax exemption, not the utilization of receipts or proceeds that does
so’ ” (emphasis added), Dialysis Clinic at ¶ 33, quoting Hubbard Press v. Tracy,
67 Ohio St. 3d 564, 566, 621 N.E.2d 396 (1993); see also Northeast Ohio Psych.
Inst. at ¶ 16.
{¶ 19} In this regard, Chagrin Realty’s reliance on Akron Golf Charities,
Inc. v. Limbach, 34 Ohio St. 3d 11, 516 N.E.2d 222 (1987), is misplaced. Akron
Golf Charities involved a claim of sales-and-use-tax exemption under former R.C.
5739.02(B)(12) and did not involve a claim of real-property-tax exemption as in
the instant appeal. Further, the sole purpose of Akron Golf Charities was to raise
funds for local charitable organizations by staging golf tournaments. By contrast,
Chagrin Realty engages in the ongoing business activity of leasing real property,
an activity that generates substantial revenue and has not been found in other cases
to be charitable in nature. See Northeast Ohio Psych. Inst. at ¶ 14, 16-17; Dialysis
Clinic, 127 Ohio St. 3d 215, 2010-Ohio-5071, 938 N.E.2d 329, at ¶ 33.
{¶ 20} Chagrin Realty also relies on Rural Health, 145 Ohio St. 3d 430,
2016-Ohio-508, 50 N.E.3d 486, as support for its claimed status as a charitable
institution. However, that case is materially distinguishable.
{¶ 21} In Rural Health, the property owner was engaged in a range of
charitable activities, such as obtaining grants for tobacco cessation and pregnancy
care and education, in addition to the ownership and leasing of a dialysis clinic. Id.
at ¶ 25, 28. In contrast, the record here contains no indication that Chagrin Realty
engaged in other activities; rather, Chagrin Realty admits that its “only purpose is
to own property, collect income from the property, and distribute that income to the
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Foundation.” Therefore, Chagrin Realty’s reliance on Rural Health is
unpersuasive.
2. Chagrin Realty’s status as a 501(c)(2) organization does not qualify it as a
charitable institution under R.C. 5709.121
{¶ 22} Chagrin Realty also contends that it is a charitable institution based
on limitations imposed on it as a 501(c)(2) organization. Relying on our precedents,
the BTA reasonably and lawfully rejected this argument. Our precedents predicate
entitlement to the charitable-use exemption on providing services “on a nonprofit
basis to those in need, without regard to race, creed, or ability to pay.” (Emphasis
added.) Church of God in N. Ohio, Inc. v. Levin, 124 Ohio St. 3d 36, 2009-Ohio-
5939, 918 N.E.2d 981, ¶ 19, citing Vick v. Cleveland Mem. Med. Found., 2 Ohio
St.2d 30, 31, 206 N.E.2d 2 (1965), paragraph two of the syllabus. Federal tax laws,
in contrast, provide for a charitable-use exemption on a less restrictive basis.
Dialysis Clinic, 127 Ohio St. 3d 215, 2010-Ohio-5071, 938 N.E.2d 329, at ¶ 26,
quoting M. Hall & J. Colombo, The Charitable Status of Nonprofit Hospitals:
Toward a Donative Theory of Tax Exemption, 66 Wash.L.Rev. 307, 320-321
(1991), quoting Rev.Rul. 69-545, 1969-2 C.B. 117 (the Internal Revenue Service
“ ‘abandoned the charity care requirement’ ” and “ ‘adopted a “per se” rule’ ” that
“ ‘an entity engaged in the “promotion of health” for the general benefit of the
community is pursuing a charitable purpose, even though a portion of the
community, such as indigents, are [sic] excluded from participation’ ” [emphasis
added in Dialysis Clinic]).
{¶ 23} Chagrin Realty’s reliance on its 501(c)(2) federal status in support
of its claimed charitable status is unavailing because it conflates Ohio’s property-
tax exemption with inapplicable federal standards for tax-exempt charities. Indeed,
we have specifically rejected “a reading of R.C. 5709.121 that essentially
substitutes [the] more lenient federal-law standards for the well-developed Ohio
law of charitable use.” Id. at ¶ 26.
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{¶ 24} Moreover, we are not persuaded by Chagrin Realty’s references to
out-of-state decisions analyzing other states’ tax-exemption statutes and allowing
exemption under those statutes based on an entity’s federal-tax-exemption status
and that entity’s relationship to its parent corporation. As we have stated, “ ‘tying
charitable use so tightly to Congress’s policy goals is wrong because Congress does
not define the scope of charitable use under Ohio law.’ ” Id. at ¶ 25, quoting NBC-
USA Hous., Inc.-Five v. Levin, 125 Ohio St. 3d 394, 2010-Ohio-1553, 928 N.E.2d
715, ¶ 20.
III. CONCLUSION
{¶ 25} Chagrin Realty’s expansive construction of the charitable-use
exemption is inconsistent with our precedents interpreting R.C. 5709.121(A).
Because the BTA’s factual findings are supported by the record in this case, they
merit our deference. See HealthSouth Corp., 132 Ohio St. 3d 55, 2012-Ohio-1871,
969 N.E.2d 232, at ¶ 10. Accordingly, we reject Chagrin Realty’s sole proposition
of law and affirm the decision of the BTA.
Decision affirmed.
O’CONNOR, C.J., and FRENCH, FISCHER, and DEGENARO, JJ., concur.
O’DONNELL, KENNEDY, and DEWINE, JJ., concur in judgment only.
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Brouse McDowell, L.P.A., Terry Vincent, and Anastasia J. Wade, for
appellant and cross-appellee.
Michael DeWine, Attorney General, and Sophia Hussain and Barton
Hubbard, Assistant Attorneys General, for appellee and cross-appellant.
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