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Exemption of property for nonprofit corporation.

Chagrin Realty is an Ohio nonprofit corporation exempt from federal income tax under Section 501(c)(2), which exempts corporations "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." Chagrin Realty owns a property that it leases to a nonprofit tenant who operates a hemodialysis facility on the property. The tenant is also the sole member of a Foundation enjoying an exemption under Section 501(c)(3), which exempts corporations "organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes." The Foundation, in turn, is the sole member of Chagrin Realty.

The nonprofit tenant contracts with a for profit management company that employs all of the facility's personnel. The management company is wholly owned by the nonprofit tenant. The tenant pays Chagrin Realty rent for the property, which Chagrin Realty disburses, less expanses, to the Foundation.

Chagrin Realty filed an application for real property tax exemption relating to the property. The Tax Commissioner determined that Chagrin Realty did not satisfy the requirements for an exemption under Ohio statutes, and denied the exemption. Chagrin Realty appealed to the Board of Tax Appeals (BTA).

The BTA rejected Chagrin Realty's contention that its federal 501(c)(2) tax status qualified it as a charitable institution, and also rejected Chagrin Realty's reliance on a vicarious-exemption theory. Because Chagrin Realty's use of the property consisted only of leasing it, the BTA determined that the requirements of the exemption were not met. Chagrin Realty appealed to the Ohio Supreme Court.

The central issue before the court was whether Chagrin Realty qualifies for the charitable-use property tax exemption by virtue of the fact that, as a 501(c)(2) organization, it holds and leases property and distributes the proceeds of that lease to another exempt organization. Under Ohio law, all real property "belonging to institutions that is used exclusively for charitable purposes shall be exempt from taxation." Any institution, whether charitable or not, may qualify for the exemption. The question is whether the use of the property is exclusively charitable, not whether the organization is a charity.

In evaluating whether Chagrin Realty qualified, the court examined the owner's "core activity." An owner cannot establish its status as a charitable institution by relying on the activities of a related institution or a lessee. Chagrin Realty admitted that its sole use of the property was for leasing but argued that the court should put "substance over form and focus on its relationship with its parent (the Foundation) and the support that it provides to the Foundation."

The court noted that although all of the entities involved in the property were closely related, Chagrin Realty is itself a separate legal entity. It stated that the exemption must be evaluated based on the owner's own activities and use of the property, and it is only the use of property in charitable pursuits that qualifies for property tax exemption, not the use of receipts of proceeds that does so. Thus, because leasing is not itself a charitable purpose, the court concluded that the property did not qualify for the exemption, and it upheld the BTA's ruling denying the exemption.

Chagrin Realty Inc. v. Testa

Supreme Court of Ohio

November 30, 2018

114 N.E.3d 204

Benjamin A. Blair, JD, is a partner in the Indianapolis office of the international law firm of Faegre Baker Daniels LLP, where his practice focuses on state and local tax litigation for clients across the United States. A frequent speaker and author on taxation and valuation issues, Blair holds a juris doctor from the Indiana University Maurer School of Law, where he also serves as an adjunct professor. Contact: benjamin.blair@FaegreBD.com
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Title Annotation:Recent Court Decisions on Real Estate and Valuation
Author:Blair, Benjamin A.
Publication:Appraisal Journal
Geographic Code:1U3OH
Date:Mar 22, 2019
Words:633
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