Dialysis Clinic, Inc. v. Levin

• Decision Date: 26 October 2010
• Docket Number: No. 2009-2310.,2009-2310.
• Citation: 2010 -Ohio- 5071,938 N.E.2d 329
• Parties: DIALYSIS CLINIC, INC., Appellant, v. LEVIN, Tax Commr., Appellee.
• Court: Ohio Supreme Court

938 N.E.2d 329

2010 -Ohio- 5071

DIALYSIS CLINIC, INC., Appellant,

v.LEVIN, Tax Commr., Appellee.

No. 2009-2310.

Supreme Court of Ohio.

Submitted Aug. 10, 2010.

Decided Oct. 26, 2010.

Dinsmore & Shohl, L.L.P., Sean Callan, Seth Schwartz, and Sarah Herron, Cincinnati, for appellant.

Richard Cordray, Attorney General, and Ryan P. O'Rourke, Lawrence D. Pratt, and Alan P. Schwepe, Assistant Attorneys General, for appellee.

Jones Day, Chad A. Readler, and Eric E. Murphy, Columbus, urging reversal for amicus curiae Ohio Hospital Association.

Brindza, McIntyre & Seed, L.L.P., David H. Seed, and Daniel McIntyre, urging affirmance for amici curiae Ohio School Boards Association, Ohio Association of School Business Officials, Buckeye Association of School Administrators, Ohio Job and Family Services Directors Association, County Commissioners Association of Ohio, Ohio Association of County Behavioral Health Authorities, Ohio Municipal League, Ohio Fire Chiefs Association, Ohio Parks and Recreation Association, Ohio Township Association, and Ohio Library Council.

LANZINGER, J.

*216 {¶ 1} This is an appeal from a decision of the Board of Tax Appeals ("BTA") in a case involving an application for a tax exemption for real property. Appellant, Dialysis Clinic, Inc. ("DCI"), provides dialysis services for patients who suffer from end-stage renal disease ("ESRD"). DCI sought to obtain a charitable-use exemption for its West Chester facility in Butler County, but the Tax Commissioner deniedthe application. On appeal, the BTA affirmed the denial of the exemption, finding that DCI had not shown that it qualified as a charitable institution for purposes of R.C. 5709.121 or that the use of the West Chester facility's real property was exclusively charitable, pursuant to R.C. 5709.12(B).

{¶ 2} Based on our review of the case law and the record of this case, and concluding that the BTA's decision is reasonable and lawful, we affirm.

I. Facts

{¶ 3} DCI was organized as a nonprofit corporation in Tennessee in 1971. DCI's charter specifically states that DCI's purpose is to operate dialysis clinics and to receive and apply funds to purposes recognized under Section 501(c)(3) of the Internal Revenue Code; as amended, the charter explicitly prohibits operating for "pecuniary gain or profit." ¹

{¶ 4} On December 22, 2003, DCI filed an application for a property-tax exemption for tax year 2004 for its West Chester facility, a 9,846-square-foot building located at 7650 University Drive in Butler County, at which DCI provides dialysis services to ESRD patients. In the application, DCI stated that fees for services "are billed to Medicare, Medicaid or insurance companies and patients with ability to pay. Patients unable to pay for services are not turned away." The application did not identify the statutory sections under which exemption was sought, but the commissioner reviewed the application as a claim for charitable-use exemption under R.C. 5709.12(B) and 5709.121.

{¶ 5} DCI is certified by the IRS as a Section 501(c)(3) tax-exempt entity. DCI's federal tax filings showed an excess of revenues over expenses of $6,306,492 in 2003 and $32,167,517 in 2004. As of October 2006, DCI operated 195 outpatient dialysis clinics in 26 states and devoted a good deal of its net income to promoting kidney research. In addition to the West Chester clinic, *217 DCI also has Ohio clinics in the Walnut Hills, Western Hills, and Mt. Healthy areas in Cincinnati, in Portsmouth, and in East Liverpool. Although some DCI facilities generate net income (as does the company as a whole), the West Chester facility was not one of them: until the August 2008 BTA hearing, the West Chester facility had suffered an average net loss of $250,000 per year.

{¶ 6} Medicare covers the cost of dialysis for persons with ESRD without regard to income. According to testimony at the BTA hearing, Medicare initially pays 80 percent of the cost of services, with 20 percent remaining the patient's responsibility. Patients who qualify for Medicare but who cannot pay the copayment may also qualify for Medicaid, which would then pay the copayment. Low-income patients who do not qualify for Medicare may qualify for Medicaid benefits. DCI accepts both Medicare and Medicaid patients. Medicare regulations prohibit a clinic from providing services at a lower fee to non-Medicare patients than to Medicare patients. As a result, DCI's clinics must seek payment from all patients and otherwise follow Medicare and Medicaid requirements.

{¶ 7} DCI stated that 62 percent of its patients at the West Chester facility are Medicare patients, and nine percent are covered by Medicaid. For many Medicare and Medicaid patients, if the patient is indigent, DCI writes off the portion that the patient is obligated to pay. DCI stated that it did provide "charity care" forpersons who are ineligible for or are waiting to qualify for Medicare or Medicaid, but it did not quantify such aid.

{¶ 8} DCI's administrator for the Cincinnati area testified before the BTA that 65 to 75 percent of DCI patients in that area are Medicare patients. At the West Chester facility, 60 to 65 percent on any given day are Medicare patients, and 10 percent are Medicaid-only patients. Approximately 15 percent of DCI's patients in the area are privately insured. Medicare is DCI's primary revenue source.

{¶ 9} DCI applied half its excess revenue to support kidney research and half to subsidize its own services—which included covering unpaid costs of providing care, opening new clinics, and operating a children's summer camp free of charge to children who suffer from ESRD or who have received kidney transplants. DCI's donations to research at the University of Cincinnati from 2004 to the 2008 hearing exceeded $1.7 million.

{¶ 10} DCI developed a policy to comply with Medicare regulations regarding care to indigent patients. Medicare prohibits providers from charging favorable rates to non-Medicare patients (so as to prohibit a sliding scale of fees). But Medicare will reimburse a provider for unpaid deductibles or coinsurance under certain circumstances. Patients in financial need are asked to fill out the Financial Analysis Form ("FAF") within ten days of admission to treatment. Even private-pay patients may submit the form, which allows DCI to ascertain whether to pursue collection of an unpaid bill or write off amounts as uncollectible *218 pursuant to Medicare guidelines. At some Cincinnati-area facilities, DCI had patients who had no outside payment source (or who had failed to properly apply for government benefits), but there had never been any such patients at the West Chester facility.

{¶ 11} DCI receives its patients through hospital referrals. A social worker assists patients to assure that all sources of payment are tapped, but if a patient is referred "with no means to pay," DCI "do[es] not turn them away." In response to the question "Do you provide service without regard to a patient's ability to pay at your facilities?" the answer was "That's true." DCI's indigency policy, however, expressly states that the "indigence policy is not a charity or gift to patients. DCI retains all rights to refuse to admit and treat a patient who has no ability to pay." (Emphasis added.)

{¶ 12} In his final determination, the Tax Commissioner denied the exemption, stating that neither DCI's acceptance of reimbursement from Medicare and Medicaid nor its write-off of bad debt constituted a charitable act.

{¶ 13} On appeal, the BTA determined that DCI's West Chester clinic did not qualify for exemption under R.C. 5709.12(B) because, "[a]s DCI concedes, it provides no free or charitable service at the subject property." Dialysis Clinic, Inc. v. Wilkins (Nov. 24, 2009), BTA No. 2006-V-2389, 2009 WL 4100065, *6. The BTA also concluded that DCI could not qualify under R.C. 5709.121 because DCI was not a "charitable institution." Id. The BTA relied heavily on the indigency policy's statement that no gift of service is intended and that DCI reserves the right to refuse treatment based on inability to pay. Id. at *7. The BTA could discern no distinction between DCI and for-profit dialysis clinics apart from the DCI's use of its excess revenue. Id. As for DCI's contributions to kidney research, the BTA held that DCI could not claim charitable status vicariously based on the charitable nature of those to whom it contributed. Id.

{¶ 14} Finally, the BTA agreed with the commissioner that the record showed no unreimbursed free or charity care at the West Chester clinic. Because DCI did not present a charity-care figure, the BTA attempted to construe one from the record. As a nationwide charity-care figure for all DCI facilities, the BTA used the Medicare "bad-debt charity write-off" figure for October 2006 through September 2007: that write-off amounted to under $6.7 million, which was 1.27 percent of $526,891,082 in charges generated for that period. Id. at *8. Although the BTA also gave reasons for not regarding the write-off as charitable care, the BTA stated that if the percentage that was written off were viewed as charity care, it would be "insufficient to meet the charitable service standards required for exemption." Id.

{¶ 15} DCI has appealed, and we affirm the BTA's decision.

*219 II. Analysis

{¶ 16} This appeal questions the BTA's interpretation of the charitable-purpose exemption. Under R.C. 5709.12(B), "[r]eal and tangible personal property belonging to institutions that is used exclusively for charitable purposes shall be exempt from taxation." Furthermore, under R.C. 5709.121(A), "[r]eal property and tangible personal property belonging to a charitable or educational institution * * * shall be considered as used exclusively for charitable * * * purposes by such institution * * * if it meets" one of the specified requirements under that statute.

{¶ 17} DCI seeks exemption primarily under R.C. 5709.121(A)(2). "To fall within the terms of R.C. 5709.121,...