Hamilton County Prop. Tax Assessment Bd. of Appeals v. Oaken Bucket Partners, LLC

Decision Date15 December 2010
Docket NumberNo. 49S10-1003-TA-140.,49S10-1003-TA-140.
Citation938 N.E.2d 654
PartiesHAMILTON COUNTY PROPERTY TAX ASSESSMENT BOARD OF APPEALS & Hamilton County Assessor, Petitioners (Respondents below), v. OAKEN BUCKET PARTNERS, LLC, Respondent (Petitioner below).
CourtIndiana Supreme Court

Gregory F. Zoeller, Attorney General of Indiana, John D. Snethen, Tax Litigation Chief, Jessica E. Reagan, Deputy Attorney General, Indianapolis, IN, Attorneys for Petitioners.

Marilyn S. Meighen, Meighen & Associates, Carmel, IN, Attorney for Board of Commissioners of the County of Hamilton Amicus Curiae.

Jeffrey T. Bennett, Karl L. Mulvaney, Bradley D. Hasler, Bingham McHale LLP, Indianapolis, IN, Attorneys for Respondent.

On Petition For Review

RUCKER, Justice.

In this opinion we determine that charging below market rent for part of a building rented to a church is insufficient, standing alone, to justify a religious and charitable purpose property tax exemption. Instead, an owner of leased property must provide evidence that it possesses an exempt purpose separate and distinct from the exempt purpose of its lessee.

Facts and Procedural History

Oaken Bucket is a domestic for-profit limited liability company that owns a multi-unit office building on the northeast corner of Interstate 69 and Hague Road in Fishers. In 2001 Oaken Bucket leased approximately thirty-five percent, or 13,000 square feet of space, to the Heartland Church, Inc. ("Heartland") at a rate of $6.00 per square foot totaling $78,000 annually. In 2003 the parties executed a second lease in which Heartland rented an additional 15,000 square feet at a rate of $8.00 per square foot, totaling $120,000 annually. The leases were triple net leases requiring Heartland to escrow $1,250 per month for Oaken Bucket's property taxes.1 Over the course of the leases Heartland also paid in excess of $300,000 in build-out costs to improve the leased space.

Oaken Bucket leased the remaining space in the office building to two other entities: A.G. Edwards & Sons, Inc., at a rate of $15.50 per square foot and First Horizon Home Loan Corporation, at a rate of $15.00 per square foot. The A.G. Edwards and First Horizon leases were also triple net leases, but Oaken Bucket was responsible for improvements.

On May 17, 2004, Oaken Bucket filed an exemption application (Form 136) with the Hamilton County Property Tax Assessment Board of Appeals ("County Board") seeking a charitable and religious purposes exemption on the portion of its building leased to Heartland. The County Board denied the application. Oaken Bucket sought review before the Indiana Board of Tax Review ("State Board"), and a hearing was conducted on July 13, 2006.

To demonstrate it was entitled to an exemption, Oaken Bucket introduced evidence that Heartland is a non-denominational church of approximately 500 members that voluntarily associates with the Baptist General Conference and its regional organization, the Midwest Baptist Conference. Oaken Bucket showed that Heartland has been designated as a 501(c)(3) organization by the Internal Revenue Service; provided two weekly Sunday worship services; operated a non-profit daycare ministry for approximately 100 children from Monday through Friday; facilitated weekly youth ministries, adult Bible studies, and fellowship dinners throughout the year, and offered various classes to better acquaint individuals with the church and its beliefs. Oaken Bucket also introduced evidence that the church lacked the financial resources to purchase or provide a down payment for a comparable sized property, and that it charged the church below market rent thereby allowing the church to conduct its services in a space and location that facilitated an expansion of its ministry. The County Board disputed Oaken Bucket's claim concerning below market rent and introduced evidence demonstrating that the fair market value for comparable property in the area ranged between $8.00 and $10.00 per square foot—which is at or just slightly above the rent charged to Heartland.

The State Board issued a final determination affirming the County Board's denial of Oaken Bucket's exemption application. In doing so the State Board concluded that the lease agreement was a standard business arrangement and that Oaken Bucket failed to produce probative evidence that the property was owned or used for anything other than investment purposes. Oaken Bucket filed a timely appeal with the Indiana Tax Court. After a hearing the court reversed the State Board's final determination. Oaken Bucket Partners, LLC v. Hamilton Cnty. Prop. Tax Assessment Bd. of Appeals, 909 N.E.2d 1129 (Ind.Tax Ct.2009). Essentially the court reasoned there was insufficient evidence supporting the State Board's decision. On rehearing the court clarified and affirmed its opinion. Oaken Bucket Partners, LLC v. Hamilton Cnty. Prop. Tax Assessment Bd. of Appeals, 914 N.E.2d 868 (Ind.Tax Ct.2009). We granted review.

Standard of Review

The Indiana Tax Court was established to develop and apply specialized expertise in the prompt, fair, and uniform resolution of state tax cases. Miller Brewing Co. v. Ind. Dep't of State Revenue, 903 N.E.2d 64, 67 (Ind.2009). This Court extends cautious deference to decisions within the special expertise of the Tax Court, and we do not reverse unless the ruling is clearly erroneous. Ind. Dep't of State Revenue v. Safayan, 654 N.E.2d 270, 272 (Ind.1995); see Ind. Tax Court Rule 10. Review of a decision of the Tax Court is subject to the same "clearly erroneous" standard of review as that provided in Indiana Trial Rule 52(A), which provides for appeal from trial court findings and conclusions. We consider the evidence most favorable to the judgment on appeal and do not reweigh the evidence. State Bd. of Tax Comm'rs v. Indianapolis Racquet Club, Inc., 743 N.E.2d 247, 249 (Ind.2001).


In Indiana all tangible property is subject to taxation. See Ind.Code § 6-1.1-2-1 ("Except as otherwise provided by law, all tangible property which is within the jurisdiction of this state on the assessment date of a year is subject to assessment and taxation for that year."). However, the Indiana Constitution provides that the legislature may exempt certaincategories of property.2 Under this grant of authority the legislature enacted Indiana Code section 6-1.1-10-16(a) which provides, "[a]ll or part of a building is exempt from property taxation if it is owned, occupied, and used by a person for educational, literary, scientific, religious, or charitable purposes." Generally exemptions from taxation are granted when there is an expectation that the public will derive a benefit from the exemption. Foursquare Tabernacle Church of God in Christ v. State Bd. of Tax Comm'rs, 550 N.E.2d 850, 854 (Ind.Tax Ct.1990). "Because an exemption releases property from the obligation of bearing its share of the cost of government and serves to disturb the equality and distribution of the common burden of government upon all property, an exemption from taxation is strictly construed against the taxpayer and in favor of the State." Nat'l Ass'n of Miniature Enthusiasts v. State Bd. of Tax Comm'rs, 671 N.E.2d 218, 220-21 (Ind.Tax Ct.1996) (internal quotation and citation omitted). In determining whether property qualifies for an exemption, the predominant and primary use of the property is controlling. Id. at 221. The taxpayer bears the burden of proving it is entitled to an exemption. Id.

Oaken Bucket contends that the portion of its property leased to Heartland qualifies for a charitable and religious purpose exemption because it is owned, occupied, and used for such purposes. The County Board does not contest that the space is occupied for religious purposes. However it contends that Oaken Bucket's ownership and use of the space have little to do with religion or benevolence; instead, according the County Board, Oaken Bucket's ownership and use of its property are analogous to that of any other landlord.

In order to qualify for an exemption the taxpayer must demonstrate that its property is owned for exempt purposes, occupied for exempt purposes, and predominately used for exempt purposes. Sangralea Boys Fund, Inc. v. State Bd. of Tax Comm'rs, 686 N.E.2d 954, 959 (Ind.Tax Ct.1997). "Once these three elements have been met, regardless of by whom, the property can be exempt from taxation." Id. The parties agree that unity of ownership, occupancy, and use by a single entity is not required. Importantly however, "when a unity of ownership, occupancy, and use is lacking (as is the case here), both entities must demonstrate that they possess their own exempt purposes...." Oaken Bucket Partners, LLC, 909 N.E.2d at 1137.

In this case Oaken Bucket argues that (a) it charged Heartland below market rents for the leased space; and (b) this fact manifested Oaken Bucket's charitable purpose because it demonstrated that Oaken Bucket owned and used the Heartland space in a manner different from that of everyday landlords. See Respondent's Br. at 17-19. We first observe that the question of whether the rents charged to Heartland were below market was disputed during the hearing before the State Board. Both sides introduced evidence on this point. The State Board ultimately concluded that Oaken Bucket had for the most part charged market rent for theHeartland space. The Tax Court owes deference to the State Board and may reverse a final determination of the State Board only when its decision is unsupported by substantial evidence, is arbitrary or capricious, constitutes an abuse of discretion, is contrary to a constitutional right, power, privilege, or immunity, or exceeds statutory authority. Dep't of Local Gov't Fin. v. Roller Skating Rink Operators Ass'n, 853 N.E.2d 1262, 1265 (Ind.2006) (citing I.C. §§ 33-26-6-4(d), 33-26-6-6(e)). Despite noting this standard, the Tax Court disagreed with the State Board's conclusion that Oaken Bucket charged Heartland standard market rent for the leased...

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