Mingledorff v. Vaughan Regional Medical Center, Inc.

• Court: Alabama Supreme Court
• Writing for the Court: HOUSTON; HOOPER
• Citation: Mingledorff v. Vaughan Regional Medical Center, Inc., 682 So.2d 415 (Ala. 1996)
• Decision Date: 06 September 1996
• Parties: George MINGLEDORFF, in his official capacity as Commissioner of Revenue, et al. v. VAUGHAN REGIONAL MEDICAL CENTER, INC., and Baptist Medical Center. 1950418.

Page 415

682 So.2d 415

George MINGLEDORFF, in his official capacity as Commissioner of Revenue, et al. v. VAUGHAN REGIONAL MEDICAL CENTER, INC., and Baptist Medical Center.

1950418.

Supreme Court of Alabama.

Sept. 6, 1996.

Gwendolyn B. Garner, Asst. Counsel, Department of Revenue, and Asst. Atty. Gen., for Commissioner and Dale Curry and Tammy Jones King.

J. Fairley McDonald III of Copeland, Franco, Screws & Gill, P.A., Montgomery, for Vaughan Regional Medical Center.

J. Hobson Presley, Jr., Tony G. Miller and Thomas H. Brinkley of Maynard, Cooper & Gale, P.C., Birmingham, for Baptist Medical Center.

Sydney Lavender and William D. Jones III of Johnston, Barton, Proctor & Powell, Birmingham, for amicus curiae Alabama Hospital Association.

Edwin E. Humphreys, Birmingham, for amicus curiae Baptist Health System, Inc.

HOUSTON, Justice.

Is the use of property owned by a nonprofit corporation organized under the laws of Alabama and operated and used by that nonprofit corporation exclusively as a hospital a use that is "exclusively" or "purely" charitable, so as to qualify for an exemption from the payment of ad valorem taxes under Amendment 373(k) of the Constitution of Alabama of 1901 and Ala.Code 1975, § 40-9-1(1)? We hold that it is; therefore, we affirm the judgment of the trial court.

Amendment 373(k) provides in pertinent part that "property devoted exclusively to ... charitable purposes" is exempt from ad valorem taxation. Section 40-9-1(1) states in pertinent part that "all property, real and personal, used exclusively for ... purposes purely charitable" is exempt from ad valorem taxation. Vaughan Regional Medical Center, Inc. ("Vaughan"), and Baptist Medical Center ("Baptist") are nonprofit corporations organized and existing under the laws of Alabama and they are qualified as "charitable organization[s]" under the Internal Revenue Code ("I.R.C."), 26 U.S.C. § 501(c)(3). They are, therefore, exempt from liability for federal income taxes, as well as for liability for state income taxes. See Ala.Code 1975, § 40-18-32(a)(11). Vaughan is located in Selma; Baptist is located in Montgomery. After many years of interpreting the state constitutional and statutory exemptions as applying to Vaughan and to Baptist, the taxing authorities in the City of Selma and in Dallas and Montgomery Counties, relying on a change in position by the Alabama Department of Revenue, assessed Vaughan and Baptist for ad valorem taxes. Vaughan filed this action in the Montgomery Circuit Court against Hollis Curry, Selma's tax collector; Dale R. Curry, the tax assessor for Dallas County; Tammy Jones King, the tax collector for Dallas County; and George Mingledorff, the Alabama commissioner of revenue, seeking declaratory and injunctive relief. Baptist was allowed to intervene, naming as defendants Sarah Norred, the tax assessor for Montgomery County; and Marvin Driver, the tax collector of Montgomery County. There is no challenge to the parties plaintiff or parties defendant. The defendants moved to dismiss, arguing that Vaughan and Baptist had failed to exhaust their administrative remedies and, therefore, that the trial court lacked subject matter jurisdiction. After a hearing on the motion and the merits, the trial court denied the motion to dismiss and held that nonprofit charitable hospitals exempt from income taxation under I.R.C. § 501(c)(3) were exempt from ad valorem taxation in Alabama. The trial court ruled that Vaughan and Baptist were entitled to a complete exemption from the payment of ad valorem taxes on their real and personal property used for the corporate purpose of operating their hospital facilities, and it enjoined the defendants from assessing any ad valorem taxes on any of the property owned by Vaughan and Baptist that was at issue in the case before the court. The defendants appealed.

Initially, we note that Vaughan and Baptist challenged the tax assessments against them on the ground that they were void and illegal. Questions of law and of statutory and constitutional construction preponderate over questions of fact in this case; therefore, Vaughan was not required to exhaust administrative remedies before filing this action, and Baptist was not required to exhaust administrative remedies before intervening. See Eagerton v. Williams, 433 So.2d 436, 449 (Ala.1983); Graves v. McDonough, 264 Ala. 407, 88 So.2d 371 (1956). The trial court had subject matter jurisdiction.

The dispositive issue is whether the property sought to be taxed, which is being used exclusively as a hospital, is being used exclusively in charitable pursuits. If it is, then there is no question that Vaughan and Baptist are exempt from ad valorem taxation under the clear wording of Amendment 373(k) and § 40-9-1(1).

It is not disputed that Vaughan (and its predecessor corporations) and Baptist were created for charitable purposes--to do all things necessary to operate hospital facilities for the care of all persons within the territories served by the facilities and to furnish healthcare services to persons otherwise unable to pay. Vaughan's articles of incorporation state in pertinent part as follows:

"The purpose of the Corporation shall be:

"A. To promote and advance charitable, scientific, and educational purposes of the nature set forth in and pursuant to Section 501(c)(3) of the Internal Revenue Code of 1954, as amended, its Regulations or the corresponding provision of any applicable future United States Internal Revenue Law or Regulations (hereafter collectively referred to as the 'Code'); including without limitation, to make distributions to organizations under Section 501(c)(3) of the Code;

"B. Without in any way limiting the foregoing purposes, to provide medical, hospital and nursing home care, medical education and research and to engage in all activities necessary or incidental thereto;

"C. To operate exclusively for charitable, scientific, and educational purposes; and

"D. To qualify as an organization exempt from federal taxation under Section 501(c)(3) of the Code, and as a public charity under Section 509(a) of the Code."

Baptist is sponsored by the Montgomery Baptist Association, an association of 54 Baptist churches located in Montgomery, Elmore, and Lowndes Counties. Its certificate of incorporation in pertinent part provides:

"The purposes for which this Corporation is formed are purely benevolent, charitable, educational, and religious, and not for financial gain, but nothing herein contained shall be construed to prohibit such reasonable charges for the care of patients who are able to pay for hospital services as may be determined by the Directors or such executive officers as the Directors may designate, to be reasonable and proper and necessary to defray the necessary expenses of the operation of the said Corporation and the expenses of caring for charity patients. It is organized to acquire or erect, and to equip, conduct and maintain on the broadest humanitarian principles, a hospital or hospitals, and a school or schools of nursing, to care for the sick and injured, and to educate and train persons in the care of the sick and injured, issuing to such persons diplomas upon graduation, and erecting and conducting such hospital or hospitals, school or schools, or other institutions as may be necessary or desirable to carry out all of said purposes to the end, also that the souls of men may be healed."

According to the incorporating documents of both Vaughan and Baptist, neither institution pays any of its net earnings to its directors, officers, or other private individuals and, upon dissolution, corporate assets, after discharge of liabilities, are to be transferred to other charitable organizations.

Relying on Most Worshipful Grand Lodge of Free & Accepted Masons of Alabama v. Norred, 603 So.2d 996 (Ala.1992), and Gay v. State, 228 Ala. 253, 153 So. 767 (1934), the defendants contend that not all of the property used by Vaughan and Baptist in the operation of their hospital facilities is devoted exclusively to a charitable purpose. Specifically, they point out that Baptist operates a parking deck, a cafeteria, and a gift shop, all of which generate income, and that both Vaughan and Baptist charge fees to, and receive payment from, the majority of their patients, either directly from the patients themselves or indirectly through private health insurers or government programs such as Medicare and Medicaid. Notwithstanding the nonprofit status of Vaughan and Baptist, generating income in this manner, according to the defendants, cannot be reconciled with Vaughan and Baptist's stated charitable purposes. Stated differently, the defendants' position is basically that Vaughan and Baptist do not qualify for the total tax exemptions set out in Amendment 373(k) and § 40-9-1(1) because they raise income to support their facilities by charging their patients who are financially able to pay. The defendants argue, instead, that Vaughan and Baptist may seek to qualify for a partial tax exemption under § 40-9-1(2), which provides:

"The following property and persons shall be exempt from ad valorem taxation and none other:

"....

"All property, real or personal, used exclusively for hospital purposes, to the amount of $75,000, where such hospitals maintain wards for charity patients or give treatment to such patients; provided, that the treatment of charity patients constitutes at least 15 percent of the business of such hospitals; provided further, that such hospital need not be assessed for taxation if the owner or manager shall file with the county tax assessor wherein such hospital is located within the time allowed for assessing such property for taxation a certificate that such hospital has done 15 percent charity work in the preceding tax year; and further provided, that such hospital through its owner or manager shall have until the expiration of the preceding tax year to class its work and...