STATE BD. OF TAX COM'RS v. New Castle Lodge# 147

• Decision Date: 12 April 2002
• Docket Number: No. 49S10-0011-TA-720.,49S10-0011-TA-720.
• Citation: 765 N.E.2d 1257
• Parties: STATE BOARD OF TAX COMMISSIONERS, Appellant (Respondent Below), v. NEW CASTLE LODGE # 147, LOYAL ORDER OF MOOSE, INC., Appellee (Petitioner Below).
• Court: Indiana Supreme Court

765 N.E.2d 1257

STATE BOARD OF TAX COMMISSIONERS, Appellant (Respondent Below), v. NEW CASTLE LODGE # 147, LOYAL ORDER OF MOOSE, INC., Appellee (Petitioner Below).

No. 49S10-0011-TA-720.

Supreme Court of Indiana.

April 12, 2002.

Steve Carter, Attorney General of Indiana, Janet L. Parsanko, Deputy Attorney General, Indianapolis, IN, Attorneys for Appellant.

B. Keith Shake, Karen Ball Woods, Henderson Daily Withrow & Devoe, Indianapolis, IN, Steven G. Hedges, Muncie, IN, Attorneys for Appellee.

SHEPARD, Chief Justice.

In 1992, the New Castle Moose Lodge submitted the same anecdotal type of information regarding its charitable efforts that earned it a sixty-seven percent property tax exemption in 1988. A State Board of Tax Commissioners hearing officer updated a 1988 analysis of hours of charitable use of the facility and recommended partial exemption, but the Board denied any exemption for stated reasons having little to do with the statutory "predominant use" test.

The Tax Court reversed, holding that the Lodge's predominant use was charitable. We granted the Board's petition for review, in order to examine the standards applicable to a non-profit's claim that its property is predominantly used for charitable purposes and thus exempt.

Standard of Review

Taxpayers bear the burden of proving entitlement to tax exemptions. See Dep't of State Revenue v. Safayan, 654 N.E.2d 270 (Ind.1995). Judicial review of an administrative decision denying tax exemption "is limited to whether the agency possessed jurisdiction over the subject matter, and whether the agency's decision was made pursuant to proper procedures, was based upon substantial evidence, was not arbitrary or capricious, and was not in violation of any constitutional, statutory or legal principle." See State Bd. of Tax Comm'rs v. Jewell Grain Co., 556 N.E.2d 920, 921 (Ind.1990) (citation omitted).

This Court reviews Tax Court decisions under the "clearly erroneous standard" provided in Indiana Trial Rule 52(A). State Bd. of Tax Comm'rs v. Indianapolis Racquet Club, Inc., 743 N.E.2d 247, 249 (Ind.2001).

The Statutory Framework

We begin with a summary of relevant statutes, to provide context for the facts that follow. Indiana Code Ann. § 6-1.1-10-16(a) (Burns 1989) says, "All 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."

In 1983 the legislature adopted a "predominant use" test for determining whether property qualifies for exemption under Ind.Code Chapter 6-1.1-10. See 1983 Ind. Acts 66. Indiana Code Ann. § 6-1.1-10-36.3 (Burns 1989) says, in relevant part:

(a) For purposes of this section, property is predominantly used or occupied for one or more stated purposes if it is used or occupied for one or more of those purposes during more than fifty percent (50%) of the time that it is used or occupied in the year that ends on the assessment date of the property.

(b) If a section of this chapter states one or more purposes for which property must be used or occupied in order to qualify for an exemption, then the exemption applies as follows: ...

(3) Property that is predominantly used or occupied for one or more of the stated purposes ... is exempt under that section from property tax on the part of the assessment of the property that bears the same proportion to the total assessment of the property as the amount of time that the property was used or occupied for one or more of the stated purposes during the year that ends on the assessment date of the property bears to the amount of time that the property was used or occupied for any purpose during that year.

(4) Property that is predominantly used or occupied for a purpose other than one of the stated purposes is not exempt from any part of the property tax.

Indiana Code Ann. § 6-1.1-11-3(a) (Burns 1989) requires a property owner seeking property tax exemption to file an application with the county auditor. Under subsection (c), exemption applications must contain:

(1) A description of the property claimed to be exempt in sufficient detail to afford identification.

(2) A statement showing the ownership, possession, and use of the property.

(3) The grounds for claiming the exemption.

(4) The full name and address of the applicant.

(5) Any additional information which the state board of tax commissioners may require.

Ind.Code Ann. § 6-1.1-30-10 (Burns 1989) authorizes the Board to delegate its powers, including the power to serve as a hearing officer in appeals, to field representatives or supervisors. With respect to such a review, the hearing officer:

[S]hall submit a written report of his findings to the state board of tax commissioners. After reviewing the report, the board may take additional evidence or hold additional hearings. The board shall base its final decision on the report, any additional evidence taken by the board, and any records that the board considers relevant.

Ind.Code Ann. § 6-1.1-30-12 (Burns 1989).¹

Facts and Procedural History

New Castle Lodge # 147, Loyal Order of Moose, Inc. is a fraternal organization qualified under § 501(c)(8) of the Internal Revenue Code.² The Lodge owns a 10,400 square foot building with a meeting/ballroom, game room, dining room, lounge, kitchens, and common areas such as hallways and restrooms.

A. The Lodge's 1988 Exemption Application. In 1988, the Lodge applied for property tax exemption, but the Henry County Board of Review denied the request. The Lodge appealed to the State Board of Tax Commissioners.

In its review, the Board relied in part on a "Room by Room Analysis of Exempt (Charitable) Activity." (Pet. Exh. 7.) This analysis showed 1,080 total hours of meeting/ballroom use during the year, of which 840 hours (seventy-eight percent) were for charitable purposes. The game room, dining room, lounge and kitchens were primarily used for social purposes and were not entitled to any exemption. The garage was deemed entirely taxable, and the common areas were deemed entirely exempt.³ The parking lot and personal property were both treated as partially exempt based on the aggregate exemption percentage calculated for the building.

The overall exemption percentage allowed by the Board, based on the foregoing analysis, was sixty-seven percent. In its findings of fact, the Board noted that Lodge members "devote a substantial amount of time to charitable activities," and that the Lodge allowed its ballroom to be used without charge for civic activities such as a Muscular Dystrophy Association Telethon.⁴ (Id.)

In its conclusions of law, the Board cited cases in which organizations that donated three percent or less of their gross income to charity were denied charitable property tax exemptions.⁵ (Id.) The Board went on to say:

The cases cited do not specifically indicate the percentage of gross income from the year in question that must be devoted to philanthropic endeavors before the organization may be considered to be charitable. However, the cases do establish that the annual donation/gross income percentage is of primary consideration when making the determination.... [The Lodge] donates 7.09% of its revenues to charity. This, along with the organization's other charitable activities qualifies the Lodge as charitable.

(Id.) The Board's final determination was dated September 25, 1992.

B. The Lodge's 1992 Exemption Application. Even before the 1988 proceeding came to a conclusion, it was time to re-apply, so in May 1992, the Lodge again submitted the standard property tax exemption request form prescribed by the Board. Again, the Henry County Board of Review denied the application, and again the Lodge appealed.

Board Hearing Officer E. Wayne Hudson visited the Lodge on February 28, 1995. He updated the "Room by Room Analysis of Exempt (Charitable) Activities" using an identical approach to that used for 1988.⁶ (Pet. Exh. 6.) He also considered other written evidence the Lodge submitted: its constitution, by-laws, and articles of incorporation; its 1991 federal Return of Organization Exempt From Tax; and its 1992 monthly member newsletters. He recommended an exemption of approximately sixty-three percent, based on the bottom line of the updated "Room by Room Analysis." (See Pet. Exh. 5, 6.)

The Board rejected this recommendation and denied the Lodge any exemption. It found as fact that the Lodge newsletter described only social activities and "ma[de] no reference to charitable activities." (Pet. to App. Exh. 4.) It also found as fact that all 1,110 hours the meeting/ballroom was used were for member meetings and "purely social functions." (Id.)

In its conclusions of law, the Board cited Saint Mary's Medical Center v. State Board of Tax Commissioners, 534 N.E.2d 277 (Ind.Tax 1989), aff'd,571 N.E.2d 1247 (Ind.1991), for the proposition that lodge facilities do not qualify for exemption if used by "others" for any reason. (Pet. to App. Exh. 4.) It cited the same cases as in 1988 as support for the proposition that up to three percent charitable contributions do not justify tax exemption, and concluded that the Lodge's four percent 1992 contribution rate did not qualify it for charitable exemption. (Id.)

The Lodge appealed to the Indiana Tax Court. See New Castle Lodge # 147, Loyal Order of Moose, Inc. v. State Bd. of Tax Comm'rs, 733 N.E.2d 36 (Ind.Tax 2000), review granted, 741 N.E.2d 1260 (2000). It presented evidence by its tax return preparer that charitable contributions were in fact substantially greater than the four percent reflected on the return. (Appellee's App. at 52-63.) The Tax Court held that the Lodge used its property predominantly for charitable purposes and remanded with instructions to the State Board to conduct further proceedings to determine the exact exemption allowed.⁷ New Castle Lodge # 147, 733 N.E.2d at 40.

The Task of Supporting an Exemption

A. The Board's Findings and...