Community-School Property Manager Denied Tax Exemption
A non-profit property management organization established by a community school is not entitled to a property-tax exemption, the Ohio Supreme Court ruled today.
The Supreme Court voted 4-3 to affirm the state’s denial of an exemption for the 2010 tax year to 250 Shoup Mill LLC, an entity established by the supporters of the Horizon Science Academy Dayton High School. Writing for the Court majority, Justice William M. O’Neill noted that while the exemption was denied for 2010, the Ohio General Assembly changed the property-tax exemption rules extensively in 2011 to explicitly allow property used by community schools, also known as charter schools, to qualify for tax exemptions.
In a dissenting opinion, Justice Sharon L. Kennedy wrote the nonprofit was not set up to generate a profit but only to maintain a community school, making it eligible for the exemption.
Former Law Excluded Property Used for Profit
Before its 2011 revision, the public-schoolhouse exemption in R.C. 5709.07(A)(1) excluded property used with a “view to profit,” and the Ohio tax commissioner and the Board of Tax Appeals (BTA) found enough evidence that Shoup charged the tenant Horizon Science Academy more than its costs to operate and finance the facilities. Even though Horizon’s school consultant, New Plan Learning, testified that any profits made by Shoup would be directed to the community school or one of the other five Horizon community schools New Plan supported, the exemption was denied because the way the profit is used is not considered as a factor.
Shoup argued that while the nonprofit itself does not provide an educational or charitable service, its corporate affiliation and financial interconnection with the community school qualifies because of the public education nature of the tenant school.
Justice O’Neill wrote Ohio case law prohibits a claim of “vicarious exemption,” and a property owner’s exemption must be judged on its own activities and not the activities of those who lease the property.
“Although Shoup contends that the surpluses realized through the leases should not be viewed as profit and that no intent to profit has been shown, the BTA, in light of the record that is now before us, found that a view to profit was indeed in evidence,” he wrote.
Shoup, New Plan, Horizon “Loop” Examined
New Plan Learning is a non-profit organization established to support community schools, particularly arranging the acquisition and renovation of property to be used by community schools including several Horizon Science Academies in Ohio. Under a routine arrangement by Horizon schools, separate limited liability companies are established and named after the property’s street address including 250 Shoup Mill, a 41,000 square-foot former commercial building on 3.7 acres.
Shoup did not separately file as a nonprofit for federal tax purposes, but rather is considered a “disregarded entity” and is listed as an activity of New Plan in New Plan’s federal tax filing. New Plan is the sole member of Shoup, and New Plan does not have its own member owners, but rather its members are the community schools that it serves.
Justice O’Neill described this arrangement as a non-profit “loop” where the landlords, Shoup and New Plan, provide real estate services to the community schools that oversee it. New Plan charged the schools the minimum rent possible to cover the loans taken to purchase, renovate, and operate the properties. When a tenant community school was unable to pay the rent, New Plan would defer it and, in one instance, made a cash donation to help a community school with its financial difficulties, Justice O’Neill noted.
Shoup charged Horizon about $34,000 a month in rent, and the tax commissioner found New Plan received a “modest surplus” of $168,000 in 2010 from the total of its six Ohio managed school properties. The tax commissioner denied a charitable use exemption for Shoup, finding the property was used with a view to profit by charging a substantial rent, and denied a public-schoolhouse exemption because Shoup is acting primarily as a landlord charging market-rate rent. The BTA affirmed the tax commissioner’s denial in 2015, and Shoup appealed to the Supreme Court. Because the BTA is an administrative agency, the Court had to hear the appeal.
Rent Exceeds Financing Costs
Justice O’Neill explained the BTA is responsible for determining the factual issues when an exemption is sought, and the Court will affirm a BTA decision if the agency provides reliable proof to support its finding. He noted the former public-schoolhouse exemption statute did not define “public schoolhouse” and did not indicate whether community schools were intended to be included.
The Shoup financial statement before the BTA indicated that Shoup acquired the school property for $3.3 million and had a 25-year loan to finance it. While it charged Horizon about $34,000 a month in rent, the monthly mortgage payment was about $23,000. Justice O’Neill maintained that even if other typical property expenses were included, “the rent amount still substantially exceeds those expenses.”
Justice O’Neill wrote that in a claim for a charitable exemption, profit is defined as the excess of price over costs, and that Shoup had the burden to prove that the rent did not typically generate a surplus over the expenses. He added the vicarious exemption rule meant Shoup had to show its own activities were not conducted with a view toward profit, and the BTA did not have to consider that New Plan may have taken the surplus received from Horizon in Dayton and used the money to support the other community schools it helped to manage.
Justice O’Neill concluded that after the loans are paid off and the leases with Horizon end, New Plan and Shoup will own the property, not the Horizon community school, and that supports the BTA’s finding that Shoup and New Plan leased the property with a view to profit.
Chief Justice Maureen O’Connor and Justices Paul E. Pfeifer and Judith Ann Lanzinger joined the opinion.
Dissent Maintains Public-Schoolhouse Exemption Applies
In her dissent, Justice Kennedy wrote that Shoup leased the property with no intent to generate a profit. Citing the Court’s 2010 Anderson/Maltbie Partnership v. Levin decision, she reasoned the public-schoolhouse exemption should apply.
She explained the focus should be on whether Shoup intended for the lease to generate a profit, and the record revealed it did not. She noted the prior Court decisions have found when the overriding purpose for the property is a charitable or public use, the earning of a minor surplus does not defeat the exemption, particularly when the surplus is used to finance the charitable or public activities.
Justice Kennedy also challenged the majority for extending the principle of “vicarious exemption” from determinations based on charitable use to public schoolhouses.
She noted that in the charitable use cases, even though the taxpayers’ customers were charities, the Court denied the taxpayers a vicarious exemption as the taxpayers themselves did not qualify as a charitable organization. In contrast, she stated that under the Court’s test in Anderson/Maltbie, the focus is on the intention of the lessor, who is the one claiming the exemption. Accordingly, Justice Kennedy concluded that there is no basis for extending the vicarious exemption analysis to the public-schoolhouse claim in this case.
Justice Terrence O’Donnell joined Justice Kennedy’s opinion and also issued a separate dissenting opinion, stating the BTA was wrong to deny the public-schoolhouse exemption. Justice Judith L. French also joined Justice Kennedy’s opinion.
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