Wednesday, May 28, 2014

Board Finds Property Leased Under Standard Commercial Arrangement not Entitled to Exemption Even Where Used by Church

Excerpts of the Board's Determination follow:

12. Although tangible property in Indiana is generally taxable, the legislature has exercised its constitutional power to exempt certain types of property. Hamilton County PTABOA v. Oaken Bucket Partners, LLC, 938 N.E.2d 654, 656-57 (Ind. 2010). Thus, all or part of a building that is owned, occupied, and predominantly used for educational, literary, scientific, religious, or charitable purposes is exempt from taxation. See I.C. §6-1.1-10-16(a); I.C. §6-1.1-10-36; Jamestown Homes of Mishawaka, Inc. v. St. Joseph County Assessor, 909 N.E.2d 1138, 1141 (Ind. Tax Ct.2009). That exemption extends to the land on which the building is situated and to personal property contained therein. I.C. §6-1.1-10-16(c) and (e). A taxpayer, however, bears the burden of proving that it is entitled to an exemption. Oaken Bucket, 938 N.E.2d at 657.

13. While a taxpayer must show that its property is owned for exempt purposes, occupied for exempt purposes, and predominately used for exempt purposes, unity of ownership, occupancy, and use by a single entity is not required. Id.; see also, Sangralea Boys Fund v. State Bd. of Tax Comm'rs, 686 N.E.2d 954 (Ind. Tax Ct. 1997). Where, as in this case, that unity is lacking, a taxpayer must show that each entity possesses its own exempt purpose. Id.

14. In Oaken Bucket, the Indiana Supreme Court addressed a taxpayer’s claim that the portion of a building it leased to a church was exempt under Ind. Code § 6-1.1-10-16(a). The case turned on whether the taxpayer showed that it owned the property for a charitable or religious purpose. The Board found that the lease was a standard business arrangement and that the taxpayer failed to show that it owned the property for anything other than investment purposes. Oaken Bucket, 938 N.E.2d at 656.

15. The Tax Court reversed. The Supreme Court, however, ultimately agreed with the Board, explaining that exemptions are generally granted when there is an expectation that the public will benefit. Id. at 657. As the court explained, a property owner does not show that it owns property for public benefit—instead of for its own private benefit—simply by renting the property to a beneficent organization. See id. at 659-60 (quoting Travelers’ Ins. Co. v. Kent, 151 Ind. 349, 50 N.E. 562, 563-64 (1898) and State ex. rel. Hammer v. MacGurn, 187 Mo. 238, 86 S.W. 138, 139 (1905)). Instead, the owner must show an exempt purpose of its own separate and distinct from that of its lessee. Id. at 659. Thus, even if the property owner in Oaken Bucket had charged below-market rent—a contested point in the case—the owner did not demonstrate that it had an exempt purpose separate and distinct from the charitable and religious purposes of its lessee. Id. at 658-59.

16. Although Living Water offered very little evidence about itself, it appears to possess a religious purpose. It might even use the subject properties to further that purpose. The Board need not decide that question, however, because Avonlea—not Living Water—owns the properties. And there is no evidence that Avonlea owns them for an exempt purpose separate and distinct from Living Water’s religious purpose.

17. The only evidence that even suggests what Avonlea’s purpose in owning the properties might be is the ground lease. That lease appears to be a standard commercial arrangement under which Living Water pays substantial rent and may exercise an option to buy the properties for an even larger additional sum. If anything, the lease tends to show that Avonlea owned the property for investment purposes. It certainly does not support a finding that Avonlea owned the properties for an exempt purpose. This appeal therefore presents an even weaker case for exemption than Oaken Bucket, where there was at least some evidence that the owner had rented the property to a church at below-market rates.