Jack Nelson Jones Professional Association
October 7-13, 2019
Karen Hardesty, in her official capacity as Boone County Assessor v. North Arkansas Medical Services, Inc., and North Arkansas Regional Medical Center, Inc., 2019 Ark. App. 410 ( Sept. 25, 2019)
This matter arose on appeal from Boone County Circuit Court, Honorable Russell Rogers, presiding. Appellant Karen Hardesty, in her official capacity as Boone County Assessor, appealed from the circuit court’s order that granted a tax exemption to appellees North Arkansas Medical Services, Inc., and North Arkansas Regional Medical Center, Inc. (collectively “the hospital”). The hospital sought tax-exempt status for its seven parcels of land in Harrison, Arkansas, for the 2016 and 2017 tax years, relying on the public-charity tax exemption provided by article 16, section 5(b) of the Arkansas Constitution, which provides that “buildings and grounds and materials used exclusively for public charity” are exempt from taxation. Following a bench trial, the circuit court found that the hospital had carried its burden of proof, entitling it to the tax exemption, County Assessor Hardesty appealed, and the Court of Appeals (“Court”) affirmed the circuit court’s order.
The Court noted as an initial matter that in civil bench trials, the standard of review on appeal is whether the circuit court’s findings were clearly erroneous or clearly against a preponderance of the evidence. It noted that due regard must be given to the opportunity of the circuit court to judge the credibility of the witnesses.
In her appellate brief, Hardesty drew no distinction between the two entities concerning responsibility for taxes. For simplicity’s sake, neither did the Court. The main hospital itself and the adjacent lots and facilities were already considered tax exempt. The seven parcels at issue were acquired in 2013, are located directly across the street from the main hospital campus, and the parcels contain existing clinic buildings, parking areas, and a vacant lot.
The Court noted that some basic taxation principles were involved: taxation is the rule, and exemption is the exception; exemptions from taxation must always be strictly construed, regardless of merit, in favor of taxation and against exemption. On appeal, tax cases are reviewed de novo, setting aside the findings of fact by the circuit court only if clearly erroneous.
In analyzing the hospital’s tax-exemption request, the Court looked to Arkansas Supreme Court (“Supreme Court”) case law. Tax-exempt status for charitable hospitals has been recognized in Arkansas for over one hundred years. In 1971, the Supreme Court held that a benevolent and charitable organization’s property used as a hospital may be constitutionally exempt from taxation (1) if it is open to the general public, (2) if no one may be refused services on account of inability to pay, and (3) if all profits from paying patients are applied to maintaining the hospital and extending and enlarging its charity. The entity seeking the tax exemption must show that it is a charitable organization and that the property claimed exempt is used exclusively for charitable purposes.
There was no dispute that the hospital is technically a charitable organization, that the hospital and its clinics are open to the general public, and that no one is refused services due to inability to pay. Hardesty did not take issue with the first two factors. In fact, Hardesty argued that the characterization of the taxpayer was irrelevant. She did not argue that generating revenue necessarily required disqualification. Hardesty’s argument was that the hospital and its clinics are operated or “used” to provide medical care in exchange for money, like any other medical clinic. Hardesty argued that the hospital operates with an expectation of payment for the services it provides, that it generates millions of dollars of annual revenue, that its free services and patient debts that are written off are a very small percentage of the overall income received, and that the free services and patient-debt write-offs within the clinics were an even smaller percentage of the income generated by the clinics. Hardesty contended that this meant the hospital’s property was “not used exclusively as a public charity.”
The hospital countered that Hardesty’s argument was misplaced, that generating revenue is necessary for the hospital and its health-care services to exist, that generating income does not destroy the charitable usage of the hospital or its clinics, and that any profits (meaning income exceeding expenses) were used solely to further its charitable purposes. The circuit court agreed with the hospital, and the Court held that Hardesty failed to demonstrate clear error in the circuit court’s findings.
The Court observed that testimony and evidence presented to the circuit court established those two factors conclusively: The hospital was exempt from federal taxation as a 501(c)(3) organization. The hospital’s corporate documents recited that it was organized exclusively for charitable, educational, and scientific purposes, specifically to establish and maintain medical facilities, provide educational activities, and carry on scientific research. It was not authorized to pay earnings to private shareholders or individuals; it was authorized to pay for reasonable compensation for services; and it was permitted to make payments and distributions in furtherance of its purposes. The hospital had no stockholders and declared no dividends. The hospital has a board of directors composed of unpaid volunteers; it operates a hospital and associated hospital clinics that provide primary, obstetric, and internal-medicine care; and its property has parking spaces for those purposes. The hospital, its clinics, and the doctors practicing therein are not permitted to discriminate against any patient on the basis of the patient’s economic status or ability to pay for medical services. The seven parcels that the hospital bought were part of the main campus of the hospital, situated across the street from the main hospital, used exclusively by hospital employees to operate outpatient health-care clinics, and the telephone numbers associated with the clinics were all listed in the main hospital’s telephone directories. The hospital and the clinics are open to the general public. These undisputed facts were gleaned from the president of the hospital’s corporation and the hospital’s chief medical officer.
The Court noted that the circuit court relied on the hospital’s witnesses who testified about the hospital’s overall revenues, its collectable and uncollectable billings, its expenditures, and those figures relevant solely to the clinics. They testified that the hospital uses its revenue to pay salaries, to buy equipment, to pay for maintenance, and to expand on the mission of the organization (i.e., buying ambulances, building an ambulance barn, buying surgical instruments, buying the clinics, providing parking, and running a rural health clinic. In 2016 and 2017, the hospital gave for free or wrote off over two million dollars in medical services, and approximately $30,000 of that debt was attributable to the clinic services. The hospital’s witnesses explained that generating revenue is necessary to keep its charitable mission in existence and that any profit is used to add, maintain, or upgrade services it provides to the general public. The Court noted that none of this was disputed.
Hardesty’s testimony focused on the usage of the hospital clinics. She testified that the main hospital and its immediately adjacent lots were deemed a public charity and tax exempt, although she opined that the nonprofit or charity status of the owner or lessee of these seven parcels was irrelevant. She stated that the “primary use” of the property was the governing principle. In denying the applications for tax exemptions related to the clinics, Hardesty relied on her understanding of the training materials and a guide provided by the Arkansas Assessment Coordination Department (AACD). She believed that the parcels the hospital bought that had the clinics and additional parking were “part of the hospital” but would not qualify for tax exemption unless the hospital proved that more than half of the health care provided by the clinics was free of charge, and it was not. These materials, however, contained no requirement that either the hospital or its clinics provide more than half of its medical care for free, a fact that Hardesty acknowledged, but she said that “primary” or “majority” property usage was talked about at the training meeting in group discussion.
The circuit court found that Hardesty’s more-than-half-free-clinic threshold was found nowhere in Arkansas law or in the materials on which she relied; that Hardesty’s acknowledgement that the main hospital and adjacent lots were exempt was inconsistent with her rejection of the exemption for the hospital clinics and associated parking; and that the hospital had proved entitlement to the tax exemption for the seven parcels at issue. The Court noted that the narrow question presented on appeal was only whether the circuit court clearly erred in finding that the seven parcels were used for charitable purposes in the manner necessary to satisfy the required qualifications for tax-exempt status.
Looking again to case law from the Arkansas Supreme Court, the Court noted that the admission of paying patients did not destroy the tax-exempt status of a hospital. Similarly, it found that a hospital and pharmacy dispensing care and medicine to paying and nonpaying alike did not undermine its tax-exempt status when fees generated from paying patients were devoted solely to help pay for treatment and medicines received by the non-payors. Then Court noted that in none of the prior cases did the Supreme Court require a particular percentage of free medical care. Rather, to “qualify for the exemption, a hospital must be a place open to the public where no one may be refused services on account of inability to pay and where all profits from paying patients are applied to maintaining the hospital and extending and enlarging its charity.”
The thrust of Hardesty’s argument was that the hospital’s usage of these parcels was for “the pursuit of compensation” and not exclusively for public charity. The Court observed that Hardesty was correct that the property’s use is what determines entitlement to a tax exemption rather than the use of its revenues. Hardesty readily acknowledged that the receipt of money for the activities carried out in the clinics “does not disqualify them from being considered a charity.” The Court found, however, that Hardesty failed to recognize that the parcels in this case were used by the hospital in a manner consistent with those requirements set forth by the Supreme Court in furtherance of the hospital’s charitable mission. Accordingly, the Court held that the circuit court did not clearly err in finding that the hospital proved its entitlement to tax exemption on these seven parcels and affirmed the circuit court’s decision.