Four Dayton area dialysis centers are entitled to a charitable tax exemption even though the organization seeks to have a majority of its users pay through insurance or federally funded healthcare programs, the Ohio Supreme Court ruled today.

The Supreme Court concluded that the portions of the Dialysis Centers of Dayton LLC (DCD) used for providing dialysis services on behalf of Miami Valley Hospital qualify for a property tax exemption because referred patients are served even if they cannot pay and are uninsured. The Court majority in a per curiam decision ruled that the portions of the facilities used by private physicians are not entitled to an exemption, and it remanded the case to the Ohio tax commissioner to calculate the proper amount of space to exempt.

Quantity of Charitable Care Triggered Dispute
DCD was formed in 1998 by Miami Valley Hospital and five physicians. The doctors were partial members until mid-2006 when the hospital system became the sole member. Miami Valley is a 501(c)(3) nonprofit charitable institution, and the DCD became “disregarded as an entity” for federal tax purposes, meaning the dialysis centers were recognized as if they were a division of Miami Valley.

With the change to sole ownership, the DCD sought a refund of its 2006 property taxes and an exemption for the 2007 tax year. The Ohio tax commissioner denied the request, and the hospital appealed to the Ohio Board of Tax Appeals (BTA).

To be treated at the DCD facilities, a person needed a referral from either a hospital or doctor. With each new patient, the staff evaluated the options for the patient to pay for treatment. The staff would determine if the patient was insured or could pay. If the patient was indigent, the DCD attempted to seek coverage from Medicare or Medicaid. Those ineligible for insurance coverage were asked to fill out a form to determine if they qualified for charitable care. The DCD treated all patients regardless of whether insurance or a patient paid for it.

The tax department requested that DCD quantify the amount of charitable care it provided to those who could not pay, excluding “bad debts” for those who did not pay. The DCD submitted that it provided $435,000 in free care in 2007 to about 150 patients, which was about 28 percent of the total patients treated.

In addition, the record showed that some space in at least three of the four centers was leased to Renal Physicians Inc. or Renal Partners II Inc. beginning in the early 1990s, even before the DCD was incorporated. The doctors leasing space at the clinics were independent contractors using the locations for office space but not for treating patients.

The tax commissioner maintained that the DCD was providing no more than “minimal charitable care” and did not qualify for a charitable exemption. The BTA noted that the lack of evidence of charitable care prompted it to deny the exemption, and the hospital appealed to the Supreme Court.

Exemption Not Based on Amount of Free Care
Before considering the exemption, the Court ruled the DCD was not entitled to a refund for 2006 because at the time the property tax was assessed, the five doctors still co-owned DCD. Because the centers were to some extent part of their profit-making medical practices, the provision of dialysis services could not be considered “an exclusive charitable use of the property” until the hospital became the sole owner of DCD.

For tax year 2007 DCD was under the sole control of Miami Valley, and to determine exempt status the Court looked to R.C. 5709.12(B), which exempts property belonging to an institution “that is used exclusively for charitable purposes.” The opinion explained that medical properties qualify as charitable as long those services are “provided on a nonprofit basis to those in need, without regard to race, creed, or ability to pay.” The Court noted that in prior decisions, it has exempted property even if a substantial amount of care was paid for by the patient.

Citing the Supreme Court’s 2010 Dialysis Clinic, Inc. v. Levin decision, the Court wrote that it has “specifically discounted the importance of showing a particular level of charitable care” when considering a charitable exemption. It found in that case that a number of patients qualified for Medicare or Medicaid, and concluded that a healthcare provider’s charitable efforts should be not hampered by its attempt to collect payments from the federal insurers.

“A crucial factor in the charitable status of property use is whether a facility is open to serve the general public — or to that part of the general public that has a special need — in order to cater to the needs of the that whole segment of the public,” the opinion stated.

The Court found DCD’s attempt to have others pay for patient care was a “prudent and diligent use of charitable assets,” allowing it to donate its funds only when payments could not be arranged. It ruled the tax commissioner’s and BTA’s focus on the amount of care provided was contrary to precedent.

As for the portion leased for physician offices, state law allows that classification of property to be split and for only the portion devoted to charitable use to be exempt, the opinion noted. The Court directed the tax department to determine the amount of space leased to private physicians, with the instruction that the leased space would remain subject to tax.

Chief Justice Maureen O’Connor and Justices Sharon L. Kennedy, Judith L. French, William M. O’Neill, Patrick F. Fischer, and R. Patrick DeWine joined the majority opinion.

Justice Terrence O’Donnell concurred in part, dissented in part, and joined the others in affirming the BTA’s denial of the 2007 exemption.

2015-0322. Dialysis Ctrs. of Dayton LLC v. Testa, Slip Opinion No. 2017-Ohio-4269.

Hear oral argument of this case.

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