Hamilton County Property Tax Assessment Board of Appeals v. Oaken Bucket Partners, LLC

ATTORNEYS FOR PETITIONERS ATTORNEYS FOR RESPONDENT

Gregory F. Zoeller Jeffrey T. Bennett

Attorney General of Indiana Karl L. Mulvaney

Bradley D. Hasler

John D. Snethen Bingham McHale LLP

Tax Litigation Chief Indianapolis, Indiana

Jessica E. Reagan

Deputy Attorney General

FILED

Indianapolis, Indiana

ATTORNEY FOR BOARD OF

COMMISSIONERS OF THE Dec 15 2010, 12:07 pm

COUNTY OF HAMILTON

AMICUS CURIAE CLERK

of the supreme court,

Marilyn S. Meighen court of appeals and

tax court

Meighen & Associates

Carmel, Indiana

______________________________________________________________________________

In the

Indiana Supreme Court

_________________________________

No. 49S10-1003-TA-140

HAMILTON COUNTY PROPERTY TAX

ASSESSMENT BOARD OF APPEALS &

HAMILTON COUNTY ASSESSOR,

Petitioners (Respondents below),

v.

OAKEN BUCKET PARTNERS, LLC,

Respondent (Petitioner below).

_________________________________

Appeal from the Indiana Tax Court, No. 49T10-0612-TA-113

The Honorable Thomas G. Fisher, Judge

_________________________________

On Petition For Review

_________________________________

December 15, 2010

Rucker, Justice.

In this opinion we determine that charging below market rent for part of a building rented

to a church is insufficient, standing alone, to justify a religious and charitable purpose property

tax exemption. Instead, an owner of leased property must provide evidence that it possesses an

exempt purpose separate and distinct from the exempt purpose of its lessee.

Facts and Procedural History

Oaken Bucket is a domestic for-profit limited liability company that owns a multi-unit

office building on the northeast corner of Interstate 69 and Hague Road in Fishers. In 2001

Oaken Bucket leased approximately thirty-five percent, or 13,000 square feet of space, to the

Heartland Church, Inc. (“Heartland”) at a rate of $6.00 per square foot totaling $78,000 annually.

In 2003 the parties executed a second lease in which Heartland rented an additional 15,000

square feet at a rate of $8.00 per square foot, totaling $120,000 annually. The leases were triple

net leases requiring Heartland to escrow $1,250 per month for Oaken Bucket’s property taxes.1

Over the course of the leases Heartland also paid in excess of $300,000 in build-out costs to

improve the leased space.

Oaken Bucket leased the remaining space in the office building to two other entities:

A.G. Edwards & Sons, Inc., at a rate of $15.50 per square foot and First Horizon Home Loan

Corporation, at a rate of $15.00 per square foot. The A.G. Edwards and First Horizon leases

were also triple net leases, but Oaken Bucket was responsible for improvements.

On May 17, 2004, Oaken Bucket filed an exemption application (Form 136) with the

Hamilton County Property Tax Assessment Board of Appeals (“County Board”) seeking a

charitable and religious purposes exemption on the portion of its building leased to Heartland.

The County Board denied the application. Oaken Bucket sought review before the Indiana

Board of Tax Review (“State Board”), and a hearing was conducted on July 13, 2006.

To demonstrate it was entitled to an exemption, Oaken Bucket introduced evidence that

Heartland is a non-denominational church of approximately 500 members that voluntarily

1

A triple-net lease generally requires the landlord to pay for structural repairs while the tenant pays for

utilities, property taxes, insurance, and property maintenance. See, e.g., Appraisal Institute, The

Appraisal of Real Estate 477 (12th ed. 2001).

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associates with the Baptist General Conference and its regional organization, the Midwest

Baptist Conference. Oaken Bucket showed that Heartland has been designated as a 501(c)(3)

organization by the Internal Revenue Service; provided two weekly Sunday worship services;

operated a non-profit daycare ministry for approximately 100 children from Monday through

Friday; facilitated weekly youth ministries, adult Bible studies, and fellowship dinners

throughout the year; and offered various classes to better acquaint individuals with the church

and its beliefs. Oaken Bucket also introduced evidence that the church lacked the financial

resources to purchase or provide a down payment for a comparable sized property, and that it

charged the church below market rent thereby allowing the church to conduct its services in a

space and location that facilitated an expansion of its ministry. The County Board disputed

Oaken Bucket’s claim concerning below market rent and introduced evidence demonstrating that

the fair market value for comparable property in the area ranged between $8.00 and $10.00 per

square foot – which is at or just slightly above the rent charged to Heartland.

The State Board issued a final determination affirming the County Board’s denial of

Oaken Bucket’s exemption application. In doing so the State Board concluded that the lease

agreement was a standard business arrangement and that Oaken Bucket failed to produce

probative evidence that the property was owned or used for anything other than investment

purposes. Oaken Bucket filed a timely appeal with the Indiana Tax Court. After a hearing the

court reversed the State Board’s final determination. Oaken Bucket Partners, LLC v. Hamilton

Cnty. Prop. Tax Assessment Bd. of Appeals, 909 N.E.2d 1129 (Ind. Tax Ct. 2009). Essentially

the court reasoned there was insufficient evidence supporting the State Board’s decision. On

rehearing the court clarified and affirmed its opinion. Oaken Bucket Partners, LLC v. Hamilton

Cnty. Prop. Tax Assessment Bd. of Appeals, 914 N.E.2d 868 (Ind. Tax Ct. 2009). We granted

review.

Standard of Review

The Indiana Tax Court was established to develop and apply specialized expertise in the

prompt, fair, and uniform resolution of state tax cases. Miller Brewing Co. v. Ind. Dep’t of State

Revenue, 903 N.E.2d 64, 67 (Ind. 2009). This Court extends cautious deference to decisions

within the special expertise of the Tax Court, and we do not reverse unless the ruling is clearly

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erroneous. Ind. Dep’t of State Revenue v. Safayan, 654 N.E.2d 270, 272 (Ind. 1995); see Ind.

Tax Court Rule 10. Review of a decision of the Tax Court is subject to the same “clearly

erroneous” standard of review as that provided in Indiana Trial Rule 52(A), which provides for

appeal from trial court findings and conclusions. We consider the evidence most favorable to the

judgment on appeal and do not reweigh the evidence. State Bd. of Tax Comm'rs v. Indianapolis

Racquet Club, Inc., 743 N.E.2d 247, 249 (Ind. 2001).

Discussion

In Indiana all tangible property is subject to taxation. See Ind. Code § 6-1.1-2-1 (“Except

as otherwise provided by law, all tangible property which is within the jurisdiction of this state

on the assessment date of a year is subject to assessment and taxation for that year.”). However,

the Indiana Constitution provides that the legislature may exempt certain categories of property.2

Under this grant of authority the legislature enacted Indiana Code section 6-1.1-10-16(a) which

provides, “[a]ll 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.”

Generally exemptions from taxation are granted when there is an expectation that the public will

derive a benefit from the exemption. Foursquare Tabernacle Church of God in Christ v. State

Bd. of Tax Comm’rs, 550 N.E.2d 850, 854 (Ind. Tax Ct. 1990). “Because an exemption releases

property from the obligation of bearing its share of the cost of government and serves to disturb

the equality and distribution of the common burden of government upon all property, an

exemption from taxation is strictly construed against the taxpayer and in favor of the State.”

Nat’l Ass’n of Miniature Enthusiasts v. State Bd. of Tax Comm’rs, 671 N.E.2d 218, 220-21 (Ind.

Tax Ct. 1996) (internal quotation and citation omitted). In determining whether property

qualifies for an exemption, the predominant and primary use of the property is controlling. Id. at

221. The taxpayer bears the burden of proving it is entitled to an exemption. Id.

2

Article 10 Section 1 provides in part:

(a) The General Assembly shall provide, by law, for a uniform and equal rate of property

assessment and taxation and shall prescribe regulations to secure a just valuation for

taxation of all property, both real and personal. The General Assembly may exempt from

property taxation any property in any of the following classes:

(1) Property being used for municipal, educational, literary, scientific, religious or

charitable purposes[.]

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Oaken Bucket contends that the portion of its property leased to Heartland qualifies for a

charitable and religious purpose exemption because it is owned, occupied, and used for such

purposes. The County Board does not contest that the space is occupied for religious purposes.

However it contends that Oaken Bucket’s ownership and use of the space have little to do with

religion or benevolence; instead, according the County Board, Oaken Bucket’s ownership and

use of its property are analogous to that of any other landlord.

In order to qualify for an exemption the taxpayer must demonstrate that its property is

owned for exempt purposes, occupied for exempt purposes, and predominately used for exempt

purposes. Sangralea Boys Fund, Inc. v. State Bd. of Tax Comm’rs, 686 N.E.2d 954, 959 (Ind.

Tax Ct. 1997). “Once these three elements have been met, regardless of by whom, the property

can be exempt from taxation.” Id. The parties agree that unity of ownership, occupancy, and use

by a single entity is not required. Importantly however, “when a unity of ownership, occupancy,

and use is lacking (as is the case here), both entities must demonstrate that they possess their own

exempt purposes . . . .” Oaken Bucket Partners, LLC, 909 N.E.2d at 1137.

In this case Oaken Bucket argues that (a) it charged Heartland below market rents for the

leased space; and (b) this fact manifested Oaken Bucket’s charitable purpose because it

demonstrated that Oaken Bucket owned and used the Heartland space in a manner different from

that of everyday landlords. See Respondent’s Br. at 17-19. We first observe that the question of

whether the rents charged to Heartland were below market was disputed during the hearing

before the State Board. Both sides introduced evidence on this point. The State Board

ultimately concluded that Oaken Bucket had for the most part charged market rent for the

Heartland space. The Tax Court owes deference to the State Board and may reverse a final

determination of the State Board only when its decision is unsupported by substantial evidence,

is arbitrary or capricious, constitutes an abuse of discretion, is contrary to a constitutional right,

power, privilege, or immunity, or exceeds statutory authority. Dep’t of Local Gov’t Fin. v.

Roller Skating Rink Operators Ass’n, 853 N.E.2d 1262, 1265 (Ind. 2006) (citing I.C. §§ 33-26-6-

4(d), 33-26-2-2(e)). Despite noting this standard, the Tax Court disagreed with the State Board’s

conclusion that Oaken Bucket charged Heartland standard market rent for the leased space. We

are of the view that the Tax Court erred in this regard. Although conflicting, there was evidence

before the State Board to support its conclusion.

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In any event, assuming the evidence uncontrovertibly showed that Oaken Bucket charged

Heartland below market rent, that fact alone would have little bearing on the question of whether

Oaken Bucket possessed its “own exempt purposes.” Stated somewhat differently, where an

entity charges below market rent to a charitable or religious organization, this may demonstrate

some indicia of the entity’s beneficent motives. But more is required to show that the entity

possesses its own exempt purposes. The case of College Corner, L.P. v. Department of Local

Government Finance, 840 N.E.2d 905 (Ind. Tax Ct. 2006), illustrates this point. In College

Corner a for profit corporation – National City Community Development Corporation

(“NCCDC”), and a not-for-profit corporation – Old Northside Foundation, Inc., (“ONF”) formed

a limited partnership – College Corner L.P. (“CCLP”) to revitalize a historic area of the City of

Indianapolis. Among other things CCLP purchased and rehabilitated seventeen parcels of real

estate and sold them at a profit. CCLP then sought a charitable purposes property tax exemption.

The Department of Local Government Finance denied the exemption because NCCDC – the for-

profit limited partner – earned a profit from the venture. Id. at 907. On appeal the Tax Court

reversed. In doing so, the court noted that Indiana Code section 6-1.1-10-16 “does not

differentiate between entities that are not-for-profit and entities that operate for profit.” Id. at

911. Rather, the statute allows a charitable purposes exemption to any entity which otherwise

qualifies. Id. Noting that the actual profit earned by NCCDC was inconsequential, the court

observed:

NCCDC’s purpose, as stated in its Articles of Incorporation, is

“[t]o promote the revitalization of low and moderate income

neighborhoods throughout the local communities of its banking

subsidiaries[.]” In partnering with ONF to help restore College

Corner, NCCDC was acting pursuant to the directives of the

federal Community Reinvestment Act, which encourages financial

institutions to help meet the credit needs of the communities in

which they are chartered.

Id. (internal citations omitted). In essence NCCDC showed that it possessed an exempt purpose

separate and apart from ONF’s not-for profit and tax exempt status.

Here, Oaken Bucket has made no such showing. There is no question that Heartland is a

religious organization as well as a non-profit 501(c)(3) organization, and thus possesses an

exempt purpose in its own right. But aside from arguing that it charged Heartland below-market

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rent – which as we have noted is a contested point – Oaken Bucket has failed to demonstrate an

exempt purpose separate from that of Heartland. At most what Oaken Bucket has proven is that

it leased and primarily used its property for religious and charitable purposes. This is laudable.

But in order to qualify for an exemption the property, among other things, must be “owned” for

religious and charitable purposes. I.C. § 6-1.1-10-16. And absent evidence that an owner of

leased property possesses an exempt purpose separate and distinct from the exempt purpose of its

lessee, the owner holds the property for its own benefit, not that of the public, and thus its

property is not entitled to the statutory exemption.

On this point, Travelers’ Insurance Co. v. Kent, 50 N.E. 562 (Ind. 1898) is instructive. In

Travelers’ an insurance company leased certain lands to the Brookston Academy, a school

corporation located in Prairie township, and sought an educational purposes property tax

exemption. The Court denied the exemption. And although Travelers’ was decided under an

earlier version of the statute exempting certain property from taxation, the following

observations are just as compelling today.

If the Brookston Academy, or Prairie school township, or the

school town of Brookston, were here, as owner of the lands in

controversy, there would be no question that, as to such school

corporations, the property would not be taxable. But the Travelers’

Insurance Company is not engaged in conducting a school; and, if

its property should be held to be exempt from taxation because it is

suffered to be used for school purposes, then it would follow that

any person who rents a hall, a store building, or a part of his house

for the use of a school would thus be able to claim such hall, store

building, or part of his dwelling free from taxes, – at least, during

the time he was so receiving rent for the property.

* * *

The very objects for which taxes are in large part assessed are to

carry on the educational and benevolent institutions of the state . . .

. None of these reasons, however, will apply in favor of a property

owner who simply rents or leases his property, to be used for one

of the purposes mentioned in the constitution. He holds such

property for his own use and benefit, – for his individual profit, –

and not for the public good.

Id. at 563-64. See also Spohn v. Stark, 150 N.E. 787, 788 (Ind. 1926) (finding property used for

rental purposes and income production not exempt from taxation “merely because the lessee may

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devote the leasehold to a municipal, educational, literary, scientific, religious, or charitable

purpose”). As one court observed:

[W]hen the owner leases his land to the public for a public use, or

to a quasi public body for a charitable or religious use, and applies

the rents derived from the land to his own personal advantage, he

contributes nothing to the public or to charity, he loses nothing by

the use, he is not a benefactor to any one, but he stands before the

law in exactly the same light as any one else who leases his land

for any other purpose, and uses the rents for his own advantage,

and therefore he is not entitled to any special consideration at the

hands of the law or the government, and his property is not

exempt.

State ex rel. Hammer v. MacGurn, 86 S.W. 138, 139 (Mo. 1905). We agree with these

observations. In sum, although leasing space to Heartland for charitable and religious purposes,

Oaken Bucket has failed to demonstrate it owned the property for such purposes because Oaken

Bucket did not possess an exempt purpose independent of Heartland’s charitable and religious

purpose. As such, Oaken Bucket has not met its burden of proving it is entitled to an exemption.

Conclusion

We reverse the judgment of the Tax Court.

Shepard, C.J., and Dickson, Sullivan and David, JJ., concur.

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