St. John’s Health System v. Wiggins (Phelps)

January 10th, 2013


State Tax Commission of Missouri






v.) Appeal Nos.10-78001 & 11-78000










Assessment by Assessor that subject property was not tax exempt under Section 137.100(5) AFFIRMED in part and SET ASIDE in part.

Complainant appeared by Counsel, Michael W. Merrigan, General Counsel, St. John’s Health System, Springfield, Missouri.

Respondent appeared by Counsel, John D. Beger, Prosecuting Attorney, Phelps County, Missouri.

Case heard and decided by Senior Hearing Officer, W. B. Tichenor


Complainant appeals the decision of the Assessor that the subject personal property is taxable.Complainant contends that a portion of the subject property is exempt from taxation under the provisions of Section 137.100(5).The Commission takes this appeal to determine whether the subject property contested by Complainant is exempt from taxation under Section 137.100(5), RSMo for the tax years 2010 & 2011.

The Hearing Officer, having considered all of the competent evidence upon the whole record enters the following Decision and Order.


1.Jurisdiction.Jurisdiction over this appeal is proper.By the Hearing Officer’s Order Overruling Motion to Dismiss, dated 12/23/11, it was determined the Commission has jurisdiction to hear Appeal 10-78001.Complainant timely appealed to the State Tax Commission from the decision of the Phelps County Board of Equalization in the 11-78000 appeal.Appeals were consolidated by Order dated 1/6/12.

2.Evidentiary Hearing.The Evidentiary Hearing was held on August 21, 2012, at the Phelps County Courthouse, Rolla, Missouri.

3.Subject Property.The subject property is identified by Assessor’s Account Number 8419.4.The property consists of machinery, tools and equipment of Complainant, located at it Rolla Clinic Facility, 1605 Martin Springs Drive, Rolla, Missouri. Complainant is not appealing the assessment of the personal property utilized in the Café/Deli Portion of the Facility (Café Equipment).[1]

4.Assessment.The Assessor assessed all of the property in Account Number 8419.4 at an assessed value $4,934,740 for tax year 2010.[2]The property was assessed at $3,654,070 for tax year 2011.[3]

5.Assessed Value – Café Equipment.The Café Equipment was assessed at $3,700 for tax year 2010 and at $9,660 for tax year 2011.[4]This property is to be assessed at the respective amounts for tax years 2010 and 2011.

6.Assessed Value – Property in Dispute.The assessed value of the property in dispute for tax years 2010 and 2011 is equal to the total assessed value for each year less the assessed value for the Café Equipment for each year.This calculates to $4,931,040 for tax year 2010 and $3,644,410 for tax year 2011.

7.Complainant’s Evidence.Complainant filed the following exhibits:




Tax and Valuation Information on Complainant’s properties


Certificate of Good Standing – Mercy Hospital Lebanon


Articles/Certificate of Amendment – Mercy Hospital Lebanon


Articles of Incorporation – Breech Regional Medical Center


Amended and Restated Bylaws of Breech Regional Medical Center

d/b/a St. John’s Hospital – Lebanon


Internal Revenue Service 501 (c) (3) Exemption Letter – 2/11/1996


Missouri Limited Sales and Use Tax Exemption – 9/28/10


Internal Revenue Service Group Exemption Status Letter – 7/12/11


Patient Information Document – St. John’s Hospital – Lebanon


Eighteen photographs of interior of St. John’s Hospital – Lebanon


Summary of Suites – Subject Facility


Physician Employment Agreement (Exhibit 5)


Bylaws –St. John’s Health System, Inc.


Missouri Limited Sales and Use Tax Exemptions – 9/17/08 & 9/14/11


Written Direct Testimony of Michael Gillen


Written Direct Testimony of Gerald Dowdy


Exhibits A through P were received into evidence.Mr. Gillen and Mr. Dowdy also testified at hearing.[5]

8.Respondent’s Evidence.Respondent filed the following exhibits:




2010 Laclede County Personal Property Tax Statements Accounts: 61-00-04025, 46201, 46203, 03111, 52103, 46200, 46131, 46202, 40460, 04025, & 54184


2010 Laclede County Personal Property Assessment Lists on St. Johns Accounts: 612600, 604500, 606515, 616250, 61000311, 602520, 603320, 606670, 606515, 601350, & 60737


2011 Laclede County Personal Property Tax Statements Accounts:

61-00-04025, 46201, 46203, 03111, 52103, 46200, 46131, 46202, 40460, & 54184


2011 Laclede County Personal Property Assessment Lists on St. Johns Accounts: 612600, 604500, 616250, 61000311, 602520, 603320, 606670, 601350, & 60737


Physician Employment Agreement (Exhibit L)


Transcript of Hearing on Motion to Dismiss – 7/21/11


Written Direct Testimony of Johnny North, Laclede County Assessor


Exhibits 1 through 7 were received into evidence.Counsel for Complainant waived cross-examination of Mr. North.[6]Exhibits 1 through 4 and 6 through 7 provide no information that is relevant to the use of the subject business property.

9.Exhibit 8.The Hearing Officer requested of the parties a listing of information to establish the assessed value to be attributed to the café/deli equipment.[7]The parties agreed on the listing and assessed values in a listing for the years 2010 and 2011.This document has been marked for purpose of identification as Exhibit 8.

10.Complainant’s Legal Status.

A.The Complainant is a not-for-profit corporation under the laws of the State of Missouri.[8]

B.The facility in which the subject property is located is a subsidiary of Complainant.It operates as a unit of St. John’s Hospital – Lebanon, formerly Breech Regional Medical Center, at time of Hearing, Mercy Hospital Lebanon. [9]

C.Complainant operates under the following purpose clause:[10]

“The purposes for which the Corporation is established are to operate exclusively for charitable, scientific and educational purposes within the meaning of Section 501(c)(3) and Section 509(a)(3) of the Internal Revenue Code of 1986, as amended (the “Code”), for the benefit of, to perform the functions of, or to carry out the purposes of the following organizations, all of which are exempt from federal income tax under Section 501(c)(3) of the Code and described in Sections 509(a)(1) and (2) of the Code: . . . Breech Regional Medical Center, a Missouri nonprofit corporation, . . . .”


D.Complainant operates under the follow dissolution clause:[11]

In the event of the dissolution of the Corporation, the Board shall, after paying or making provision for the payment of all of the liabilities of the Corporation, distribute all of the assets of the Corporation to the Corporate Member, if then in existence and an organization described in Section 501(c)(3) of the Code, otherwise in such manner, or to such organization or organizations organized and operated exclusively for charitable, educational or scientific purposes as shall at the time qualify as an exempt organization or organizations under Section 501 (c)(3) of the Code, and as shall be affiliated with the Corporate Member, as the Board shall determined.Any such assets not so disposed of shall be disposed of by a court of competent jurisdiction of the county in the state in which the principal office of the Corporation is then located, exclusively for such purposes or to such organization or organizations, as said court shall determine, which are organized and operated exclusively for such purposes.”


E.The sole member of the Corporation is Sisters of Mercy Health Systems, St. Louis, Inc., a Missouri nonprofit corporation.[12]

F.The Complainant is exempt from Federal Income Tax under section 501(c)(3) of the Internal Revenue Code.[13]Exemption from federal income tax does not, of itself, establish that the subject property is exempt from ad valorem taxation.

G.The Complainant is exempt from Missouri Sales and Use Tax on purchases.[14]Exemption from Missouri sales and use tax does not, of itself, establish that the subject property is exempt from ad valorem taxation.

10.Physician Compensation.Physicians of Complainant utilizing the equipment at the Rolla facility receive compensation under the Physician Employment Agreement.[15]Under this agreement there are two components of compensation, these are the draw and income distribution.The first component is a semi-monthly draw which is an advance and not a guarantee of salary, unless the specific physician is under a salary guarantee.The draw is generally 85% of the annualized actual compensation for the prior year.The second component is a distribution of income over expenses or margin.[16]The distribution is based on a Stark compliant compensation formula (state and federal law), which provides for compensation to a physician in relation to the number or amount of referrals to the lab.[17]



The Commission has jurisdiction to hear this appeal and correct any assessment shown to be unlawful, unfair, arbitrary or capricious.[18]

Burden of Proof

Complainant has the burden to present substantial evidence to rebut the presumption of correct assessment by the Board of Equalization.[19]In order to meet this burden in an appeal seeking exemption from taxation, the Complainant must meet the substantial burden to establish that the property falls within an exempted class under the provisions of Section 137.100.[20] It is well established that taxation is the rule and exemption from taxation is the exception.Exemption is not favored in the law.[21]Complainant seeks exemption of its property from taxation pursuant to Section 137.100(5):

“The following subjects are exempt from taxation for state, county or local purposes:

(5) All property, real and personal, actually and regularly used exclusively for … purposes purely charitable and not held for private or corporate profit, . . . ;”


Complainant’s substantial burden of proof has been met in the present case.

Franciscan Tertiary Test

In meeting its burden of proof that the subject property is used “exclusively for … purposes purely charitable, and not held for private or corporate profit….”Complainant must

meet the three prong test set forth by the Missouri Supreme Court in Franciscan Tertiary Province v. STC.[22]The court said:

The first prerequisite for property to be exempt as charitable under §137.100 is that it be owned and operated on a not-for-profit basis.It must be dedicated un-conditionally to the charitable activity in such a way that there will be no profit, presently or prospectively, to individuals or corporations.Any gain achieved in use of the building must be devoted to attainment of the charitable objectives of the project . . . .


The requirement that the property must be operated as a not-for-profit activity does not mean that it is impermissible for the project at times or even fairly regularly to operated in the black rather than on a deficit basis, provided, of course, that any such excess of income over expenses, is achieved incidentally to accomplishment of the dominantly charitable objective and is not a primary goal of the project, and provided further that all of such gain is devoted to the charitable objectives of the project.


Another prerequisite for charitable exemption is that the dominant use of the property must be for the benefit of an indefinite number of people, for thepurpose, as expressed in Salvation Army, of “relieving their bodies of disease, suffering, or constraint…or by erecting or maintaining pubic buildings…lessening the burdens of government.” 188 S.W.2d at 830…. Thus it is required that there be the element of direct or indirect benefit to society in addition to and as a result of the benefit conferred on the persons directly served by the humanitarian activity.[23]


The three tests to be met under Franciscan are:

1.Property must be owned and operated on a not-for-profit basis;


2.Property must be actually and regularly used exclusively for a charitable purpose; and


3.Property must be used for the benefit of an indefinite number of persons and for society in general, directly or indirectly.


Complainant’s Property Qualifies Under Franciscan Test

The subject property is owned and operated on a not-for-profit basis.The ownership of the machinery, tools and equipment by a not-for-profit corporation is without question.Complainant operates the property on a not-for-profit basis.

The fact that Complainant may realize income in excess of expenses from the providing of health care services does not operate to defeat the Complainant from meeting the Franciscan test.It is not necessary that the property always operate in the red.It may operate in the black and still satisfy the criteria to be operated on a not-for profit basis.

Respondent’s main point of contention at hearing appeared to the Hearing Officer to be the compensation plan for the physicians employed by Complainant.The payment of compensation which is a combination of a percentage draw against the prior year’s salary and a distribution of the margin (income over expenses) based upon the amount of work being performed by the physician does not constitute a paying of profits or distribution of dividends that one might expect from a for profit operation.The compensation methodology employed by Complainant for the physicians utilizing the subject machinery, tools and equipment is in accord with state and federal statutes regulating the matter.The compensation plan is tied to the work load of each given physician.It is not the primary purpose of Complainant to operate at a profit.The payment of compensation to the staff of Complainant working in conjunction with the subject facility is clearly a reasonable cost of conducting Complainant’s charitable activities.

The subject machinery, tools and equipment being utilized to provide health care constitutes a charitable use of the property.The health care services are available and provide a benefit to an indefinite number of persons.Society is both directly and indirectly benefited by not for profit entities providing health care services.


The assessment of the subject property made by the Assessor and sustained by the Board of Equalization for Phelps County for the subject tax day is AFFIRMED in part and SET ASIDE in part.

The assessed value for the property identified by Assessor’s Account Number 8419.4 is $3,700 for tax year 2010 and at $9,660 for tax year 2011 (Café Equipment).

The county clerk is ordered to enter the non-Café machinery, tools and equipment located at Complainant’s Rolla Clinic Facility on the list of exempt property into the supplemental tax book for the county for the tax years 2010 and 2011.

A party may file with the Commission an application for review of this decision within thirty days of the mailing date set forth in the Certificate of Service.The application shall contain specific facts or law as grounds upon which it is claimed the decision is erroneous.Said application must be in writing addressed to the State Tax Commission of Missouri, P.O. Box 146, Jefferson City, MO 65102-0146, and a copy of said application must be sent to each person at the address listed below in the certificate of service.

Failure to state specific facts or law upon which the appeal is based will result in summary denial. [24]

The Collector of Phelps County, as well as the collectors of all affected political subdivisions therein, shall continue to hold the disputed taxes pending the possible filing of an Application for Review, unless said taxes have been disbursed pursuant to a court order under the provisions of Section 139.031.8, RSMo.

Any Finding of Fact which is a Conclusion of Law or Decision shall be so deemed.Any Decision which is a Finding of Fact or Conclusion of Law shall be so deemed.

SO ORDERED January 10, 2013.



W. B. Tichenor

Chief Hearing Officer

Certificate of Service


I hereby certify that a copy of the foregoing has been mailed postage prepaid on this 10th day of January, 2013, to: Michael Merrigan, 1235 E. Cherokee Street, Springfield, MO 65804-2263, Attorney for Complainant; John Beger, Prosecuting Attorney, 200 N. Main, Suite G-69, Rolla, MO 65401, Attorney for Respondent; William Wiggins, Assessor, 200 North Main Street, Rolla, MO 65401; Carol Bennett, Clerk, 200 North Main Street, Suite 102, Rolla, MO 65401; Davis Haas, Collector, 200 North Main Street, Rolla, MO 65401.


Barbara Heller

Legal Coordinator

Contact Information for State Tax Commission:

Missouri State Tax Commission

301 W. High Street, Room 840

P.O. Box 146

Jefferson City, MO 65102-0146


573-751-1341 Fax

[1] Complainant withdrew request for exemption on the café/deli equipment at the evidentiary hearing – Tr. 39:18


[2] 2010 Personal Property Tax Statement (filed with Complaint for Review of Assessment)


[3] BOE Property Assessment Appeal (filed with Complaint for Review of Assessment)


[4] Exhibit 8


[5] Tr. 5:3 – 16:23 – Gillen; Tr. 17:11 – 37:20 – Dowdy


[6] Tr. 38:3 – 24


[7] Email, dated 11/6/12-7:21 AM (contained in the Commission file)


[8] Exhibit M


[9] Exhibits B, C, D, E & O


[10] Exhibit M, ARTICLE IIICORPORATE – 3.2


[11] Exhibit M, ARTICLE IIICORPORATE – 3.4




[13] Exhibits F & H


[14] Exhibits G & N


[15] Exhibit L


[16] Exhibit A to Exhibit L – 4. Conditions/Payment Schedule, Draw and Income Distribution


[17] Exhibit A; Tr. 35:21 – 36:15


[18] Article X, Section 14, Missouri Constitution of 1945; Sections 138.430, 138.460(2), RSMo.

[19] Hermel, Inc. v. State Tax Commission, 564 S.W.2d 888, 895 (Mo. banc 1978).


[20] State ex rel. Council Apartments v. Leachman, 603 S.W.2d 930, 931 (Mo. 1980).


[21](See, Missouri Church of Scientology v. STC, 560 S.W.2d 837, 844 (Mo. banc 1977); CSCEA v. Nelson, 898 S.W.2d 547, 548 (Mo. banc 1995), citing Scientology).


[22] 566 S.W.2d 213, 223-224 (Mo. banc 1978).


[23] Id. At 224.

[24] Section 138.432, RSMo.