ST. JOHN’S HEALTH SYSTEMS, )
)
Complainant, )
)
v. ) Appeal Number 00-65001
)
DAVID TUNNELL, ASSESSOR, )
LAWRENCE COUNTY, MISSOURI, )
)
Respondent. )
DECISION AND ORDER
SUMMARY
Complainant appeals the non-exempt status of its property for tax year 2000.
On April 5, 2001, an evidentiary hearing was held before the Tax Commission Hearing Officer, Aimee Smashey, at the Lawrence County Courthouse in Mount Vernon, Missouri. Complainant was represented by Michael Merrigan. Respondent was represented by Robert E. George.
ISSUE
Do Complainant’s operations at the subject medical clinic constitute charity?
HOLDING
Each tax exemption case is peculiarly one which must be decided upon its own facts. The persuasive impact of the evidence presented indicates that the area of the property housing the two medical clinics is actually and regularly used exclusively for a charitable purpose, is owned and operated on a not-for-profit basis, and that the use of the subject clinic is beneficial to society, in addition to those directly served by the subject clinic. That portion of the subject clinic is entitled to a property tax exemption. Accordingly, this hearing officer finds that 89% of the subject property should be exempt from property taxes.
FINDINGS OF FACT
1. The subject property is a 2.91 acre lot improved with a clinic building built in 1992 containing approximately 12,390 square feet. It is located at 1319 South Landrum Street in Mount Vernon, Missouri (Parcel Id. No. 08-7.0-36-004-002-031.003).
2. The subject clinic houses a two-physician family medicine clinic, a one-physician internal medicine clinic, and a small private pharmacy. Complainant’s Exhibits B at 6 & 7, R at 4.
3. The pharmacy is operated by a private individual who leases the space from Complainant. The pharmacy is operated on approximately 1,344 square feet (11%) of the subject property.
4. The subject clinic is owned and operated by St. John’s Regional Medicine of the Ozarks (SJRMO), a Missouri Nonprofit Corporation. SJRMO is a subsidiary of Complainant.
5. SJRMO’s Articles of Incorporation state the corporation’s purpose to be:
…to establish and maintain one or more medical clinics as institutions with permanent health service facilities for the diagnosis and treatment of patients and to provide such medical services as may be required by patients; to conduct educational activities related to care of the sick and injured or to the promotion of health; to develop efficient and practical arrangements for providing health services; to foster teaching and research functions at its facilities in cooperation with other health services and educational institutions; to provide in service training programs to personnel employed at its facilities in order to maintain their skills and to make them aware of developments in the health services field; and for any and all other lawful purpose or purposes for which a nonprofit corporation may be organized in the State of Missouri….
Complainant’s Exhibit E, at 1. The Articles further provide that no part of SJRMO’s net earnings or property may inure to the benefit of any private shareholder or individual and that upon dissolution of the corporation, the corporate assets are to be distributed to the Sisters of Mercy Health System, St. Louis, Inc. or affiliated nonprofits or, alternatively, to a charitable organization as determined by the court. Id., at 2 and 4.
6. The subject clinic operated at a $126,964 loss for the fiscal year ending June 30, 2000, and operations for the six months ending December 31, 2000, also indicated a $107,335 loss. The subject clinic has operated at a loss since 1991 and the losses are covered by Complainant. Complainant’s Exhibit R at 8.
7. The mix of payment sources are: 37.5%- Medicare, 5%-Medicaid, Self Pay 27.5% and Insurance 30%.
8. The salaries and benefits for the physicians at the subject clinic are at or below the 25th percentile of the nationally surveyed range of salaries for family practice and internal medicine specialties. Complainant’s Exhibit M, at 1.
9. The other clinic staff persons are paid market level salaries.
10. Clinic physicians can receive additional compensation if his or her production exceeds the production levels established in their compensation plan. Complainant’s Exhibit R at 10, Complainant’s Exhibit N, Appendix at 2. The physician’s supplemental compensation is not driven by or contingent upon the profitability of the clinic.
11. Patients are not denied service at the subject clinic based upon an inability to pay.
CONCLUSIONS OF LAW
Jurisdiction
Jurisdiction over this appeal is proper. Complainant timely appealed to the State Tax Commission from the decision of the Lawrence County Board of Equalization.
Burden of Proof
Although a taxing statute is construed strictly against the state, an exemption statute is strictly construed against the one claiming the exemption. State ex rel. Union Electric Co. v. Goldberg, 578 S.W.2d 921, 923 (Mo. banc 1979). “The law disfavors claims for exemption from taxation. The substantial burden of establishing the property falls within the exempted class is on the person claiming exemptions under the referenced constitutional and statutory provisions. To prevent the curtailing of the purpose and intended scope of a tax exemption, the tax exemption statute is to be strictly but reasonably construed.” Twitty v. State Tax Commission of Missouri, 896 S.W.2d 680, 684 (Mo. App. S.D. 1995) (citations omitted). Accordingly, in order to prevail, Complainant must demonstrate by substantial and persuasive evidence that it is entitled to an exemption.
Substantial evidence is that evidence which, if true, has probative force upon the issues, i.e., evidence favoring facts which are such that reasonable men may differ as to whether it established them, and from which the Commission can reasonably decide an appeal on the factual issues. Cupples-Hesse Corporation v. State Tax Commission, 329 S.W.2d 696, 702 (Mo. 1959).
Persuasive evidence is that evidence which has sufficient weight and probative value to convince the trier of fact. The persuasiveness of evidence does not depend on the quantity or amount thereof but on its effect in inducing belief. Brooks v. General Motors Assembly Division, 527 S.W.2d 50, 53 (Mo. App. 1975).
Statutory Exemptions
Properties which can be exempted from taxation are set out within our Constitution and the statutes enacted to enforce that Constitution, to wit:
. . .all property, real and personal, not held for private or corporate profit and used exclusively for religious worship, for schools and colleges, for purposes purely charitable, . . .may be exempt from taxation by general law but any such law may provide for approximate restitution to the respective political subdivisions of revenues lost by reason of the exemption. All laws exempting from taxation property other than the property enumerated in this article, shall be void. Article X, Section 6, Mo. Const. of 1945.
In support of this Constitutional provision, the Legislature has enacted Section 137.100, RSMo 2000, which provides in relevant part:
The following property shall be exempt from taxation:
(5) All property, real and personal, actually and regularly used exclusively for religious worship, for schools and colleges, or for purposes purely charitable and not held for private or corporate profit, except that the exemption herein granted does not include real property not actually used or occupied for the purpose of the organization but held or used as investment even though the income or rentals received therefrom is used wholly for religious, education or charitable purposes;
Section 137.100, RSMo 2000.
Case Law on Charitable Use
In order for a property to be exempt from taxation for state, county or local purposes, the following tests must be met:
1. The property must be actually and regularly used exclusively for a charitable purpose, as charity is defined by Salvation Army v. Hoehn, 188 S.W.2d 826 (Mo. banc 1945). “Charity” is therein defined as “. . .a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their hearts under the influence of education or religion, by relieving their bodies of disease, suffering or constraint, by assisting them to establish themselves for life, or by erecting or maintaining the public buildings or works or otherwise lessening the burdens of government.” Salvation Army at 830.
2. The property must be owned and operated on a not-for-profit basis. The property “must be dedicated unconditionally 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 achievement of the charitable objectives of the project.” Franciscan Tertiary Province v. State Tax Commission, 566 S.W.2d 213, at 224 (Mo. banc 1978).
3. The dominant use of the property must be for the benefit of an indefinite number of persons and must directly or indirectly benefit society generally. “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”. Franciscan at 224. See also, Barnes Hospital v. Leggett, 589 S.W.2d 241 (Mo. banc 1979).
Subject Property Operations
1. The 1,344 square feet of the subject clinic that is operated as a pharmacy is not operated on a not-for-profit basis. It is taxable.
2. The provision of products or services to the public at cost or less constitutes a gift.
3. Medical treatment directly benefits people by relieving their bodies of disease, suffering, or constraint and health education assists to establish people for life.
4. The performance history of the subject clinic evidences an intent to provide medical and educational services on a non-profit basis.
5. The availability of cost-based or subsidized medical services at the subject clinic accessible to rich and poor alike is beneficial to the Lawrence County community.
DECISION
1. Use
Exemption law requires an unconditional dedication to a charitable objective. Charity is defined as defined as “. . .a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their hearts under the influence of education or religion, by relieving their bodies of disease, suffering or constraint, by assisting them to establish themselves for life, or by erecting or maintaining the public buildings or works or otherwise lessening the burdens of government.” Salvation Army at 830. Does Complainant’s operation of the subject clinic constitute a gift? The provision of products or services to the public at cost or less constitutes a gift. Complainant is organized as a non-profit corporation. Complainant through its subsidiary St. John’s Regional Medicine of the Ozarks (SJRMO) operates a two-physician family practice clinic and a one-physician internal medicine clinic at the subject property. Complainant presented evidence that the subject clinics operated at a $126,964 loss for the fiscal year ending June 30, 2000, and operations for the six months ending December 31, 2000, also indicated a $107,335 loss. While there is not evidence to show or explain the decision making involved in setting the charges or fees for the services at the clinics, the performance history evidences an intent to provide medical and educational services at cost or less.
The provision of medical services in a clinic setting clearly qualifies as an appropriate use under the Salvation Army definition in that medical treatment directly benefits people by relieving their bodies of disease, suffering, or constraint and health education assists to establish people for life.
2. Operation
Exemption law requires ownership and operation on a non-profit basis. The subject clinic is owned and operated by St. John’s Regional Medicine of the Ozarks (SJRMO), a Missouri Nonprofit Corporation. SJRMO was established as a Missouri Nonprofit Corporation in September of 1999. Since that time they have continuously owned and operated the subject clinic in Mount Vernon, Missouri. Complainant’s Exhibit R at 4. SJRMO’s Articles of Incorporation state the corporation’s purpose to be:
…to establish and maintain one or more medical clinics as institutions with permanent health service facilities for the diagnosis and treatment of patients and to provide such medical services as may be required by patients; to conduct educational activities related to care of the sick and injured or to the promotion of health; to develop efficient and practical arrangements for providing health services; to foster teaching and research functions at its facilities in cooperation with other health services and educational institutions; to provide in service training programs to personnel employed at its facilities in order to maintain their skills and to make them aware of developments in the health services field; and for any and all other lawful purpose or purposes for which a nonprofit corporation may be organized in the State of Missouri….
Complainant’s Exhibit E, at 1. The Articles further provide that no part of SJRMO’s net earnings or property may inure to the benefit of any private shareholder or individual and that upon dissolution of the corporation, the corporate assets are to be distributed to the Sisters of Mercy Health System, St. Louis, Inc. or affiliated nonprofits or, alternatively, to a charitable organization as determined by the court. Id., at 2 and 4.
As referenced in the “use” discussion above, Complainant presented evidence that the subject clinic operated at a $126,964 loss for the fiscal year ending June 30, 2000, and operations for the six months ending December 31, 2000, also indicated a $107,335 loss. The mix of payment sources are: 37.5%- Medicare, 5%-Medicaid, Self Pay 27.5% and Insurance 30%. Elysa Fabian, C.O.O. for SJRMO testified:
…the payor mix is weighted heavily toward Medicare, Medicaid and self pay patients which compose approximately 70% of patients seen in the clinic. Both Medicare and Medicaid reimburse for physician services pursuant to a fee schedule. For example, on a Level III office visit for an established patient, the St. John’s charge is $55.25. Medicare pays $44.97 dollars and Medicaid pays $24.00 for the service. From a cost accounting standpoint the amount paid by Medicaid does not cover the cost incurred by St. John’s in the provision of these services.
Complainant’s Exhibit R at 8. She further testified that the subject clinic has operated at a loss since 1991 and that the losses are covered by St. John’s Health System, Inc., the parent corporation. Id. Trying to collect payment for services is not a factor that would disqualify a taxpayer from receiving a charitable exemption. Callaway Community Hospital v. Craighead, 759 S.W.2d 253, 256 (Mo. App. 1988).
The Medical Group Management Association annually publishes a national survey reporting salary, benefit, and retirement benefit ranges for physicians practicing a number of different specialties. The salaries and benefits for the physicians at the subject clinic are at or below the 25th percentile of the surveyed range of values for family practice and internal medicine specialties. Complainant’s Exhibit M, at 1. Ms. Fabian opined that the staff salaries were consistent with marketplace salaries for such positions. Complainant’s Exhibit R, at 9.
The salary structure for physicians is a two-tiered system. The physicians receive a bi-weekly draw payment that is based upon their historical productivity and can receive additional compensation if his or her production exceeds the production levels established in their compensation plan. Complainant’s Exhibit R at 10, Complainant’s Exhibit N, Appendix at 2. The additional compensation is tied to increased patient management as measured by net professional and ancillary revenues and not any resulting profit of the clinic. Complainant’s Exhibit N, Appendix at 2-3. While this may be a thin line, it appears that there are no profits paid to the physicians.
While there is not evidence to show or explain St. John’s Health System Inc.’s decision- making in setting the charges or fees for the services at the clinic, the performance history evidences an intent to provide medical and educational services on a non-profit basis.
Twitty v. State Tax Commission
In the Twitty v. State Tax Commission case, the Court of Appeals in the Southern District found a medical clinic in Greene County owned and operated by a corporate entity of St. John’s Regional Health Center to be taxable. 896 S.W.2d 680 (Mo. App. S.D. 1995). The Court found that the clinic failed to qualify for property tax exemption because (1) the use of the subject clinic was not consistent with its corporate purposes of supplying medical care in under served areas; and (2) the role of the subject clinic was to generate income or profit to enhance the network. Id., at 687 and 688.
The operations of the subject clinic in this appeal are distinguishable from the clinic reviewed in the Twitty case in a number of ways. First, St. John’s Health System, Inc., and its subsidiaries have re-organized. As of 1999, the regional clinics are now owned and operated by a subsidiary entitled St. John’s Regional Medicine of the Ozarks which, according to its Articles of Incorporation, operates for the purpose of establishing and maintaining “…medical clinics as institutions with permanent health care facilities for the diagnosis and treatment of patients…” and providing certain health education functions on a not-for-profit basis. Complainant’s Exhibit E at 1. The owning and operating entity is no longer organized for the express corporate purpose of providing medical care in medically under served areas. The corporate purpose of establishing medical clinics in under served areas was important in the Twitty case because the clinic under review was established in Greene County which was not listed as a medically under served area. In this case, the owning entity does not have the express corporate purpose of establishing medical clinics in medically under served areas, rather, they have the purpose of establishing and operating medical clinics. Lawrence County is not currently designated as a medically under served area, but had been in the past. Tr. 4. A St. John’s corporate entity first established a medical clinic in Mt. Vernon in 1991. Complainant’s Exhibit R at 5. Elysa Fabian, C.O.O. of SJRMO, testified that Lawrence County would become under served again if either the Cox Health Systems clinic or the subject clinic would close. Id., at 11. Second, unlike the clinic in the Twitty case, there are no exhibits or testimony which suggest that profit was the primary goal of the clinic for the benefit of the clinic network, thereby, undermining a necessary determination that the clinic is dedicated unconditionally to a charitable objective. The Court’s analysis in the Twitty case as applied to the subject property’s operation lends support for a positive determination of exempt status.
Pharmacy
As referenced above, Complainant leases 1,344 square feet (11%) of the subject clinic to an individual for the operation of a pharmacy. The area is leased at a monthly rental of $1,106.00. All pharmacy proceeds are retained by the owner of the pharmacy. Complainant’s Exhibit R at 5. Even though the pharmacy tenant compliments the medical use of the building, this portion of the clinic is clearly held and leased for investment purposes and would not qualify for exemption, as conceded by Complainant.
3. Public Benefit
Exemption law further requires “…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.” Franciscan Tertiary Province v. State Tax Commission, 566 S.W.2d 213, at 224 (Mo. banc 1978). The patients seen and treated at the clinic are the persons directly served by the clinic operations. The families of those patients are also directly served by the clinic. On occasion, the clinic physicians provide services at area homes, the rehabilitation center, and the local law enforcement facilities. They also may provide volunteer services at area health programs, athletic events and community programs. Complainant’s Exhibit R at 11. Respondent contends that “…there has been no objectively measurable benefit to the county as a whole since Complainant purchased the subject premises (a tax-paying enterprise at that time) four years ago.” Respondent’s Brief at 4. While it is always easier to analyze objective measurements, there may not be a means of objectively measuring a direct or indirect benefit to society. Under this analysis the court requires us to consider whether the rendering of the charitable activity inherently confers a benefit to society in general. Is the operation of the subject clinic beneficial to that community in general, even if similar medical services are available elsewhere in the community? In developing this test, the court reasoned as follows:
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 the purpose, as expressed in Salvation Army, of “bringing their hearts under the influence of education or religion, by relieving their bodies from disease, suffering, or constraint, by assisting them to establish themselves for life, or by erecting or maintaining public buildings or works or otherwise lessening the burdens of government.” 188 S.W.2d at 830. The court at that same point included “humanitarian activities, * * * rendered at cost or less, which are intended to improve the physical, mental and moral condition of the recipients and make it less likely that they will become burdens on society and make it more likely that they will become useful citizens.” 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.
Examples of such humanitarian activities previously held to be exempt as charitable include the operation of hospitals which are open and available to rich and poor (Community Memorial and Jackson County ); a facility operated to provide employment and training for handicapped persons (Goodwill ); operating a YMCA building housing boys and young men, preferably of low income, as a part of a program intended *225 to foster good citizenship and Christian ideals in those boys and young men (YMCA No. 4 ); providing housing at less than cost to girls and young women, including the needy, intended to promote the welfare of such persons (Salvation Army ); providing good low cost housing for low income people to replace old, delapidated properties in a slum area which was cleared (Bader Realty ). All of these, while benefitting the individuals served, also were considered to benefit society generally.
Franciscan Tertiary Province v. State Tax Commission, 566 S.W.2d 213, 224-225 (Mo. banc 1978) (emphasis supplied).
Patients are not denied service at the subject clinic based upon an inability to pay. Ms. Fabian clarified Complainant’s policies regarding indigent patients as follows:
Q: Are patients denied service due to their inability to pay?
A: No. Our policy is to work with patients to determine an acceptable payment arrangement. If they are unable to make payments, their account is written off to charity care.
Q: Do you write off patient accounts as bad debts?
A: We write off accounts to charity for those patients who work with us. Those patients who do not accept responsibility for the payment of their bills and do not respond to any of the billing statements are often written off as bad debt and referred to a collection agency.
Q: Are these patients given the opportunity to work with the clinic regarding payment arrangements?
A: As previously stated, our staff is very willing to work with those patients who accept responsibility for payment of their bills, communicate with us, and show follow through to their commitments.
Q: Are patients terminated from the clinic because of their payments?
A: No, they are not. As stated earlier, we try and work with those patients who do not have insurance to determine an acceptable payment schedule. We also have a very significant Medicare and Medicaid payor mix and we participate in a number of managed care insurance contracts.
Q: Are the patients denied appointments with the clinic?
A: Appointments are made pursuant to scheduling availability. There will be times when physicians are on vacation or ill and we are unable to accommodate patient requests for appointments. Individuals who have shown a lack of responsibility on their accounts may also have their patient-physician relationship terminated and if this was to occur we would not schedule their appointment. However, we provide the patient thirty (30) days notice of any type of termination and remain available to provide emergency care should they happen to come back to the clinic thereafter.
Complainant’s Exhibit R, at 12.
The fact that Lawrence County has cost-based or subsidized medical services at the subject clinic (and perhaps other locations) available to rich and poor alike is beneficial to the Lawrence County community.
Conclusion
The evidence persuasively supports a conclusion that the portion of the subject clinic used for family practice and internal medicine clinics is actually and regularly used exclusively for a charitable purpose, is owned and operated on a not-for-profit basis, and that the use of the subject clinic is beneficial to society in addition to those directly served by the subject clinic. That portion of the subject clinic is entitled to a property tax exemption.
ORDER
The non-exempt status the subject property for tax year 2000, as determined by the Assessor and approved by the Board of Equalization, is SET ASIDE. The Clerk is HEREBY ORDERED to show this parcel as exempt for tax year 2000.
A party may file with the Commission an application for review of a hearing officer decision within thirty (30) days of the mailing of such decision. The application shall contain specific detailed grounds upon which it is claimed the decision is erroneous.
If an application for review of a hearing officer decision is made to the Commission, any protested taxes presently in an escrow account in accordance with this appeal shall be held pending the final decision of the Commission. If no application for review is received by the Commission within thirty (30) days, this decision and order is deemed final and the Collector of Lawrence County as well as the collectors of all affected political subdivisions therein, shall disburse the protested taxes presently in an escrow account in accord with the decision on the underlying assessment in this appeal. If any protested taxes have been disbursed pursuant to Section 139.031(8), RSMo, either party may apply to the circuit court having jurisdiction of the cause for disposition of the protested taxes held by the taxing authority.
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 September 6, 2001.
STATE TAX COMMISSION OF MISSOURI
Aimee Smashey
Hearing Officer