Tax officer: Mercy Clinic property is tax exempt

Citing that St. John’s Health Systems, Inc. meets a three-prong test set forth by a Missouri Supreme Court case, a Missouri State Tax Commission hearing officer has ruled in favor of St. John’s appeal that certain personal property assessed by Phelps County in 2010 and 2011 at the Rolla Mercy Clinic is tax exempt.

The decision and order issued Jan. 10 by Senior Hearing Officer W. B. Tichenor ruled in favor of St. John’s, which disagreed with a decision by the Phelps County Assessor’s Office that the subject personal property at the Mercy Clinic is taxable.

An evidentiary hearing regarding the issue was held Aug. 21, 2012, at the Phelps County Courthouse. Michael W. Merrigan was counsel for St. John’s and County Prosecuting Attorney John Beger was counsel for the assessor’s office.

County Assessor Bill Wiggins explained that Kevin Rasmussen, the previous county assessor, assessed personal property at the clinic as it was being built and shortly afterwards in 2010 and 2011 that Rasmussen felt was taxable.

St. John’s contended that the property is exempt from taxation under state statute 137.100(5), which states, “All property, real or personal, actually or regularly used exclusively for ... purposes purely charitable and not held for private or corporate profit” is exempt from taxation for state, county or local purposes.

St. John’s is a not-for-profit corporation and the Rolla Mercy Clinic is a subsidiary of St. John’s and operates as a unit of Mercy Hospital Lebanon.

The property that was appealed consists of machinery, tools and equipment located at the Rolla Mercy Clinic.

Gerald Dowdy, vice president of the Rolla Mercy Clinic, said the property that St. John’s contended was tax exempt was exclusively used for hospital-based services. Dowdy said St. John’s does pay property taxes on the clinic portion of the equipment.

St. John’s also did not appeal for an exemption of personal property utilized in the café/deli portion of the facility.

The assessed value of personal property, not including the café/deli personal property, totaled $4,931,040 in 2010 and $3,644,410 in 2011.

According to Wiggins, St. John’s paid taxes on the personal property at the Rolla Mercy Clinic under protest for 2010, 2011 and 2012. St. John’s only filed appeals for 2010 and 2011, which were combined into one appeal.

Actual property taxes paid in protests were not available at press time.

It is unclear at this time how the 2012 taxes will be handled, and Wiggins noted that decision will likely depend on if the county decides to appeal Tichenor’s order.

Wiggins said the county has contracted with an attorney, who will report back to the assessor and county on their options to proceed.

An appeal of Tichenor’s decision must be filed within 30 days and must contain specific facts or law as grounds upon which the decision is claimed erroneous.

Wiggins said the county is likely to appeal Tichenor’s order to the tax commission itself. Additionally, if the county chooses to appeal or if the county were to lose its appeal, an appeal could be filed in the court system.

"We'll look at all of the options that are in the best interest of the county and taxpayers," Wiggins said, adding that he doesn’t agree with Tichenor’s decision and was surprised when he received it.

“I thought John Beger made a very solid case for it being taxable,” Wiggins said.

Mike Gillen, president of Mercy Hospital Lebanon, said he understands the reasoning why the county assessor thought the assets should been taxed.

Gillen said St. John’s has supported the county in everything it has asked for during the appeal process.

Three-prong test

In Tichenor’s decision, he stated that in order for St. John’s to prove it is tax-exempt under the state statute, it must meet a three-prong test set forth by the state Supreme Court in Franciscan Tertiary Province v. STC. The three tests to be met under this case 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.

“From our standpoint, we meet all of those tests,” Gillen said, and Tichenor agreed in his decision.

Dowdy echoed Gillen’s statement, noting that “we do our share of community good.”

According to Tichenor’s decision the county’s main point of contention as it appeared to him was the compensation plan for the physicians employed by St. John’s at Rolla Mercy Clinic.

Beger used this argument, which Wiggins said was the same argument used against St. John’s when it made a similar appeal in multiple counties previously.

“That (compensation plan) was the reason it was taxable last time,” Wiggins recalled.

In that previous case, the appeal by St. John’s was rejected, Dowdy said, and the corporation elected not to appeal that decision.

In Tichenor’s decision, he said, “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 Complaintant (St. John’s) for the physicians utilizing the subject machinery, tools and equipment is in accord with state and federal statutes regulating the matter ... The payment of compensation to the staff of Complaintant working in conjunction with the subject facility is clearly a reasonable cost of conducting Complaintant’s charitable activities,” according to Tichenor’s decision.