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).
2
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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