University Medical Center Corp. v. Department of Revenue
Docket: No. 1 CA-TX 01-0005
Court: Court of Appeals of Arizona; December 24, 2001; Arizona; State Appellate Court
University Medical Center Corporation (UMCC) is appealing a judgment that ruled against its claim for ad valorem tax exemption for six parcels it owns outside the University of Arizona campus. The judgment, made in favor of the assessors, determined that the parcels do not qualify for exemption under specific Arizona statutes, primarily A.R.S. 15-1637(D). Historically, the University Hospital, operated by the Arizona Board of Regents, faced significant financial losses due to its inability to compete effectively in the healthcare market and access issues related to its campus location. A study indicated that without changes, the hospital would continue to incur substantial losses. In response, the Arizona Legislature enacted A.R.S. 15-1637 in 1984, permitting the Board of Regents to privatize the hospital while maintaining oversight to ensure its educational mission was preserved. This statute allowed the leasing of property to a nonprofit corporation to operate as a healthcare institution, imposing conditions such as requiring Board approval for the nonprofit's organization and operations. The nonprofit’s earnings could not benefit individuals but could be used for operational expenses and required reporting to the Board and other governmental entities. Furthermore, upon dissolution, the nonprofit's assets would revert to the Board of Regents. The nonprofit was limited to powers delegated by the Board and those necessary to meet IRS requirements for nonprofit status.
Subsection 15-1637(E) permits a nonprofit to issue revenue bonds for health care purposes as defined by its lease with the Board of Regents. Subsections 15-1637(F) and (G) allow the nonprofit to acquire and operate other health care facilities and property, provided these actions support the hospital’s educational or research missions or enhance operational efficiency. A.R.S. 15-1637 subsections (C) and (D) establish that a nonprofit lessee is a valid corporate entity benefiting public health, performing essential governmental functions, and is exempt from property taxes in Arizona. In 1984, UMCC was created as the nonprofit under this statute, leasing the hospital and receiving its assets from the Board of Regents, with its assets classified as state assets. The IRS recognizes UMCC as a tax-exempt organization under 26 U.S.C. 501(c)(3), and it was acknowledged as a "charitable institution" under the Arizona Constitution. From 1996 to 1998, UMCC acquired six off-campus parcels, including an office building and medical offices, for non-profit health services. Despite initially being exempt from property taxes, the assessor later denied this status and imposed back taxes from 1997 to 1999. UMCC filed for declaratory relief and tax refunds, claiming exemption under A.R.S. 15-1637(D). The tax court denied UMCC's summary judgment motion on the exemption claim and did not rule on the assessor’s motion regarding late tax payments before the trial in December 2000.
In a post-trial memorandum, the assessor contended that refunds for property tax exemptions could only be granted for years when UMCC owned and utilized the property in an exempt manner as of January 1. The tax court ruled that none of UMCC's six off-campus parcels qualified for exemption, thus not addressing issues related to delinquent payments or ownership as of January 1. UMCC appealed the formal judgment based on this ruling, invoking jurisdiction under A.R.S. 12-210KB (1994).
The Arizona Constitution allows for exemptions from taxation for properties of educational, charitable, and religious institutions not used for profit. The appellate court reviews constitutional and statutory interpretations de novo, meaning it is not bound by the trial court's legal conclusions.
The assessor argued that A.R.S. 15-1637(D) intended to exempt only the University Hospital, asserting that the provision's language specifically referred to UMCC as the lessee of the Campbell Avenue campus. He claimed that the grammatical structure implied the exemption was limited to this property. However, the analysis countered this interpretation, stating that the language of A.R.S. 15-1637 is consistently applied across multiple subsections, not solely focused on the leased property. Further, other subsections authorize the nonprofit to operate additional health care institutions and acquire other properties. The court concluded that the legislative intent was not to restrict tax exemptions to the leased property alone, as such a limitation was not explicitly stated in the statute.
A.R.S. 15-1637 identifies "lessee" simply and provides an exemption for all UMCC property not held for profit, extending beyond just the hospital. The tax court rejected UMCC's motion for summary judgment, viewing the exemption as a blanket "entity" exemption, and noted that UMCC did not present sufficient precedent for such an exemption. The court referenced the constitutional interpretation that the legislature cannot grant an entity exemption to private organizations. The assessor argued, based on Conrad v. Maricopa County, that the constitution prohibits qualification on an entity level regarding exemptions. However, the court clarified that the Conrad ruling allows legislative exemptions for property of "charitable associations or institutions" not used for profit, and criticized the assessor's interpretation as misreading the relevant statute. The court emphasized that A.R.S. 15-1637(D) does not provide a blanket exemption and that while the statute might seem to exempt all nonprofit property from taxation, it does not authorize for-profit use of such property. The legislature’s authority to grant exemptions is limited by the Arizona Constitution, and thus the exemption under A.R.S. 15-1637(D) should be interpreted to apply only to property not used for profit, aligning it with constitutional constraints. The court affirmed that while tax exemptions are strictly construed, lawful exemptions should not be denied.
The tax court ruled on UMCC's motion for summary judgment, identifying a conflict between the broad exemption in A.R.S. 15-1637(D) and the Uniformity Clause of the Arizona Constitution, which mandates uniform taxation on similar property classes. The court determined that the exemption in A.R.S. 15-1637(D) violated this clause because it applied selectively to certain properties. To resolve this conflict, the court interpreted A.R.S. 15-1637(D) as applying exclusively to the University of Arizona hospital property leased to UMCC, thereby preserving its constitutionality.
The ruling occurred prior to the Circle K Stores decision, where the state argued that a $50,000 exemption for business personal property applied only once per property owner. Taxpayers contended this interpretation violated the Uniformity Clause, referencing the precedent set in America West Airlines v. Department of Revenue. However, Circle K Stores rejected this argument, citing that the differing taxation was constitutionally permitted under Article 9, Section 2(6), which allows for exceptions to the Uniformity Clause.
This analysis also pertains to A.R.S. 15-1637(D), which is similarly authorized by Article 9, Section 2(2) for charitable institution properties. The Uniformity Clause, being more general, does not apply to properties exempted under specific constitutional provisions, as these properties are not taxable. Thus, the Uniformity Clause remains relevant but permits the legislature to create exceptions through specific provisions. An exemption is defined as a specific deviation from the general taxation rule for properties that would otherwise be subject to uniform taxation, a principle that applies to constitutional exemptions like those in Article 9, Section 2(2).
The tax court incorrectly determined that the Uniformity Clause mandated the exclusion of off-campus properties purchased by UMCC from the exemption under A.R.S. 15-1637(D) because those properties were not used for profit during the relevant tax years. As a result, they should qualify for exemption. The ruling does not prevent the assessor from later verifying compliance with Article 9, Section 2(2) regarding property use. All claimants for exemptions under Article 9, Section 2 must adhere to the affidavit and verification procedures specified in A.R.S. 42-11151 through 42-11153. This requirement is not limited to exemptions under Title 42, but also applies to claims like A.R.S. 15-1637(D). However, the assessor did not argue that UMCC failed to comply with these procedures for the tax years in question, which means this issue does not affect the case's outcome. The court's analysis does not necessitate a review of additional potential exemptions under A.R.S. 42-11105(A), 42-11105(B), or 42-11107. The tax court will decide on remand whether the assessor can limit refund liability regarding UMCC's delinquent tax payments and non-ownership of certain parcels. UMCC's request for attorneys' fees on appeal is granted, and they may determine the amount by following Rule 21(c) of the Arizona Rules of Civil Appellate Procedure.
The judgment is reversed and remanded for further proceedings. Section 103 allows for the exclusion from federal gross income of income derived from state or local bonds, defined as obligations of a state or its political subdivisions. The court clarifies that the term "institution" in the relevant constitutional provision refers to the society itself rather than the physical buildings owned or occupied by the organization. The statute specifies exemptions for certain institutions, including hospitals and other charitable entities, focusing on their use for the relief of the indigent or afflicted, rather than the organizations per se. Additionally, Article 9, Section 2(2) mandates that property owned by charitable institutions must not be used for profit to qualify for exemption. The Arizona Constitution, Article 9, Section 18, limits increases in the cash valuation of residential properties and allows seniors to freeze their property values. Hospital property is exempt from taxation as state property, and exemptions under Article 9, Section 2(2) apply only if the charitable institution owns the property, not if it merely leases it.
