August 8, 2020

Volume X, Number 221

August 07, 2020

Subscribe to Latest Legal News and Analysis

August 06, 2020

Subscribe to Latest Legal News and Analysis

August 05, 2020

Subscribe to Latest Legal News and Analysis

Tax Exemption Ruling Defines Public Charity v. Business Interests

The Kentucky Supreme Court recently ruled that a private, non-profit entity which acquired and marketed property in order to attract new business to Floyd County, did not qualify for an exemption from paying ad valorem real property taxes. Connie Hancock, Floyd County Property Valuation Administrator, et al. v. Prestonsburg Industrial Corporation, et al., 2010-SC-000376-DG, decision rendered on April 26, 2012. The Prestonsburg Industrial Corporation (“PIC”), a non-profit industrial development company, founded in 1968 by several Prestonsburg businesspersons, had not paid real property taxes on the real property that it acquired, improved and marketed to potential businesses since its inception. The Supreme Court determined that PIC was not entitled to a tax exemption because it was neither a governmental agency nor was it a purely public charity which was exempt from taxation under Section 170 of the Kentucky Constitution.

In 2001, PIC had purchased a 100 acre parcel from the City of Prestonsburg and the Floyd County PVA sought to tax that property. Apparently, no similar efforts to tax PIC’s property had previously occurred. PIC claimed an exemption under Section 170 of the Kentucky Constitution but the Revenue Cabinet denied the exemption. The Kentucky Board of Tax Appeals agreed with the Revenue Cabinet. On appeal, the Floyd Circuit Court disagreed and granted the exemption, finding that PIC was a charitable organization and was exempt under Section 170 of the Constitution.

The Kentucky Court of Appeals agreed with the Floyd Circuit Court finding that PIC was a purely charitable organization whose activities “reasonably bettered mankind”.

The Supreme Court reversed, finding that PIC’s efforts to increase commercial activity and add jobs was not “pure public charity” because such benefits were only incidental, the primary benefit being the promotion of PIC’s member’s business interests. “Simply stated, commercial and economic development are the promotion of business interests and not, therefore, indicative of actions of a purely public charity.”

The lone dissenter, Justice Scott, vigorously defended the tax exemption for PIC. Justice Scott argued that bringing new business to Prestonsburg, increasing tax receipts and employing Floyd County citizens were benefits which constituted “pure public charity” and if such results incidentally benefited the members of PIC, so what?

It should be noted that this decision would not affect industrial development authorities or industrial park foundations which are created pursuant to Kentucky statutory provisions. Such entities would qualify as quasi-governmental agencies and would not be required to pay property taxes on properties that they own.

There are at least two takeaways from this decision. First, it evidences the Supreme Court’s restrictive interpretation of “institutions of purely public charity” set forth in Section 170 of the Kentucky Constitution. A footnote in the decision would indicate that simply because an entity has achieved 501(c)(3) status, its real property will not automatically be exempted from taxation pursuant to Section 170. Further, the decision would appear to open the door to allow for the retroactive collection of property taxes from similar private industrial development groups who can no longer claim the exemption. And, anyone who has acquired property from such an entity may find that its property might be subject to a lien for such retroactively assessed taxes. 

© 2020 Dinsmore & Shohl LLP. All rights reserved.National Law Review, Volume II, Number 128


About this Author

John R. Rhorer Jr., Dinsmore Law, Real Estate Lawyer, Commercial Development

John Rhorer is a Partner in the Corporate Department. John advises clients on real estate and commercial lending matters. He has substantial experience in the mineral industry, consulting clients on titles, leasing, contracting and other transactional matters. John advises buyers, sellers and lenders in all manner of business transactions. John is a member of the firm's Recruiting Committee.