Title: Mingledorff v. VAUGHAN REGIONAL MEDICAL
Citation: 682 So. 2d 415
Docket Number: 1950418
State: Alabama
Issuer: Alabama Supreme Court
Date: September 6, 1996

682 So. 2d 415 (1996)
George MINGLEDORFF, in his official capacity as Commissioner of Revenue, et al.
v.
VAUGHAN REGIONAL MEDICAL CENTER, INC., and Baptist Medical Center.
1950418.

Supreme Court of Alabama.
September 6, 1996.
Gwendolyn B. Garner, Asst. Counsel, Department of Revenue, and Asst. Atty. Gen., for Commissioner and Dale Curry and Tammy Jones King.
J. Fairley McDonald III of Copeland, Franco, Screws &amp; Gill, P.A., Montgomery, for Vaughan Regional Medical Center.
J. Hobson Presley, Jr., Tony G. Miller and Thomas H. Brinkley of Maynard, Cooper &amp; Gale, P.C., Birmingham, for Baptist Medical Center.
Sydney Lavender and William D. Jones III of Johnston, Barton, Proctor &amp; Powell, Birmingham, for amicus curiae Alabama Hospital Association.
*416 Edwin E. Humphreys, Birmingham, for amicus curiae Baptist Health System, Inc.
HOUSTON, Justice.
Is the use of property owned by a nonprofit corporation organized under the laws of Alabama and operated and used by that nonprofit corporation exclusively as a hospital a use that is "exclusively" or "purely" charitable, so as to qualify for an exemption from the payment of ad valorem taxes under Amendment 373(k) of the Constitution of Alabama of 1901 and Ala.Code 1975, § 40-9-1(1)? We hold that it is; therefore, we affirm the judgment of the trial court.
Amendment 373(k) provides in pertinent part that "property devoted exclusively to... charitable purposes" is exempt from ad valorem taxation. Section 40-9-1(1) states in pertinent part that "all property, real and personal, used exclusively for ... purposes purely charitable" is exempt from ad valorem taxation. Vaughan Regional Medical Center, Inc. ("Vaughan"), and Baptist Medical Center ("Baptist") are nonprofit corporations organized and existing under the laws of Alabama and they are qualified as "charitable organization[s]" under the Internal Revenue Code ("I.R.C."), 26 U.S.C. § 501(c)(3). They are, therefore, exempt from liability for federal income taxes, as well as for liability for state income taxes. See Ala.Code 1975, § 40-18-32(a)(11). Vaughan is located in Selma; Baptist is located in Montgomery. After many years of interpreting the state constitutional and statutory exemptions as applying to Vaughan and to Baptist, the taxing authorities in the City of Selma and in Dallas and Montgomery Counties, relying on a change in position by the Alabama Department of Revenue, assessed Vaughan and Baptist for ad valorem taxes. Vaughan filed this action in the Montgomery Circuit Court against Hollis Curry, Selma's tax collector; Dale R. Curry, the tax assessor for Dallas County; Tammy Jones King, the tax collector for Dallas County; and George Mingledorff, the Alabama commissioner of revenue, seeking declaratory and injunctive relief. Baptist was allowed to intervene, naming as defendants Sarah Norred, the tax assessor for Montgomery County; and Marvin Driver, the tax collector of Montgomery County. There is no challenge to the parties plaintiff or parties defendant. The defendants moved to dismiss, arguing that Vaughan and Baptist had failed to exhaust their administrative remedies and, therefore, that the trial court lacked subject matter jurisdiction. After a hearing on the motion and the merits, the trial court denied the motion to dismiss and held that nonprofit charitable hospitals exempt from income taxation under I.R.C. § 501(c)(3) were exempt from ad valorem taxation in Alabama. The trial court ruled that Vaughan and Baptist were entitled to a complete exemption from the payment of ad valorem taxes on their real and personal property used for the corporate purpose of operating their hospital facilities, and it enjoined the defendants from assessing any ad valorem taxes on any of the property owned by Vaughan and Baptist that was at issue in the case before the court. The defendants appealed.
Initially, we note that Vaughan and Baptist challenged the tax assessments against them on the ground that they were void and illegal. Questions of law and of statutory and constitutional construction preponderate over questions of fact in this case; therefore, Vaughan was not required to exhaust administrative remedies before filing this action, and Baptist was not required to exhaust administrative remedies before intervening. See Eagerton v. Williams, 433 So. 2d 436, 449 (Ala.1983); Graves v. McDonough, 264 Ala. 407, 88 So. 2d 371 (1956). The trial court had subject matter jurisdiction.
The dispositive issue is whether the property sought to be taxed, which is being used exclusively as a hospital, is being used exclusively in charitable pursuits. If it is, then there is no question that Vaughan and Baptist are exempt from ad valorem taxation under the clear wording of Amendment 373(k) and § 40-9-1(1).
It is not disputed that Vaughan (and its predecessor corporations) and Baptist were created for charitable purposesto do all things necessary to operate hospital facilities for the care of all persons within the territories served by the facilities and to furnish healthcare services to persons otherwise unable *417 to pay. Vaughan's articles of incorporation state in pertinent part as follows:
"The purpose of the Corporation shall be:
Baptist is sponsored by the Montgomery Baptist Association, an association of 54 Baptist churches located in Montgomery, Elmore, and Lowndes Counties. Its certificate of incorporation in pertinent part provides:
According to the incorporating documents of both Vaughan and Baptist, neither institution pays any of its net earnings to its directors, officers, or other private individuals and, upon dissolution, corporate assets, after discharge of liabilities, are to be transferred to other charitable organizations.
Relying on Most Worshipful Grand Lodge of Free &amp; Accepted Masons of Alabama v. Norred, 603 So. 2d 996 (Ala.1992), and Gay v. State, 228 Ala. 253, 153 So. 767 (1934), the defendants contend that not all of the property used by Vaughan and Baptist in the operation of their hospital facilities is devoted exclusively to a charitable purpose. Specifically, they point out that Baptist operates a parking deck, a cafeteria, and a gift shop, all of which generate income, and that both Vaughan and Baptist charge fees to, and receive payment from, the majority of their patients, either directly from the patients themselves or indirectly through private health insurers or government programs such as Medicare and Medicaid. Notwithstanding the nonprofit status of Vaughan and Baptist, generating income in this manner, according to the defendants, cannot be reconciled with Vaughan and Baptist's stated charitable purposes. Stated differently, the defendants' position is basically that Vaughan and Baptist do not qualify for the total tax exemptions set out in Amendment 373(k) and § 40-9-1(1) because they raise income to support their facilities by charging their patients who are financially able to pay. The defendants argue, instead, that Vaughan and Baptist may seek to qualify for a partial tax exemption under § 40-9-1(2), which provides:
This provision, according to the defendants, applies specifically to all hospitals, profit or nonprofit, that generate income from their facilities through the operation of such things as gift shops, cafeterias, etc., or that charge the majority of their patients for services rendered. After examining the record and considering the briefs, as well as certain revenue rulings from the Internal Revenue Service ("I.R.S.") and decisions from other jurisdictions, we must disagree.
In order to qualify for the total ad valorem tax exemption provided by Amendment 373(k) and § 40-9-1(1), Vaughan and Baptist must use their property exclusively for charitable purposes or, as this Court stated in Norred, supra, at 1000, they must use it "solely, only, or wholly for a ... charitable purpose." In Henderson v. Troy Bank &amp; Trust Co., 250 Ala. 456, 466, 34 So. 2d 835, 841 (1948), this Court, quoting Johnson v. Holifield, 79 Ala. 423, 425 (1885), discussed the nature of a "charity":
This definition is consistent with the definition of "charity" set out in Black's Law Dictionary (6th ed.1990):
As noted earlier, the incorporating documents of both Vaughan and Baptist clearly charted a charitable course for these nonprofit institutions. The net earnings of Vaughan and Baptist do not inure to the benefit of any director, officer, or private individual, and the assets of both institutions are earmarked for charitable use upon their dissolution. Both Vaughan and Baptist have an "open door" policy in that they do not turn away patients who are unable to pay for medical services. The record indicates that the income generated by Vaughan and Baptist, including the income generated by those patients able to pay, serves to offset the expense of running the facilities and caring for indigent patients.
It is significant, we think, that both Vaughan and Baptist have satisfied the I.R.S. that their charitable status entitles them to be exempt from federal income taxation. I.R.C. § 501(c)(3) states in pertinent part *419 that the income tax exemption is available to "[c]orporations ... organized and operated exclusively for ... charitable ... purposes." The I.R.S. has interpreted § 501(c)(3), insofar as it applies to hospitals. Revenue Ruling 56-185 states in pertinent part:
Later, in Revenue Ruling 69-545, the I.R.S. addressed the § 501(c)(3) income tax exemption in the context of two specific examples of nonprofit hospital corporations. In one of the examples, the institution was a community hospital and operated a full-time emergency room having an "open door" policy for emergency treatment, but which otherwise ordinarily limited admissions to those who could pay the cost of their hospitalization, either themselves or through private health insurance or with the assistance of public *420 programs such as Medicare or Medicaid. The I.R.S. noted:
In Revenue Ruling 83-157, the I.R.S. indicated that a hospital of the kind addressed in *421 Revenue Ruling 69-545 would be entitled to the income tax exemption under § 501(c)(3) even if it did not offer emergency room services because of a determination by state regulatory authorities that such a service was unnecessary:
Based on the evidence before us, we think it clear that Vaughan and Baptist have satisfied the I.R.S.'s requirement that their property be used exclusively for a charitable purpose. Contrary to the defendants' urgings, we can discern no logical basis for imposing a more stringent requirement on nonprofit hospitals seeking the ad valorem tax exemption under Amendment 373(k) and § 40-9-1(1). In fact, the I.R.S.'s position concerning the primary issue in this casewhether the receipt of payment from those able to pay defeats a hospital's charitable purposeis consistent with the position this Court has taken in the past. See, e.g., Moore v. Walker County, 236 Ala. 688, 185 So. 175 (1938), wherein this Court, addressing a question of governmental immunity, noted:
236 Ala. at 691, 185 So.  at 178. See, also, Clark v. Mobile County Hospital Board, 275 Ala. 26, 151 So. 2d 750 (1963). In accord, see Sebastian County Equalization Board v. Western Arkansas Counseling &amp; Guidance Center, Inc., 296 Ark. 207, 752 S.W.2d 755 (1988); Richards v. Iowa Department of Revenue, 414 N.W.2d 344 (Iowa 1987); Bethesda Foundation v. Board of Review of Madison County, 453 N.W.2d 224 (Iowa App. 1990); Community Memorial Hospital v. City of Moberly, 422 S.W.2d 290 (Mo.1967); Jackson County v. State Tax Commission, 521 S.W.2d 378 (Mo.1975); Callaway Community Hospital Association v. Craighead, 759 S.W.2d 253 (Mo.App.1988); Medical Center Hospital of Vermont, Inc. v. City of Burlington, 152 Vt. 611, 566 A.2d 1352 (1989); Evangelical Lutheran Good Samaritan Society v. Gage County, 181 Neb. 831, 151 N.W.2d 446 (1967); Harvard Community Health Plan, Inc. v. Board of Assessors of Cambridge, 384 Mass. 536, 427 N.E.2d 1159 (1981); Downtown Hospital Association v. Tennessee State Board of Equalization, 760 S.W.2d 954 (Tenn.App.1988). All of these cases suggest a trend toward defining a "charity" broadly, in terms of an act of kindness or benevolence, not narrowly in terms of the specific revenue-producing methods used by the organization. This trend is noted in 71 Am.Jur.2d State and Local Taxation, § 373 (1972):
See, also, 15 Am.Jur.2d Charities, § 183 (1976), wherein it is stated:
Concerning the defendants' reliance on Gay v. State, supra, and their contention that Vaughan and Baptist could qualify only for the partial tax exemption set out in § 40-9-1(2), we agree with Vaughan and Baptist that § 40-9-1(2) is applicable to for-profit hospitals, a portion of whose property is used for charitable purposes. However, hospitals such as Vaughan and Baptist, whose overall objective is to provide health services to the public at large, with no reservation as to those who cannot afford to pay and with no eye toward the attainment of profit or private advantage, qualify for the general ad valorem tax exemptions contained in Amendment 373(k) and § 40-9-1(1). In Gay v. State, this Court was called on to construe Art. IV, § 91, of the Alabama Constitution, a tax exemption provision similar to the one set out in Amendment 373(k) and subdivision (1) of § 3022 of the 1923 Code (predecessor to § 40-9-1(1)). Section 91 provides an ad valorem tax exemption for property used "for purposes purely charitable." For all that appears from the opinion, the hospital in Gay v. State was a privately owned, for-profit institution, the majority of whose patients were able to, and actually did, pay for the hospital's medical services. However, the hospital claimed that it qualified for the § 91 and § 3022 exemptions because it had provided services to a number of patients who, although billed for those services, could not pay. The question of the exemption was submitted to a jury, which found against the hospital as to two of the five years in which tax assessments were made. In an attempt to ascertain the meaning of the words "purely charitable," as used in § 91 and § 3022, this Court stated:
228 Ala. at 256, 153 So.  at 770. After examining Gay v. State, we conclude that the result reached in that case was the correct one, for the undisputed evidence clearly showed that the privately owned, for-profit hospital involved in that case was not engaged in a "purely charitable" pursuit. However, we fail to see why a jury was required to determine whether the hospital was a "purely charitable" institution. Given the undisputed evidence that the hospital was not a "purely charitable" institution, whether the hospital qualified for the exemption under § 91 and § 3022 was a legal issue that should have been decided by the court. In any event, we are not persuaded that Gay v. State correctly states Alabama law on the question whether a nonprofit hospital's receipt of payment from patients financially able to pay defeats the charitable purpose for which that hospital was organized. Therefore, to the extent that it is inconsistent with this opinion, Gay v. State is overruled.
For the foregoing reasons, the judgment is affirmed.
AFFIRMED.
HOOPER, C.J., and MADDOX, ALMON, SHORES, KENNEDY, INGRAM, COOK, and BUTTS, JJ., concur.