Could a nonprofit hospital's administrator residence remain property-tax exempt even though no health-care services were provided in the home?

Plain-English summary

North Central Homes, a 501(c)(3) nonprofit, ran a hospital and nursing home in Kingsbury County. It also owned a separate residence where the hospital administrator had lived since 1967. When the Lake Preston hospital facility closed, the county auditor noticed that the residence had been left off the tax rolls for over twenty years and used SDCL 10-11-3 to bring it onto the assessment list.

The nonprofit argued the residence was exempt as charitable property. The Director of Equalization disagreed, reading SDCL 10-4-9.3, the 1986 statute on property used primarily for health care, narrowly: a residence is not where health-care services are delivered, so it cannot be exempt under that section.

AG Tellinghuisen rejected the view that the 1986 amendment eliminated any charitable or benevolent exemption a health-care institution otherwise enjoyed. Before 1986, property of a charitable, benevolent, or religious society used for those purposes could qualify under SDCL 10-4-9. The Scottish Rite Temple Association case had recognized an exemption for a charitable society's employee residence by analogy to a parsonage.

The 1986 amendment dealt with property used primarily for human health care and related purposes. Tellinghuisen said an administrator's residence could continue to fall under the charitable or benevolent exemption where its use promoted the hospital's or nursing home's operation. He did not make a factual finding that the Lake Preston residence met that condition.

A practical warning ended the opinion: if the residence was provided to the administrator without charge or as compensation, the leasehold interest might still be taxable to him under SDCL 10-4-1 and 10-4-2. Tellinghuisen also referred to Official Opinion 78-10 on leasehold taxation.

Currency note

This opinion was issued in 1989. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. SDCL 10-4-9, 10-4-9.3, and the leasehold-tax provisions at SDCL 10-4-1 and 10-4-2 may have been amended since 1989; check the current statutes before applying any rule mentioned here.

What the opinion meant at the time

For Kingsbury County, the opinion supplied a conditional rule for assessing the administrator's home. The county needed to determine whether the use of the residence promoted the hospital's or nursing home's operation. The opinion did not decide whether the particular property stayed off the tax rolls, and the Lake Preston hospital facility had closed.

For other nonprofit hospital systems holding employee residences, the opinion said the 1986 amendment did not remove any charitable or benevolent exemption they otherwise had. The relevant use question for an administrator's residence was whether it promoted the institution's operation.

For administrators, the opinion flagged a separate leasehold question. If the residence was provided without charge or as part of salary, the administrator's leasehold interest might be taxable under SDCL 10-4-1 and 10-4-2.

Common questions

Q: Did the 1986 amendment to SDCL 10-4-9 narrow the charitable exemption?
A: The AG said no, at least not for support-function property. The amendment moved health-care property into its own dedicated section (10-4-9.3) but did not eliminate the broader charitable exemption for property used to support a charitable society's operations.

Q: How did the parsonage analogy work?
A: The Scottish Rite Temple case treated a Masonic Lodge secretary's residence as exempt by analogy to a minister's parsonage. Tellinghuisen used that reasoning to explain why an administrator's residence could qualify if its use promoted the hospital's operation.

Q: What was the leasehold interest warning about?
A: Tellinghuisen said that if the residence was provided without charge or as part of salary, the administrator's leasehold interest might be taxable under SDCL 10-4-1 and 10-4-2. He did not decide whether such a taxable interest existed here.

Q: Why was the home off the rolls since 1967?
A: The opinion says the home was "inadvertently omitted" from the tax rolls. The county then gave North Central notice under SDCL 10-11-3 that it was adding the property and required the organization to appear and show cause why it should not be added.

Q: Would the same answer apply to a for-profit hospital?
A: The opinion involved a nonprofit recognized as tax-exempt under 501(c)(3). It did not decide the tax treatment of a for-profit hospital's residence.

Background and statutory framework

SDCL 10-4-9 historically exempted property belonging to a charitable, benevolent, or religious society and used exclusively for those purposes. Tellinghuisen cited Scottish Rite Temple Association for the proposition that an employee residence can serve a charitable or benevolent purpose by supporting the organization's operation.

The 1986 legislation moved property used primarily for human health care and related purposes into SDCL 10-4-9.3. The Kingsbury Director of Equalization argued that this provision did not cover a home used solely as a residence, with no health-care services performed there.

Tellinghuisen concluded that the 1986 amendment did not eliminate charitable or benevolent exemptions an institution otherwise enjoyed. He conditioned exemption of an administrator's residence on its use promoting the hospital's or nursing home's operation.

SDCL 10-11-3 is the procedural counterpart: when a county auditor finds property that should have been on the assessment rolls but was not, the auditor gives written notice to the owner and requires a show-cause appearance within 15 days. That mechanism was the trigger here.

Tellinghuisen separately warned that a residence supplied to an administrator without charge or as part of salary might create a taxable leasehold interest under SDCL 10-4-1 and 10-4-2.

Citations and references

Statutes:

• SDCL 10-4-9 (charitable, benevolent, religious exemption)
• SDCL 10-4-9.3 (health-care property exemption, 1986)
• SDCL 10-11-3 (omitted property procedure)
• SDCL 10-4-1, 10-4-2 (leasehold interest taxation)

Cases:

• In re Scottish Rite Temple Association, 62 S.D. 204, 252 N.W. 626 (1934) (parsonage analogy for charitable society residence)

Prior AG opinions:

• Official Opinion 78-10 (leasehold interest taxation)

Source

• Landing page: https://atg.sd.gov/OurOffice/OfficialOpinions/opinionhtml.aspx?id=25

Original opinion text

OFFICIAL OPINION NO. 89-25

Taxability of Home used by Hospital Administrator

Dear Mr. Wilkinson:

You have requested an official opinion relating to the following factual situation:

FACTS:

North Central Homes is a nonprofit corporation and recognized as an exempt organization under 501(c)(3) of the United States Internal Revenue Code of 1954 which owns and operates a hospital and nursing home in Kingsbury County, South Dakota. North Central also owns at a separate location, a home in which the hospital administrator has resided since it was built in 1967.

Recently North Central closed the Lake Preston hospital facility and it was discovered that the hospital administrator's home had been inadvertently omitted from the tax rolls since 1967. Proceeding under SDCL 10-11-3, notice was given to North Central that the County Auditor was adding the property to the assessment rolls and requiring North Central to appear before her at a specified time, within fifteen days, to show cause why the property should not be added to the assessment rolls.

At the meeting with the County Auditor, North Central claimed that as a nonprofit corporation and recognized as exempt under 501(c)(3) that the home in which the administrator lived was exempt from taxation pursuant to SDCL 10-4-9.3. Kingsbury County Director of Equalization's position was that SDCL 10-4-9.3 is not applicable wherein the home is used solely as a residence structure and not in any way utilized for health care services.

Based upon these facts, you have asked the following question:

QUESTION:

Is a hospital or nursing home administrator's residence tax exempt when the property owned by a nonprofit organization is recognized as an exempt organization under 501(c)(3) when no health related services are performed in the structure?

GENERAL DISCUSSION:

You have used as your principal statutory citation SDCL 10-4-9.3. That section relates to property used primarily for human health care and health care related purposes. As presently written, this section was enacted in 1986 and amended in 1988. Prior to that time the Legislature separately classed all property belonging to any charitable, benevolent, or religious society and used exclusively for charitable, benevolent, or religious purposes. If it met the criteria of SDCL 10-4-9, it was exempt from ad valorem taxation.

As that statute was interpreted, the residence of an employee of a charitable, benevolent or religious society, owned by such society was exempt from taxation. In the case of In re Scottish Rite Temple Association, (1934) 62 S.D. 204, 252 N.W. 626, the South Dakota Supreme Court held that the residence of the secretary of a Masonic Lodge was exempt just as the use of a parsonage for the residence of a minister and his family is exempt as being for a religious purpose. The Court held that the residence property bears the same relation to the benevolent and charitable organization that a parsonage does to a religious organization.

The question then becomes: Did the 1986 amendment to SDCL 10-4-9 result in a change to the existing interpretation of that section and thereby render taxable property which heretofore was exempt? In my opinion, it did not.

While the law relating to property of health care institutions was removed from the general exemption statute in 1986, that amendment only dealt with property which was used primarily for human health care and health care related purposes. It did not take away from such institution any charitable or benevolent exemption they otherwise enjoyed based on charitable or benevolent characteristics which they might have had. Thus, the residence of a hospital or nursing home administrator would continue to fall under the criteria set forth for such institutions where the purpose of the use was to promote the operation of the hospital or nursing home.

I should call your attention to the fact that if this residence was provided without charge to the administrator, or as a part of his salary, it might well be that the leasehold interest thus created would be taxable to the administrator as provided in SDCL 10-4-1 and 10-4-2. Also in this connection, see Official Opinion 78-10 and the authority cited therein for taxation of this sort of leasehold interest.

Respectfully submitted,

ROGER A. TELLINGHUISEN

ATTORNEY GENERAL

RAT:ss