A nonprofit hospital's administrator lived in a home the hospital had owned since 1967. The county discovered the residence had never been on the tax rolls and tried to add it. The hospital says the home is exempt as charitable property; the Director of Equalization says SDCL 10-4-9.3 only exempts property used for health-care services. Who is right?
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 sided with the nonprofit. The key move was treating the question as a continuation of the pre-1986 framework. Before 1986, all property of a charitable, benevolent, or religious society used for charitable purposes was exempt under SDCL 10-4-9. The 1934 Scottish Rite Temple Association case had recognized that a charitable society's employee residence was exempt on the same theory that a parsonage is exempt for religious use: the residence supported the society's charitable mission.
The 1986 amendment carved out health-care property as its own category in SDCL 10-4-9.3 but did not eliminate the charitable exemption for property that did not directly deliver health-care services. Charitable hospitals could still claim the broader SDCL 10-4-9 exemption for support-function property like an administrator's residence, as long as the purpose was to advance the operation of the hospital.
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. That mirrored a 1978 AG 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 and 10-4-9.3 have both been amended multiple times since 1989, and the leasehold-tax provisions at SDCL 10-4-1 and 10-4-2 should be checked against current statute and Department of Revenue guidance before applying.
What the opinion meant at the time
For Kingsbury County and the Lake Preston facility, the residence stayed off the tax rolls. The Director of Equalization's narrow reading of SDCL 10-4-9.3 was rejected; the broader charitable exemption at SDCL 10-4-9 still covered the administrator's home.
For other nonprofit hospital systems holding employee residences, the opinion confirmed that the parsonage analogy from Scottish Rite Temple survived the 1986 reorganization of the property-tax exemptions. The threshold question was whether the residence supported the nonprofit's charitable purpose, not whether direct patient care occurred inside.
For administrators themselves, the leasehold caveat was the part to watch. A free or compensation-equivalent residence could create a personally taxable leasehold interest even when the underlying real estate stayed exempt to the nonprofit. Reviewing the housing arrangement with a tax attorney was prudent.
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 1934 Scottish Rite Temple case had held that a Masonic Lodge's residence for its secretary was exempt on the same theory that a parsonage for a minister is exempt as religious use. The administrator's home for a charitable hospital fit the same pattern: the residence supported the charitable mission, so it shared the exemption.
Q: What was the leasehold interest warning about?
A: SDCL 10-4-1 and 10-4-2 separately authorize taxing a leasehold interest held by a private party in otherwise-exempt property. If the administrator received the residence as part of his salary or for free, his use right could be valued and taxed to him personally, even while the underlying real estate remained exempt to the nonprofit.
Q: Why was the home off the rolls since 1967?
A: The opinion describes it as "inadvertently omitted" rather than the result of a contested exemption claim. SDCL 10-11-3 gives the county a process for adding omitted property and demanding the owner show cause. The dispute over the exemption surfaced only when the Lake Preston facility's closure drew attention to the residence.
Q: Would the same answer apply to a for-profit hospital?
A: No. The exemption analysis turns on the nonprofit's charitable character under SDCL 10-4-9. A for-profit hospital's administrator residence would not qualify for the charitable exemption, although other exemption theories might apply in specific cases.
Background and statutory framework
South Dakota's property-tax exemption regime is built around use rather than the formal status of the owner. SDCL 10-4-9 historically exempted property of "any charitable, benevolent, or religious society and used exclusively for charitable, benevolent, or religious purposes." The "used exclusively for" language pulled in support-function property under the doctrine that a society's employee residence was part of the broader charitable purpose.
In 1986 the legislature pulled health-care property into a dedicated section, SDCL 10-4-9.3, which focused on property "used primarily for human health care and health care related purposes." Read narrowly, that section seems to require direct health-care use, which is why the Kingsbury Director of Equalization argued an administrator's home was not covered.
Tellinghuisen's resolution was that 10-4-9.3 added a category but did not preempt the broader 10-4-9 exemption. A nonprofit hospital could still be a "charitable society" whose support-function property was exempt as charitable use. The 1934 Scottish Rite Temple parsonage analogy continued to apply.
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.
The leasehold taxation rules at SDCL 10-4-1 and 10-4-2 reflect a separate doctrine: a private party's possessory interest in exempt property can itself be taxable, even when the title-holder is exempt. This guards against the use of exempt entities as conduits for tax-free employee compensation.
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
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