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March 3, 2000

Record No. 990766





Charles B. Flannagan, II, Judge

Present: Carrico, C.J., Compton,[1] Lacy, Hassell, Keenan, Koontz, and Kinser, JJ.


In this appeal we consider whether the trial
court correctly determined that Smyth County Community Hospital
(the Hospital) was not entitled to a tax exemption pursuant to
Code ? 58.1-3606(A)(5) for property it owned and operated as a
nursing home.

The Hospital is a Virginia non-stock,
not-for-profit, tax exempt, community hospital located in Smyth
County, Virginia. It owns and operates Francis Marion Manor (the
Manor), an intermediate care nursing facility. Smyth County and
the Town of Marion (collectively "the County") assessed
real and personal property taxes on the nursing home property for
the 1993, 1994, and 1995 tax years. In October 1996, the Hospital
filed a petition for declaratory judgment and for relief from
those assessments, claiming that the nursing home property is
exempt from taxation under ? 58.1-3606(A)(5). Following a
hearing, the trial court determined that the property was not
exempt from taxation under that Code section, stating that the
statute required that the property "be used as an integral
part of the hospital operations" for application of the
exemption. We awarded the Hospital this appeal. Because we
conclude that the property in question is entitled to an
exemption from taxation under ? 58.1-3606(A)(5), we will reverse
the judgment of the trial court.

While the parties disagree as to the
conclusions to be drawn from the factual record, the facts
themselves are not in dispute. The Hospital is a non-profit
corporation organized "exclusively for charitable,
scientific and educational purposes." It is exempt from
state and federal taxation. Its Articles of Incorporation include
as one of its purposes the establishment and maintenance of
medical facilities of "all descriptions for the care of
persons suffering from illnesses or disabilities which require in
or outpatient care or attention." The facilities of the
Hospital, according to its Articles of Incorporation, include
facilities for "nursing services." Another purpose of
the Hospital is "[t]o participate . . . in any activity
designed and carried on to promote the general health of the

The Manor has been in existence since 1967 and
has always been owned by the Hospital. In 1987, the Manor
relocated to the "hospital campus." The Hospital owns
the property on which the Manor is situated, along with the
equipment and facilities located within the Manor. Although the
Manor has its own administrator, it is governed by the Hospital’s
board of directors and is not a separate legal entity through
incorporation or otherwise.

Nursing services for the patients at the Manor
are provided by nurses who are employees of the Hospital and who
work at both the Hospital and the Manor. There are no employees
at the Manor who are not employed by the Hospital.

The Manor does not have an operational checking
account, but uses the Hospital’s consolidated checking account.
The Manor begins each year with no retained earnings. If, within
a year, the Manor generates revenue exceeding its expenses, those
funds are placed in a "hospital fund . . . for replacement
of capital equipment or to meet other operating needs of the
hospital long term."

On the Hospital’s audited consolidated
financial statements, the Hospital and the Manor are presented as
a single entity. The notes to those reports for 1993, 1994, and
1995 refer to the Manor as a "wholly-owned
subsidiar[y]" of the Hospital. Following the 1995 report,
the consolidated financial reports refer to the Manor as an
"operating division of the Hospital." The consolidated
financial statements of the Hospital separate the Hospital and
the Manor into two components in a double entry bookkeeping
system, reflecting payments made by the Hospital for services and
supplies provided at the Manor. One of the consolidated
balance sheets reflects, as a liability of the Manor, a debt owed
to the Hospital. None of the other departments of the Hospital,
such as the emergency room, pharmacy, or radiology units are
separated out on the Hospital balance sheet, and the Manor is the
only unit whose financial performance is discussed regularly in
the monthly report of the Hospital president.

The Manor and the Hospital are licensed by the
Commonwealth of Virginia Department of Health but receive
different types of licenses. The Hospital is listed as the
"Legal Name of the Operator" on the Manor’s licensing
application. The Manor’s application is signed by both its
administrator and by the president and CEO of the Hospital. Both
the Hospital and the Manor are accredited by the Joint Commission
on Accreditation of Health Care Organizations, but are accredited
under separate standards.

As relevant here, ? 58.1-3606(A)(5) exempts
from taxation:

Property belonging to and actually and
exclusively occupied and used by . . . hospitals . . . conducted
not for profit but exclusively as charities . . . .

To come within the exemption allowed by ?
58.1-3606(A)(5), the Hospital has the burden of showing that the
Manor belonged to the Hospital and was "actually and
exclusively occupied and used by" the Hospital. Memorial
Hosp. Ass’n, Inc. v. County of Wise
, 203 Va. 303, 307, 124
S.E.2d 216, 219 (1962). The general rule is that an exemption
from taxation is the exception and provisions exempting property
from taxation must be strictly construed. The strict construction
of this statute means that entitlement to the exemption must
"appear clearly from the statutory provisions" relied
upon. Westminister Canterbury of Hampton Roads v. City of
Virginia Beach
, 238 Va. 493, 501, 385 S.E.2d 561, 565 (1989).
If there is any doubt concerning the exemption, the doubt must be
resolved against the party claiming the exemption. Id.

The County asserts that this record supports
its contention that the Manor is a separate entity and,
therefore, is not actually and exclusively occupied and used by
the Hospital, as required by the statute. This is true, according
to the County, because the Hospital itself treats the Manor as a
separate entity and because the Manor is licensed and inspected
according to separate requirements. The evidence relied upon by
the County for this assertion is the Hospital’s treatment of the
Manor in its financial statements. Unlike other departments of
the Hospital, the Manor has been specifically referred to as a
"wholly owned subsidiar[y]" of the Hospital and as a
separate reporting entity for financial reporting purposes. We
disagree with the conclusion advanced by the County based on this

While the evidence cited by the County, taken
alone, may support an inference that the Manor is a separate
entity, such an inference cannot overcome the undisputed evidence
that the Manor is not a legal or operational entity separate and
apart from the Hospital. The internal and external financial
reporting forms may serve certain interests of the Hospital, but
do not vest the Manor with a separate existence.

Likewise, a separate license issued to the
Manor cannot create a separate institution. As shown in the
record, separate licenses and licensing standards are required
for a number of departments in the Hospital, such as nuclear
medicine, the pharmacy, and rehabilitation. Separate licensing
requirements do not transform departments into entities separate
from the Hospital. The Manor’s license application lists the
Hospital as the legal operator of the Manor and, accordingly, the
license authorizes the Hospital to operate the Manor.

The undisputed evidence in this record shows
that the Hospital owns the property operated by the Manor. The
undisputed evidence also shows that Hospital employees staff the
Manor and the Manor is operated according to Hospital policies
adopted and imposed by the Hospital’s board of trustees. There is
nothing in the record to suggest any entity or persons other than
Hospital personnel, with the exception of patients at the Manor,
occupy or use the Manor. Based on this evidence, there can be no
doubt that the Hospital actually and exclusively occupied and
used the Manor, as required by ? 58.1-3606(A)(5).

This determination does not end our inquiry,
however. We also apply the "dominant purpose test" in
cases involving issues of property taxation exemption. That test,
generally speaking, is whether the property in question promotes
the purpose of the institution seeking the tax exemption. The
test is applied in two different contexts; one in which the
qualifying status of the property owner is challenged; the
other in which the qualifying status of the property is
challenged. An example of the first context is a challenge to a
hospital’s charitable status, and accompanying property taxation
exemption, if some of the hospital’s property is used for revenue
generating purposes such as office rental space or a pharmacy. If
the dominant purpose of the revenue generating property is not to
obtain revenue or profit, but "to promote the purposes for
which the [charity] was established and is incidental
thereto," the hospital retains its charitable status and
thus its property tax exemption. Wise, 203 Va. at 309, 124
S.E.2d at 220. See also Board of Supervisors v.
Medical Group Found., Inc.
, 204 Va. 807, 814, 134 S.E.2d 258,
263 (1964).

In the second situation, the qualifying status
of the institution owning the property is clear, but the issue is
whether the property of the qualified owner is entitled to the
tax exemption. Under these circumstances, the property is
entitled to the tax exemption regardless of any revenue it
produces incident to its use, if the property has "direct
reference to the purposes for which the [institution was
created,] and tends immediately and directly to promote those
purposes." Commonwealth v. Lynchburg Y.M.C.A., 115
Va. 745, 752, 80 S.E. 589, 591 (1914). See also Washington
County v. Sullins College Corp.
, 211 Va. 591, 595, 179 S.E.2d
630, 633 (1971); County of Hanover v. Trustees of
Randolph-Macon College
, 203 Va. 613, 617, 125 S.E.2d 812, 815

In applying the dominant purpose test in this
case we are mindful that it was originally developed and applied
under the provisions of the prior constitution and implementing
statutes to which a liberal interpretation was applied. See
Lynchburg Y.M.C.A., 115 Va. at 747-48, 80 S.E. at 590.
However, the statutory provisions at issue in this case, as we
have said, must be strictly construed and the dominant purpose
test must be applied in the context of this rule of statutory

There is no challenge in this case to the
charitable status of the Hospital because of the Hospital’s
operation of the Manor. Rather, the issue in this case falls in
the category in which the status of the property is challenged.
Applying the dominant purpose test, we consider whether the Manor
property has "direct reference to the purposes for
which" the Hospital was created, and "tends immediately
and directly to promote those purposes," and thus, is
entitled to the exemption.

The County argues that the Manor was operated
for the purpose of producing revenue for the Hospital. This goal
is reflected, according to the County, in the Hospital directors’
and officers’ "fixation on the financial performance
of" the Manor. Evidence of this fixation is demonstrated,
the County asserts, in the president’s monthly reports to the
board of directors discussing the financial performance of the
Manor and efforts to improve its "profitability,"
including discussions to improve the "payor mix" at the
Manor by decreasing the number of Medicaid patients. We disagree
with the County.

The interest of the Hospital’s officers in the
financial health of the Manor does not make the purpose of the
Manor the production of revenue for the Hospital. Attention to
the financial health of the Manor is important because any
deficit in the operational expenses of the Manor must be met by
the general fund of the hospital. Insuring that the Manor does
not have a significant adverse financial impact on the ability of
the hospital itself to function is a legitimate responsibility of
the officers and board members of the Hospital. Notably, the
record shows that the Manor produced no profit until 1992. The
record does not support the County’s assertion that the purpose
of the Manor is to produce income for the Hospital.

The County further argues that the Manor was
not being conducted in a manner "not for profit but
exclusively" as a charity. This argument misapplies the
requirements of ? 58.1-3606(A)(5). The requirement that an
operation be conducted "not for profit but exclusively"
as a charity applies to the institution seeking the exemption, in
this case the Hospital. The statute does not impose that
requirement upon the property for which exemption is sought.
Compare ? 58.1-3617 (requiring that property be used for
charitable, religious, or educational purposes). Likewise, the
dominant purpose test assumes that some activity is occurring
which is revenue producing, thereby making the use of the
property not exclusively charitable. But, the test is whether the
Manor, even if it produces revenue, immediately and directly
promotes the charitable purposes of the Hospital.

As recited above, one of the purposes of the
Hospital is the provision of nursing services. Operation of the
Manor directly promotes this purpose. Furthermore, the record
shows that the Manor follows the Hospital’s policies regarding
admission of patients and collection of bills. Patients are
admitted to both institutions without regard to their ability to
pay, and collection of unpaid bills is undertaken by both the
Hospital and the Manor when the patient has the means to pay but
has refused to do so. These policies further the purpose of the
Hospital to engage in activities which advance the general health
of the community by providing nursing care to all members of the

While the judgment of a trial court comes to us
with a presumption of correctness, the trial court cannot
disregard undisputed credible evidence. Cheatham v. Gregory,
227 Va. 1, 4, 313 S.E.2d 368, 370 (1984). Furthermore,
application of the requirements of ? 58.1-3606(A)(5) is a mixed
question of fact and law and we are not bound by the trial
court’s determination in this regard. For the reasons discussed
above, we conclude that the Hospital met its burden to establish
that it was entitled to a tax exemption for the property it owned
and operated as the Manor. The Hospital produced evidence that it
was conducted exclusively as a charity, that the property of the
Manor belonged to the Hospital and was "actually and
exclusively occupied and used by" the Hospital, and that the
use of the property furthered the charitable purposes of the

Accordingly, we find that the trial court erred
in holding that the property owned by the Hospital and operated
as the Manor was not entitled to an exemption from taxation under
? 58.1-3606(A)(5).
[2] We will reverse the judgment of the trial court and
remand the case for determination of the amount to be refunded to
the taxpayer.

Reversed and remanded.



[1] Justice Compton participated in
the hearing and decision of this case prior to the effective date
of his retirement on February 2, 2000.

[2] The Hospital argues that the
trial court used the wrong legal standard in reaching its
conclusion. We disagree. We construe the trial court’s finding
that the Manor was not operated "as an integral part of the
Hospital’s operations" as tantamount to a finding that the
Manor was not "actually and exclusively occupied and used
by" the Hospital. Additionally, the trial court’s request
that portions of the transcript be transcribed for the purpose of
determining "how this promotes the dominant purposes"
reflects its understanding of the appropriate legal standards,
even though, as indicated, these standards were improperly