CHICAGO -- The Iowa Supreme Court last week upheld a lower court's ruling that a nursing home in Union County is not exempt from paying property taxes even though it is a nonprofit corporation.

The Supreme Court concurred with the 1991 Union County District Court decision finding that Care Intiatives, a nonprofit corporation that owns and leases 41 nursing homes in Iowa, does not operate with "charitable and benevolent objectives.

In September 1991, Union County District Court Judge Gene Needles denied the property tax exemption in a case involving Creston Manor, which is owned by Care Initiatives. Needles ruled that a trio of investors netted "excessive" profits by creating Care Initiatives as a "shell" nonprofit corporation to obtain tax-exempt bond financing to purchase nursing homes in the state.

The 1991 decision resulted from a property tax exemption appeal that Care Initiatives filed in 1990 on behalf of Creston Manor. The corporation filed the appeal after the Union County assessor denied its application for an exemption.

In his decision, Needles also said that Care Initiatives had received a notice that its tax-exempt status is under investigation by the Internal Revenue Service.

An IRS official this week would neither confirm nor deny that the agency was conducting an investigation of Care Initiatives. However, the official did say that the IRs looks at "state court decisions with interest."

Duncan Graham, president of Care Initiatives, this week confirmed that his firm is being investigated by the IRS.

"We're being audited by the IRS. We feel strongly that we are in compliance in every way. We feel we will be vindicated," Graham said, adding that the audit began in 1991.

Graham said he did not believe the state Supreme Court decision would negatively affect the tax-exempt status of the roughly $86 million of revenue bonds previously issued in 1989 by the Iowa Finance Authority on behalf of Care Initiatives.

In response to complaints from around the nation, the IRS in 1990 warned that 501(c)(3) organizations involved in bond-financed acquisitions or sales benefiting private parties could lose their tax-exempt status.

The IRS official interviewed this week said that the revocation of a nonprofit corporation's 501(c)(3) certification would eliminate its ability to issue more tax-exempt debt and could cause its outstanding bonds to become taxable. He added tha the IRS in the past has negotiated with issuers for a direct payment in order to spare bondholders the distress of seeing their tax-exempt investments become taxable.

In 1989, Care Initiatives, then known as Mercy Health Initiatives, issued $85.6 million of tax-exempt revenue bonds to finance the acquisition of 41 nursing home properties and leases in 33 Iowa counties. The corporation changed its name to Care Initiatives after Iowa hospitals owned by the Catholic Sisters of Mercy objected to the nonprofit's use of the word "mercy." Care Initiatives has no religious affiliation.

Placed with institutional investors by Underwood, Neuhaus & Co., the unrated bonds offered tax-exempt yields ranging from 9.70% in 1999 to 9.95% in 2019.

Ted Chapler, executive director for the Iowa Finance Authority, said the authority was not involved in the litigation. Both Chapler and an official from Boatmen's National Bank of Des Moines, trustee for the revenue bondholders, declined to comment on the possible impact the Supreme Court decision could have on the tax-exempt status of the bonds.

Frank Pechachek Jr., and attorney for Union Country, said the state Supreme Court's ruling means that the county can keep about $2.4 million in property taxes paid by Care Initiatives since 1990.

He said the Supreme Court ruling could set a precedent for similar property tax exemption appeals filed by Care Initiatives in 29 other counties. Pechachek's law firm represents Union County and most of the other counties that are hoping to retain property taxes from Care Initiatives.

Graham of Care Initiatives said the nonprofit its considering refiling appeals in Union County and other district courts based on new developments sinc the original appeals were filed. He said the corporation also may request at a rehearing of the Union County appeal before the state Supreme Court.

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