Appeal of Wirt

• Decision Date: 31 March 1979
• Docket Number: No. 49869,49869
• Citation: 592 P.2d 875,225 Kan. 517
• Parties: Appeal of Clay L. WIRT, Robert C. Bacon, and John J. Franke, Jr., as the Board of County Commissioners of the County of Johnson, Kansas, Prather H. Brown, Jr., as the County Appraiser of Said County, Edna C. Craig as the County Treasurer of Said County, and Donald Curry, as County Clerk of Said County, from a Decision of the Board of Tax Appeals of the State of Kansas, Appellees.
• Court: Kansas Supreme Court

Page 875

592 P.2d 875

225 Kan. 517

Appeal of Clay L. WIRT, Robert C. Bacon, and John J. Franke,

Jr., as the Board of County Commissioners of the County of

Johnson, Kansas, Prather H. Brown, Jr., as the County

Appraiser of Said County, Edna C. Craig as the County

Treasurer of Said County, and Donald Curry, as County Clerk

of Said County, from a Decision of the Board of Tax Appeals

of the State of Kansas, Appellees.

No. 49869.

Supreme Court of Kansas.

March 31, 1979.

Syllabus by the Court

1. The principles of exemption of property from ad valorem taxation are reviewed and stated.

2. Property owned by a non-tax-exempt entity and leased for profit to a qualifying tax-exempt entity, is not being used exclusively for tax-exempt purposes and is subject to ad valorem and property taxes.

Ronald E. Manka, of Lathrop, Koontz, Righter, Clagett, Parker & Norquist, Kansas City, Mo., argued the cause, and James R. Hubbard, of Breyfogle, Gardner, Martin, Davis & Kreamer, Olathe, was with him on the brief for appellants.

Bruce F. Landeck, of Lowe, Terry & Roberts, Olathe, argued the cause and Lyndus A. Henry, County Counselor, Overland Park, was with him on the brief for appellees.

Wayne E. Hundley, Topeka, filed a brief amicus curiae for Director of Division of Property Valuation, Department of Revenue.

Wayne T. Stratton, of Goodell, Cogswell, Stratton, Edmonds, Palmer & Wright, Topeka, filed a brief amicus curiae for Kansas Hospital Association.

HOLMES, Justice:

This appeal arises out of applications filed by Martin Psychiatric Research Foundation, Inc. (Martin Psychiatric) and Mid-Continent Hospitals, Inc. (Mid-Continent) with the Board of Tax Appeals seeking a determination that certain leased real and personal property in Johnson County is exempt from all ad valorem and property taxes levied under the laws of the State. The Board of Tax Appeals ruled the property was exempt from taxation. On appeal by the appropriate officials of Johnson County, the district court reversed the Board and held the property was not exempt from taxation as it was not used exclusively for an exempt purpose. Martin Psychiatric and Mid-Continent have appealed.

Martin Psychiatric is a Kansas nonprofit corporation formed in 1965. Mid-Continent is a Kansas corporation formed for profit in July, 1971. Martin Psychiatric enjoys federally tax-exempt status under section 501(c)(3) of the Internal Revenue Code, as amended, and is licensed by the Department of Social and Rehabilitation Services to conduct a treatment facility designated as a psychiatric hospital with day care treatment and out-patient service. The property in question includes both real and personal property owned by Mid-Continent and leased to Martin Psychiatric under a written lease agreement originally entered into in June, 1972. Located on the real property are improvements operated as a private psychiatric hospital with day care treatment and out-patient services. The personal property included in the lease agreement is used by Martin Psychiatric in the operation of the hospital. All parties agree that the functions of Martin Psychiatric qualify all property used exclusively by it for tax-exempt status.

The original lease was for a period of fifteen years at an annual rental of $84,000.00. The lease contains options which allow the lessee to extend the lease for successive five-year periods until the year 2071. Martin Psychiatric evidently was not as successful as originally anticipated and in December, 1975, the annual rental was reduced by agreement of the parties to $46,645.32 until 1982 at which time it will increase to $60,000.00 per year. The lessee is also obligated to pay all property taxes, real and personal, and in addition is responsible for all repairs, maintenance and replacement of the leased property.

The sole issue is whether real and personal property owned by a profit corporation and leased to a nonprofit corporation is "actually and regularly used exclusively" by the nonprofit corporation so as to be exempt from property and ad valorem taxation under K.S.A. 79-201b First.

At the outset we wish to thank the Kansas Hospital Association and the Director of Property Valuation, Department of Revenue, for the excellent Amicus briefs filed with the court. Along with the briefs of the parties, they were of assistance to and carefully considered by the court.

K.S.A. 79-201b states in relevant part as follows:

"The following described property, to the extent herein specified, Shall be and is hereby exempt from all property or ad valorem taxes levied under the laws of the state of Kansas:

"First: All real property, and tangible personal property, actually and regularly used exclusively for hospital purposes by a hospital as the same is defined by K.S.A.1977 Supp. 65-425, and amendments thereto, or A psychiatric hospital as the same is defined by K.S.A.1977 Supp. 59-2902, and amendments thereto, Which hospital or Psychiatric hospital is operated by a corporation organized not for profit under the laws of the state of Kansas or by a corporation organized not for profit under the laws of another state and duly admitted to engage in business in this state as a foreign, not for profit corporation; and all intangible property including moneys, notes and other evidences of debt, and the income therefrom, belonging exclusively to such a corporation and used exclusively for hospital or psychiatric hospital purposes." (Emphasis added.)

The district court held that when property is leased for profit to an exempt organization, the property is not being used exclusively by the exempt organization and therefore is not exempt from taxation. The renting of the property by the owner for profit was held to be a use of the property.

Before addressing the express question before the court, we will iterate some of the basic tenets of property taxation. These principles have been summarized in Lutheran Home, Inc. v. Board of County Commissioners, 211 Kan. 270, at pages 275-276, 505 P.2d 1118 at pages 1122-23 (1973) as:

"(1) Constitutional and statutory provisions exempting property from taxation are to be strictly construed.

"(2) The burden of establishing exemption from taxation is on the one claiming it.

"(3) The exemption from taxation depends solely upon the exclusive use made of the property and not upon the ownership or the character, charitable or otherwise, of the owner.

"(4) The test of whether an enterprise is charitable for ad valorem tax purposes is whether its property is used exclusively to carry out a purpose recognized in law as charitable.

"(5) The question is not whether the property is used partly or even largely for the purposes stated in the exemption provisions, but whether it is used exclusively for those purposes. (Clements v. Ljungdahl, 161 Kan. 274, 278, 167 P.2d 603; State, ex rel., v. Security Benefit Ass'n, 149 Kan. 384, 87 P.2d 560.)

"(6) The phrase 'used exclusively' as contained in Section 1, Article 11, of the Kansas Constitution, was intended by the framers in the sense that the use made of property sought to be exempt from taxation, must be only, solely, and purely for the purposes stated in the Constitution, and without admission to participation in any other use. (Sigma Alpha Epsilon Fraternal Ass'n v. Board of County Comm'rs, supra (207 Kan. 514, 485 P.2d 1297).)"

Briefly, they may be summarized as: taxation is the rule, exemption is the exception.

While the precise question is one of first impression, this court has had occasion to consider the converse issue. In Stahl v. Educational Assoc'n, 54 Kan. 542, 38 P. 796 (1895), property owned by the association was leased to a tenant and all of the rents and profits derived from the property were used by the association (a tax-exempt educational institution) exclusively for educational purposes. The court denied exempt status to the property and stated "When its real estate is rented to a tenant, or its funds invested in other property for profit, or loaned at interest, the property thus rented or invested or loaned will be liable to taxation, as much as any other property that is rented or invested or loaned, no matter in whose hands it might be." P. 549, 38 P. p. 797.

All parties agree ownership is not a controlling factor in determining if property is exempt and although appellants go to great lengths to distinguish between ownership and use, the parties recognize the "exclusive use" of the property is the test under the statute. Appellants take the position "use" means the physical use of the property and the intangible benefits of ownership, including renting of the property for profit, do not constitute using the property. Appellants urge that we look only to the physical use by the lessee, Martin Psychiatric, to determine the issue. Appellees, on the other hand, contend when property is rented or leased that, in and of itself, is a use by the owner and the lessee cannot be said to be using the property exclusively.

Appellants and the Kansas Hospital Association contend that to exempt from taxation leased property used by an exempt organization meets the intent of the Constitution and statutes by giving relief to the tax exempt institution and...