IN RE TAX APPLICATION OF CENTRAL KANSAS ENT ASSOCIATES, PA, No. 89

• Decision Date: 30 May 2003
• Docket Number: No. 89, No. 030, No. 031
• Parties: IN THE MATTER OF THE APPLICATION OF CENTRAL KANSAS E.N.T. ASSOCIATES, P.A., FOR EXEMPTION OF AD VALOREM TAXATION IN SALINE COUNTY, KANSAS.
• Court: Kansas Supreme Court

275 Kan. 893

69 P.3d 595

IN THE MATTER OF THE APPLICATION OF CENTRAL KANSAS E.N.T. ASSOCIATES, P.A., FOR EXEMPTION OF AD VALOREM TAXATION IN SALINE COUNTY, KANSAS.

Nos. 89,030, 89,031

Supreme Court of Kansas

Opinion filed May 30, 2003.

Jason L. Reed and Kenneth W. Wasserman, of Norton, Wasserman, Jones & Kelly, of Salina, were on the brief for appellant.

No appearance by appellee.

The opinion of the court was delivered by

DAVIS, J.:

Central Kansas E.N.T. Associates, P.A. (E.N.T.) appealed the Kansas Board of Tax Appeals' (BOTA) order denying its motion for reconsideration on the question of whether its aircraft are exempt from taxation under the K.S.A. 79-201k. BOTA concluded that both aircraft were rented for personal use and, therefore, not regularly used exclusively to earn income under the terms of the statute. We transferred this case from the Court of Appeals pursuant to K.S.A. 20-3018(c).

E.N.T. owns a 1980 Piper Saratoga and a 1986 Piper Malibu, both of which are used in its business of providing health care for Kansas patients. E.N.T. applied for exemptions from ad valorem tax for both of its airplanes. The applications for exemption were handled separately before BOTA and were consolidated for purposes of this appeal. E.N.T. claimed that its airplanes were exempt from property and ad valorem taxes based upon K.S.A. 79-201k, which provides an exemption for "all aircraft actually and regularly used exclusively to earn income for the owner in the conduct of the owner's business or industry."

Dr. David A. Hendrick, explained E.N.T.'s use of the 1980 Piper Saratoga:

"I use this aircraft for flying to branch clinics. I serve patients through Central and Western Kansas. I specifically fly for patient care in Quinter, Kansas and in Norton, Kansas. I also have used the aircraft extensively for continuing education meetings, doing research at the library at Colorado School of Medicine in Denver and going to other practices for continuing education and practice management.

"Our corporation also currently owns for business purposes a Piper PA 46 1986 Malibu. I have made every attempt to be insurable to fly the Malibu for the same business purposes as my partners. Because of my relatively low flying hours, I have not been able to obtain insurance with my given number of flying hours. Attached is a copy of the letter from my insurance agent explaining this situation. I expect to be able to fly the Malibu and to sell the Saratoga sometime before the year 2002. In the meantime, our corporation is in the position of having to maintain two separate airplanes for the corporate officers to accomplish their business use of the two planes.

....

"The aircraft is used for business purposes. We do rent it for some personal use to qualified corporate officers including Jerrold Cossette, M.D., Mark Bell, M.D. and myself with a rental charge of $100 per hour. To date this rental service has been primarily to myself as I strive to accumulate the required 500 hours of flying time that would allow our corporation to sell the Saratoga and work solely with the Malibu. The proceeds from the plane rental is business income that helps defray the fixed costs of the ownership of the plane by the corporation."

Dr. Jerrold E. Cossette explained E.N.T.'s use of the 1986 Piper Malibu:

"We use this aircraft for flying to branch clinics. We cover most of Central and Western Kansas. We have branch offices in Colby, which is 200 miles away, Russell, Norton, Quinter, Concordia, Belleville, McPherson and Beloit. We also use the aircraft for continuing education and practice management.

....

"The aircraft is used for business purposes and also as a rental plane. We do rent it for some personal use to qualified corporate officers including Mark G. Bell, M.D., Jerrold E. Cossette, M.D. and David A. Hendrick, M.D. with a rental charge of $150 per hour. This rental use is for the purpose of the Central Kansas Ear, Nose and Throat corporation. When it is rented for personal use, it is often used for other business ventures including farming and property management. The proceeds from the plane rental are business income that helps defray the fixed costs of the ownership of the plane. Obviously owning a plane for purposes of renting it is a business use of it."

BOTA requested additional information from E.N.T. regarding the number of times both planes were rented out for personal use. In 2001, the 1980 Piper Saratoga was flown 72 times, of which 12 were rented out for personal use. The remaining 60 flights were for business purposes. The 1986 Piper Malibu was flown 26 times in 2001, of which 5 were rented out for personal use. On average, the 1986 Piper Malibu is rented for personal use three or four times a year.

BOTA's Decision

BOTA found that 16.7% of the Saratoga flights in 2001 were rented out for personal use:

"4. The applicant uses the subject property to fly to branch clinics. The applicant acquired the subject property on February 27, 2000. The applicant allows the subject property to be rented out at $100/hour to qualified corporate officers. The applicant indicates that in 2001, the plane was flown 72 times. Of those flights, 12 or 16.7% were rented flights for personal use."

BOTA made substantially the same findings for the Malibu but noted that the Malibu was rented out for $150 per hour and 19.2% of the flights in 2001 were rented out for personal use. E.N.T. does not dispute these factual findings on appeal.

BOTA's tax exemption analysis as to the 1980 Piper Saratoga and the 1986 Piper Malibu was identical. BOTA noted that under the exemption statute, E.N.T. must use the aircraft "exclusively to earn income for the owner." BOTA cited T-Bone Feeders, Inc. v. Martin, 236 Kan. 641, 646, 693 P.2d 1187 (1985), for the proposition that the phrase "used exclusively" must be "only, solely, and purely for the purposes stated, and without participation in any other use." BOTA concluded E.N.T. had failed to make this showing:

"7. Upon examination of the application, the Board finds that the applicant does not use the subject property exclusively for the purpose of earning income for the owner in the conduct of the owner's business or industry. The applicant also uses the subject property for rental purposes, which is not a business purpose and is not exempt pursuant to K.S.A. 79-201k(b) First, and amendments thereto."

Standard of Review

The Act for Judicial Review and Civil Enforcement of Agency Actions, K.S.A. 77-601 et seq., controls this court's review of an order from BOTA. K.S.A. 74-2426(c). Pursuant to K.S.A. 77-621(a), the burden of proving the invalidity of BOTA's action lies with E.N.T. K.S.A. 77-621(c) further specifies that this court may grant relief from a BOTA order only in the following cases:

"(1) The agency action, or the statute or rule and regulation on which the agency action is based, is unconstitutional on its face or as applied;

"(2) the agency has acted beyond the jurisdiction conferred by any provision of law;

"(3) the agency has not decided an issue requiring resolution;

"(4) the agency has erroneously interpreted or applied the law;

"(5) the agency has engaged in an unlawful procedure or has failed to follow prescribed procedure;

"(6) the persons taking the agency action were improperly constituted as a decision-making body or subject to disqualification;

"(7) the agency action is based on a determination of fact, made or implied by the agency, that is not supported by evidence that is substantial when viewed in light of the record as a whole, which includes the agency record for judicial review, supplemented by any additional evidence received by the court under this act; or "(8) the agency action is otherwise unreasonable, arbitrary or capricious."

See In re Tax Appeal of Panhandle Eastern Pipe Line Co., 272 Kan. 1211, 1222-24, 39 P.3d 21 (2002). This appeal requires that we interpret the provisions of K.S.A. 79-201k(b). The interpretation of a statute is a question of law, and our scope of review is unlimited. Babe Houser Motor Co. v. Tetreault, 270 Kan. 502, 506, 14 P.3d 1149 (2000).

The rules relating to the interpretation of tax exemptions are familiar and well settled in Kansas:

"Taxation is the rule, and exemption from taxation the exception under the Kansas Constitution and statutes. [Citations omitted.] Constitutional and statutory provisions exempting property from taxation are to be strictly construed against the one claiming exemption, and all doubts are to be resolved against exemption. [Citations omitted.] Where the language of a statute, in particular, is relied upon as creating an exemption from taxation, it must be strictly construed against the party claiming the exemption, and he must bring himself clearly within the exemption. [Citations omitted.] Strict construction, however, does not warrant unreasonable construction. [Citation omitted.]" Tri-County Public Airport Auth. v. Board of Morris County Comm'rs, 245 Kan. 301, 304-05, 777 P.2d 843 (1989).

The burden of establishing an exemption from taxation is on the party claiming the exemption. Board of Wyandotte County Comm'rs v. Kansas Ave. Properties, 246 Kan. 161, 166, 786 P.2d 1141 (1990).

Discussion and Analysis

E.N.T. argues its aircraft are exempt from property and ad valorem taxes pursuant to K.S.A. 79-201k, which provides as follows:

"(a) It is the purpose of this section to promote, stimulate and develop the general welfare, economic development and prosperity of the state of Kansas by fostering the growth of commerce within the state; to encourage the location of new business and industry in this state and the expansion, relocation or retention of existing business and industry when so doing will help maintain or increase the level of commerce within the state; and to promote the economic stability of the state by maintaining and providing employment opportunities, thus promoting the general welfare of the citizens of

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