MAIN LINE, INC. v. BOARD OF RENO COUNTY COMM'RS, 91,569.
| Decision Date | 01 October 2004 |
| Docket Number | No. 91,569.,91,569. |
| Citation | 33 Kan.App.2d 875,112 P.3d 951 |
| Parties | MAIN LINE, INC., Appellant, v. BOARD OF RENO COUNTY COMMISSIONERS, Appellee. MAIN LINE, INC., Appellant, v. BOARD OF RICE COUNTY COMMISSIONERS, Appellee. |
| Court | Kansas Court of Appeals |
Robert J. O'Connor and Geron J. Bird, of Stinson Morrison Hecker LLP, of Wichita, for appellant.
Richard A. Benjes, of Hutchinson, for appellee.
Before JOHNSON, P.J., MALONE and HILL, JJ.
Petition for review denied 279 Kan. 1006 (2005).
Main Line, Inc., appeals the district court's affirmation of the Board of Tax Appeals' (BOTA) classification of Main Line's rental real estate as commercial, rather than as property owned and operated by a not-for-profit corporation. Specifically, Main Line contends that BOTA erred in finding that Main Line did not operate the real property and erred in refusing to grant relief retroactively. We affirm.
Main Line was a for-profit corporation that held rental property, generating total revenues in 1997 of approximately 2.5 million dollars. In June 1998, Main Line's depreciable property was valued in excess of 10 million dollars. Health Care, Inc., a not-for-profit corporation, purchased a 100% interest in Main Line and converted it into a tax-exempt not-for-profit organization. Main Line's application for tax exempt status was dated November 27, 1998. Main Line's brief supports many of its factual contentions by citing to its entries in the tax exemption application. Based upon the information in that application, the Internal Revenue Service (IRS) issued a letter ruling, determining Main Line to be exempt from federal income tax as an organization described in Section 501(c)(3) of the Internal Revenue Code (IRC). 26 U.S.C. § 501(c)(3) (2000).
Main Line owns medical equipment, land, and buildings, all of which are leased to Hutchinson Clinic, P.A. (Clinic), a Kansas for-profit corporation. Main Line's only source of operating revenue is the rental income from the Clinic, albeit the tax exemption application asserts that, if needed, potential cash infusions are available from Health Care, Inc. The rental agreement is governed by a 30-year Master Facilities Lease (lease), which contains provisions effecting a common commercial lease arrangement, known as a triple-net lease, whereby the tenant is responsible for paying the insurance, taxes, and repairs. Specifically, the Clinic is obligated to pay "all taxes and assessments, general and special, which may be lawfully taxed, charged, levied, assessed or imposed upon or against or payable for or in respect of the Leased Property or any part thereof." If the Clinic fails to perform any of its duties under the lease, then Main Line has the option, but not the obligation, to perform the duties.
The lease included three parcels of real estate in Reno County and one parcel in Rice County. In mid-2001, Main Line commenced the process to challenge the rate at which ad valorem taxes were assessed against its real estate. Specifically, in June 2001, Main Line filed an equalization appeal on the Reno County parcels, challenging the 2001 assessment. Two months later, Main Line filed applications protesting payment of the 2000 ad valorem taxes on the three Reno County parcels, and on September 25, 2001, it applied for relief on the same parcels for the 1999 tax year. With respect to the Rice County parcel, Main Line filed a protest on August 7, 2001, challenging the 2000 tax assessment, and a month later applied for relief for the 1999 tax.
Before BOTA, Main Line filed for summary judgment, and the Counties filed a motion to dismiss for lack of jurisdiction. BOTA dismissed the appeals for the 1999 tax year, as well as the 2000 appeal on one parcel for which Main Line had previously filed and then dismissed an equalization appeal. Main Line's remaining claims were denied on the merits.
After Main Line's motion for reconsideration was denied, it filed a timely petition for judicial review in Reno County. The Kansas Supreme Court ordered the consolidation of the Rice County and Reno County cases. After hearing oral arguments and reviewing the evidence, the district court sustained BOTA's findings.
The core issue presented is whether Main Line operated the land, as required by K.S.A. 79-1439(b)(1)(D) to receive a favorable 12% tax rate. To resolve the question, we must interpret the statute. We give weight and consideration to BOTA's interpretation of a statute, but the final construction of a statute rests with the courts. See Lario Enterprises, Inc. v. State Bd. of Tax Appeals, 22 Kan. App. 2d 857, 860, 925 P.2d 440, rev. denied 261 Kan. 1085 (1996). Courts construe statutes imposing a tax strictly in favor of the taxpayer. In re Tax Appeal of Harbour Brothers Constr. Co., 256 Kan. 216, 223, 883 P.2d 1194 (1994). On the other hand, tax exemption statutes are construed strictly in favor of imposing the tax and against allowing the exemption for one who does not clearly qualify. Presbyterian Manors, Inc. v. Douglas County, 268 Kan. 488, 492, 998 P.2d 88 (2000).
The assessed valuation of Main Line's real estate for ad valorem tax purposes was computed at 25% of its value, which is the assessment rate for commercial property. K.S.A. 79-1439(b)(1)(F). Main Line argues that it fit within a special classification applicable to certain tax-exempt organizations pursuant to K.S.A. 79-1439(b)(1)(D). That provision is the enabling statute for Kan. Const. art. 11, § 1(a)(4) (2003 Supp.), and provides, in pertinent part:
K.S.A. 79-1439a limits the 12% tax rate to organizations that are granted tax-exempt status under 6 of the 27 subsections of IRC 501(c); IRC 501(c)(3) is one of the 6 subsections listed for special treatment. Main Line is, at least for purposes of this opinion, an IRC 501(c)(3) organization. IRC 501(c)(3) provides:
"Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office." 26 U.S.C. § 501(c)(3).
If K.S.A. 79-1439(b)(1)(D) simply applied the 12% assessment rate to real property owned by a qualifying tax-exempt organization, our analysis would be complete; Main Line would qualify for the rate. However, the statute makes the additional requirement that the real property must be operated by the qualifying not-for-profit, tax-exempt organization. In a vacuum, one would intuit that a tax-exempt organization is not operating the property. A professional association of medical care providers has possession of the real estate and is actively utilizing it to generate income, presumably with the goal of earning profits for the Clinic's beneficial owners. Main Line's role in the real estate's operation is simply to receive passive income from the property in the form of rents. It is difficult to perceive how Main Line's rental of its assets to a for-profit enterprise is in furtherance of the tax-exempt IRC 501(c)(3) purpose for which Main Line is ostensibly organized and exclusively operating. Accordingly, the arrangement does not comport with the spirit of our state's legislation designed to foster the religious, charitable, etc. activities contemplated in IRC 501(c)(3).
However, language in prior cases dealing with distinguishable fact patterns and often addressing different statutory provisions has provided Main Line with fuel to drive its arguments that it should be deemed to have operated the subject real property. Main Line contends that the statutory operation requirement can be met in more than one way. We perceive Main Line's arguments to be that its leasing of the property can fulfill the "operated" requirement; that through the relationship between Main Line and the Clinic, the Clinic can perform the operation requirement on behalf of Main Line; and that the Clinic's independent operations fulfill the statutory requirement.
BOTA found that Main Line's leasing of the land to the Clinic did not constitute an operation of the land. The agency noted that the lease required the Clinic to pay the taxes and opined that Main Line's discretion to enforce the lease provisions was not tantamount to operating the land. BOTA observed that the triple-net lease provision would give the benefit of the lower tax rate to the Clinic, which was responsible for paying the property taxes but which was not tax-exempt under IRC 501(c)(3). BOTA found this situation contravened legislative intent. See Most Worshipful Grand Lodge v. Board of Shawnee County Comm'rs, 259 Kan. 510, 518-19, 912 P.2d 708 (1996) (...
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