Presbyterian Manors, Inc. v. Douglas County

Decision Date04 February 2000
Docket NumberNo. 81,779.,81,779.
Citation268 Kan. 488,998 P.2d 88
PartiesPRESBYTERIAN MANORS, INC., Appellant, v. DOUGLAS COUNTY, KANSAS, Appellee.
CourtKansas Supreme Court

Kasey Alan Rogg, of Martin, Churchill, Blair, Hill, Cole & Hollander, Chartered, of Wichita, argued the cause, and Paul C. Herr, J. Michael Kennalley and W. Stanley Churchill, of the same firm, were on the briefs for appellant.

Evan H. Ice, of Stevens & Brand, L.L.P., of Lawrence, argued the cause and was on the briefs for appellee.

Jeffrey A. Chanay, of Entz & Chanay, P.A., of Topeka, was on the brief of amicus curiae Kansas Association of Homes and Services for the Aging, Inc.

The opinion of the court was delivered by

ALLEGRUCCI, J.:

Presbyterian Manors, Inc., appeals from an order of the Board of Tax Appeals (BOTA) denying a property tax exemption for its adult care home and housing for the elderly facility in Lawrence, Kansas. The court transferred this case from the Court of Appeals, pursuant to K.S.A. 20-3018(c) BOTA concluded that Presbyterian Manors did not qualify for property tax exemption under K.S.A. 79-201b because it "neither charges for its services an amount which, in the aggregate, is less than its costs, nor provides it[s] services to residents at the lowest feasible cost." On appeal, the issue is whether the facility in Lawrence operated at the "lowest feasible cost." Presbyterian Manors does not quarrel with BOTA's conclusion that it did not charge its residents an amount less than the actual operating cost.

BOTA's order includes findings of fact, which have not expressly been challenged by Presbyterian Manors. The following relevant findings are from BOTA's order:

"[Presbyterian Manors] has submitted evidence that the property at issue will be used exclusively as an adult care home and for elderly housing purposes.... [T]he applicant's nursing home facility is currently licensed in accordance with K.S.A. 39-923.
"... Presbyterian Manor[s] is a not-for-profit corporation organized in Kansas.
"... Presbyterian Manor[s] has submitted evidence that it is exempt from paying federal income tax under I.R.C. 501(c)(3) by virtue of satisfying the federal definitions of `charitable' and `religious.' ... [C]ontributions to this type of nonprofit organization are deductible for federal income tax purposes, and consequently for state income tax purposes...."

BOTA reviewed Presbyterian Manors' audited financial statements for fiscal years 1993 through 1997 and its net operating income for 1977 through 1997. "The Board finds that the sum of Presbyterian Manor[s'] overall operations resulted in a net income of $45,870. The Board further finds that for the past 3 years, the applicant has experienced a net income from overall operations of $534,562." On the basis of these findings, BOTA concluded that "Presbyterian Manor[s] is not operating below its cost of operation."

BOTA's summary of Presbyterian Manors' finances shows that for the years 1995 through 1997, operations income was $138,005, $269,617, and $126,940, respectively. Investment earnings were $103,001, $108,044, and $80,124, respectively.

"13. The Board finds that while the cumulative net income from operations alone is not incredibly high, the net income from operations figures for fiscal years 1995 through 1997 are substantial. The Board also finds that when investment earnings are added in, the net income figures for 1995 through 1997 are quite large, as is the cumulative total net income. Finally, the Board finds that the applicant's Fund Balance is very large, $2,682,360 in 1995; $3,103,014 in 1996; and $3,321,544 in 1997. The applicant stated during the hearing that some of the money that has been built up will be used for imminent repairs. However, the applicant's estimates for these repairs made up less than half of the built up net income. The Board also notes that some of the Fund Balance, although not all of it[,] is made up of donor restricted monies.
"14. The Board further finds that the applicant has substantial current assets in comparison to its current liabilities.2 The applicant had a current ratio of 12.5 to 1 in 1995, 12.1 to 1 in 1996, and 9.8 to 1 in 1997. This ratio is an indicator of the applicant's solvency. The applicant's current ratio indicates that it had sufficient cash on hand or assets readily convertible to cash to meet its current obligations nine to twelve times over on June 30, 1995, 1996, and 1997. Furthermore, the applicant's total liabilities have decreased substantially over this three year period.3"

The footnotes state:

"2The applicant had current assets of $2,546,870 in 1995, $2,319,398 in 1996, and $2,413,343 in 1997. The applicant had current liabilities of $203,833 in 1995, $191,410 in 1996, and $246,065 in 1997.
"3The applicant's total liabilities were $6,828,132 in 1995, $5,941,771 in 1996, and $3,340,166 in 1997."

On the basis of these findings, BOTA concluded that Presbyterian Manors "is not providing services to its residents at the lowest feasible cost. The applicant's financial statements indicate that the applicant has more than sufficient income to make substantial improvements and sizably reduce its debt."

BOTA further remarked that "the financial evidence submitted to the Board indicates that the applicant is operating more profitably than an entity confined to operating at its lowest feasible cost."

Presbyterian Manors filed a petition for reconsideration, suggesting the legislative history of K.S.A. 79-201b Second and Fifth showed that the term "lowest feasible cost" was to be construed according to Rev. Rul. 72-124 of the Internal Revenue Code. BOTA summarily denied reconsideration for lack of new evidence. One Board member wrote a concurring opinion for the purpose of "elaborat[ing] on the `lowest feasible cost' analysis." The concurring member prefaced her opinion as follows:

"According to the petitioner, the legislative history of K.S.A. 79-201b dictates that Revenue Ruling 72-124 is the sole basis for determining whether an applicant seeking exemption from ad valorem property tax is providing its services to residents at the lowest feasible cost. I do not agree that the analysis is so limited. While the legislative history does make reference to Revenue Ruling 72-124, the express language of the statute does not. I do not believe the Legislature intended to limit our inquiry so narrowly. However, even if Revenue Ruling 72-124 is determined to be the controlling analysis, I do not agree with the petitioner's argument that the Board's analysis is inconsistent in any way with that ruling."

During the 1999 session, the legislature amended the statute in question by adding a retroactive provision that affects this court's consideration of BOTA's decision. Here are pertinent portions of the statute showing the changes:

"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:
....
"Second. All real property, and tangible personal property, actually and regularly used exclusively for adult care home purposes by an adult care home ... which is operated by a corporation organized not for profit under the laws of the state of Kansas ... charges to residents for services of which produce an amount which in the aggregate is less than the actual cost of operation of the home or the services of which are provided to residents at the lowest feasible cost, taking into consideration such items as reasonable depreciation, interest on indebtedness, acquisition costs, interest and other expenses of financing acquisition costs, lease expenses and costs of services provided by a parent corporation at its costs, and contributions to which are deductible under the Kansas income tax act; .... For purposes of this paragraph and for all taxable years commencing after December 31, 1976, an adult care home which uses its property in a manner which is consistent with the federal internal revenue service ruling 72-124 issued pursuant to section 501(c)(3) of the federal internal revenue code, shall be deemed to be operating at the lowest feasible cost....
....
"Fifth. All real property and tangible personal property, actually and regularly used exclusively for housing for elderly persons, which is operated by a corporation organized not for profit under the laws of the state of Kansas ... in which charges to residents produce an amount which in the aggregate is less than the actual cost of operation of the housing facility or the services of which are provided to residents at the lowest feasible cost, taking into consideration such items as reasonable depreciation and interest on indebtedness and contributions to which are deductible under the Kansas income tax act; and all intangible property including moneys, notes and other evidences of debt, and the income therefrom, belonging exclusively to such corporation and used exclusively for the purpose of such housing. For purposes of this paragraph and for all taxable years commencing after December 31, 1976, an adult care home which uses its property in a manner which is consistent with the federal internal revenue service ruling 72-124 issued pursuant to section 501(c)(3) of the federal internal revenue code, shall be deemed to be operating at the lowest feasible cost." L. 1999, ch. 154, § 74.

BOTA's decision and its order denying reconsideration in this case were issued in 1998. Thus, the statutes had not yet been modified to make Rev. Rul. 72-124 the controlling standard. Because BOTA is a specialized agency for the purpose of deciding taxation issues, the court generally gives its decisions deference on tax questions unless BOTA's interpretation is erroneous as a matter of law. In re Tax Appeal of Boeing Co., 261 Kan. 508, 515, 930 P.2d 1366 (1997).

This case presents an unusual situation where the amended statutes that actually control the outcome...

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