Recreation Centers of Sun City, Inc. v. Maricopa County, CV-87-0087-PR

• Decision Date: 02 November 1989
• Docket Number: No. CV-87-0087-PR,CV-87-0087-PR
• Citation: 162 Ariz. 281,782 P.2d 1174
• Parties: RECREATION CENTERS OF SUN CITY, INC., a nonprofit corporation, Plaintiff-Appellee, v. MARICOPA COUNTY, a body politic, and the Arizona Department of Revenue, Defendants-Appellants.
• Court: Arizona Supreme Court

Page 1174

782 P.2d 1174

162 Ariz. 281

RECREATION CENTERS OF SUN CITY, INC., a nonprofit corporation, Plaintiff-Appellee, v. MARICOPA COUNTY, a body politic, and the Arizona Department of Revenue, Defendants-Appellants.

No. CV-87-0087-PR.

Supreme Court of Arizona, In Banc.

Nov. 2, 1989.

Reconsideration Denied Dec. 12, 1989.

Evans, Kitchel, & Jenckes, P.C. by James R. Hienton and David J. Ouimette, Phoenix, for plaintiff-appellee.

Robert K. Corbin, Atty. Gen., and Anthony B. Ching, Sol. Gen. by Robert A. Zumoff and James D. Winter, Asst. Attys. Gen., Phoenix, for defendants-appellants.

FELDMAN, Vice Chief Justice.

Maricopa County and the Department of Revenue ("department") petition this court to review a court of appeals decision holding that a deed restriction on property owned by Recreation Centers of Sun City, Inc. ("Rec Centers") destroyed the property's value for tax purposes. See Recreation Centers of Sun City, Inc. v. Maricopa County, 162 Ariz. 277, 782 P.2d 1170 (App. 1986). We granted review because issues pertaining to the proper method of assessing use restricted property are of statewide importance. See Rule 23 Ariz.R.Civ.App.P. 17B A.R.S. We have jurisdiction pursuant to Ariz. Const. art. 6, § 5(3) and A.R.S. § 12-120.04.

I. FACTS

Prior to 1961, Del E. Webb Development Company ("Webb") commenced the development of Sun City, a large, adult retirement community located northwest of Phoenix. Webb built various recreational facilities as part of the development. The record indicates that Webb had a consistent policy of conveying the recreation property to the homeowners' organization as phases of the development were completed. See Warranty Deeds, Exhibits 1-6.

Webb conveyed the six parcels of land at issue ("property") to Rec Centers with the following restrictive covenant:

[S]aid property shall be used only for the purposes presently set forth in the articles of incorporation of the grantee [Rec Centers] herein, i.e., said property shall be used for the purpose of operating and maintaining a community center and recreational facilities without pecuniary gain or profit, for the benefit of property owners in Sun City, Maricopa County, Arizona.

Id. Rec Centers is a nonprofit, homeowners corporation.

The properties at issue have various improvements, including recreation center complexes (each consisting of a swimming pool, social and meeting halls, auditorium, craft room, and other facilities), golf courses with pro shops, and a bowling alley. Rec Centers owns and operates all the facilities.

Sun City homeowners may become members of Rec Centers and obtain the right to use the recreational facilities by signing a facilities agreement and by paying annual dues. Articles of incorporation and by-laws govern the rights and obligations of members. Any Sun City homeowner may enforce the covenant if Rec Centers attempts to use the property in a manner inconsistent with the restriction. Pretrial Statement, filed Nov. 19, 1984.

II. PROCEDURAL HISTORY

A. The Trial Court

The county assessor determined that the value of the property owned by Rec Centers was in excess of $11 million for the year 1981 and in excess of $12 million for 1982. He based the value of the land on sales of comparable commercial property without deed restrictions and used a cost basis to value the improvements.

Rec Centers challenged the 1981 and 1982 valuations in the board of tax appeals. ¹ Upon receiving adverse decisions from the board, it properly filed appeals in superior court that were consolidated by stipulation of the parties.

At trial, Rec Centers stipulated to the trial court that "if the property is to be valued without regard to the restriction, the values placed on it by the public authorities are the values to be followed in this case." Reporter's Transcript (RT), Nov. 20, 1984, at 5. The trial court suggested that the department stipulate that "[i]f the property is to be evaluated on a restricted use [the department had] no evidence that it [had] any value at all." Id. at 6. The department agreed to Rec Centers' stipulation, but had reservations about the court's suggested addendum. The in-court dialogue is confusing, at best, but apparently the department agreed that the restricted property could be deemed valueless if Rec Centers made an offer of proof or adduced testimony that would so prove. Id. at 7. What this meant we cannot tell; it is possible to conclude from the record, however that the department did not agree that the property was valueless. The department stated, and the trial court agreed, that Rec Centers had the burden of going forward with the evidence.

Rec Centers introduced testimony from two witnesses who claimed the property had no value because the restrictions rendered it unmarketable. The department presented no witnesses. Finding the property to be valueless, the trial court concluded that Rec Centers was entitled to recover all taxes paid on the six parcels for 1981 and 1982. The department appealed.

B. The Court of Appeals

The court of appeals affirmed, stating "that when the deed restriction is considered, the property has no value for tax purposes." 162 Ariz. at 281, 782 P.2d at 1174. The court rejected the department's argument that because the original owners voluntarily imposed the restriction it should be treated like any other voluntary encumbrance, for example, a lease or mortgage, and consequently be ignored. Acknowledging that it is well settled in Arizona that leases and mortgages will not be considered when determining market value for purposes of taxing real property, the court declined to apply the same rule to a deed restriction that "permanently encumbers the title to the property and severely restricts its use." 162 Ariz. at 280, 782 P.2d at 1173.

We granted the department's petition for review. We must therefore decide whether the assessor's failure to consider the deed restriction resulted in an excessive valuation and whether the trial court and court of appeals were correct in holding that, considering all the terms of the restriction, the property had no value for tax purposes.

III. DISCUSSION

A. The Property Tax

1. Constitutional Considerations

Our constitution states that "[t]he power of taxation shall never be surrendered, suspended, or contracted away." Ariz. Const. art. 9, § 1. Such power is to be exercised for the public good. Id. Indeed, "the object of taxing property is to produce the revenues with which to conduct the business of the state...." State v. County of Maricopa, 38 Ariz. 347, 350, 300 P. 175, 176 (1931). Accordingly, only specific property may be exempt from taxation. Ariz. Const. art. 9, §§ 2, 2.1, 2.2, and 2.3. The purpose of these constitutional provisions is to ensure that all property in the state bears "its just burden of the taxes." Brophy v. Powell, 58 Ariz. 543, 554, 121 P.2d 647, 652 (1942).

Legislative tax exemptions that force other taxpayers to bear increased tax burdens must foster legitimate social goals and comply with constitutional provisions. See Comment, Real Property Exemptions in Arizona, Law & Soc. Order 241 (1972). Therefore, the legislature may not exempt from ad valorem tax any property or class of property not specified in the constitution, and any law exempting property from taxation is to be strictly construed. Kunes v. Samaritan Health Serv., 121 Ariz. 413, 590 P.2d 1359 (1979). The legislature's policy is that "all property in this state shall be taxed, excepting only the classifications permitted by the constitution." See A.R.S. § 42-271(A)(1) to (17). Rec Centers' property does not fall within any of the permitted exceptions. ²

Of course, the arguments in this case are not based on a legislatively granted, constitutionally permitted exemption. However, unless the property actually has no value, its zero assessment effects a de facto exemption that reduces the state's ability to raise revenue. Thus, in turning to analyze the effect of the deed restriction, we bear in mind the policy of the constitution: all property not exempted must bear its share of the tax burden.

2. Valuation: The Statutory Scheme

When imposing property taxes, the assessor must consider the property's full cash value, the assessment ratio, and the tax rate. See A.R.S. §§ 42-201(1), 42-227, and 42-304. In arriving at an accurate full cash value, the assessor is required to determine market value. A.R.S. § 42-227. Market value is synonymous with "full cash value" and is "that estimate of value that is derived annually by the use of standard appraisal methods and techniques or as provided by law." A.R.S. § 42-201(4). Thus, property may be valued by the market data, cost, or income approach. County of Maricopa v. Sperry Rand Corp., 112 Ariz. 579, 581, 544 P.2d 1094, 1096 (1976).

A taxpayer may challenge the department's assessment in superior court. A.R.S. § 42-178. The trial court, however, may not make an independent evaluation of full cash value until the taxpayer presents evidence to rebut the statutory presumption that the valuation is correct. A.R.S. § 42-178(B) ("The valuation or classification as approved by the appropriate state or county authority shall be presumed to be correct and lawful"); Department of Property Valuation v. Trico Elec. Coop., Inc., 113 Ariz. 68, 546 P.2d 804 (1976). The trial court must determine that the valuation is either excessive or insufficient before it makes its own evaluation. Id.

The trial court in the present case considered the testimony of Rec Centers' witnesses regarding the value of the property on the open market. One witness was the manager of a real estate brokerage firm, the other the manager of a realty appraisal firm. Addressing only the property's value in the marketplace, they testified that the deed restriction quoted above destroyed marketability. In their opinion, no one would buy property that could not be operated on a for-profit basis. Based on the testimony that...