church exemption

In the Matter of the Application of PRESBYTERY OF NORTHERN KANSAS OF THE PRESBYTERIAN CHURCH, INC. for Exemption from Ad Valorem Taxation in Jackson County, Kansas.


Case Information:



Docket/Court: 104,886, Court of Appeals of Kansas



Date Issued: 09/23/2011



Tax Type(s): Property



Appeal from Court of Tax Appeals.



Nathanael Berg, of Hampton & Royce, L.C., of Salina, for appellant Presbytery of Northern Kansas.



Alexandria S. Morrissey, Jackson County Counselor, for appellee Jackson County.



OPINION

Before STANDRIDGE, P.J., PIERRON, J., and BRAZIL, S.J.



PER CURIAM.



NOT DESIGNATED FOR PUBLICATION (Pursuant to Kansas Supreme Court Rule 7.04(f), unpublished opinions are not precedential and are not favored for citation. They may be cited for persuasive authority on a material issue not addressed by a published Kansas appellate court opinion.)



MEMORANDUM OPINION

The Presbytery of Northern Kansas (Presbytery) appeals from the Court of Tax Appeals' (COTA) decision to deny its application for ad valorem tax exemption under K.S.A.2008 Supp. 79-201 Second. Presbytery claims COTA erred in its determination that the property failed to meet the “used exclusively” for exempt purposes requirement of the statute. For the reasons stated below, we affirm.



FACTS

The parties generally do not dispute the facts in this case. In April 2008, the Presbyterian Church of Holton, Kansas, ceased operations. When the church closed its doors, it owned property located at 402 West 5th Street, Holton, Jackson County, Kansas.



On May 1, 2008, the Presbyterian Church of Holton conveyed the property to Presbytery. Presbytery entered into a 36-month lease with the Evangel United Methodist Church, Inc. (Methodist Church) on November 14, 2008, after deciding to delay starting another Presbyterian church in Holton. Methodist Church leased the property to expand its Hispanic congregation. The lease required Methodist Church to use the property “for the purpose of providing church services.” Methodist Church paid $500 a month in rent plus the utilities attributable to the property and maintenance expenses up to $1,000.



On January 7, 2009, Presbytery requested a tax exemption pursuant to K.S.A.2008 Supp. 79-201 but did not specify the applicable subsection. On November 12, 2009, COTA, formally the Board of Tax Appeals, held a hearing on Presbytery's application. Upon review, COTA determined the applicable statute to be K.S.A.2008 Supp. 79-201 Second.



At trial, Edward J. Thompson, General Presbyter for Presbytery, testified that Presbytery used the monthly rent of $500 to cover its cost of insurance and maintenance in excess of $1,000. It was Thompson's understanding the Methodist Church did not conduct worship services on the property but that it still used it for religious purposes and outreach to the Hispanic community.



Reverend Evelyn Fisher, district superintendent for the United Methodist Church in Kansas, testified that a church service had never been held on the property. Rather, Methodist Church conducted outreach activities to the Hispanic population that included Spanish and English conversation groups, movie nights, bible studies, a nonprofit food pantry, and a clothing exchange. The food pantry made a $125 monthly donation to Methodist Church for utilities and used the property's kitchen facilities to store and distribute food. The clothing exchange stored clothes on the property and used it to conduct periodic meetings.



Roger Hower, a local real estate broker, testified on behalf of Presbytery that the $500 monthly lease was not a fair market value for the property. Hower calculated the fair market value at $5,000 a month based on properties he considered comparable and the square footage of the church. Hower did not use another church in his comparables.



Betty Estes, the deputy county assessor for Jackson County, testified that the property should be left on the tax rolls until worship services began because Presbytery did not use the property exclusively for religious purposes.



When asked by the court to address the simultaneous use problem from In re Tax Exemption Application of K.S.U. Foundation, 34 Kan.App.2d 40 , 114 P.3d 176 (2005) , Jackson County argued that the property did not meet the exclusive use test of K.S.A.2008 Supp. 79-201 Second because Methodist Church used the property more as a community building or such. Counsel for Jackson County stated that pursuant to In re K.S.U. Foundation, it is the use of the property that determines its tax exempt status, not the tax exempt character of the owner. Presbytery did not address the issue and only acknowledged that despite its understanding that it leased the property for religious services, Methodist Church was hoping to establish a relationship with the Hispanic population “in hopes of having bible studies [and] worship services in the future.”



On June 23, 2009, COTA denied Presbytery's application. COTA gave three reasons for its decision. First, COTA found that it could not determine the exact use of the property because evidence was presented that it was not being used for church services but as a community center. Second, COTA found that Presbytery did not sufficiently establish its assertion that the monthly lease rate of $500 was substantially below the market. Third, citing In re K.S.U. Foundation, 34 Kan.App.2d at 47 , COTA found Presbytery's use of the property was not an exclusive use, but a simultaneous one where Presbytery gained an advantage of benefiting from any property appreciation.



Presbytery filed a petition for reconsideration on July 7, 2009. COTA affirmed its original finding that Presbytery was not exempt under K.S.A.2008 Supp. 79-201 Second. COTA also found insufficient evidence of an exemption under either K.S.A.2008 Supp. 79-201 First or K.S.A.2008 Supp. 79-201 Ninth.



ANALYSIS

When the facts are not in dispute, whether certain property is exempt from ad valorem taxation is a question of law. Interpretation of a statute is a question of law over which this court has unlimited review. In re Tax Exemption Application of Mental Health Ass'n of the Heartland, 289 Kan. 1209, 1211 , 221 P.3d 580 (2009) .



“' “BOTA [Board of Tax Appeals] is a specialized agency and is considered to be the paramount taxing authority in this state. [Citation omitted.] BOTA is a specialized agency that exists to decide taxation issues. [Citation omitted.] Its decisions are given great weight and deference when it is acting in its area of expertise. [Citation omitted.] The party challenging BOTA's decisions has the burden to prove that the action taken was erroneous. [Citation omitted.] However, if BOTA's interpretation of law is erroneous as a matter of law, appellate courts will take corrective steps. [Citation omitted.]' “[Citations omitted.]” In re Tax Appeal of Western Resources, Inc., 281 Kan. 572, 575 , 132 P.3d 950 (2006) .

While statutes imposing a tax must be interpreted strictly in favor of the taxpayer, statutes granting exemptions are interpreted strictly in favor of the tax and against allowing the exemption. In re Mental Health Ass'n of the Heartland, 289 Kan. at 1211 .



The Kansas Constitution provides that all property used exclusively for religious purposes is exempt from taxation. Kan. Const. art. 11, § 1 (b) (2008 Supp.). Likewise, K.S.A.2008 Supp. 79-201 Second provides that all real property actually and regularly used exclusively for religious purposes is exempt from all property or ad valorem taxes levied under Kansas law. Case law has clearly defined “used exclusively” to mean “the use made of the property sought to be exempted from taxation, must be only, solely and purely for the purposes stated, and without admission to participation in any other use.” Seventh Day Adventist v. Board of County Commissioners, 211 Kan. 683, 690 , 508 P.2d 911 (1973) . K.S.A.2008 Supp. 79-201 Second also provides in part:



“[T]his exemption shall not apply to such property, not actually used or occupied for the purposes set forth herein, nor to such property held or used as an investment even though the income or rentals received therefrom is used wholly for such ... religious ... purposes.... This exemption shall not be deemed inapplicable to property which would otherwise be exempt pursuant to this paragraph because an agency or organization: ... (b) is reimbursed for the actual expense of using such property for purposes enumerated in this paragraph....”

In support of its claim of error, Presbytery cites three cases in Kansas for the legal proposition that one who owns property in Kansas can meet the exclusivity test even if leasing that property does not provide a profit to the owner. The first case is In re Board of Johnson County Comm'rs, 225 Kan. 517 , 592 P.2d 875 (1979) , which addressed the question of whether a nontax-exempt entity's leasing agreement for its property with a qualifying tax-exempt organization was exclusive use when the property was being used exclusively for exempt purposes. The court found that the property was not “used exclusively” for exempt purposes because it simultaneously leased the property for profit. 225 Kan. at 523 . The second case cited by Presbytery is Board of Wyandotte County Comm'rs v. Kansas Ave. Properties, 246 Kan. 161, 176-77 , 786 P.2d 1141 (1990) , where the court found that when a property is intended to be leased only to tenants that qualify for ad valorem tax exemption, the property is not “used exclusively” for exempt purposes if the lease is for profit. The court found this was true even though the property would be exempt if the owner was operating the units for the same purpose as the tenants. See 246 Kan. at 164 . The third case cited is In re K.S.U. Foundation, where the court held that one tax exempt organization leasing to another tax exempt organization did not meet the definition of “used exclusively” because even though the lease payments arguably provided no profit to the owner of the property they provided the means to acquire an ownership interest in the property. 34 Kan.App.2d at 47 .



Presbytery argues that the nature of the lease agreement between Presbytery and Methodist Church distinguishes the lease in this case from the leases considered in each of these other cases. Specifically, Presbytery points out that the lease between Presbytery and Methodist Church is not for profit, well below fair market value, and will not give Presbytery a more valuable asset at the expiration of the lease. Presbytery also argues that K.S.A.2008 Supp. 79-201 Second (b) expressly permits the owner to lease the property for the cost of the use of the property.



Presbytery's argument necessarily frames the question presented to be whether the lease agreement and subsequent payment of rent used to offset Presbytery's actual expenses take this property out of an exclusively religious use category and transform it into an investment property. But even if we were to find Presbytery is entitled to the exemption under K.S.A.2008 Supp. 79-201 Second because it is not simultaneously using the property for investment purposes, Presbytery still must demonstrate that the property is being used for purposes enumerated in K.S.A.2008 Supp. 79-201 Second to qualify for the ad valorem tax exemption. And even if we were to find that K.S.A.2008 Supp. 79-201 Second (b) permits exemption because the lease with Methodist Church is reimbursing Presbytery's actual expenses of using the property, Presbytery again must demonstrate that the property is being used for purposes enumerated in K.S.A.2008 Supp. 79-201 Second. Thus, regardless of whether we agree with Presbytery on the issue of simultaneous use to generate a profit or on the issue of reimbursement for actual expenses, Presbytery must be able to demonstrate that the property is used exclusively for religious purposes in order to qualify for the exemption under K.S.A.2008 Supp. 79-201 Second.



To that end, COTA stated in both its initial order and its order on reconsideration that the decision to deny the requested exemption was based on Presbytery's failure to prove the property was being used for church services or religious purposes:



“In the instant matter, [ Presbytery] asserts that the tenant is using the property for church services. However, evidence has also been presented to indicate that the property is being utilized as a community center. Based upon the conflicting information, the Court is unable to determine the exact use of the property by the tenant.”

“While religious motivations may have prompted [ Presbytery] and [Methodist Church] to enter into their current lease arrangement, there is insufficient proof showing the property is actually used—and used exclusively—for religious purposes. In fact, as set forth in the original order, the evidence indicates there is a simultaneous 'investment use' of the subject property, preventing exemption status in this case.”

As a preliminary matter, we find COTA did not err when it interpreted K.S.A.2008 Supp. 79-201 Second to require that the property at issue must be used exclusively for religious purposes in order to qualify for the religious exemption. Moreover, COTA's subsequent decision to deny relief based on Presbytery's failure to meet the requisite burden of proof is a negative factual finding. “Our standard of review for a negative finding of fact is that the party challenging the finding must prove arbitrary disregard of undisputed evidence or must prove some extrinsic consideration such as bias, passion, or prejudice. [Citation omitted.]” Hall v. Dillon Companies, Inc., 286 Kan. 777, 781 , 189 P.3d 508 (2008) . In this case, Presbytery fails to argue, let alone prove, that COTA arbitrarily disregarded undisputed evidence or that COTA's decision was the result of bias, passion, or prejudice.



Affirmed.