CNL Hotels & Resorts, Inc. v. Maricopa County
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Plaintiffs leased state trust land and owned all structures and improvements on the land. Under the terms of the lease, the improvements that existed on the land would become the state's property upon lease termination. After the leases were entered into, the legislature created a property tax classification ("Class Nine") in which property was taxed at a lower rate than that applicable to commercial property. For certain years, Maricopa County classified the improvements under the classification applicable to general commercial property and taxed Plaintiffs accordingly. The State Board of Equalization denied Plaintiffs' request for Class Nine classification. Plaintiffs then filed a declaratory judgment action in the tax court. The tax court granted summary judgment for the County based on Plaintiffs' failure to meet the requirements of Ariz. Rev. Stat. 42-12009(A)(1)(a), which provides that improvements on land leased from the state qualify for a reduced ad valorem tax rate if they become the property of the state on termination of the leasehold interest in the property. The Supreme Court remanded, holding that section 42-12009(A)(1)(a) applies when, at the time of taxation, improvements exist on the land that, under the terms of the lease, would become the state's property upon lease termination.
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SUPREME COURT OF ARIZONA En Banc CNL HOTELS AND RESORTS, INC., a Maryland corporation; and MARRIOTT DESERT RIDGE RESORT, LLC, a Delaware limited liability company, ) ) ) ) ) ) Plaintiffs/Appellants, ) ) v. ) ) MARICOPA COUNTY, a political ) subdivision of the State of ) Arizona, ) ) Defendant/Appellee. ) ) __________________________________) Arizona Supreme Court No. CV-11-0072-PR Court of Appeals Division One No. 1 CA-TX 09-0003 Arizona Tax Court Nos. TX2007-000057 TX2007-000177 (Consolidated) O P I N I O N Appeal from the Arizona Tax Court The Honorable Dean M. Fink, Judge and Thomas Dunevant, Retired Judge VACATED AND REMANDED ________________________________________________________________ Opinion of the Court of Appeals Division One 226 Ariz. 155, 244 P.3d 592 (2010) VACATED ________________________________________________________________ BALLARD SPAHR LLP By Brian W. LaCorte Joseph A. Kanefield Phoenix And GALLAGHER & KENNEDY, P.A. Phoenix By Mark A. Fuller James G. Busby, Jr. Attorneys for CNL Hotels and Resorts Inc and Marriott Desert Ridge Resort LLC HELM LIVESAY & KYLE LTD By Roberta S. Livesay Raushanah Daniels Attorneys for Maricopa County Tempe LASOTA & PETERS, PLC Phoenix By Donald M. Peters Kristin M. Mackin Attorneys for Amicus Curiae Arizona Association of School Business Officials GUST ROSENFELD P.L.C. Phoenix By David A. Pennartz Attorney for Amicus Curiae Paradise Valley Unified School District No. 69 JONES SKELTON & HOCHULI, P.L.C. Phoenix By Timothy J. Bojanowski Attorney for Amici Curiae Rodger Dahozy, Philip S. Leiendecker, Chris Mazon, Darlene Adler, Linda Durr, Keith E. Russell, Cammy Darris, William Staples, Paul Larkin, Felipe A. Fuentes, Jr., Pamela J. Pearsall, and Joe Wehrle THOMAS C. HORNE, ARIZONA ATTORNEY GENERAL Phoenix By Paula S. Bickett, Chief Counsel, Civil Appeals Daniel P. Schaack, Assistant Attorney General Attorney for Amicus Curiae State of Arizona ________________________________________________________________ B R U T I N E L, Justice ¶1 Improvements on land leased from the state qualify for a reduced ad valorem tax rate if they become the property of the . . . state . . . on termination of the leasehold interest in the property. that this A.R.S. § 42-12009(A)(1)(a) (2009). provision applies when, at the time of We hold taxation, improvements exist on the land that, under the terms of the lease, would become the state s property upon lease termination. 2 I. ¶2 In 1993, the predecessor-in-interest to CNL Hotels and Resorts Inc. ( CNL ) entered into two ninety-nine year leases of state trust land to build the Desert Ridge Resort and Spa and adjacent golf course. only be used for The leases provide that the property may the construction, operation, maintenance, renovation and/or reconstruction of a hotel or other similar resort facility. improvements on Although the land, CNL at owns lease all structures termination, CNL and must surrender peaceable possession of the [p]remises, including the improvements, and quitclaim to the state any right, title or interest in the leasehold. the right to improvements on remove the or During each lease term, CNL has demolish property all without or any any part obligation of to reconstruct them. ¶3 After the leases were entered into, the legislature created a property tax classification ( Class Nine ) in which property is taxed at a rate of one percent, significantly lower than that generally applicable to commercial property. See A.R.S. §§ 42-12001, -12009 (defining Class One and Class Nine properties); A.R.S. §§ 42-15001, -15009 (prescribing lower tax rate for Class Nine than for Class One). From 2003 through 2006, the tax years at issue here, Maricopa County classified the Desert Ridge improvements 3 under Class One, the classification applicable to general commercial property, and taxed CNL accordingly. ¶4 State CNL appealed the County s 2006 tax assessment to the Board of classification. Equalization, requesting Class Nine The Board denied the request, concluding that the improvements would not unequivocally become the property of the state when the leases ended. CNL then filed a declaratory judgment action in the tax court. The County moved for summary judgment, arguing that Class Nine did not apply because CNL had the unqualified right to remove or destroy improvements during the lease term. Neither the County s motion nor CNL s response addressed whether purposes described Desert in Ridge is used § 42-12009(A)(1)(b) primarily (the for the primary use requirement ) or the appropriate tax classification of the golf course. within See Class § 42-12001(9) One); within Class Two). (including § 42-12002(1)(d) golf course (including golf property courses The tax court granted summary judgment for the County based on CNL s failure to meet the requirements of § 42-12009(A)(1)(a). ¶5 The court of appeals reversed and directed the tax court to instead enter summary judgment for CNL. CNL Hotels & Resorts, Inc. v. Maricopa Cnty., 226 Ariz. 155, 164 ¶ 41, 244 P.3d 592, 601 (App. 2010). It held that § 42-12009 requires the existence of a demonstrable reversionary interest at the 4 time of taxation, id. at 160 ¶ 19, 244 P.3d at 597, and that the CNL leases meet this requirement, id. at 162 ¶ 29, 244 P.3d at 599. It further concluded that the evidence in the record supported the tax court s finding that CNL meets the primary use requirement. Id. at 163 ¶ 35, 244 P.3d at 600. Moreover, the court of appeals held that the County had waived review on the primary use issue by not cross-appealing. ¶¶ 37-38, 244 P.3d at 600-01. The court also Id. at 163-64 rejected the County s argument that CNL was not entitled to seek relief for back taxes under A.R.S. § 42-16251(3), the error correction statute. Id. at 162-63 ¶¶ 30-33, 244 P.3d at 599-600. ¶6 We importance granted concerning review the to address interpretation issues of of property the statewide tax statutes. II. A. ¶7 The first issue involves the proper interpretation of § 42-12009(A)(1)(a), which applies Class Nine to: 1. Improvements that are located on federal, state, county or municipal property and owned by the lessee of the property if: a. The improvements become the property of the federal, state, county or municipal owner of the property on termination of the leasehold interest in the property. b. Both the improvements and the property are used primarily for athletic, recreational, 5 entertainment, artistic, convention activities. cultural or ¶8 To qualify for Class Nine tax status, improvements on government property land on the must become lease s the governmental termination. The landowner s parties dispute, however, whether Class Nine applies to improvements that may no longer exist at the end of a lease, although they will become the government s property if they do. CNL asserts, and the court of appeals held, that sub-paragraph (a) requires only that the taxed improvement will become exists upon lease termination. government property if it See CNL Hotels, 226 Ariz. at 160 ¶ 18, 244 P.3d at 597 (requiring tax assessment to focus on the present existence of a demonstrable reversionary interest ).1 The County, however, argues that the Class Nine statute also requires proof the improvement will in fact exist at the end of the lease. ¶9 Both readings are consistent with the language of § 42-12009(A)(1)(a); the statute does not specify whether Class Nine status requires certainty that the government lessor will receive now-existing terminates. Because improvements when § 42-12009(A)(1)(a) the is lease subject to later two 1 The parties and courts below use the term reversionary interest to describe the sub-paragraph (a) requirement of future ownership, but this terminology is technically inaccurate because the government could not hold a reversionary interest in improvements it did not previously own. 6 plausible interpretations, it is ambiguous. Ins. Co., 178 Accordingly, we Ariz. must 264, 268, interpret 872 the P.2d statute Hayes v. Cont l 668, in 672 (1994). light of its context, subject matter, and historical background; its effects and consequences; and its spirit and purpose. ¶10 We conclude reasonable one. that CNL s Id. interpretation is the more Section 42-12009 is a property tax statute. Our property tax laws generally do not assign immutable tax classifications; instead, property taxes are assessed annually. See A.R.S. § 42-13051 (requiring tax assessor to yearly list property and assess its value for purposes of the tax roll). Because a property s appropriate classification is reevaluated each year the interpreted as property is taxed, contemplating § 42-12009 that tax is classifications consider the circumstances at the time of taxation. about hypothetical future events is reasonably will Speculating unnecessary. If the government landowner s right to receive the improvement at the termination of the lease, in fact, terminates, so will the taxpayer s entitlement to Class Nine status. ¶11 The County s administrative difficulties. interpretation also creates Tax assessors would be required to scrutinize each lease, covenant, contract, and statute governing the leasehold to determine whether a future contingency could prevent the lessor from actually receiving the improvement. 7 See Killebrew v. Indus. Comm n of Ariz., 65 Ariz. 163, 168, 176 P.2d 925, 928 (1947) operation of statutory (considering the law text). to The difficulties discern County s in correct position the practical interpretation would also of likely require tax assessors to inquire into rebuilding requirements in the event of natural or manmade disasters such as fire, flood, earthquake, war, or terrorist attack. ¶12 The equally actually will County s unpersuasive. receives not the receive as It for contends improvement sufficient lessee s tax benefit. ¶13 rationale its that taxed economic interpretation unless under value the state § 42-12009, to is justify it the We disagree. The County characterizes the state s future ownership consideration receives. for the one percent tax rate the lessee But neither § 42-12009 nor the property tax scheme generally evinces any legislative intent to require taxpayers to compensate the government when they benefit from favorable tax rates. And in any event, it was not unreasonable for the legislature to determine that reducing property taxes for Class Nine would benefit the state by encouraging government land and spurring development. the lease of See Ariz. Const. art. 10, §§ 1-11 (prescribing management of state trust lands); see also Turken v. Gordon, 223 Ariz. 342, 348 ¶ 23, 349 ¶ 29, 224 P.3d 158, 164, 165 (2010) (acknowledging that city council could 8 reasonably conclude increased tax base benefits public). ¶14 In contrast, the court of appeals and CNL s interpretation of subsection (A)(1)(a) avoids these analytical and administrative pitfalls. Similarly, it comports with the state s duty to responsibly manage trust land. ¶15 Reading § 42-12009(A)(1)(a) to require only that, at the time of taxation, an improvement exist on the land that, under the terms of the lease, would become the property of the government landowner at the lease s termination results in a statute that is easy to apply and understand. Tax assessors would be faced with a manageable task, consistent with their statutorily defined duties. See § 42-13051 (describing duties of county tax assessors as determining names of owners and cash value of properties). Their inquiry would be limited to examining each tax year what exists on the land and determining whether the government landowner at that time has the right to own any improvements upon termination of the lease. ¶16 Applying this interpretation, CNL has satisfied § 42- 12009(A)(1)(a) s future ownership sits on state trust land. requirement. Desert Ridge Upon the termination of each lease, CNL must quitclaim the premises, including any improvements, to the state. 9 B. ¶17 The County also argues that the court of appeals erred in ordering summary judgment in favor of CNL because no evidence was presented to show CNL met the primary use requirements of § 42-12009(A)(1)(b). The County s motion for summary judgment had specifically reserved the right to litigate that issue, and the County asks that we vacate the court of appeals opinion, allowing it to litigate whether Desert Ridge is used primarily for athletic, recreational, entertainment, artistic, cultural or convention activities. ¶18 § 42-12009(A)(1)(b). In granting the County s motion for summary judgment, the tax court stated that CNL met the primary use requirement, but did not explain this assertion or cite any authority or evidence supporting it. The court of appeals interpreted the tax court s statement as a finding establishing primary use even though this issue had neither been briefed nor argued in the tax court. ¶19 [I]t is incorrect to direct entry of summary judgment on issues not raised by the movant in the trial court and on which the parties have therefore marshal and present evidence. Ariz. 310, 320, 909 P.2d not had an opportunity to City of Phoenix v. Yarnell, 184 377, 387 (1995). The County, therefore, is entitled to fully litigate this issue in the tax court on remand. 10 ¶20 The court of appeals also erred in concluding that the County was required to file a cross-appeal on the primary use issue. 01. its CNL Hotels, 226 Ariz. at 163-64 ¶ 37, 244 P.3d at 600- Arizona s long-settled rule is that if [an] appellee in brief judgment seeks of only the to lower support court or from defend which and the appeals, a cross-appeal is not necessary. uphold opposing the party Maricopa Cnty. v. Corp. Comm n, 79 Ariz. 307, 310, 289 P.2d 183, 185 (1955). A cross-appeal is required only if the appellee seeks to attack [the] judgment thereunder (internal or with a view lessening quotations the of either rights omitted). of Merely enlarging his his rights adversary. seeking to Id. support a lower court s judgment for reasons not relied upon by it is not attempting to enlarge [an appellee s] own rights or lessen those of [an] adversary, and a cross appeal is unnecessary. Santanello v. Cooper, 106 Ariz. 262, 265, 475 P.2d 246, 249 (1970); see also Committee Note. Ariz. R. Civ. App. P. 1, 13, State Bar As a prevailing party not seeking to expand its own rights, the County was not required to file a cross-appeal. C. ¶21 Desert We also granted review on the County s claim that the Ridge golf course property should be classified separately from the resort property because golf course property is listed as belonging to Class One or Class Two under §§ 4211 12001(9) and 42-12002(1)(d). Rather than decide this issue, we leave it to the tax court to address in the first instance when it considers the primary use of the Desert Ridge property for purposes of § 42-12009(A)(1)(b). D. ¶22 not Finally, we address the County s argument that CNL was entitled Section to relief 42-16251(3) under the authorizes error correction correction of any statute. mistake in assessing or collecting property taxes when the error is caused by any circumstance listed in subsections (3)(a) through (3)(e). The County maintains that the court of appeals wrongly concluded that the statute applies to the kind of errors CNL alleged. ¶23 or Subsection (3)(b) includes [a]n incorrect designation description classification. of the use or occupancy of property or its The court of appeals correctly concluded that because Desert Ridge had been wrongly categorized under Class One, CNL could avail itself of the error correction statute. CNL Hotels, 226 Ariz. at 162 ¶ 30, 255 P.3d at 599. ¶24 The County, however, contends that subsection (3)(e) bars CNL s recovery. Subsection (e) states that error exists when a valuation or legal classification [of property] is based on an error that is exclusively factual in nature or due to a specific legal verifiable restriction without the . . exercise 12 . of and that is discretion, objectively opinion or judgment. under The County argues that CNL cannot qualify for relief subsection requirement for (3)(e) Class because Nine meeting involves the factual subject to discretion, opinion, or judgment. arguendo that the County is correct primary use determinations But even assuming about subsection 3(e), nothing in § 42-16251 suggests that a taxpayer s inability to seek relief under one subsection bars relief under another. III. ¶25 For the appeals opinion foregoing and remand reasons, the case we vacate to the further proceedings consistent with this opinion. the tax court court of for We deny CNL s request for attorney fees, without prejudice to CNL requesting the tax court to award it fees for this stage of proceedings if it prevails on remand. See Ariz. R. Civ. App. P. 21(c); Leo Eisenberg & Co. v. Payson, 162 Ariz. 529, 535, 785 P.2d 49, 55 (1989). _____________________________________ Robert M. Brutinel, Justice CONCURRING: _____________________________________ Rebecca White Berch, Chief Justice _____________________________________ Scott Bales, Vice Chief Justice 13 _____________________________________ A. John Pelander, Justice _____________________________________* * Before his resignation on June 27, 2012, as a result of his appointment to the United States Court of Appeals for the Ninth Circuit, Justice Andrew D. Hurwitz participated in this case, including oral argument, and concurred in this opinion s reasoning and result. 14
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