HANCOCK (CONNIE), ET AL. VS. KENTUCKY BOARD OF TAX APPEALS , ET AL.
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RENDERED: MAY 7, 2010; 10:00 A.M.
TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2009-CA-001144-MR
CONNIE HANCOCK, FLOYD
COUNTY PROPERTY VALUATION
ADMINISTRATOR; AND THE
KENTUCKY REVENUE CABINET,
N/K/A THE DEPARTMENT OF REVENUE,
FINANCE AND ADMINISTRATION
CABINET, COMMONWEALTH
OF KENTUCKY
v.
APPELLANTS
APPEAL FROM FLOYD CIRCUIT COURT
HONORABLE DANNY P. CAUDILL, JUDGE
ACTION NO. 05-CI-00638
THE KENTUCKY BOARD OF
TAX APPEALS AND PRESTONSBURG
INDUSTRIAL CORPORATION
OPINION
AFFIRMING
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BEFORE: MOORE, TAYLOR, AND THOMPSON, JUDGES.
APPELLEES
TAYLOR, JUDGE: Connie Hancock, Floyd County Property Valuation
Administrator, and the Kentucky Revenue Cabinet, n/k/a the Department of
Revenue, Finance and Administration Cabinet, Commonwealth of Kentucky
(collectively referred to as appellants) bring this appeal from a May 22, 2009,
Opinion, Findings of Fact, Conclusions of Law and Judgment of the Floyd Circuit
Court determining that Prestonsburg Industrial Corporation was exempt from
paying ad valorem taxes and reversing an order of the Kentucky Board of Tax
Appeals to the contrary. We affirm.
Prestonsburg Industrial Corporation (PIC) was formed as a nonprofit
corporation in 1968 by “a group of local charitable-minded businessmen.” The
intent was “to assist in the development of the City of Prestonsburg as a means to
attract business and industry into the area.” Pursuant to PIC’s articles of
incorporation, its purpose was to advance the societal and economic interests of
Prestonsburg as well as the general welfare and prosperity of the area. It also was
created to operate exclusively for religious, charitable, scientific or educational
purposes for people residing in the Prestonsburg area.
Relevant to this appeal, PIC purchased a 100-acre tract of land from
the City of Prestonsburg in 2001. The City of Prestonsburg agreed to accept $1.00
for the property in exchange for a portion of the proceeds to be realized from the
sale of the property by PIC. Shortly after the deed of conveyance from the City to
PIC was recorded, the Floyd County Property Valuation Administration (PVA)
placed the 100-acre tract on the “tax rolls” and notified PIC’s secretary, Burl
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Spurlock, of such action. Spurlock notified the PVA that PIC was entitled to tax
exempt status pursuant to Section 170 of the Kentucky Constitution. The PVA
supplied Spurlock with an application for tax-exempt status to be filed with the
Kentucky Revenue Cabinet (Cabinet). The Cabinet subsequently notified PIC that
it was not entitled to tax exempt status.
PIC filed an appeal with the Floyd County Board of Assessment
Appeals (Floyd County Board). Following a hearing, the Floyd County Board
determined that the 100-acre tract owned by PIC was tax exempt. PIC was later
informed, however, that the Floyd County Board did not have authority to make a
determination regarding tax-exempt status and was advised to “appeal to
Frankfort.”
PIC then filed a timely appeal to the Kentucky Board of Tax Appeals
(KBTA). Following a hearing, KBTA rendered Order No. K-19361. Therein, the
KBTA determined:
Under the Kentucky Constitution § 170, in order
for real estate to be exempt from taxation the property
must belong to a public entity and must be used for
public purposes. The Appellant in this case [PIC] is not a
governmental body or an agency of same, nor is it
created and controlled by governmental body for the
purpose of performing a governmental duty. Thus, the
Appellant is not exempt from taxation.
PIC subsequently sought review of KBTA’s decision in the Floyd
Circuit Court. By order entered May 22, 2009, the Floyd Circuit Court reversed
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KBTA’s decision and held that the 100-acre tract owned by PIC was tax exempt.
The circuit court specifically concluded:
[T]hat Section 170 of the Kentucky Constitution does not
require PIC to pay the taxes which the BTA (Board of
Tax Appeals) has sought to impose upon it. PIC is
exempt from the payment of such taxes, or any taxes,
since it is a charitable institution. Further, PIC’s property
is public property used for public purposes. That
property, or any of PIC’s property, is exempt from the
payment of taxes.
As such, the circuit court held that PIC was a charitable organization and that the
100-acre tract was public property used for public purposes, thus excluding same
from taxation pursuant to Section 170 of the Kentucky Constitution. Our review
follows.
Appellants contend that the circuit court erroneously reversed the
KBTA’s decision and erroneously held that the 100-acre tract owned by PIC was
tax exempt under Section 170 of the Kentucky Constitution. Judicial review of an
administrative agency’s decision is concerned with arbitrariness. American Beauty
Homes Corp. v. Louisville and Jefferson County Planning and Zoning
Commission, 379 S.W.2d 450 (Ky. 1964). Arbitrariness has many facets, but an
administrative agency’s decision is arbitrary if the agency erroneously applied the
law to the facts presented therein. See id. In this appeal, the material facts are
undisputed. We are concerned with application of the law to those facts, which
presents a question of law for the Court. See Camera Center, Inc. v. Revenue
Cabinet, 34 S.W.3d 39 (Ky. 2000). Specifically, we are faced with the issue of
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whether the 100-acre tract owned by PIC qualified for an exemption from ad
valorem taxes under Kentucky Constitution Section 170 because either: (1) PIC
constitutes a purely charitable organization or (2) the 100-acre tract constitutes
“public property used for public purposes.” We initially address whether the 100acre tract owned by PIC constitutes “public property used for public purposes”
within the meaning of Kentucky Constitution Section 170.
Under Kentucky Constitution Section 170, property that is “public
property used for public purposes” is exempt from ad valorem taxation. To
constitute “public property” under Kentucky Constitution Section 170, the property
must be “owned by all the citizens of the state, or by all the citizens of a
community.” Inter-County Rural Elec. Co-op. Corp. v. Reeves, 171 S.W.2d 978,
982 (Ky. 1943).
In the case at hand, the 100-acre tract was titled in fee simple to PIC.
PIC is not a governmental entity; rather, it is a private corporation. While it may be
true that PIC promotes economic development and works closely with the City of
Prestonsburg, the fundamental nature of PIC remains a private entity. And, the
circuit court’s attempt to identify PIC as an agent of the city or county was simply
misplaced. Indeed, the circuit court specifically observed that “PIC has agreed that
it is neither a governmental agency nor a municipality subject to the open records
law.”
It must be acknowledged that the citizens of the community did not
actually own the 100-acre tract. Rather, the 100-acre tract was, in fact, owned by
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PIC, a private corporation. However, the circuit court reasoned that since the 100acre tract “will inure to the benefit of the aggregate of the community” such tract is
essentially owned by the community. We, however, reject this reasoning. The
circuit court confused the purpose of the 100-acre tract with the ownership of the
100-acre tract. The distinction between purpose and ownership is pivotal. As
recognized by our Supreme Court:
The first observation to be made is that the
devotion of its functions to public purposes does not
clothe property with public ownership. It is obvious that
a private person, firm, or corporation engaged in the
distribution of electricity is engaged in an enterprise
which serves a purpose no less public than a municipality
or other governmental agency engaged in like enterprise.
But such function does not wrest the ownership of the
property from those who acquired it previous to the
service to which it became devoted, and the service to
which it is put does not of itself command exemption
from taxation under section 170 of the Constitution,
because the purpose of the service is not the only public
attribute the property must have attained to be the subject
of the exemption claimed. It must in addition be owned
by the public.
Reeves, 171 S.W.2d at 981.
Under no interpretation can it be said that all citizens of Prestonsburg
or Floyd County “own” the 100-acre tract. Consequently, we conclude that the
100-acre tract owned by PIC did not constitute public property used for a public
purpose within the meaning of Section 170 of the Kentucky Constitution.
We now determine whether the 100-acre tract constitutes property
belonging to a purely public charity within the meaning of Kentucky Constitution
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Section 170. To be entitled to the charitable exemption under Kentucky
Constitution Section 170, “the institution must itself be a charity and the income
from its property must be used to further its charitable purpose . . . [and] the
property must be employed for a purely charitable purpose.” Iroquois Post No.
229, Am’n Legion v. City of Louisville, 309 S.W.2d 353, 354 (Ky. 1958). When
determining whether property is employed for a purely charitable purpose, “it is
sufficient that the ultimate effect of the use of the property is to accomplish the
charitable purposes of the institution.” Banahan v. Presbyterian Hous. Corp., 553
S.W.2d 48, 51 (Ky. 1977).
In the case at hand, PIC was incorporated for the general purpose of:
[A]dvanc[ing] the educational, civic, social, commercial,
and economic interests of the City of Prestonsburg and
the general welfare and prosperity of its tributary
territory; to promote integrity and good faith; just and
equitable principles in business and professional activity;
and uniformity in commercial usages and to acquire,
preserve, and distribute educational, civic, social,
commercial, and economic statistics and information of
value; and further, to operate exclusively for religious,
charitable, scientific or educational purposes for the
people residing in the aforesaid area, including, but not
limited to, receiving contributions and paying them over
to one or more organizations described in Section
501(c)(3) and exempt from taxation under Section 501(a)
of the Internal Revenue Code as now in force and
afterwards amended. (Article IV, Section 1)[.]
Under PIC’s articles of incorporation, it is specifically stated that “[t]he
corporation is organized to serve the public interests; accordingly, it shall not be
operated for the benefit of private interests.” The articles of incorporation further
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provide that PIC is to “exercise the general powers as set forth in Chapter 273,
Kentucky Revised Statutes.” KRS Chapter 273 is titled Charitable and
Educational Societies and sets forth the requirements of such societies. Moreover,
PIC’s articles of incorporation prohibit paid compensation to its members, offices,
or directors.
It is undisputed that PIC was incorporated for the purpose of
promoting economic development in Prestonsburg and the surrounding area by
attracting business and industry. PIC purchased the 100-acre tract from
Prestonsburg for $1.00. Concomitant thereto, PIC and Prestonsburg entered into
an “agreement” concerning development of the 100-acre tract. Under this
agreement, PIC promised “to use its best efforts to develop . . . [the 100-acre tract]
for the creation of new jobs or in order to preserve existing jobs.”
From the above facts, we believe that PIC is a charitable organization.
Although PIC’s purpose is not to provide society with such basic human needs as
food, clothing, or shelter, our case law clearly holds that a charity should not be so
narrowly defined and necessarily includes “activities which reasonably better the
condition of mankind.” Bahanah, 553 S.W.2d at 52 (quoting Commonwealth ex
rel Luckett v. Bernheim Foundation, Inc., 505 S.W.2d 762, 764 (1974)). In
contemporary society, economic development is a fundamental need and is directly
linked to the general welfare of each member thereof. The creation and
preservation of jobs in a community serves a societal need and performs one of the
most basic functions of government. Moreover, the stated purpose of PIC’s
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acquisition of the 100-acre tract was to develop the tract so as to promote job
creation and job preservation in the community. Thus, it is clear that PIC’s
“activities . . . reasonably better the condition of mankind.” Banahan, 553 S.W.2d
at 52.
As such, we believe that PIC is a charitable organization and that its
resources are used for the charitable purpose of promoting economic development
in the community. The 100-acre tract of land at issue is clearly employed to fulfill
that charitable purpose. We also note that neither the shareholders nor the
directors receive any economic gain or profits from the activities conducted by PIC
in promoting economic development.
Accordingly, we hold that PIC is a purely charitable organization and
that the 100-acre tract is exempt from ad valorem tax under Section 170 of the
Kentucky Constitution.
For the foregoing reasons, the Opinion, Findings of Fact, Conclusions
of Law and Judgment of the Floyd Circuit Court is affirmed.
ALL CONCUR.
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BRIEFS FOR APPELLANTS:
BRIEF FOR APPELLEES:
Douglas M. Dowell
Frankfort, Kentucky
Richard E. Fitzpatrick
Lexington, Kentucky
Dwight S. Marshall
Assistant County Attorney
Prestonsburg, Kentucky
Martin L. Osborne
Prestonsburg, Kentucky
ORAL ARGUMENT FOR
APPELLANTS:
Dwight S. Marshall
Assistant County Attorney
Prestonsburg, Kentucky
ORAL ARGUMENT FOR
APPELLEES:
Richard E. Fitzpatrick
Lexington, Kentucky
Martin L. Osborne
Prestonsburg, Kentucky
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