Grand Lodge of Kentucky Free and Accepted Masons v. Darlene Plummer, Kenton County Property Valuation Administrator

• Court: Court of Appeals of Kentucky
• Decided: June 13, 2024
• Docket: 2023 CA 001080
• Status: Unknown

Opinion

RENDERED: JUNE 14, 2024; 10:00 A.M. NOT TO BE PUBLISHED

Commonwealth of Kentucky Court of Appeals NO. 2023-CA-1080-MR

GRAND LODGE OF KENTUCKY FREE AND ACCEPTED MASONS; ALICE WERBRICH; AMOS OAKS; ARA DEAN LEURCK; ARNOLD BLANTON; BETTY BEAGLE; BETTY COLEMAN; BETTY JANE BRAY; BOBBIE COX; CARL GAMEL; CHARLES WILSON; CLAIRE DAUGHERTY; CLAIRE KENTRUP; DARLENE SCHIMERMAN; DOLORES MEYER; DONALD BEAGLE; EDITH OAKS; EDWARD GAMEL; EUGENE BARNETT; FLORA FERGUSON; FRANCES GREENE; FRANCIS KELLY; HAROLD ISERAL; IRENE MORMILE; JACK SCHAAF; JAMES STEFFEN; JANE WILSON; JEAN ISERAL; JEANETTE WHITE; JERALD BRAY; JERRY TREADWAY; JESSIE EPPINGHOFF; JOHN NIEDEREGGER; JOHN RICHE; JOYCE THEUNEMAN; KAY NIEDEREGGER; LAWRENCE OSTERHAGE; LOIS TALBERT; LOIS WILSON; MARGARET KIRK; MARGARET KRESSER; MARGARET OSTERHAGE; MARGIE DARBY; MARIE BARNETT; MARTHA REED; MARY JO HUNT; MARY SUE GAMEL; MORRIS REED; MYRTLE BLANTON; NORA LEDFORD; PATRICIA BOERGER; PAUL TALBERT; RAYMOND KENTRUP; RAYMOND LEURCK; RICH LAGRANDE; ROBERTA GAMEL; ROSEMARY RIPPE; SHIRLEY BURDINE; STAN WERBRICH; STANLEY SCHIMERMAN; SUE STEFFEN; THOMAS LOUDERBACK; VIRGINIA SCHAAF; AND WANDA HODGE APPELLANTS

APPEAL FROM KENTON CIRCUIT COURT v. HONORABLE PATRICIA M. SUMME, JUDGE ACTION NO. 22-CI-00280

DARLENE PLUMMER, KENTON COUNTY PROPERTY VALUATION ADMINISTRATOR; CITY OF TAYLOR MILL; AND KENTUCKY BOARD OF TAX APPEALS APPELLEES

OPINION AFFIRMING

** ** ** ** **

BEFORE: THOMPSON, CHIEF JUDGE; ACREE AND L. JONES, JUDGES.

THOMPSON, CHIEF JUDGE: Grand Lodge of Kentucky Free and Accepted

Masons, et. al. (“Appellants”) appeal from an order of the Kenton Circuit Court

affirming an order of the Kentucky Board of Tax Appeals (“the Board”). On

remand from a prior appeal, the Board calculated the amount of ad valorem taxes

-2- payable by persons possessing non-assignable occupancy interests in residential

units owned by Grand Lodge. Appellants argue that the Board erred in affirming

the Kenton County Property Valuation Administrator’s calculation of these ad

valorem taxes. After careful review, we find no error and affirm the order on

appeal.

FACTS AND PROCEDURAL HISTORY

Grand Lodge is a tax-exempt entity which owns a 24-acre parcel of

real property situated in Taylor Mill, Kentucky. Because it is a nonprofit entity,

Grand Lodge is exempt from ad valorem taxation.1 The subject parcel was devised

to Grand Lodge with the condition that it be used only for Masonic purposes and

could not be sold. If Grand Lodge used the property for non-Masonic purposes,

title would revert to the United States.

In 2001, Grand Lodge leased the parcel to an affiliated nonprofit

entity called Masonic Retirement Village of Taylor Mill, Inc. (“MRV”). MRV was

established to provide affordable housing to senior citizens. To further this goal,

MRV created a retirement community known as Spring Hill Village, and

constructed 48 residential units on the property. The units were available for

occupancy for persons aged 55 and over. To acquire a residential unit, an

1 See Kentucky Constitution §170 and Commonwealth ex. rel. Luckett v. Grand Lodge of Kentucky, 459 S.W.2d 601 (Ky. 1970).

-3- applicant has to execute a Residential Agreement (“the Agreement”). Per the

terms of the Agreement, a resident would pay what was characterized as an

entrance fee ranging from $151,000.00 to $252,000.00. The entrance fee entitled

the resident to exclusive occupancy of a residential unit, terminated by the death or

incapacity of the resident, the resident’s relocation to a nursing facility, or 30 days’

written notice. Upon termination of the Agreement, the resident or his/her estate

was entitled to a full refund of the entrance fee, minus expenses, if termination

occurred within 6 months of occupancy. If termination occurred after 6 months of

occupancy, the resident or estate was entitled to a refund of 82% of the entrance

fee.

In 2011, Taylor Mill and Kenton County filed a petition for

declaratory judgment in Kenton Circuit Court against the Kenton County Property

Valuation Administrator (“PVA”) and the Kentucky Department of Revenue.

Taylor Mill and Kenton County argued that the residents’ possessory interests were

subject to ad valorem taxation. The parties entered into an agreed judgment

holding that the residents at Spring Hill Village were subject to ad valorem

taxation.

Beginning in 2012, the PVA issued an ad valorem tax assessment to

each resident based on the value of the residential unit. The residents appealed the

tax assessments to the Board. In 2014, the Board voided the tax assessments upon

-4- concluding that the real property as a whole was exempt from property tax

assessment based on Kentucky Constitution §170. The Board determined that the

residents were not owners of the real property and did not have sufficient

possessory interests in the property to be subject to ad valorem taxation by reason

of KRS 132.195(1).

Thereafter, Taylor Mill and Kenton County filed an original action in

Kenton Circuit Court to challenge the Board’s ruling. In 2015, the circuit court

entered a judgment reversing the Board’s decision denying ad valorem taxation of

the residential units. The court determined that while charitable organizations

retain their status as exempt from taxation in accordance with Kentucky

Constitution §170, the individual residents are subject to taxation on the fair

market value of their possessory interests.

Grand Lodge and the residents appealed to the Court of Appeals. In

2017, a panel of this Court affirmed the Kenton Circuit Court’s ruling that Taylor

Mill and Kenton County were entitled to assess ad valorem taxes on the residents.

In affirming the trial court, the panel focused on the residents’ occupancy creating

a taxable possessory interest which supplanted the tax-exempt, nonprofit interests

of Grand Lodge and MRV. This Court then vacated and remanded the matter to

the Kenton Circuit Court for a proper valuation of the taxable interests. The panel

held:

-5- The law is well-settled that a leasehold’s fair market value for taxation purposes is obtained by subtracting the fair market value of the real property with the leasehold from the fair market value of the real property without the leasehold. Ky. Dept. of Revenue v. Hobart Mfg. Co., 549 S.W.2d 297 (Ky. 1977). Hence, a resident’s possessory interest in a unit at the Springhill [sic] Village is only taxable to the extent of its fair market value. See Pike Cty. Bd. of Assessment v. Friend, 932 S.W.2d 378 (Ky. App. 1996); Ky. Tax Comm’n v. Jefferson Motel, Inc., 387 S.W.2d 293 (Ky. 1965).

In this case, a review of the record reveals that the PVA neither valued the Resident’s interest as a leasehold nor utilized the above formula to determine the fair market value of each Resident’s possessory interest. We, therefore, conclude that the PVA erroneously valued the Residents’ respective interests and vacate the tax assessments upon such ground. The PVA should consider each Resident’s possessory interest as a leasehold for valuation purposes and should obtain the fair market value by subtracting the fair market value of the unit with the Resident’s leasehold from the fair market value of the unit without the leasehold. The difference constitutes the taxable fair market value of the Resident’s possessory interest in a particular unit.

Grand Lodge of Kentucky Free and Accepted Masons v. City of Taylor Mill, No.

2015-CA-001617-MR, 2017 WL 541077 at *5-6 (Ky. App. Feb. 10, 2017).

On remand, the PVA hired an appraiser who applied the Hobart

formula using the sales comparison approach to determine the tax assessments.

Grand Lodge and the residents appealed to the Board, which affirmed the PVA’s

assessments.

-6- They then filed an original action in Kenton Circuit Court to challenge

the Board’s decision affirming the PVA’s assessments. Grand Lodge and the

residents argued before the circuit court that the Board’s order was not supported

by substantial evidence because it relied on sales comparisons which were

materially different from the property at issue. They argued that the appraiser

improperly disregarded the restrictions on the property which significantly

impaired the market value. They asserted that the deed restrictions, which require

Grand Lodge to use the parcel for Masonic purposes only and prevent Grand

Lodge from selling the property, result in the property having a fair market value

of zero dollars. Taylor Mill, the Kenton County PVA, and the Board responded

that Grand Lodge did not offer competent evidence of a contrary assessment

sufficient to challenge the PVA’s assessment.

In considering the issues presented, the Kenton Circuit Court relied to

large degree on Hobart, supra, in concluding that the residents – as non-exempt

lessees – had a taxable leasehold interest which was properly assessed by the PVA.

The court adopted the Board’s reasoning that the assessments were correctly based

on the value of the residents’ possessory interests, not the value of the realty if

sold. It went on to reject the petitioners’ Equal Protection arguments upon finding

that Kenton County’s taxation of other entities, such as nursing homes and assisted

-7- living centers, was distinguishable from the facts before it. It sustained the Board’s

order upholding the PVA’s assessments and this appeal followed.

STANDARD OF REVIEW

The Kentucky Board of Tax Appeals is owed no deference on

questions of law; therefore, we consider the issues before us de novo. Estate of

Mcvey v. Commonwealth of Kentucky, Department of Revenue, 480 S.W.3d 233,

239 (Ky. 2015).

ARGUMENTS AND ANALYSIS

Appellants argue that the Kenton Circuit Court erred in affirming the

Board’s decision sustaining the PVA’s assessments of the subject parcels.

Appellants contend that the Board failed to strictly apply the Hobart formula when

it disregarded the use and sale restrictions encumbering the property. They argue

that under Hobart, the value of the leasehold interest is absolutely dependent on

the value retained by the landowner. According to Appellants, since the Board

failed to consider the fair market value of Grand Lodge’s ownership interest, it

necessarily follows that the Board could not properly determine the differential in

the fair market values with and without the leasehold interests as required by

Hobart. Stated differently, Appellants argue that if the value of the landowner’s

interest is not known, the Hobart formula cannot be applied and the Kenton Circuit

Court erred in failing to so rule. Appellants also argue that the Board misapplied

-8- the presumption that the PVA’s assessments are correct, and improperly

discriminated against Appellants by failing to uniformly assess all residential

occupancy interests in tax-exempt properties.

The primary question for our consideration is whether the Kenton

Circuit Court properly determined that the PVA and the Board correctly applied

Hobart on remand. The matter before us presents a unique set of facts which are

somewhat distinguishable from Hobart. While the Hobart landowner and lessor

was a tax-exempt entity as in the matter at bar, the realty in Hobart was not subject

to the same usage and transfer restrictions found in the instant case. The realty in

Hobart was subject to transfer restrictions, but the lessee had the option to

purchase the parcel in the future. In the matter before us, not only do the lessees

have no option to purchase the residences, the restrictive covenants prevent the

parcel from ever being sold. The only caveat is that title to the property will revert

to the United States if Grand Lodge ever ceases to use the property for Masonic

purposes. If that occurred, presumably the United States could then sell the parcel.

In addressing this unique set of facts, the Kenton Circuit Court relied

in part on the following language in Hobart:

To put the problem in its simplest perspective, fee simple title to real estate and the improvements thereon is no more than a bundle of all of the rights one could have in and to the property. The result of the sifting process, which is required in this peculiar class of cases, is the tax-exempt lessor pays no ad valorem tax on those rights

-9- which it retains but the non-exempt lessee must pay ad valorem tax on those rights which it obtains. The rights conferred by the lease being a part of the bundle of total rights in and to a parcel of realty and not otherwise listed for taxation, the leasehold is taxable as real estate at its fair cash value.

The terms “fair cash value” and “fair market value” are synonymous. In Commonwealth, Department of Highways v. Sherrod, Ky., 367 S.W.2d 844, 950 (1963), we held that the fair market value of a leasehold (if any) can be ascertained by simply subtracting the fair market value of the land as a whole if sold subject to the lease from the fair market value of the land as a whole if sold free and clear of the lease. This formula has worked well in condemnation cases. We see no reason why it would not work equally well in taxation cases.

Hobart, 549 S.W.2d at 299-300.

Having closely examined the record and the law, we find no error in

the Kenton Circuit Court’s order affirming the Board’s decision. We draw this

conclusion from the express language of Hobart, wherein the Kentucky Supreme

Court stated, “[t]he result of the sifting process, which is required in this peculiar

class of cases, is . . . [that] the non-exempt lessee must pay ad valorem tax on

those rights which it obtains.” Id. (emphasis added). This language is not

ambiguous and is independent of the lessor’s status as exempt from taxation. The

residents of Spring Hill Village, like the lessee in Hobart, are non-exempt lessees

who must pay ad valorem tax on the rights they obtain.

-10- Further illuminating is the Supreme Court’s conclusion that, “the

leasehold is taxable as real estate at its fair cash value.” Id. at 300. The residents

on appeal possess leasehold interests of value per Hobart, as payment in the form

of an entrance fee is made to the lessor when the leases commence. Appellants

assert that the value of these leaseholds cannot be determined by a strict

application of Hobart, because the underlying realty is subject to restrictions and

cannot be sold. We agree that due to the unique facts presented, a strict application

of Hobart is not possible in the instant case. Based on Hobart and the supportive

case law, however, the value of the leaseholds must nevertheless be calculated for

purposes of ad valorem taxation.

As noted by Appellees, the value of the leasehold is calculated by

“subtracting the fair market value of the land as a whole if sold subject to the lease

from the fair market value of the land as a whole if sold free and clear of the lease.”

Id. (emphasis added). The calculation of any leasehold interest, therefore, is

necessarily based on hypothetical fair market values. Because the subject parcel

cannot be sold, the PVA based its assessments on the best information available to

it at the time, including the calculated values of the residents’ leasehold interests.

The circuit court properly so held.

Appellants go on to argue that the Board misapplied the presumption

of validity set out in KRS 49.220(5). KRS 49.220(5) provides that “[t]he assessed

-11- value shall be prima facie evidence of the value at which the property should be

assessed.” Appellants direct our attention to the testimony of their certified

property appraiser, Eric Gardner, who determined that the underlying value of the

realty was zero dollars by virtue of the deed restrictions. Appellants also point to

the testimony of the PVA’s appraiser, Eric Fagan, who acknowledged that a

precise market analysis of the property’s value could not be undertaken because

there were no comparable properties in the area with the same or similar deed

restrictions. The focus of this argument is that Appellants offered compelling

evidence sufficient to overcome the presumption that the property was properly

assessed, and that the circuit court erred in failing to so rule.

In considering this issue, the Kenton Circuit Court determined that

there was insufficient evidence to conclude that the residents’ possessory interests

have no value, and no evidence that the residents do not benefit from the services

of Taylor Mills and Kenton County. To the contrary, the court found that the

evidence supports the finding of the Board that the refund of at least 82% of the

entrance fee when the resident vacates the property demonstrates that their

possession rights have a value of that amount. These conclusions are supported by

the record, and we find no basis for concluding that Appellants overcame the

statutory presumption of validity.

-12- Lastly, Appellants argue that the tax assessments were applied in a

discriminatory manner in violation of various provisions of the Kentucky

Constitution. They direct our attention to Madonna Manor and Baptist Life

Communities, which they claim received more favorable assessments than those

applied to Appellants. We are not persuaded by this argument, as no evidence was

adduced that Madonna Manor or Baptist Life Communities employed the same

“entrance fee” payment and refund structure employed by Spring Hill Village.

Due to the unique deed restrictions in the instant case, there is no basis for

concluding that the residents herein were subjected to an improper and

discriminatory application of ad valorem tax assessments.

CONCLUSION

For the foregoing reasons, we affirm the order of the Kenton Circuit

Court.

ALL CONCUR.

-13- BRIEFS FOR APPELLANTS: BRIEF FOR APPELLEE THE CITY OF TAYLOR MILLS: Elizabeth Graham Weber Justin L. Knappick Jack S. Gatlin Covington, Kentucky Covington, Kentucky

BRIEF FOR APPELLEE DARLENE PLUMMER, KENTON COUNTY PROPERTY VALUATION ADMINISTRATOR:

Drew C. Harris Assistant Kenton County Attorney Covington, Kentucky

-14-