In re Tax Appeal of Fleet (Corrected March 15, 2012)

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IN THE SUPREME COURT OF THE STATE OF KANSAS

No. 102,645


IN THE MATTER OF THE APPLICATION OF FLEET
FOR RELIEF FROM A TAX GRIEVANCE IN SHAWNEE COUNTY, KANSAS,

and

IN THE MATTER OF THE APPLICATION OF CONNELL FINANCE COMPANY
FOR RELIEF FROM A TAX GRIEVANCE IN SHAWNEE COUNTY, KANSAS.


SYLLABUS BY THE COURT
1.
The right to appeal is entirely statutory. An appellee must file a cross-appeal to
preserve an issue on appeal not raised by an appellant.

2.
Claim preclusion is a common-law doctrine, designed to prevent relitigation of a
final judgment. Four elements are required for claim preclusion to apply: (a) the same
claim; (b) the same parties; (c) claims that were or could have been raised; and (d) a final
judgment on the merits.

3.
Issue preclusion prevents a second litigation of the same issue between the same
parties, even when raised in a different claim or cause of action. Three elements are
required for issue preclusion: (a) a prior judgment on the merits that determined the
parties' rights and liabilities on the issue based upon ultimate facts as disclosed by the
pleadings and judgment; (b) the same parties or parties in privity; and (c) the issue
litigated must have been determined and necessary to support the judgment.
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4.
If the requisite elements are established, the doctrines of claim or issue preclusion
will bar a second administrative proceeding when the first administrative proceeding
provided the procedural protections similar to court proceedings when an agency is acting
in a judicial capacity.

Appeal from Shawnee District Court; FRANKLIN R. THEIS, judge. Opinion filed January 27, 2012.
Affirmed.

James M. Crowl, assistant county counselor, argued the cause, and Richard V. Eckert, county
counselor, was with him on the briefs for appellant Board of Shawnee County Commissioners.

S. Lucky DeFries, of Coffman, DeFries, and Nothern, of Topeka, argued the cause, and Jeffrey A.
Wietharn, of the same office, was with him on the briefs for appellees Fleet and Connell Finance
Company.

The opinion of the court was delivered by

BILES, J.: This is an administrative appeal by the Shawnee County Board of
County Commissioners from a decision by the Board of Tax Appeals (BOTA) (now the
Court of Tax Appeals) setting aside tax assessments the County claims on three
executive-style business aircraft for tax years 2000, 2001, and 2002.The dispute arises
after the County had agreed in earlier proceedings that the aircraft were not subject to
taxation and BOTA ordered them exempted. But the County had a change of heart a few
years later and attempted to reassess the aircraft for back taxes, interest, and penalties.
The aircrafts' owners objected and commenced this action to avert the taxation. BOTA
and the district court agreed with the owners, but each had different reasons for its
rulings.
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We find the controlling question is whether claim or issue preclusion bars the
County from initiating new taxation efforts for the same tax years after the initial BOTA
exemption orders became final. As more fully explained below, we hold that both
preclusion doctrines apply—preventing the County from relitigating the aircrafts'
exemption status for the tax years in controversy. We affirm the district court's judgment
and remand this matter to BOTA for it to set aside the County's correction orders and
assessment notices for the aircraft and tax years at issue.

FACTUAL AND PROCEDURAL BACKGROUND

For a number of years, Fleet National Bank and Connell Finance Company (the
owners) leased business aircraft to Westar Energy, Inc. As was the industry practice at
that time, the owners applied with BOTA for an ad valorem tax exemption. Shawnee
County officials received notice of these applications because the aircraft were located in
that county. The exemptions were sought under K.S.A. 79-201k(b) First (Ensley 1989)
because the owners claimed the aircrafts' exclusive use was to earn them income through
their leasing agreements with Westar. At the time these exemptions were sought, the
statute provided a tax exemption for "all aircraft actually and regularly used exclusively
to earn income for the owner in the conduct of the owner's business or industry." K.S.A.
79-201k First (Ensley 1989). This version of K.S.A. 79-201k was enacted by the
legislature in 1988.

The previous version of the statute exempted "all aircraft actually and regularly
used exclusively in the conduct of a business or industry." L. 1982, ch. 390, sec. 4. The
legislature amended that language shortly after the Court of Appeals interpreted it as
requiring that both the owner and the lessee use the aircraft exclusively for a business
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purpose in order to qualify for the tax exemption. See Kenneth Godfrey Aviation v. Smith,
12 Kan. App. 2d 434, 437, 746 P.2d 1068 (1987), rev. denied 242 Kan. 903 (1988).

It is undisputed that BOTA routinely viewed the 1988 statutory amendment as
overruling the Godfrey Aviation decision and allowing an owner to receive the tax
exemption as long as the owner exclusively used the aircraft for business purposes. Under
that belief, the lessee's use was not considered relevant. And the County admits in its
briefing that "the consensus of most counties, taxpayers, and BOTA was that the Kansas
Legislature had overturned the holding in [Godfrey Aviation], making lessee use of
business aircraft largely irrelevant when considering whether an aircraft was used
exclusively for business purposes and entitled to an exemption."

In the case now on appeal, the behavior of the aircrafts' owners and the County
suggests that they also believed the 1988 amendment provided the requested tax
exemption if the owners' use was exclusively for business purposes, such as leasing to a
third party. For example, the owners' documentation when applying for the exemptions
was silent regarding how Westar (as lessee) would use the aircraft. And, at the BOTA
proceedings, the County did not request information about Westar's use, even though it
could have done so. In fact, the County concedes that it agreed to the exemptions when
the owners first applied and does not claim the owners withheld relevant details or acted
in a misleading or deceptive manner with either BOTA or the County.

Consistent with the parties' apparent expectations, BOTA granted the exemptions
effective for the initial tax year when the applications were made, as well as all
subsequent years. The exemptions were not conditioned on Westar's future use of the
aircraft. Most importantly, the County did not appeal BOTA's orders—as was its right—
and the orders became final.

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The County's change in position occurred in 2003 following media reports about
an internal Westar investigation into alleged inappropriate personal and recreational use
of company aircraft by corporate executives. As publicized, the investigation concluded
that the jets had been misused for personal travel, not only by officers and employees of
the company, but also their families and friends. The investigation accused the
responsible officers of falsely representing in company flight logs that personal travel
was undertaken for business purposes. This publicity prompted the County to issue
correction orders indicating the aircraft were added to the tax roll and announcing new
assessments for taxes and penalties for tax years dating back to 1997.

The County's initial correction orders were unsigned and did not include any
reference or statement of legal or factual support as to why they were issued. And a
section on the forms entitled "Reason for Change" was left blank. In addition, the forms
purported to make the assessments directly against Westar, even though that company
was not the owner of the leased aircraft.

Coincidentally, on the day after the County mailed the initial correction orders,
this court released In re Tax Application of Central Kansas E.N.T. Associates, P.A., 275
Kan. 893, 69 P.3d 595 (2003), which addressed the same business aircraft exemption
under K.S.A. 79-201k(b) First in a case not involving Westar or the owners. In that
opinion, this court held that the 1988 legislative amendment did not change the statutory
exclusive use requirements found in the Godfrey Aircraft decision. 275 Kan. 893, Syl. ¶
4. Our court held that the amended statute, like its predecessor, required that BOTA
consider an aircraft lessee's usage, as well as the owner's, before granting a tax
exemption. And when an aircraft lessee's use included personal activities, the court
determined there were two simultaneous uses—one which fit the purpose of the statute
and the other that failed to meet its business exclusivity requirement. We then held that
an aircraft would not qualify for the exemption if either the owner or lessee did not
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operate the aircraft "exclusively" for the business purpose required by the statute. 275
Kan. at 901.

Notably, the E.N.T. Associates decision did not indicate whether its holding should
be applied retroactively to undo the exemptions already granted, such as those ordered for
the owners' aircraft at issue here. And based on this silence, the County points to E.N.T.
Associates as authority for its attempt now to relitigate the property exemptions granted
for the business aircraft used by Westar.

BOTA Tax Grievance Proceedings

After receiving the County's notice to collect back taxes, interest, and penalties,
Fleet and Connell submitted tax grievances with BOTA, which were consolidated into a
single proceeding. The County argued it had authority to order the assessments under
three statutory mechanisms: (1) K.S.A. 79-214, which requires taxpayers to file a
statement informing the county appraiser when exempt property is no longer being used
for exempt purposes; (2) K.S.A. 79-1422, which provides for assessing penalties when
K.S.A. 79-214 is violated; and (3) K.S.A. 79-1427a, which pertains to personal property
discovered to have been omitted from the tax rolls and is commonly referred to as
escaped property. The owners disputed the County's arguments, but also asserted that the
original BOTA orders granting the exemptions were final and could not be reopened.

The owner's grievances originally encompassed Westar-leased aircraft from as far
back as 1997 and continuing through the 2005 tax year. But as the dispute progressed
through the hearing process, stipulations by the parties and findings by BOTA narrowed
the controversy to three aircraft and 3 tax years: N650W for year 2000; N800W for years
2001 and 2002; and N860W for years 2000-2002. The issues were addressed in two
proceedings.
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In its first effort to decide the dispute, BOTA held that the County lacked authority
to overturn BOTA's previous orders that were long since final. BOTA ordered the County
to cancel all taxes and penalties. It also held that K.S.A. 79-214 was not applicable
because there never was a change in use by Westar. And based on that holding, BOTA
reasoned that K.S.A. 79-1422(a), which authorized a penalty for failing to file the form
required by K.S.A. 79-214, was inapplicable because K.S.A. 79-214 was not violated.

Undeterred, the County filed a petition for reconsideration. It argued BOTA
misinterpreted the exemption statutes in its first order, erred by finding there was no
change in use under K.S.A. 79-214, and erroneously found that K.S.A. 79-1422(a) only
authorized the County to pursue a penalty but not back taxes. BOTA granted the motion
to reconsider, and in doing so effectively reopened all previously decided issues. It then
required the parties to rebrief the issues and ordered another hearing.

At the conclusion of this rehearing process, BOTA issued a second decision
partially reversing its original determinations. It found K.S.A. 79-214 had obligated the
owners to report to county officials that the aircraft no longer qualified for exemption.
BOTA then reasoned that since the taxpayers failed to make this statutorily required
report, the penalties under K.S.A. 79-1422(a) applied. But in so holding, BOTA also
determined that those statutory penalties abated under K.S.A. 79-1422(c) because of
excusable neglect. The agency reasoned that the owners could not have foreseen how the
statute would be interpreted by this court in E.N.T. Associates.

Regarding the escaped property statute, BOTA held that K.S.A. 79-1427a was
broad enough to permit retroactive taxation and that the aircraft were underreported
because the owners did not disclose Westar's use. But that retroactive taxation, as
attempted by the County, was inappropriate because the County failed to comply with the
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procedural requirements set out in K.S.A. 79-1427a(a) by not formally designating the
aircraft as "escaped" property on its appraisal roles. BOTA further noted that the county
clerk had not certified and designated the amount of tax due and that the county treasurer
had not issued an escaped property tax bill to the owners.

Because the County failed to follow these required procedures, BOTA held the
owners still had a statutorily granted 45-day period to pay any tax owed. And any tax or
interest imposed by the County was premature. See K.S.A. 79-1427a(a). It then held any
remaining issues moot.

The County timely filed a petition for review with the district court pursuant to
K.S.A. 74-2426(c) (final BOTA order appealable under the Kansas Judicial Review Act).

District Court Proceedings

In its appeal to the district court, the County argued that BOTA misinterpreted and
misapplied the escaped property statute by finding that no taxes were owed because the
County failed to properly cite the applicable statute in its correction orders; erred by
concluding the aircraft were not subject to penalty under K.S.A. 79-1422 or 79-1427a
because of the taxpayers' excusable neglect; and improperly imposed the burden of proof
on the County.

In their response, the owners disputed the County's specific contentions, but also
noted they had "other arguments and disagreements" with the County's claims and the
Board's order that they intended to present during the district court's briefing process. But
as to these issues, it is unclear what statutory vehicle the owners believed could be
employed to address their additional disagreements with the BOTA order because they
did not cross-appeal any allegedly adverse findings or conclusion by BOTA as required
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by the Kansas Judicial Review Act (KJRA). See K.S.A. 74-2426(c) (BOTA orders
subject to KJRA); K.S.A. 77-607(defining persons entitled to judicial review); K.S.A. 77-
614 (contents of petition).

An additional oddity in the lower court proceedings occurred on the same day the
County filed its brief on the merits because the County simultaneously issued new
"corrected" tax orders to the owners in an apparent attempt to rectify the procedural
failings noted by BOTA in its second memorandum order. These corrected tax
assessments were attached to and discussed within the County's district court brief, along
with affidavits from county officials alleging new factual contentions that claimed the
County had completed the other procedural requirements found lacking by BOTA as
prerequisites to imposing back taxes. The County then argued the district court could
simply add these newly created documents to the administrative record on appeal and
find the newly issued tax orders related back to the original orders, curing any defects
noted by BOTA. As such, the County argued, it could pursue taxes, penalties, and interest
under the escaped property statute in the district court as a part of its KJRA appeal.

In its ruling on the merits, the district court held that the doctrine of res judicata
applied to bar the County's claims because the original exemption orders were final and
there was no statutory mechanism permitting the County to reopen or relitigate the issues
resolved by the original exemption proceedings. The district court further determined that
the requirement to report when exempt property ceases to be used exclusively for that
purpose under K.S.A. 79-214 was inapplicable because there was never a change in the
aircraft's use. And, finally, the district court held that the escaped property statute, K.S.A.
79-1427a, did not apply because BOTA's original order simply mandated that the
property not be taxed. Therefore, the court reasoned, the aircraft were not escaped
property as envisioned by that statute. The district court also observed:

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"Here, there was never a change in exempt use and a determination of exempt
use had been the very subject and nexus of the tax exemption procedure. To urge that one
must report—has a duty under K.S.A. 79-214 to report—as a change in use a very use the
grant of tax exemption implicitly sustained has an Alice in Wonderland quality to it. Such
a construction would undermine the very sanctity of the adversarial procedural process
intended to the grant of an exemption itself. The Legislature could not have intended such
a consequence. Accordingly, it would not be until the standard or standards prescribed for
the exemption granted was authoritatively changed or was authoritatively challenged that
K.S.A. 79-214 could apply if only the previously approved exempt use was the issue.
This would anticipate a prospective change, not a retroactive one."

The County appealed. The owners did not cross-appeal, as was their right, but
have attempted to argue in their briefs to this court that the County's tax assessment effort
against them violated equal protection because the County had made no effort to
retroactively tax any other businesses that received the exemptions. We will not address
this claim below and hold that any equal protection issue was waived because the owners
did not cross-appeal on that point. K.S.A. 60-2103(h); Mid-Continent Specialists, Inc. v.
Capital Homes, 279 Kan. 178, 191-92, 106 P.3d 483 (2005) (appellee must file a cross-
appeal to preserve an issue on appeal not raised by an appellant). The right to appeal is
entirely statutory. Butler County R.W.D. No. 8 v. Yates, 275 Kan. 291, 299, 64 P.3d 357
(2003). We have jurisdiction to decide the County's claims under K.S.A. 20-3018(c)
(transfer from the Court of Appeals on the court's own motion).

DISCUSSION

In this appeal, the County argues it may retroactively assess taxes on these aircraft
and that the doctrine of res judicata does not apply. And even if it does apply, the County
continues, this court should decline to enforce the doctrine because it would create poor
public policy. BOTA did not reach this policy point because it found the assessments
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were inappropriate on other grounds. The district court viewed the controversy differently
than BOTA, but at its core the district court held the doctrine of res judicata barred the
County's claims because there was no statutory procedure to reexamine or change the
initial order.

We believe the primary questions are: (1) Does claim or issue preclusion bar the
County from issuing new tax assessments on the owners' aircraft for past tax years when
that property was exempted in previous BOTA proceedings? and (2) Even if these claims
normally would be precluded, is there a statutory mechanism allowing the County to re-
open the tax exemptions?

In answering these questions, we will discuss the different approaches BOTA and
the district court took to deal with this controversy.

Standard of Review

The KJRA defines the appropriate standard of review and enumerates eight
circumstances in which a court may grant relief from an agency action. K.S.A. 77-621(c).
An appellate court exercises the same statutorily limited review of an agency's action as
the district court. Frick Farm Properties v. Kansas Dept. of Agriculture, 289 Kan. 690,
697, 216 P.3d 170 (2009). Under the KJRA, the County bears the burden of establishing
BOTA erred. K.S.A. 77-621(a)(1) (party asserting invalidity has the burden of proving
it).

At the outset, we note that in its district court pleadings and the briefs to this court,
the County failed to identify which sections of K.S.A. 77-621 it relies upon to claim it is
entitled to relief. As we have previously indicated, a party's failure to specifically
reference the statutory provisions upon which relief is sought is problematic because a
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court reviewing an administrative action may only grant relief if one of the enumerated
statutory provisions is violated. 289 Kan. at 697; see also Pittsburg State University v.
Kansas Bd. of Regents, 30 Kan. App. 2d 37, 45, 36 P.3d 853 (2001), rev. denied 273 Kan.
1036 (2002) ("specificity in pleading under the KJRA is necessary to give focus to the
asserted agency error and to give the reviewing court a proper understanding of the type
of relief sought").

A review of the County's claims suggests it is relying on K.S.A. 77-621(c)(4)
because the County argues BOTA erroneously interpreted or applied the law. An effort at
oral argument to have the county counselor articulate the statutory basis for relief appears
to confirm this. Accordingly, we will review the County's claims under that provision.

Claim and Issue Preclusion Apply

The district court's references to res judicata are broad enough to encompass both
claim and issue preclusion. The modern trend is to more precisely refer to claim
preclusion as res judicata and issue preclusion as collateral estoppel. Waterview
Resolution Corp. v. Allen, 274 Kan. 1016, 1023, 58 P.3d 1284 (2002). But since it is not
entirely clear whether the district court was relying upon claim or issue preclusion, we
will consider both doctrines under the general umbrella of res judicata. Whether claim or
issue preclusion applies is a question of law subject to unlimited appellate review. Winkel
v. Miller, 288 Kan. 455, 467, 205 P.3d 688 (2009).

Claim preclusion is a common-law doctrine, designed to prevent relitigation of a
final judgment. In Kansas, four elements must be met to invoke the doctrine. Most
plainly stated, claim preclusion requires: (1) the same claim; (2) the same parties; (3)
claims that were or could have been raised; and (4) a final judgment on the merits.
Winston v. State Dept. of SRS, 274 Kan. 396, 413, 49 P.3d 1274 (2002).
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In the case before us, there is no real question that these four elements are present.
The same parties are involved and the original tax exemption proceedings reached a final
judgment on the merits. Furthermore, the second effort at taxation involves the same
claim, which is defined as whether the subject property qualified for a tax exemption
under K.S.A. 79-201k(b) First during the tax years in question. And finally, the County's
interpretation of the statute as argued in this appeal could have been raised during the
first proceedings. We hold that the elements of claim preclusion are met.

Issue preclusion prevents a second litigation of the same issue between the same
parties, even when raised in a different claim or cause of action. Three elements are
required for issue preclusion: (1) a prior judgment on the merits that determined the
parties' rights and liabilities on the issue based upon ultimate facts as disclosed by the
pleadings and judgment; (2) the same parties or parties in privity; and (3) the issue
litigated must have been determined and necessary to support the judgment. Venters v.
Sellers, 293 Kan. 87, 98, 261 P.3d 538 (2011). Again, we hold that all three elements are
satisfied in this case. The same parties are involved, there was a prior judgment on the
merits, and the determination that the airplanes qualified for exemption was necessary to
the judgment.

But even though the elements of claim and issue preclusion are technically
satisfied, the County argues that neither doctrine should be applied here because: (1)
claim preclusion does not apply to all administrative actions; (2) the original exemption
orders were based upon a mistaken understanding of the law; (3) promissory estoppel
does not apply to government tax matters; and (4) Kansas tax policies require that
counties have authority to rectify tax errors. And while some of these principles are true
under different circumstances, none of these exceptions apply in this case, predominately
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because the County is attempting to relitigate tax determinations for the same tax years.
Each argument is addressed below.

Preclusion applies to agency determinations made in a judicial capacity

The County argues the preclusion doctrines should not apply because ordinarily
not all administrative agency decisions are subject to them, such as actions taken in an
administrative or legislative capacity, citing Warburton v. Warkentin, 185 Kan. 468, 345
P.2d 992 (1959) ("The doctrine of res judicata does not ordinarily apply to decisions of
administrative tribunals."). The County contends that the doctrine of res judicata "is not
an iron legal mandate that must be applied regardless of the underlying circumstances."
But this argument attempts to mask the nature of the proceedings at issue with this
aircraft, and in doing so underscores the fatal flaw in the County's position.

This court has held that the doctrine of res judicata applies to administrative
determinations "'when the first administrative proceeding provides the procedural
protections similar to court proceedings when an agency is acting in a judicial capacity.'"
Winston, 274 Kan. at 413 (citing Parker v. Kansas Neurological Institute, 13 Kan. App.
2d 685, 686, 778 P.2d 390, rev. denied 245 Kan. 785 [1989]). And there is no doubt in
this case that BOTA was acting in a judicial capacity when it approved the tax
exemptions for these aircraft. See Brown v. U.S.D. No. 333, 261 Kan. 134, 155-56, 928
P.2d 57 (1996) (judicial function requires notice and a hearing, involves the application
of legal criteria to specific facts, or carries with it any of the "normal trappings" of a
judicial inquiry, such as the presentation of evidence or the presence of counsel).

The fact that administrative decisions made in a legislative or administrative
capacity are not subject to res judicata principles does not mean the decision in this case
escapes the doctrine's function here. Application depends upon the nature of the
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proceedings, which in this instance involves BOTA acting in a judicial capacity, and the
existence of the other requisite elements of the doctrine in issue.

The County simply offers no support for its claim that the preclusion doctrines
should not apply in this case. We find this argument to be without merit.

Preclusion bars a second action on the same claim for the same tax year

Next, the County argues the preclusion doctrines should not bar its tax collection
efforts because the original exemption orders were based on a mistaken understanding of
the law, which this court corrected in E.N.T. Associates. For this contention, the County
first directs our attention to Commissioner v. Sunnen, 333 U.S. 591, 68 S. Ct. 715, 92 L.
Ed. 898 (1948), and Tait v. Western Md. Ry. Co., 289 U.S. 620, 53 S. Ct. 706, 77 L. Ed.
1405 (1933), as caselaw authority that "res judicata should not attach to exemption orders
that were entered as a matter of course over several years under a mistaken understanding
of the law." But these cases are not applicable.

Tait and Sunnen pertain to whether a government entity is bound by a prior
adjudication in a different tax year. For example, the taxpayer in Sunnen had entered into
a contract gifting certain royalty income to his wife. In 1935, the Tax Court held that the
income paid to the wife under that agreement was not taxable to him for the years 1929-
1931. But the taxpayer's liability for income paid to his wife under the same agreement
arose again during 1937, and the issue then was whether the courts were required to
follow the 1935 decision for the 1937 tax year based on the principles of res judicata. The
Tax Court held that it was bound by the 1935 decision, but the United States Supreme
Court reversed.

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In doing so, the Court noted that income taxes are levied annually and each tax
year creates a new liability and a separate cause of action based on that particular tax
year. It then held that "a judgment on the merits is res judicata as to any subsequent
proceeding involving the same claim and the same tax year." (Emphasis added.) 333 U.S.
at 598. The Court found the prior judgment acted as a collateral estoppel on the matters
actually presented and determined in the first lawsuit. 333 U.S. at 598-99; see also
Limbach v. Hooven & Allison Co., 466 U.S. 353, 362, 104 S. Ct. 1837, 80 L. Ed. 2d 356
(1984) (doctrine of collateral estoppel does not apply because this case does not involve
the same tax years); Tait, 289 U.S. at 623-24 (final judgment on the merits is a bar to a
subsequent action between the same parties on the same claim or demand, but not if
subsequent action involves different tax years).

The Sunnen Court concluded its analysis by explaining the policy behind allowing
the relitigation of a similar tax issue for a different tax year, stating:

"[Collateral estoppel] is designed to prevent repetitious lawsuits over matters which have
once been decided and which have remained substantially static, factually and legally. It
is not meant to create vested rights in decisions that have become obsolete or erroneous
with time, thereby causing inequities among taxpayers." 333 U.S. at 599.

This authority actually supports the district court's ruling that the County was
barred from relitigating the aircrafts' exempt status for the 2000, 2001, and 2002 tax
years. Sunnen and Tait involved different tax years, but as noted above the Sunnen Court
clearly states that relitigation of the same claim from the same tax year is prohibited. 333
U.S. at 598. And the County's claim that these cases support their attempt to relitigate the
property's exempt status in these tax years lacks merit.

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Similarly, the County directs us to secondary legal authority that also does not
support the proposition advocated by the County. It argues that the Restatement (Second)
of Judgments, § 28 (1980), which pertains to issue preclusion, allows for the relitigation
of a prior judgment for the same tax year when based on a mistake of law. The portion of
the Restatement cited by the County states:

"Although an issue is actually litigated and determined by a valid and final
judgment, and the determination is essential to the judgment, relitigation of the issue in a
subsequent action between the parties is not precluded in the following circumstances:
. . . .
"(2) The issue is one of law and . . . a new determination is
warranted . . . to take account of an intervening change in the applicable
legal context or otherwise to avoid inequitable administration of the
laws."

Admittedly, it is not entirely clear at first glance from the language of this section
whether this provision is meant to include the relitigation of an exemption from a prior
tax year. But context provides that clarity. Illustration 3 to the Restatement makes
apparent that this section is meant to establish that a party is not precluded from
relitigating an issue when there is ongoing conduct and the law governing that conduct
changes. Illustration 3 states:

"A, a state agency, brings an action against B to revoke B's wholesale liquor license on
the ground that B has violated the law governing the license by selling only to himself as
a retailer. The court grants B's motion to dismiss for failure to state a claim, holding that
the conduct charged does not violate the law. In a subsequent action by A against C, a
higher court holds that identical conduct by C is ground for the revocation of C's
wholesale liquor license. In a second action against B for revocation of B's license, A is
not precluded from asserting that since the first dismissal, B has continued, as before, to
sell only to himself as a retailer." Restatement (Second) Judgments § 28.
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Under this section, as supported by the Illustration, a party engaging in ongoing
conduct cannot use issue preclusion to immunize itself from a change in the law because
the issue was previously litigated. But it does not authorize the reopening of a final
judgment in a prior tax year, which is what the County is trying to do.

Thus, the County's assertion that it may reopen the tax exemptions granted for the
2000, 2001, and 2002 tax years because this court's E.N.T. Associates decision conflicted
with the County's previously held belief regarding eligibility for the exemption lacks
merit.

Promissory estoppel caselaw is irrelevant to whether res judicata applies

Next, the County directs our attention to several Kansas cases holding that
promissory or equitable estoppel and estoppel by laches do not apply to matters relating
to public welfare, taxation, or the exercise of police powers, specifically: Skinner v.
Mitchell, 108 Kan. 861, 197 P. 569 (1921) (doctrine of laches); Harvey County Comm'rs
v. School District, 139 Kan. 457, 32 P.2d 812 (1934) (promissory estoppel); and Shriver
v. Board of County Commissioners, 189 Kan. 548, 552-53, 370 P.2d 124 (1962)
(promissory estoppel).

But none of these cases involve an attempt to relitigate a tax exemption from the
same tax year, and a closer review of Shriver actually supports barring the County's suit
in this case. In Shriver, for example, a commercial building was exempted from taxes
because it was held in a trust benefiting the City of Wichita. The petition for the
exemption order only sought a determination regarding the 1937 tax year. But the City
removed the building from its tax rolls until 1959 when it assessed taxes for that tax year.
The trustees appealed the 1959 tax order. The district court vacated the 1959 tax
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assessments, holding that the 1938 exemption order was final and binding on that date
and as long as the same statutes and owners existed. This court reversed, holding that the
1938 order only granted an exemption for the 1937 tax year because the petition did not
seek a determination for any subsequent years and the district court erred in finding the
City bound by it for the 1959 tax year. 189 Kan. at 552-53. Notably, the City was not
seeking the taxes exempted in the 1938 order or trying to retroactively assess taxes from
1938 to 1958.

The Shriver court's treatment of the 1938 judgment suggests an attempt to
relitigate the final exemption order would not have been well taken. But the County cites
the case for a different proposition. It focuses on the trustees' claim that the City
acquiesced to the district court's 1959 decision that the property was exempt by refunding
the first half of the 1959 taxes the trustees had paid under protest. And in response to that
argument, this court held that "[i]n matters relating to the public welfare, taxation, or any
exercise of the police powers, the state or one of its political subdivisions is not estopped
to assert or protect public rights." 189 Kan. at 556. In other words, the City's decision to
refund the 1959 taxes as ordered by the court did not prevent it from appealing the order
to establish the property was not in fact exempt.

This holding cannot be read, as argued by the County, as establishing that
preclusion doctrines do not apply to final tax orders. Similarly, the other cases cited by
the County are inapplicable to the questions presented because they do not address the
same factual scenario and do not support the County's effort to reach back and tax
property exempted under a final BOTA order. Again, we find this argument by the
County to be without merit.



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Kansas tax policy does not support a new exception for preclusion

The County next makes two public policy arguments, which it claims provide
important context in support of its position that the County must be able to retroactively
tax personal property that, for whatever reason, avoided taxation. But both policy
arguments require us to deviate from our previous caselaw in favor of invoking
preclusion under appropriate circumstances similar to this one.

First, the County argues it is the taxpayer who is responsible for "properly"
reporting personal property, not the County, citing In re Tax Protest of United Ag
Services, 37 Kan. App. 2d 902, 159 P.3d 1050 (2007). In that case, two grain elevators
were mistakenly omitted from the tax rolls and the primary issue was whether they could
be added after the fact under the statute applicable to real property, K.S.A. 79-1475. The
Court of Appeals in ruling in favor of the grain elevators' owner compared a taxpayer's
duty to report personal property with the county appraiser's duty to list and appraise real
property, saying: "In the case of personal property, the taxpayer has a statutory
responsibility to report taxable property to the taxing authority; in the case of real
property, it is the county appraiser who must list and appraise the property without any
affirmative obligation on the taxpayer to report." 37 Kan. App. 2d at 913. The County
seizes on this language and argues this taxpayer "duty" is relevant now because the
district court erroneously "placed the legal responsibility for appropriately characterizing
the proper status of the aircraft on the County."

But this argument lacks merit because it reflects a failure to appreciate the
meaning of claim preclusion, and it is not relevant to the issue before the court. The
County suggests that public policy should permit any taxing authority at anytime to
reopen tax proceedings in an effort to collect revenue. But as pointed out by the aircraft
owners' counsel at oral argument, taxpaying businesses also need to have finality
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regarding their tax liabilities, which is a competing policy concern and one recognized in
our caselaw, including United Ag Services when it observed "finality in matters of
taxation is critical." 37 Kan. App. 2d at 912.

The second policy argument the County raises pertains specifically to tax
exemptions. The County contends that since the general rule is that personal property is
subject to tax and exemptions are to be the exception, this court should decline to apply
claim preclusion in this case to uphold the preference for taxing property.

But it is nonsensical to believe that applying the doctrines of claim or issue
preclusion as the courts have done in previous cases will undermine the general rule. As
noted earlier, these doctrines were designed purposefully to prevent a case such as this
where the County seeks to overrule a prior exemption order for the same tax years. And
we decline to depart from our long history of applying claim and issue preclusion to
prevent parties from relitigating issues that have reached final judgment.

No statutory mechanism exists for reopening the tax assessments

The County next makes two statutory arguments that it claims should deflect an
adverse ruling based on claim preclusion. First, the County asserts that since the aircraft
should not have been exempted in the first proceeding, they were "escaped" property as
that term is used in K.S.A. 79-1427a. And if so, the County claims, it may retroactively
tax the aircraft under that statute in a new proceeding. Second, the County argues it can
retroactively tax the aircraft under K.S.A. 79-214 because the owners failed to notify the
county appraiser when the exempted property ceased to be used exclusively for the
exempt purpose. We examine each statute separately, but the arguments under both
inevitably circle back to the same place and remain linked to the same issues already
22



resolved in the original exemption proceedings, i.e., whether the aircraft qualified for the
business tax exemption.

The escaped property statute

As to the escaped property statute, K.S.A. 79-1427a, the County argues it provides
a mechanism to retroactively tax the property because the aircrafts' values were
"underreported" in the initial proceedings. The district court and BOTA differed in how
they addressed this contention. The district court rejected it outright and held that the
aircraft had not escaped taxation as defined by the statute because BOTA's original order
found the property was not subject to any tax; therefore, the court concluded the statute
did not apply in this case. But BOTA based its decision on what it found to be the
County's failure to comply with K.S.A. 79-1427a(a)'s procedural requirements, which it
said were a prerequisite to issuing the escaped property tax assessments. Therefore,
BOTA determined, the County assessment effort was barred.

During the district court proceedings, the County attempted to address the
procedural deficiencies identified by BOTA by issuing "corrected" tax assessments that
the County argued complied with the statute's requirements. For reasons that are not clear
in the record, the district court allowed the County to supplement the agency record with
the corrected tax assessments over the owners' objections but then found the effort to no
avail because of the court's view of the issues. And we feel obligated to note that we find
no statutory authority allowing the addition of new evidence under these circumstances.
See K.S.A. 77-619(a) (establishing two limited exceptions for when new evidence can be
added to the agency record); see also K.S.A. 2010 Supp. 77-618 (judicial review of
disputed facts is limited to the agency record unless an exception applies); Brewer v.
Schalansky, 278 Kan. 734, 747, 102 P.3d 1145 (2004).

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But we are prevented from holding that the County's supplemental documents
were improperly admitted because the owners failed to cross-appeal the district court's
order as required by K.S.A. 2010 Supp. 60-2103(h). Cooke v. Gillespie, 285 Kan. 748,
755, 176 P.3d 144 (2008) (appellee must file a cross-appeal to present adverse rulings to
the appellate court). As such, we must determine whether issue preclusion bars the
County from arguing that this property was underreported and had escaped taxation.

As discussed above, issue preclusion requires a prior judgment on the merits that
determined the parties' rights and liabilities on the issue based upon ultimate facts as
disclosed by the pleadings and judgment, the same parties or parties in privity, and the
issue litigated must have been determined and necessary to support the judgment.
Venters, 293 Kan. at 98. A review of the escaped property statute is required to define the
issue presented.

Under K.S.A. 79-1427a(a), tangible personal property has escaped taxation if it
"has been underreported for whatever reason." When property is found to have been
underreported within the time allowed by statute, the county appraiser is required to list
and appraise the underreported portion of the property, adding a 50 percent penalty for
escaping taxation. K.S.A. 79-1427a(a). The County argues this statute applies and
authorizes these retroactive taxes because the property was "underreported." In its order
on reconsideration, BOTA agreed and held that the property was "underreported because
the Taxpayers simply did not report the lessee's use of the subject aircraft."

But the original exemption orders turned on this same issue, i.e., whether the
lessees' use is relevant to whether the owners' property qualified for the business tax
exemption under K.S.A. 79-201k(b) First. The lessee's use was not reported because
none of the parties thought it was relevant, and the exemption was approved based on all
parties' mutual position that it was irrelevant. Nothing prevented the County from seeking
24



information on Westar's use at the time the owners sought the exemptions, and there is no
allegation that the County was prevented from arguing that Westar's use was relevant
under K.S.A. 79-201k(b) First.

We hold that since the County had an opportunity to fully litigate the relevance of
the lessee's use, all parties agreed that the only necessary determination involved the
owners' use, and BOTA's initial decision was based entirely on the owners' use that the
doctrine of issue preclusion bars the County for arguing that the property had escaped
taxation. We agree that K.S.A. 79-1427a does not permit the retroactive assessment the
County contemplates. We hold that issue preclusion bars the County from arguing that
the property was underreported. Thus, we do not need to reach whether the statute applies
under these facts as the district court did.

The statute requiring a statement upon cessation of exempt use

Finally, the County argues it can retroactively tax the aircraft under K.S.A. 79-214
because the owners failed to notify the county appraiser when the exempted property
ceased to be used exclusively for the exempt purpose. BOTA agreed with the County and
held that the taxpayers were required to file a statement indicating the property was no
longer used for an exempt purpose at the time E.N.T. Associates was decided, although it
then held that any penalties should be abated due to excusable neglect as permitted by
K.S.A. 79-1422(c) because the owners could not foresee that the law would change
during the tax years at issue. The district court reversed this rationale, holding instead that
the owners were not required to report a change in use when "there was never a change in
exempt use and a determination of exempt use had been the very subject and nexus of the
tax exemption procedure." We agree with the district court and hold that the owners were
not required to report a change in use under K.S.A. 79-214.

25



When exempted property "ceases to be used exclusively for an exempt purpose"
the property owners must submit a statement to the county appraiser within 30 days,
indicating the property is no longer used for the exempt purpose. If that statement is not
timely filed, the property is subject to penalties prescribed in K.S.A. 79-1422. K.S.A. 79-
214. But it is important to emphasize that at the time BOTA first entered an order
exempting the airplanes under K.S.A. 79-201k First, the owners used the aircraft for their
business purposes only (leasing to third parties). Moreover, the parties stipulated that
there was never a change in the use of this property between the time of the original
proceeding and the grievance hearings, so it is counterintuitive for the County to argue
that the property "ceased to be used for an exempt purpose."

As the district court held, the use of the aircraft continued in the same manner as
when BOTA originally held the owners qualified for an exemption. At its core, the reality
is simply that the County's understanding of the law changed, so the County is trying now
to stretch K.S.A. 79-1422 beyond its intended purpose to reopen a valid, final judgment
for these particular taxpayers.

In short, issue preclusion prevents the County from retroactively taxing the aircraft
for the years in which the owners had a valid exemption order. And neither K.S.A. 79-
1427a nor K.S.A. 79-1422 provides a statutory mechanism to reopen the original
exemption orders.

The judgment of the district court remanding the matter to BOTA with direction to
dismiss is affirmed.

BEIER, J., not participating.
RULON, C.J., and BRUCE T. GATTERMAN, District Judge, assigned.
1

26



1
REPORTER'S NOTE: Chief Judge Gary W. Rulon, retired, was appointed to hear
case No. 102,645 vice Justice Beier pursuant to the authority vested in the Supreme Court
by K.S.A. 20-2616. Pursuant to the authority vested in the Supreme Court by art. 3, § 6(f)
of the Kansas Constitution, Judge Gatterman was appointed to hear the same case to fill
the vacancy on the court created by the retirement of Chief Justice Robert E. Davis.