In re Tax Exemption Application of Kouri Place

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No. 101,648

IN THE COURT OF APPEALS OF THE STATE OF KANSAS

IN THE MATTER OF THE APPLICATION
FOR TAX EXEMPTION OF
KOURI PLACE, L.L.C.

SYLLABUS BY THE COURT

K.S.A. 2009 Supp. 79-201b Sixth provides a real-estate tax exemption when
property is used exclusively as a group home for low-income people with special needs
and other statutory requirements are met. A federal statute, 29 U.S.C. § 42 (2006),
provides tax credits that can be used to help provide funding for low-income housing
projects. Under the facts of this case, the use of those tax credits to build a group home
otherwise exempt from taxation under K.S.A. 2009 Supp. 79-201b Sixth does not
constitute a separate use of the property so as to negate the required exclusive use as a
group home.

Appeal from the Court of Tax Appeals. Opinion filed September 3, 2010. Reversed and
remanded with directions.

Karl N. Hesse, of Foulston Siefkin LLP, of Wichita, and James D. Oliver, of the same firm, of
Overland Park, for appellant.

Patricia J. Parker, assistant county counselor, for appellee.

Before MCANANY, P.J., BUSER and LEBEN, JJ.

LEBEN, J.: The Kansas Legislature has provided a real-estate tax exemption when
the property is "used exclusively" as a group home for low-income people with special
needs. Kouri Place, L.L.C., sought an exemption for such a property, one that has 14 of

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its 15 units used to house people with special needs and 1 unit devoted to housing on-site
managers. The Kansas Court of Tax Appeals agreed that the exclusive physical use of the
property qualified for the tax exemption. But the court nonetheless denied the exemption
because Kouri Place financed most of the project's construction through a federal tax-
credit program; that court held that this constituted a separate intangible use of the real
estate, thus eliminating exclusive use as a group home.

We find the Court of Tax Appeals' interpretation of this exemption statute in error.
Kouri Place used a tax-credit program established by federal law, authorized by state law,
and awarded by a Kansas state agency for the purpose of building the group home. The
dominant purpose of the "use" of the tax-credit program here was to build a group home.
Indeed, this is exactly what Congress intended when it set up the low-income housing
tax-credit program—that people would use the tax credits to help get such projects built.

Our case arises under K.S.A. 2009 Supp. 79-201b Sixth, one of several similar
Kansas statutes providing exemption from real-estate property taxes. K.S.A. 2009 Supp.
79-201b Sixth provides for an exemption when the real property is (1) "actually and
regularly used exclusively for the purpose of group housing" of people with special needs
such as mental illness or physical or mental disability, (2) operated by a nonprofit
corporation, (3) charging residents less than the actual cost of operation, and (4) licensed
under Kansas law as a facility for housing people with special needs. The Court of Tax
Appeals found that only one of these requirements—exclusive use—was missing. Kouri
Place has appealed, and the appeal focuses on the single issue of whether the property
was being "used exclusively for the purpose of group housing" of people with special
needs.


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The underlying facts are not in dispute. This group-home project was undertaken
by Starkey, Inc., a nonprofit corporation in Wichita that has been serving people with
disabilities since 1930; Starkey is funded in part by state and county funds. Starkey
decided to create a community living home for people with special needs who could, with
some help, live independently. Starkey turned the project into reality with three main
funding sources: land donated by Wichita residents Sam and Jacque Kouri; an affordable
housing grant of $67,500 from the Federal Home Loan Bank of Topeka; and $1,268,500
in federal income-tax credits allocated to this project by the Kansas Housing Resources
Corporation. Starkey was able to turn the income-tax credits, usable over the next 10
years, into $1,048,930 in immediate cash paid from investors in exchange for the future
tax credits. The investors were able to use the tax credits to offset federal income taxes
they otherwise would have owed. By paying a discounted amount of cash for what would
later be nearly $1.3 million in tax credits, the investors will earn about 1.9% on their
investment over the 10-year period of the credits.

The group home was built on the donated land and opened to qualified residents in
2005. At the time the tax-exemption application was filed, all residents were low-income
Kansans receiving Medicaid assistance who were charged rental rates that were below
state-established guidelines for low-income housing.

Starkey used a standard organization structure—the formation of a limited-liability
company—to transfer the tax credits to investors. The limited-liability company, Kouri
Place, L.L.C., became the owner of the property. The investors were aggregated into a
single limited partnership, called Kansas Equity Fund III, L.P., which owned 99.9% of
Kouri Place. The use of such an organizational structure and the allocation of such a high
percentage to the investor member(s) is a standard practice in building housing using
these low-income housing tax credits. With this structure, essentially all of the tax credits

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can be passed through to the investors, who can use them, rather than Starkey, a nonprofit
corporation that generally doesn't owe income taxes and thus can't use these tax credits.
See Handel & Nahas, Leveraging the Low-Income Housing Tax Credits Program, 26
L.A. Law 23 (Jan. 2004). Starkey owned the other .01% of Kouri Place.

The tax credits came through a program that Congress established by statute. See
26 U.S.C. § 42 (2006). These credits are available under limits set by Congress, and they
are allocated by state agencies. See generally Partnerships: Market Segment
Specialization Program Guideline, 2002 WL 32770029, at *191-92 (I.R.S. 2002). The
Kansas Legislature authorized the Development Finance Authority to set up a subsidiary
corporation to allocate these credits, and that program is now administered by the Kansas
Housing Resources Corporation, a subsidiary of the Development Finance Authority. See
K.S.A. 74-8904(v); see also K.A.R. 110-10-1. Significantly, Congress has required that at
least 10 percent of the credits be allocated to nonprofit entities. See 26 U.S.C. § 42;
Partnerships, 2002 WL 32770029, at *191.

As the basis for its decision, the Court of Tax Appeals seized upon the
organization structure chosen by Starkey to facilitate the use of these tax credits. The real
estate is owned by Kouri Place, and Kansas Equity Fund III has a 99.99% ownership
interest in the limited-liability company. Thus, the Court of Tax Appeals concluded that
Kansas Equity Fund III "possesses the ultimate control over the physical use of the
property." In the event that the Internal Revenue Service would determine that the
property wasn't being used for the purposes for which Congress made the tax credits
available—and the IRS disallowed those credits—the Court of Tax Appeals concluded
that Kansas Equity Fund III could take over the property to protect its interests since it
had "the ultimate control" as a 99.9% owner of the limited-liability company.


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To the extent the Court of Tax Appeals equated control with ownership, it is
legally wrong to conclude that a member holding a majority ownership interest in a
limited-liability company owns the company's property. A limited-liability company may
own property in its own name, and members have no ownership interest in specific
limited-liability company property. K.S.A. 17-76,111. But the Court of Tax Appeals
seems to have focused more on the reality of the situation than on legal ownership. Even
there, though, Starkey is solely responsible for managing the operation of the property
under the limited-liability company's operating agreement, subject to very limited
decisions that require the approval of all members. In addition, while there are potential
circumstances in which Starkey could be removed as manager, such as fraud, there is no
suggestion in our record that there is even a remote likelihood of Starkey's removal.
Instead, Kouri Place has worked exactly as it was supposed to. Starkey used the state-
allocated federal income-tax credits to finance the construction of low-income housing,
and the project is being used exclusively for that purpose.

The statute at issue, K.S.A.79-201b Sixth, tells us that purpose matters: there must
be exclusive use of the property "for the purpose of group housing" of these people with
special needs. Using federally provided and state-allocated tax credits for the purpose of
building this project—the intended purpose of K.S.A. 2009 Supp. 79-201b Sixth—should
not logically turn the purpose of the use of the property into something else. We find
nothing in the organization structure that Starkey adopted to get the tax credits into the
hands of investors who could use them—again the intended purpose of those tax
credits—that should affect this result. Our state legislature obviously was trying to
encourage the development of these group homes through the property-tax exemption,
and Congress and the state legislature were trying to encourage the building of such
housing through these tax credits. The Court of Tax Appeals' approach turns purposive
statutory interpretation on its head by concluding that taking advantage of two statutes

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aimed at the same general goal somehow negates the applicability of one of the statutes—
even though there's no conflict between the language of the two statutes and our tax-
exemption statute expressly tells us that purpose matters.

The question before us is one of statutory interpretation, and we generally review
such questions independently, without deference to a lower court. Genesis Health Club,
Inc. v. City of Wichita, 285 Kan. 1021, Syl. ¶ 2, 181 P.3d 549 (2008). Some level of
deference has traditionally been given in Kansas to the statutory interpretation of an
administrative agency regarding a statute it administers. E.g., Blue Cross & Blue Shield
of Kansas, Inc. v. Praeger, 276 Kan. 232, 249, 75 P.3d 226 (2003) (giving "great
deference" to Insurance Commissioner's statutory interpretation if it has a "rational
basis"). Despite its name, the Court of Tax Appeals is an administrative agency within
the executive branch of state government. But the Kansas Supreme Court has recently
said that "deference [is] no longer being given to the agency's interpretation." Kansas
Dept. of Revenue v. Powell, 290 Kan. 564, ___, 232 P.3d 856, 859 (2010); accord Ft.
Hays St. Univ. v. University Ch. Am. Ass'n of Univ. Profs., 290 Kan. 446, Syl. ¶ 2, 228
P.3d 403 (2010). These cases arose in situations where the case for deference to an
agency's interpretation is relatively weak—Powell, a case before the Civil Services
Board, which is a court-like tribunal, and Ft. Hays St. Univ., a case before the Public
Employee Relations Board, which was interpreting its own statutory authority.

Although the factual settings of these two cases were limited, our Supreme Court's
language regarding the lack of deference to agency statutory interpretations was not. It is
possible that some level of deference might yet be given to agency interpretation in some
situations, such as when an agency is administering a technically complex regulatory
scheme in which complicated legal issues are involved even in determining the facts.
E.g., Frank v. Kansas Dept. of Agriculture, 40 Kan. App. 2d 1024, Syl. ¶¶ 1-2, 198 P.3d

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195 (2008); see also Pappas, No Two-Stepping in the Laboratories: State Deference
Standards and Their Implications for Improving the Chevron Doctrine, 39 McGeorge L.
Rev. 977 (2008); Andersen, Chevron in the States: An Assessment and a Proposal, 58
Admin. L. Rev. 1017 (2006); Asimow, The Scope of Judicial Review of Decisions of
California Administrative Agencies, 42 U.C.L.A. L. Rev. 1157, 1192-1209 (1995). But
the case now before us is much like Powell, in which the administrative agency was
acting in a court-like manner, a situation in which we are equally capable of the task of
statutory interpretation. Based on Powell, we conclude that no deference is owed here to
the statutory interpretation of the Court of Tax Appeals.

There is one standard rule of statutory interpretation in tax cases that we must
consider: the rule that tax-exemption statutes are interpreted strictly in favor of imposing
the tax and against granting the exemption except for one who clearly qualifies. In re Tax
Exemption Application of Mental Health Ass'n of the Heartland, 289 Kan. 1209, 1211,
221 P.3d 580 (2009). Lest that be considered a strict ruling requiring that we deny an
exemption any time there is an arguable ambiguity in the statute, however, our Supreme
Court has cautioned in recent years that the strict construction of an exemption statute
should not lead to an unreasonable interpretation. 289 Kan. at 1211; In re Tax Application
of Lietz Constr. Co., 273 Kan. 890, Syl. ¶ 7, 47 P.3d 1275 (2002).

In re Tax Exemption Application of Mental Health Ass'n of the Heartland is such a
case where strict construction of an exemption statute led to an unreasonable
interpretation. It involved the interpretation of exclusive-use provisions. The Mental
Health Association of the Heartland had set up a low-rent apartment building where
residents had to "have severe and persistent mental illness" and be homeless. 289 Kan. at
1210. The Court of Tax Appeals found that the project didn't meet some of the
requirements of K.S.A. 2009 Supp. 79-201b Fourth, which provides a tax exemption for

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property exclusively used for the housing of persons with special needs who are low-
income, but only when other requirements (like enrollment in programs for life-training
skills) are also met. The Mental Health Association of the Heartland argued that it
qualified for exemption under other statutes, specifically K.S.A. 2009 Supp. 79-201
Second (property exclusively used for charitable purposes) and K.S.A. 2009 Supp. 79-
201 Ninth (property exclusively used for the predominant purpose of providing
humanitarian services). The Court of Tax Appeals held that K.S.A. 2009 Supp. 79-201b
Fourth applied, since it dealt specifically with housing low-income people with special
needs and a standard rule explains that a specific statute applies over a more general one.
289 Kan. at 1214-15. A panel of our court agreed. See In re Tax Appeal of the Mental
Health Ass'n of the Heartland, 40 Kan. App. 2d 531, 194 P.3d 580 (2008).

Our Supreme Court reversed, finding that there was no conflict between the three
statutes and, thus, no reason that an exemption could not be granted under any of the
three. The court found that the property's use met the requirements of K.S.A. 2009 Supp.
79-201 Second (exclusive use for charitable purposes) even though the nonprofit entity
that owned the property received some reduced-cost fees for its services. 289 Kan. at
1216-17. The court found that the property's use also met the requirements of K.S.A.
2009 Supp. 79-201 Ninth (predominant purpose of use is humanitarian services). 289
Kan. at 1217-18. The court then held that there was no conflict between the statutes—and
thus no need to apply the rule that a more specific statute controls over a conflicting
general one. 289 Kan. at 1218.

The Mental Health Ass'n of the Heartland case is significant to the analysis of our
case. First, ambiguities in the statutes were analyzed there that could have invoked
application of the rule that tax-exemption statutes are strictly construed against granting
the exemption—if any ambiguity were enough to invoke it. Both the Court of Tax

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Appeals and our court had felt there was sufficient ambiguity in the interplay of the
statutes to invoke the rule that the more specific statute (which the taxpayer didn't meet)
controlled. In addition, our Supreme Court addressed an ambiguity in the statute
providing an exemption for property used exclusively for charitable purposes; since the
residents paid some fees, there was an argument that it was not exclusively a charitable
purpose. But the court noted that "the modern view" of what constitutes charitable or
benevolent purposes generally allows the receipt of some offsetting rental or fee
payments. 289 Kan. at 1216-17 (citing cases). Second, the court noted that "the
legislative history of the three statutes in question shows a clear intent on the part of the
legislature to broaden the scope of property that is exempt by virtue of its charitable or
humanitarian use." 289 Kan. at 1217. One of those three statutes, K.S.A. 2009 Supp. 79-
201b, is the statute at issue in our case.

Any analysis of K.S.A. 2009 Supp. 79-201b Sixth must start with the words used
in it, which are of course the most important guide to the legislature's intention. 289 Kan.
at 1216. The most significant word at issue here is "use," and as we've noted, all agree
that the exclusive physical use of the property is for an exempt purpose. In any ordinary
meaning of the word "use," Starkey and Kouri Place have made use of the tax credits to
support the exempt property use, not a use of the property to support some other use (like
making a profit).

Kansas courts have also consistently looked to the purpose of a statute to
determine its meaning. E.g., Southwestern Bell Tel. Co. v. Beachner Const. Co., 289 Kan.
1262, 1270, 221 P.3d 588 (2009); Mason v. McLeod, 57 Kan. 105, Syl. ¶ 2, 45 P. 76
(1896); State ex rel. Kellogg v. Mercantile Association, 45 Kan. 351, 355, 25 P. 984
(1868). There is no question here that K.S.A. 2009 Supp. 79-201b Sixth was intended to
spur the development of group housing for low-income Kansans with special needs. We

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see no reason that the legislature could have intended that the use of these federally
provided, state-allocated income-tax credits should negate the incentive our legislature
provided through K.S.A. 2009 Supp. 79-201b Sixth.

We acknowledge that another panel of our court has come to the opposite
conclusion in a case that is indistinguishable from this one. See In re Tax Exempt.
Application of CLASS Homes I, 44 Kan. App. 2d ___, 234 P.3d 35 (2010). We
respectfully disagree with its conclusion:
• The CLASS Homes opinion cited the rule that decisions of the Court of Tax
Appeals about tax matters "are given great weight and deference," 234 P.2d at 37;
we believe that deference is no longer owed to statutory interpretations of the
Court of Tax Appeals under the Kansas Supreme Court decisions we've cited. In
2009 in Mental Health Ass'n of the Heartland, a tax-exemption appeal, the court
did not even mention deference to the agency interpretation; in 2010 in Powell and
Ft. Hays St. Univ., the court explicitly said it no longer gave deference to agency
statutory interpretations.
• The CLASS Homes opinion also relied in part on the rule of strict construction
against tax exemptions, a rule that did not carry the day in Mental Health Ass'n of
the Heartland. We think it has no more weight here than it did in that case; in both
situations, the clear statutory purpose and the statutory language provide support
for the exemption. As the court noted in Mental Health Ass'n of the Heartland,
although the strict-construction rule was applied more strictly in early exclusive-
use cases, the legislature has since tried to broaden the availability of these
exemptions in several statutes, including K.S.A. 2009 Supp. 79-201b. 289 Kan. at
1211-13.
• The CLASS Homes opinion found two past cases of support to its holding: Board
of Wyandotte County Comm'rs v. Kansas Ave. Properties, 246 Kan. 161, Syl. ¶ 5,

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786 P.2d 1141 (1990); and In re Johnson County Comm'rs, 225 Kan. 517, Syl. ¶ 2,
592 P.2d 875 (1979). Those cases do confirm that that there may be a nonphysical,
intangible use of property, just as there may be a physical use. One such intangible
use is the leasing of the property for a profit. Thus, in each of those cases, when a
nontax-exempt entity leased its property for a profit to a tax-exempt entity (which
then physically used the property only for exempt purposes), the property was not
exclusively used for that exempt purpose because the property is simultaneously
being used to make money for the owner. But in the case of Kouri Place, the only
financial use arguably being made of the property is realistically needed to adapt
the use of these tax credits to the financing of a building being built by a nonprofit
corporation that can't take tax credits for its own use. That is not akin to the
leasing of the property for a profit.
• The CLASS Homes also found nonbinding language in another case, In re Tax
Appeal of Univ. of Kan. School of Medicine, 266 Kan. 737, 766-67, 973 P.2d 176
(1999), supportive of its analysis. We do not find it persuasive in deciding how to
interpret K.S.A. 2009 Supp. 79-201b Sixth on our facts. In the University of
Kansas case, one nonprofit entity leased a building to another nonprofit entity at
below-market rent, and the lessee used the building predominantly for
humanitarian purposes. The court held that this qualified for a tax exemption
under K.S.A. 79-201 Ninth, which grants an exemption when the "predominant
purpose" of the use is for humanitarian purposes. 266 Kan. at 764-69. The CLASS
Homes opinion explains that our Supreme Court noted as one of several points
supporting this result that none of the funds generated by the lease rental payments
went to benefit any private shareholder or individual. The CLASS Homes panel
concluded that this suggested that having a private benefit to anyone holding an
interest in Kouri Place would negate an exclusive-use exception. 234 P.3d at 39.
But the University of Kansas court also said that its decision was ultimately guided

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by "the intent of the legislature," and its reference to the lack of pass-through
rental income to any private interest holder was merely one of the reasons it
concluded that its interpretation in that factual setting was consistent with
legislative intent. 266 Kan. at 766-67. In our case, there is a clear indication of
legislative intent both in K.S.A. 2009 Supp. 79-201b Sixth, which is designed to
encourage the development of group-homes for low-income, special-needs
Kansans, and the federal statute, 26 U.S.C. § 42, which is designed to encourage
the development of low-income housing generally by giving tax credits to entities
that pay income taxes so that such entities will put money into low-income
housing projects. Nothing in the University of Kansas opinion suggests to us that
combining these two statutory purposes into a single project should cause the
project to lose eligibility for a tax exemption under our statute.

In sum, Kouri Place is entitled to the tax exemption that it sought under K.S.A.
2009 Supp. 79-201b Sixth. The ruling of the Court of Tax Appeals is reversed, and this
case is remanded with directions to enter an order approving the exemption application.