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CITY OF RICHMOND v. VA UNITED METHODIST HOMES, INC.


CITY OF RICHMOND

v.

VA UNITED METHODIST HOMES,
INC.


January 8, 1999
Record No. 980498

CITY OF RICHMOND

v.

VIRGINIA UNITED METHODIST HOMES, INC.

FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND
Melvin R. Hughes, Jr., Judge
PRESENT: Carrico, C.J., Lacy, Hassell, Keenan,
Koontz,and Kinser, JJ.

OPINION BY JUSTICE LAWRENCE L. KOONTZ, JR.


In this appeal, we consider whether the trial
court erred in ruling that certain properties were exempt from
the assessment of local real estate taxes because of their status
as charitable "asylums."

BACKGROUND

Virginia United Methodist Homes, Inc. is a
Virginia non-stock, non-profit corporation operating continuing
care facilities for adults throughout the Commonwealth.
[1] Among these facilities are The Hermitage in Richmond
and Snyder Memorial Home (collectively, the properties), both of
which are located within the City of Richmond.
[2] Methodist Homes was chartered in 1945 and acquired the
properties in 1948. In 1976, the Via Health Care Center, a
115-bed nursing home facility, was added to The Hermitage in
Richmond. The properties presently provide three levels of care:
independent living, assisted living, and health care. Depending
on the needs of an individual resident, these levels of care are
available under continuing care contracts for the life of the
resident or under monthly and daily leases.

The 1945 articles of incorporation of Methodist
Homes called for the establishment of "a home or homes for
the aged and infirm and needy persons." As a matter of
policy, admission was limited initially to persons age 65 and
older. Individual contracts of admission were negotiated with
each prospective resident based upon the estimated cost of
lifetime care and the individual’s available income and
assets to pay that cost, generally in monthly installments.
However, the ability of the resident to pay the full cost of care
from personal income and assets was not a requisite factor in
determining admission. Once admitted, no resident was expelled
because of the inability to continue to pay the agreed upon
installments.

Over time, greater emphasis was placed on the
ability of a prospective resident "to pay for their cost of
care over their actuary life expectancy." In 1961, the
articles of incorporation were amended to reflect that the
purpose of the corporation was to provide "a home or homes
for aging persons." As a result of this change in emphasis
in the admission policy and corporate purpose, Methodist Homes
began requiring that prior to admission there be an identified
source of funds from "the individual, the government,
family, church, [or] somebody" adequate to pay for the
expected cost of lifetime care.

In the 1980s, Methodist Homes established the
"Samaritan fund," a charitable account designed to
provide "benevolent care" by funding the shortfall in
future anticipated cost of care of prospective residents who lack
sufficient income and assets to pay that cost at the time of
admission. Currently Methodist Homes is "trying to develop
the process where [it] can fund benevolent care" on a
regular basis. However, funds available for benevolent care are
limited and are first applied to the needs of residents already
living in the properties.

The majority of the current residents of the
properties are parties to continuing care contracts that require
them to pay an entrance fee and monthly fees thereafter. Under
the fee schedule pertinent to such contracts, the entrance fees
range from $24,750 to $175,500 depending on the type of
accommodation acquired and the present and prospective health
care needs of the resident. Similarly, the monthly fees range
from $1,074 to $2,979. Continuing care residents who become
unable to pay their monthly fees are nevertheless entitled to
residence and care for life. At the time relevant to this appeal,
29 continuing care residents were receiving this contract
benefit. The deficit of their monthly fees is made up from
charitable sources available to Methodist Homes, including the
Samaritan fund.

The remaining residents of the properties are
monthly lessees in independent and assisted living units and
daily lessees who require full nursing care. The monthly lease
rates range from $665 to $2,279; daily rates range from $99 to
$135. Daily and monthly residents who are unable to meet their
lease obligations are not entitled to receive assistance from the
Samaritan fund or other direct assistance from Methodist Homes
and "are asked to relocate."

Medicare and Medicaid benefits are not accepted
from any resident to fulfill obligations under a continuing care
contract or lease. The properties are not operated for profit and
have never operated at a profit. Although financial gifts are
regularly received from the United Methodist Church, Methodist
Homes is neither operated nor controlled by the Church.

Until 1996, the properties were listed on the
tax assessment rolls of the City of Richmond as tax-exempt. In
1996, and again in 1997, the City assessor determined that the
properties were not eligible for tax-exempt status and assessed
real estate taxes against them. Thereafter, Methodist Homes filed
an application pursuant to Code Sect. 58.1-3984 for relief
from those tax assessments and to have the resulting taxes,
previously paid, refunded.
[3] The City resisted the application. The City admitted
that "it was incorrectly noted in the City Assessor’s
records that the [p]roperties were asylums and therefore they
were accorded non-tax status" and for that reason no taxes
had been assessed on the properties prior to 1996. However, the
City maintained that the properties had never been entitled to
have tax-exempt status, thus the 1996 and 1997 assessments were
proper.

Prior to trial, the City filed a motion to
restrict the evidence of Methodist Homes to proof of the
allegation in the application that the properties are entitled to
tax exemption as "asylums" under the provisions of Code
Sect. 58.1-3606(A)(5). The trial court sustained this
motion.

At trial, Methodist Homes acknowledged that
under the express provisions of Code Sect. 58.1-3984 it had
the burden to show that the 1996 and 1997 assessments are
"illegal." Toward that end, Methodist Homes maintained
that the previously related facts established that the properties
were originally exempt from local taxation because the properties
were conducted exclusively as charities and constituted
"asylums" under the classification exemption provided
in Section 183(e) of the 1902 Constitution of Virginia.
Continuing, Methodist Homes maintained that the properties remain
tax-exempt under Code Sect. 58.1-3606(A)(5), which provides
for the same exemption from local taxation for
"asylums" as did Section 183(e) of the 1902
Constitution. This is so, Methodist Homes asserted, because the
"grandfather clause" of Article X, Section 6(f) of the
1971 Constitution, and its codification in Code
Sect. 58.1-3606(B), requires the application of the rule of
liberal construction to the exemption for "asylums," as
that exemption is provided in Code Sect. 58.1-3606(A)(5),
for entities in existence in 1971, rather than the rule of strict
construction, as is required under Article X, Section 6(f) for
tax exemptions generally.

The City essentially took the opposite position
and maintained that, under either rule of construction, the
properties never operated as asylums as contemplated by the
relevant statutory and constitutional provisions. In the
alternative, the City asserted that even if the properties had
been entitled to tax-exempt status in the past, the subsequent
changes in Methodist Homes’ corporate purpose and its
admission policies had removed them from tax-exempt status.
Finally, the City maintained that even if a liberal construction
of Code Sect. 58.1-3606(A)(5) is appropriate with regard to
a portion of the properties, a strict construction was
nonetheless required with regard to the Via Health Care Center
wing of The Hermitage in Richmond, because that facility had not
been constructed until 1976.

In its final order, the trial court expressly
found that since their inception the properties had been
"used exclusively as charities [and] as asylums under the
law then applicable" and, thus, it was required by Code
Sect. 58.1-3606(B) to apply a liberal construction to the
exemption by classification provisions of Code
Sect. 58.1-3606(A)(5). Applying that standard, the trial
court further found that for the tax years in question the
properties "were used as asylums for nonprofit purposes
exclusively as charities and thus . . . the assessments
of the two aforementioned properties for the year[s] 1996 and
1997 [are] erroneous." The trial court ordered the City to
refund the taxes already paid, together with costs and interest.
We awarded the City this appeal.

DISCUSSION

On appeal, as was the case at trial, one of the
principal disputes between the parties is whether the provisions
of Code Sect. 58.1-3606(A)(5) are to be construed with
reference to the properties in question by applying a strict or
liberal construction rule. The distinction between these rules of
construction is found in Commonwealth v. Lynchburg Y.M.C.A.,
115 Va. 745, 80 S.E 589 (1914). There, with reference to the 1902
Constitution, we stated:

The general rule is that provisions
exempting property of individuals or private corporations
from taxation must be strictly construed, taxation of
such property being the rule and exemption from taxation
the exception. One of the reasons for this is that all
such persons should bear their fair share of the burdens
of taxation, and that lessening the burden of one
increases the burdens of others. But as the policy of the
State has always been to exempt property of the character
mentioned and described in section 183 of the
Constitution, it should not be construed with the same
degree of strictness that applies to provisions making
exemptions contrary to the policy of the State, since as
to such property exemption is the rule and taxation the
exception.

Id. at 747-48, 80 S.E. at 590.

Thus, it is apparent that the application of a
liberal construction rule, that is, one in which exemption is the
rule and taxation the exception, significantly facilitates
Methodist Homes’ assertion that the properties come within
the exemption granted by Code Sect. 58.1-3606(A)(5). Stated
alternately, if the properties do not qualify for this exemption
under the rule of liberal construction, they necessarily would
not qualify under the rule of strict construction, that is, where
taxation is the rule and exemption the exception, because under
that rule, "where there is any doubt, the doubt is resolved
against the one claiming exemption." Golden Skillet Corp.
v. Commonwealth
, 214 Va. 276, 278, 199 S.E.2d 511, 513
(1973).

This is the fourth instance in which we have
been called on to review an organization’s claim of
tax-exempt status by classification under Code
Sect. 58.1-3606. See Mariner’s Museum v. City
of Newport News
, 255 Va. 40, 495 S.E.2d 251 (1998); Children,
Inc. v. City of Richmond
, 251 Va. 62, 466 S.E.2d 99 (1996); Westminster-Canterbury
of Hampton Roads, Inc. v. City of Virginia Beach
, 238 Va.
493, 385 S.E.2d 561 (1989). Although in each of these prior cases
we focused primarily on the charitable status of the owner’s
overall operations and the use of the property in question in
furtherance of that charitable purpose, rather than the
classification of the property itself, these cases, in large
part, guide our resolution of the present appeal. In contrast,
here we must first determine whether the trial court properly
found that the properties are "asylums" within the
classification for tax-exempt property provided in the applicable
constitutional and statutory provisions before we reach the
issue, if necessary, of whether they are operated exclusively as
charities. Our resolution of the rule of construction to be
applied in construing the exemption is critical to that
determination.

Section 183(e) of the 1902 Constitution
provided a tax exemption for

[r]eal estate belonging to, actually and
exclusively occupied and used by, and personal property,
including endowment funds, belonging to young men’s
christian associations, and other similar religious
associations, orphan or other asylums, reformatories,
hospitals and nunneries, conducted not for profit, but
exclusively as charities.

(Emphasis added.)

The 1971 Constitution eliminates this per se
tax exemption, and instead provides in Article X, Section
6(a)(6) that "[p]roperty used by its owner for religious,
charitable, patriotic, historical, benevolent, cultural, or
public park and playground purposes," is subject to
tax-exemption through "classification or designation by a
three-fourths vote of the members elected to each house of the
General Assembly and subject to such restrictions and conditions
as may be prescribed." Under this authority, the tax
exemptions of Section 183 of the 1902 Constitution, including
those of subsection (e), were codified in substantially the same
form first in former Code Sect. 58-12, and subsequently in
Code Sect. 58.1-3606. Subsection (A)(5) of the latter
statute, applicable at the time the assessments in question were
made, provides tax exemptions to property belonging in one of the
following classes:

Property belonging to and actually and
exclusively occupied and used by the Young Men’s
Christian Associations and similar religious associations,
including religious mission boards and associations, orphan
or other asylums
, reformatories, hospitals and nunneries,
conducted not for profit but exclusively as charities (which
shall include hospitals operated by nonstock corporations not
organized or conducted for profit but which may charge
persons able to pay in whole or in part for their care and
treatment).

(Emphasis added.)

Article X, Section 6(f) of the 1971
Constitution provides that "[e]xemptions of property from
taxation as established or authorized hereby shall be strictly
construed; provided, however, that all property exempt from
taxation on the effective date of this section shall continue to
be exempt until otherwise provided by the General Assembly."
Thus, property that was entitled to tax-exempt status prior to
July 1, 1971, the effective date of the 1971 Constitution, was
"grandfathered" out of the requirement for strict
construction until such time as the legislature acted to affirm
or remove that status.

As we discussed in Children, Inc., supra,
under both the 1902 Constitution and the grandfather clause of
the 1971 Constitution, the tax exemptions of Code
Sect. 58.1-3606 were liberally construed, whereas, following
1985 amendments to Code Sect. 58.1-3606(A), new property
exemptions were created by the General Assembly that no longer
required the organization seeking the exemption to have been in
existence and to have acquired the property prior to July 1,
1971. Accordingly, we held that the General Assembly also thereby
imposed a rule of strict construction upon these new tax
exemption classifications. Children, Inc., 251 Va. at
65-66, 466 S.E.2d at 101-02. Noting that these amendments had the
potential to disrupt the tax exemption that many organizations
had previously enjoyed under the 1902 Constitution and the
grandfather clause of the 1971 Constitution, we went on to
observe that

The General Assembly addressed this
potential problem by adding subsection B to Code
Sect. 58.1-3606. That subsection provides:

B. Property, belonging in one of
the classes listed in subsection A of this section,
which was exempt from taxation on July 1, 1971, shall
continue to be exempt from taxation under the rules
of statutory construction applicable to exempt
property prior to such date.

Thus, the rule allowing liberal
construction of exemptions was preserved under certain
circumstances. Those circumstances are plainly and
unambiguously set out, avoiding the uncertainty generated by
the word "property" in the grandfather clause.
Property, as used in subsection B, belongs "to a
class"; it does not mean "a class of
property." Thus, the word property refers to a specific
piece of real or personal property.

Subsection B limits the use of liberal
rules of construction to circumstances involving a specific
piece of property that (i) belongs to one of the classes
described in subsection A, and (ii) was exempt from taxation
on July 1, 1971. Requiring a piece of property to be exempt
on a specific date presumes that the property existed on that
date. And, because tax exemptions do not run with property, see
Code Sect. 58.1-3601, an organization must have owned
the piece of property on July 1, 1971, to qualify for a tax
exemption under the liberal construction allowed by
subsection B.

Children, Incorporated, 251 Va. at 67,
466 S.E.2d at 102 (footnote omitted).

Turning now to the circumstances of the present
case, we think it is clear both that the properties were in
existence and were owned by Methodist Homes prior to July 1,
1971.
[4] Accordingly, we will initially apply a liberal
construction to the exemption in question to determine whether
the properties were "asylums" on or before that date.

We have not previously defined the term
"asylums" as used in Section 183(e) of the 1902
Constitution or Code Sect. 58.1-3606 and its predecessor
statute. However, drawing on common definitions from the time of
ratification of the 1902 Constitution, the dissent in Westminster-Canterbury
defined an "‘Asylum’ . . . as ‘a
place of refuge and protection . . . a place of retreat
and security: shelter . . . an institution for the
protection or relief of some class of destitute, afflicted, or
otherwise unfortunate persons.’" Westminster-Canterbury,
238 Va. at 504-05, 385 S.E.2d at 568 (Russell, J., dissenting)
(quoting Webster’s Third New International
Dictionary)(emphasis omitted). While we need not, and do not,
adopt this as a comprehensive definition of this term for all
purposes, we are satisfied that it is a commonly accepted
definition and adequate for the resolution of this appeal. This
is particularly so in the absence of any alternate definition
offered by Methodist Homes and when this definition is applied in
the context of a tax exemption that is given the benefit of a
liberal construction.

The original purpose of the properties as
defined by the 1945 articles of incorporation was to provide
"a home or homes for the aged and infirm and needy
persons." In the context that tax exemption is the rule and
taxation the exception, we discern no material distinction
between such use of the properties and the use of property for
the protection or relief of some class of destitute, afflicted,
or otherwise unfortunate persons under the above definition of
asylum. Accordingly, we are satisfied that the properties were
exempt from taxation for many years after they were acquired by
Methodist Homes in 1948 because during that time they came within
the definitional classification of "asylums" in Section
183(e) of the 1902 Constitution.

However, the 1961 amendment of the articles of
incorporation deleted the reference to "the aged and infirm
and needy persons," and replaced it with the term
"aging persons." This was a significant change in the
purpose for which the properties would be used and requires that
we determine whether as a result the properties continued to
qualify for the exemption for asylums even under a liberal
construction of that exemption. Cf. Mariner’s
Museum
, 255 Va. at 45, 495 S.E.2d at 253-54 (change in use of
property may render otherwise exempt property taxable). We
conclude that they did not.

The term "aging persons" does not
necessarily include disabled or afflicted persons; nor is there
any indication in the amended articles of incorporation that
assisting those in financial need would continue to be a relevant
consideration of the corporate purpose. Indeed, the current
requirement that prospective residents have sufficient financial
means from sources independent of Methodist Homes to meet the
cost of care prior to admission and that daily and monthly
lessees unable to meet their obligations are required to relocate
refutes any notion that the properties are used to serve
destitute or otherwise unfortunate persons. It may be true that
many residents of the properties do suffer from disabilities and
afflictions or ultimately become indirect beneficiaries of the
charitable funds that may be applied to supplement a shortfall in
payment of life care contract fees. However, if the express
purpose of a given institution and the use of its property is to
provide residence and care merely for "aging persons"
without special regard for whether they are also "destitute,
afflicted, or otherwise unfortunate persons," that property
cannot, even under a liberal construction, be termed an
"asylum." Accordingly, we hold that the trial court
erred in ruling that on July 1, 1971 the properties were used as
"asylums" and, thus, were entitled to tax exemption at
that time and to continued tax-exempt status under a liberal
construction of Code Sect. 58.1-3606.

Because the properties continued to be utilized
as "homes for aging persons" during the time relevant
to this appeal, it is self-evident that they do not qualify as
"asylums" under a strict construction of the exemption
in question. Since the properties do not belong to the class of
properties defined in Code Sect. 58.1-3606(A)(5) and, thus,
do not qualify for that tax exemption, we need not reach the
issue of whether they are operated exclusively as charities.
[5]

For these reasons, we will reverse the judgment
of the trial court and enter final judgment for the City.

Reversed and final judgment.

 

 

 

FOOTNOTES:

[1] The corporation was originally
incorporated in the name of Virginia Methodist Home for the Aged,
Inc. In this opinion we will refer to the continuing corporation
and its predecessor entity as Methodist Homes.

[2] Subsequent to the time relevant to
this appeal, Methodist Homes sold the Snyder Memorial Home
property.

[3] Methodist Homes filed its original
application on July 26, 1996 challenging the 1996 tax assessment.
On October 17, 1997, it filed an amended application to include a
challenge to the 1997 tax assessment. Although in both instances
Methodist Homes styled its application as a "motion for
judgment," specific reference was made to Code
Sect. 58.1-3984 which provides the right to challenge the
assessments.

[4] The City did not apportion its
assessment so as to assess the Via Health Care Center separately,
and Methodist Homes maintains that the Center is an integral part
of The Hermitage in Richmond. Neither party presented evidence at
trial that would have required or permitted the trial court to
consider the tax-exempt status of the Center independently.
Therefore, any issue of apportionment is not properly presented
in this appeal. Cf. City of Richmond v. United Givers
Fund
, 205 Va. 432, 439, 137 S.E.2d 876, 881 (1964); see
also Code Sect. 58.1-3603.

[5] Nothing in this opinion should be
interpreted as restricting Methodist Homes from obtaining a
legislative exemption from local taxes by designation under Code
Sect. 58.1-3607.

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