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In re Appeal of Fort Leavenworth Frontier Heritage Communities II, LLC

Tax Court of Kansas

September 11, 2013



JOELENE R. ALLEN, Secretary.

Now the above-captioned matter comes on for consideration and decision by the Board of Tax Appeals of the State of Kansas. The Taxpayer, Fort Leavenworth Frontier Heritage Communities II, LLC ('Taxpayer"), appears by its attorneys of record, David Kenner of the firm Levy and Craig P.C. and Arthur Brown of the firm Levine. Staller, Sklar, Chan, Brown & Donnelly, PA. The Kansas Department of Revenue (the "Department") appears by its attorney of record, Michael Burrichter.

Having exercised jurisdiction pursuant to K.S.A. 74-2438, this Board conducted a final hearing on August 27, 2007. After considering the facts and being fully advised in the premises, the Board finds and concludes as follows.


Stipulated Facts

This matter was submitted on stipulated facts through a document filed on June 5, 2007 titled "Joint Stipulations." The Board hereby adopts the parties' stipulated facts, summarized below.

Taxpayer is a Kansas limited liability company with its business located in Leavenworth, Kansas. In 1996, pursuant to the Military Housing Privatization Initiative, the United States government privatized the housing units at certain military bases including the Fort Leavenworth United States Army base in Leavenworth, Kansas. In furtherance of the Privatization Fort Initiative, Fort Leavenworth Frontier Heritage Communities, LLC ("FHC") entered into a long-term ground lease with the United States government pursuant to which FHC leased certain parcels of land located at Leavenworth for a term of 50 years with a 25-year extension option.

Pursuant to the ground lease, the United State government also conveyed to FHC all of its right, title and interest in all buildings, improvements and fixtures located on the leased land. When it executed the ground lease, FHC also entered into a sublease with Taxpayer, pursuant to which FHC subleased to Taxpayer the land and all improvements covered by the ground lease.

The parties stipulate that Taxpayer is engaged in the commercial enterprise of owning, operating and renting residential housing units to individuals. Other than receiving de minimis income from other sources, Taxpayer derives all of its income from its rental units. The rents received by Taxpayer from leasing the units are not subject to the Kansas Retailers' Sales Tax.

The standard residential lease used by Taxpayer is a six-month lease; thereafter, the lease continues on a month-to-month basis. Either party may terminate the lease upon 30 days' notice. After the lease is executed, the tenant is entitled to the use and enjoyment of the unit, subject to the tenant's compliance with the terms of the lease and guidelines established for the residential community.

Taxpayer's administrative offices are located in Leavenworth, Kansas. Activities carried on at the administrative offices include without limitation the execution of residential leases; receipt of tenant rent payments; and receipt of goods, deliveries, and mail.

Taxpayer also provides other services to its tenants, including without limitation refuse and recycling, trash pick-up, snow and ice removal, landscaping, maintenance and repair, pest control, and utilities. No additional fees or assessments are charged to the tenants for such services.

Taxpayer is engaged in a construction/reconstruction/rehabilitation project relating to the residential units at the Fort Leavenworth site (the "Project"). The Project includes demolition, renovation and remodeling of certain existing residential units in addition to the construction of certain new units. The Project commenced in March 2006 and is scheduled to conclude in 2014.

The Project includes construction of 708 residential units (approximately 1, 600 to 2, 200 square foot homes in duplex and single-family configurations) and the renovation and remodeling of 588 residential units. Additionally, a 10, 000 square foot administrative office building will be built in 2009 and 2010 from which Taxpayer will conduct its operations. The estimated cost of construction includes approximately $131 million in labor and services, $107 million in materials, and $13 million for machinery and equipment.

Taxpayer has contracted with an outside construction company to perform the Project. Taxpayer does not directly perform any construction or remodeling work but has hired, and currently employs, eleven full-time people as a direct result of the Project. These employees work primarily at the Taxpayer's administrative offices in Leavenworth.

On March 7, 2006, Taxpayer applied for a project exemption certificate exempting the Project from Kansas Retailers' Sales Tax. In its initial application for exemption, Taxpayer inadvertently stated that it was seeking exemption under subsection (d) of K.S.A. 74-50, 115. The Department denied Taxpayer's exemption application.

During a May 18, 2006 informal conference with the Department, and in its amended application, Taxpayer stated that it was amending its application to request exemption as a nonmanufacturing business under subsection (b) of K.S.A, 74-50, 115.

On September 12, 2006, the Designee of the Secretary of Revenue issued a final order upholding the Department's denial of Taxpayer's requested project exemption certificate. On October 12, 2006, a Notice of Appeal from the Department's final order was timely filed with this Board.


Burden of Proof and Presumption of Validity

Taxpayer is the exemption applicant and therefore bears the burden of proof. See In re Tax Appeal of Alex R. Masson, Inc., 21 Kan.App.2d 863, 865, 909 P.2d 673, 675 (1995). "In Kansas, taxation is the rule and exemption is the exception." Id. Statutory exemption provisions are strictly construed against the party requesting exemption, and all doubts concerning exemption must be resolved against granting the exemption and in favor of taxation. Id.

The Department's final action is accorded a rebuttable presumption of validity, See Country Club Home, Inc. v. Harder, 228 Kan. 756, 763, 620 P.2d 1140, 1147 (1980) (holding that in spite of presumption, SRS regulations governing nursing home reimbursement were invalid because they were in contravention of enabling statute). The Board also acknowledges the ...

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