Supervisor of Assessments v. Asbury Methodist Home, Inc.

⁶¹⁶ MURPHY, Chief Judge. The issues in this ease arise from a Maryland Tax Court decision denying exemption from property tax for the 1983-84 tax year to three apartment buildings for elderly residents, which were owned and operated by a nonprofit, charitable corporation. I The record before us discloses that, in 1926, the Baltimore Conference of the Methodist Episcopal Church South built a home for the Conference’s elders in Gaithersburg, Maryland. The home, known as the Asbury Methodist Home, opened its doors to five residents, grew quickly to its initial capacity of 70 residents, and after renovation and expansion in the 1950s reached a capacity of 175 residents.

By this time the home had been incorporated as the Asbury Methodist Home, Inc. (the Corporation), a nonprofit organization dedicated, according to its articles of incorporation, exclusively to the charitable purposes of providing homes for aged members of the Conference and such other members of society as space would permit. In the 1970s the Corporation began to build other facilities, in addition to the home, on the 128 acres of land it owned in Gaithersburg, as it expanded into what is now known as the Asbury Methodist Village. The first wing of a health center was erected in the mid-1970s; the second half of the center was completed in 1981. Three buildings, known as the Asbury Apartments, were erected in 1972, 1977, and 1980.

Thus, as of the end of 1982, the Asbury Village campus comprised three basic facilities: the home, which, providing domiciliary care only, housed approximately 175 residents in older style single room accommodations with shared baths; the health center, a 279 bed facility providing comprehensive and modern nursing care; and the three modern eight story apartment buildings, containing 393 apartment units, which altogether housed approximately 500 residents. Applicants ⁶¹⁷ to the home and health center, but not to the apartments, were eligible for admission regardless of ability to pay. 1 Until 1983, the Asbury Apartments, along with the home and the health center, enjoyed a real property tax exemption under Maryland Code (1957, 1980 Repl.Vol.) Art. 81, § 9(a) and (e). 2 These subsections provided, in pertinent part: “(a) ... The following real and tangible personal property are exempt from assessment and from State, county, and city ordinary taxation, except as otherwise stated, which exemptions shall be strictly construed: (e) ... Property owned by ...

(2) any nonprofit charitable, fraternal or sororal, benevolent, educational, or literary institutions or organizations when ... actually used exclusively for and necessary for charitable, benevolent, or educational purposes (including athletic programs and activities of an educational institution) in the promotion of the general public welfare of the people of the State.” In early 1983 the State Department of Assessments and Taxation (SDAT), as part of a review of the taxation of all nonprofit nursing home facilities in Maryland, examined the Asbury Apartments’ tax exempt status. Reasoning that the Corporation needed to justify the exemption for the apartments separately and not by reference to the home and health care facilities, and that the apartments when viewed separately did not meet the statutory requirements for exemption, SDAT concluded that the apartments should be taxable. 3 The Supervisor of Assessments of Montgomery County, the appellant in this case, was directed to ⁶¹⁸ assess property tax on the apartments beginning July 1, 1983. The Corporation appealed the assessment to the Property Tax Assessment Appeals Board for Montgomery County, which reversed. The Supervisor then appealed to the Maryland Tax Court.

That agency in August 1984 conducted an evidentiary hearing. Most of the basic facts concerning the apartments adduced at the hearing were uncontroverted 4 ; they showed that to be eligible for entrance to the apartments, applicants were required to be age 65 or over (a spouse of a qualifying applicant could be as young as 60) and to have letters of recommendation from their pastor, priest, or rabbi. A physical examination was necessary immediately before admission. Admission policy was not to admit those who needed nursing care prior to admission, though apartment residents had priority for admission to the health care center if the need for nursing care arose after they had occupied the apartments.

They were, however, expected to pay their own costs at the health center. At the end of 1982 about 8% of the residents at the health center had come from the apartments; about 17% from the home; and about 75% from the general public. Financial requirements for admission to the Asbury apartments included an entrance fee, which varied with the size of the apartment, and a monthly maintenance charge. Entrance fees in 1982 ranged from $21,000 for a single studio apartment to $43,800 for a large two bedroom apartment.

In 1982, the monthly charge, which covered utilities, food service (one meal each day), maintenance of buildings and grounds, and various other operating expenses, ranged from $323 for one person in a small studio apartment to $659 for two persons in a large two bedroom apartment. The monthly charge was calibrated from year to year to equal the total operating costs; consequently, there was ⁶¹⁹ neither profit nor loss from the operation of the apartments. The apartments received little support from charitable contributions. 5 The contract between the Corporation and the apartment resident contained a “Financial Misfortune” provision, which stated: “If, through financial misfortune, beyond the control of the Resident, a Resident becomes unable to meet the monthly maintenance charges, health care costs and living costs, then the Corporation agrees to provide for the necessary housing, health care and financial assistance for the Resident at no charge, or partial charge depending upon individual circumstances, so long as the Resident continues to be a resident of the Asbury Methodist Village and the Resident needs this financial assistance, provided such assistance does not impair the ability of the Corporation to operate on a sound financial basis and maintain the facilities for other Residents. The Resident agrees to exhaust all sources of public and private financial assistance as a condition precedent to requesting or being granted financial assistance by the Corporation.

During the time that the Resident continues to reside in the Asbury Methodist Village Apartment Community and is unable to meet the full monthly maintenance charge, the Corporation will absorb the difference between the amount of such monthly maintenance charge and the amount paid by the Resident, and will not pass through any resulting deficit to the other apartment Residents. Such continued inability to meet the monthly maintenance charge may cause severe hardship as to the future financial structure of the Apartments, therefore, the Corporation reserves the right, after consultation with the Resident’s family, to transfer the Resident to whatever other ⁶²⁰ facility located within Asbury Methodist Village that will best meet the needs and situation of the Resident.” As of 1982, no resident of the apartments had ever invoked the protection of this provision. Construction of the apartments was financed by a loan, with an interest rate of approximately 6%, from the Corporation’s capital fund. This fund had been accumulated over the years from various sources, including donations.

The money received by the Corporation as entrance fees to the apartments was first, as an accounting matter, segregated into the apartments’ capital fund; from there it was paid to the Corporation’s capital fund as debt retirement, becoming available as part of the Corporation’s total capital. This total capital was then available for such things as major repairs for all the Corporation’s facilities, construction, and for subsidizing deficits from the home and health center, both of which operated at a loss. In its December 1984 decision the Tax Court said that the question before it was whether the apartments “fall within the category of property owned by a charitable institution which is actually used exclusively for and necessary for charitable ... purposes.” It noted that the Corporation’s facilities provided continuing care to the aged in three different stages: “(1) nonprofit apartment housing for those who are self-sufficient, (2) intermediate nursing care or domiciliary services and (3) comprehensive care/medical facility.” The Tax Court said that the “entrance fees [to the apartments] are used to repay the loan from the Home’s capital fund that was used to construct the Apartments, to fund operating deficits at the other two parts, the Home and the Health Care Center, and to subsidize apartment residents who are unable to pay full charges.” It concluded that “taking the three-pronged functions of ... [the Corporation’s] facilities as an integrated whole,” the apartments were tax-exempt under § 9(e) for the 1983-84 tax year. The Supervisor moved for reconsideration.

After hearing argument, the Tax Court in July 1985 issued a new order reversing the Board’s decision, thus denying the apart- ⁶²¹ merits’ exemption. In its memorandum on reconsideration, the Tax Court again stated that the issue was whether the apartments were actually used exclusively for and necessary for charitable purposes, as required by Article 81, § 9(e). Summarizing the facts, the Tax Court concluded that the “entrance fees are used to repay the construction loan to the Home’s capital fund and could be used to subsidize apartment residents who are unable to pay full charges.” The Tax Court noted the position of the Supervisor “that so far no residents have been in financial need and that the apartment does not contribute to the funding of operating deficits of the other two facilities, since the entrance fees are merely repaying a loan from the endowment fund.” It noted further that the Supervisor challenged the Tax Court’s earlier finding “that the apartment complex forms an integral part of the overall operation.” The Tax Court then observed that between the time of the first hearing and that on Reconsideration, the Circuit Court for Montgomery County issued its opinion in Friends House, Inc. v. Supervisor of Assessments of Montgomery County, Civil No. 0099 (1985), a case involving similar questions of entitlement to tax exemption. The Tax Court observed that in Friends the circuit court, which affirmed the Tax Court’s denial of the tax exemption, stated that “it is not charitable to provide low-cost housing to those who do not need financial assistance, whether they are young or old.” The Tax Court stated that “[t]he arguments presented by [the Supervisor], and the recent decision in the Friends case, have convinced us that the apartments should not be exempt from the property tax.” The Corporation appealed to the Circuit Court for Montgomery County, which reversed and ordered the Supervisor to grant the exemption.

In a memorandum opinion by Judge Miller, who was the author of the Friends opinion, the court stated that “[t]he Asbury Apartment entrance ⁶²² fees are also used to fund operating deficits at the Home; to fund operating deficits at the Health Care Center; and to provide for apartment residents who are unable to pay their monthly maintenance fees.” The circuit court further found that “Asbury Apartment residents are provided with a life care contract which protects residents who are no longer financially able to pay monthly maintenance fees and expenses.” As to the statement in Friends that it was not charitable to provide low-cost housing to those not needing financial assistance, the court said: “This is, perhaps, an overgeneralization. It may have been more appropriate to summarize the Friends decision as follows: ‘it is not charitable to provide low cost housing and nothing more to the elderly who do not need financial assistance.’ ” In the circuit court’s view, the apartments were “an integral part of Asbury’s life care contract with its elderly,” which provided not only housing but also health care and financial security to aged persons. The apartments were therefore found by the court to be tax-exempt under § 9(e). It concluded that the Tax Court’s contrary ruling was erroneous as a matter of law.

The Supervisor appealed to the Court of Special Appeals, which affirmed. Supervisor v. Asbury Methodist Home, 72 Md.App. 352 , 529 A.2d 852 (1987). The intermediate appellate court held the circuit court was correct in concluding that the Tax Court erred as a matter of law. Citing its prior decision in Supervisor of Assessments of Baltimore v. Friends School, 67 Md.App. 508 , 508 A.2d 514 , cert. granted, 307 Md. 342 , 513 A.2d 911 (1986), the court stated that “the proper test for determining the tax exempt status of a portion of the property owned by a charitable institution is whether the subject property is actually and exclusively used for and necessary for the charitable purposes of the whole organization." 72 Md.App. at 356-57 , 529 A.2d 852 (emphasis in original).

According to the court, Lodge # 817, Order of Elks v. Supervisor, 292 Md. 533 , 439 A.2d 591 (1982), in which we held that a golf course owned ⁶²³ by a nonprofit fraternal organization was not entitled to tax exemption under § 9(e), and Supervisor v. Trs., Bosley Meth. Ch., 293 Md. 208 , 443 A.2d 91 (1982), in which we held that real estate owned by a religious organization for use as a caretaker’s residence was not tax exempt under Article 81, § 9(c), 6 supported rather than contradicted its position that, as a matter of law, it was error to view the apartments separately from the Asbury Village’s other facilities. The court concluded that the apartments’ purposes and those of the Corporation were the same. It reasoned that since the Corporation’s purposes, as expressed in its charter, were clearly charitable, the only remaining question concerned whether the apartments were “actually used exclusively for and necessary for” these purposes.

With respect to the actual and exclusive use elements, the court, prior to summarizing the testimony presented at the Tax Court hearing, stated that its “review of the uncontroverted facts leads us to conclude that the Apartments satisfy the actual and exclusive use requirements of § 9(e)(2).” Id. 72 Md.App. at 360 , 529 A.2d 852 . Turning to the requirement that the apartments be “necessary for” the identified charitable purposes, the court weighed the factors it had set forth in Friends School, viz., “the type of organization, the needs of the people it served, the location of the organization, the proximity of the property under review to the remainder of the organization’s facilities, and the ability of the organization to perform its charitable function without use of the subject property under review.” Id. at 364 , 529 A.2d 852 . The court concluded: “Asbury is much more than a retirement village; it provides a continuum of care for the elderly, serving their ⁶²⁴ needs from the time they are reasonably healthy and financially stable through periods of impaired health and depleted assets____ The location of the Apartments on a campus with Asbury’s other facilities allows the organization to provide for the recreation and health care needs of the Apartment residents. “It is Asbury’s offering of this total package of services that attracts persons over age 65 who have enough assets to afford the Apartment entrance fees. In turn, the money collected from the entrance fees enables the organization to continue providing services at the Home and Health Care Center for elderly persons and Medicaid patients from the surrounding community, along with Apartment residents who have suffered financial misfortune.

In this way, the Apartments are necessary for the charitable purposes of the whole Asbury enterprise.” Id. at 364-65 , 529 A.2d 852 (footnotes omitted). Finally, the court stated that while “on paper” the apartment entrance fees were being used to repay the construction loan from the corporation, “the payments went into the Corporation’s capital fund. That fund in turn funded operating deficits from the Home and Health Care Center, the repair of worn-out equipment, and the building of new facilities---- “Once the Apartment debt service is paid, the entrance fees collected will provide the Corporation with additional funding reserves. These reserves will allow the Corporation to expand to meet the increasing demand for housing and medical services for the elderly.” Id. at 365 , 529 A.2d 852 .

(footnotes omitted). Having determined that the actual use, exclusive use, and “necessary for” requirements were satisfied, the court held that the apartments were tax exempt under § 9(e). The Supervisor petitioned for certiorari, questioning whether on the present facts the apartments are entitled to tax exemption. We granted certiorari to consider this important question. ⁶²⁵ To resolve the issues presented in this case we must first decide whether, when applying § 9(e), the apartments are to be viewed as a necessary component of the Asbury Methodist Village complex and therefore as sharing in the charitable purposes of the home and health center, as the Corporation asserts and the circuit court and Court of Special Appeals held; or whether the apartments must pass muster under § 9(e) separately and without reference to the other facilities in the Village, as the Supervisor contends and the Tax Court ultimately held.

Second, having determined our focus, we must decide whether the several requirements imposed by § 9(e) have been satisfied. Intertwined with both questions are issues involving the proper standard of review of a Tax Court decision. We turn first to these issues concerning the standard of review. II Article 81, § 229(o) provides, with respect to appeals from the Tax Court, that the circuit court “shall determine the matter upon the record made in the Maryland Tax Court ... [and] shall affirm the Tax Court order if it is not erroneous as a matter of law and if it is supported by substantial evidence appearing in the record.” The narrow bounds imposed by this provision on judicial review of Tax Court decisions apply to this Court and the Court of Special Appeals as well as to the circuit courts.

Supervisor v. Group Health Ass’n, 308 Md. 151, 156 , 517 A.2d 1076 (1986). The provision’s substantial evidence test is the same as that used for judicial review of other administrative agencies, Balto. Lutheran High Sch. v. Emp. Sec. Adm., 302 Md. 649, 660-61 , 490 A.2d 701 (1985); Fairchild Hiller v. Supervisor, 267 Md. 519, 521 , 298 A.2d 148 (1973).

This test “requires restrained and disciplined judicial judgment so as not to interfere with the agency’s factual conclusions,” Insurance Comm 'r v. Nat’l Bureau, 248 Md. 292, 309-10 , 236 A.2d 282 (1967); and judicial review must be limited to determining whether a reasoning mind could have reached the factual conclusion reached by the agency, Ram ⁶²⁶ say, Scarlett & Co. v. Comptroller, 302 Md. 825, 834 , 490 A.2d 1296 (1985); Comptroller v. Diebold, Inc., 279 Md. 401, 407 , 369 A.2d 77 (1977). Application of the test, therefore, must not result in substitution of judicial judgment for agency judgment. Comptroller v. Haskin, 298 Md. 681, 693-94 , 472 A.2d 70 (1984); Bulluck v. Pelham Woods Apartments, 283 Md. 505, 512-13 , 390 A.2d 1119 (1978). Moreover, it is “the province of the agency to resolve conflicting evidence, [and] where inconsistent inferences from the same evidence can be drawn, it is for the agency to draw the inferences.” Bulluck, supra, at 513 , 390 A.2d 1119 , quoted in St. Leonard Shores Joint Ven. v. Supervisor, 307 Md. 441, 447 , 514 A.2d 1215 (1986).

Under § 229(o), when the Tax Court’s order is premised solely upon an erroneous conclusion of law, the reviewing court may substitute its judgment for that of the Tax Court. Ramsay, Scarlett, supra, 302 Md. at 834, 490 A.2d 1296 . Thus, in Washington Nat’l Arena v. Comptroller, 308 Md. 370 , 519 A.2d 1277 (1987), we considered the question whether under Article 81, § 402 a single charge covering admission to events, parking and club membership may be allocated, for admission tax purposes, between the sum apportionable to admission and the sum apportionable to the other items. In deciding this question, the Tax Court, in its final summation, stated that “on a reading of the statute itself, the Court finds itself in a position that we have to interpret the law.

And in interpreting the law we do not ... feel that we can grant any relief.” This language, we said, demonstrated that the Tax Court held that no allocation was permissible as a matter of law. Accordingly, application of the deferential substantial evidence test was not appropriate. In Supervisor v. Chase Associates, 306 Md. 568 , 510 A.2d 568 (1986), the principal issue for review was whether Article 81, §§ 19(a)(1) and 232(8)(d)(2) authorized a mid-cycle reassessment of a certain residential apartment building. We held that the issue involved the proper interpretation of two statutory provisions and was therefore solely a question of law.

Consequently, we held, ⁶²⁷ the Tax Court’s interpretation was entitled to no presumption of