In re Tax Appeal of DSW Broadview

NOT DESIGNATED FOR PUBLICATION

No. 117,610

IN THE COURT OF APPEALS OF THE STATE OF KANSAS

In the Matter of the Appeal of DSW BROADVIEW, LLC
From the Denial of Historic Tax Credits.


MEMORANDUM OPINION

Appeal from Shawnee District Court; EVELYN Z. WILSON, judge. Opinion filed June 8, 2018.
Reversed.

S. Lucky DeFries and Jeffrey A. Wietharn, of Coffman, DeFries & Nothern, of Topeka, for
appellant.

Scott Reed and James Bartle, of Legal Services Bureau, Kansas Department of Revenue, for
appellee.

Before LEBEN, P.J., GARDNER, J., and BURGESS, S.J.

LEBEN, J.: The Broadview Hotel opened as a grand downtown Wichita hotel in
1922. The building remains in use today as a hotel.

The case now before us presents a dispute between the building's current owner,
DSW Broadview, and the Kansas Department of Revenue about the owner's eligibility
for tax credits for some extensive renovation work done on the hotel. The Department
said that a portion of the work—remodeling the largely open space in a 1975 addition to
make it into a restaurant—didn't qualify for the tax credits because that portion of the
building wasn't at least 50 years old. Because that portion of the building was less than 50
years old, the Department concluded that it didn't contribute to the hotel building's overall
historic character and thus shouldn't qualify for the historic-building tax credit.
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But the Department's position wasn't based on any provision in the Kansas statute
authorizing these tax credits, K.S.A. 2017 Supp. 79-32,211, or a related federal law
mentioned in the Kansas statute. Nor does either the state or federal statute provide for
separate consideration of portions of a building that is otherwise a qualified historic
structure, as the Broadview Hotel building has been. We therefore conclude that DSW
Broadview is entitled to the tax credits it seeks related to the restaurant build-out within
the 1975 addition to the Broadview Hotel building.

With that overview, let's proceed with a more detailed discussion of this appeal.
Before we get into the merits of this case, we must first look at how the case got to us and
how that affects the way we will review the issues on appeal.

In most administrative proceedings, all the evidence is presented in the agency
proceeding, not in a court. But in appeals from the Board of Tax Appeals, the Legislature
has provided that any "aggrieved party" may file a petition for review in the Court of
Appeals—while "a taxpayer" may file that petition for review either in the Court of
Appeals or the district court. K.S.A. 2017 Supp. 74-2426(c)(4). If a taxpayer chooses to
appeal to the district court, the Legislature has provided that the appeal there "shall be a
trial de novo," meaning that the district court tries the matter anew and decides it
independently, based solely on the evidence presented in the district court. See K.S.A.
2017 Supp. 74-2426(c)(4)(B); Manzano v. Kansas Dept. of Revenue, 50 Kan. App. 2d
263, 268, 324 P.3d 321 (2014).

Here, though, things didn't go exactly as the statute provides. The taxpayer, DSW
Broadview, won in the Board of Tax Appeals and did not appeal that decision. Instead,
the appeal was filed by the Department of Revenue. Since the State, not a taxpayer, filed
the appeal, its only option was to appeal to the Court of Appeals. But the Department
filed its petition for judicial review in the district court. Until now, no one has apparently
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questioned the Department's ability to do so. Because the question has not been briefed in
this case, we will presume, without deciding, that had this been noticed, the proper course
would have been transfer of the appeal to the Court of Appeals, not dismissal for lack of
jurisdiction.

We are comfortable with that approach here because the odd procedure that
preceded our consideration of the case does not seem to have any effect. Had the
statutory procedure been followed and the petition for judicial review been filed first in
this court, we would have owed no deference to the district court—it wouldn't have
considered the case. But even if the district court had been the proper place to first
consider the Department's appeal, we would still review the issues independently, with no
required deference to the district court. That's because even though the statute presumes
that review in the district court is de novo, with all the evidence presented there, the
parties here chose not to present any evidence to the district court. Instead, they simply
resubmitted the competing motions for summary judgment they had submitted to the
Board of Tax Appeals. And neither party claimed before the district court that there were
facts in dispute.

So the case was decided both in the district court and before the Board of Tax
Appeals on competing summary-judgment motions, and the Kansas Judicial Review Act
provides that we review decisions on petitions for review of agency action as we would
in any civil case. See K.S.A. 77-623 ("Decisions . . . are reviewable by the appellate
courts as in other civil cases."). In a civil case, when no material facts are disputed, we
review the grant of summary judgment independently, with no required deference to the
district court's decision. Wagner Interior Supply of Wichita, Inc. v. Dynamic Drywall,
Inc., 305 Kan. 828, 831, 389 P.3d 205 (2017). The same would be true here. In addition,
this case also involves statutory interpretation, another situation in which we review the
matter independently, with no required deference to the district court's decision. In re Tax
Appeal of BHCMC, 307 Kan. 154, 161, 408 P.3d 103 (2017).
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We therefore begin our analysis with the competing summary-judgment motions.
The parties presented a single issue—whether some expenditures incurred in the build-
out of the restaurant area of the Broadview Hotel building in Wichita qualified for
income-tax credits under Kansas law. They stipulated that "the amount of expenditures
directly associated with the construction of the Restaurant area . . . that may qualify" for
the credit, depending on resolution of their dispute, totaled $1,581,204.

After the Broadview Hotel's 1922 opening, additions were built onto it in 1929,
1950, 1961, and 1975. That last addition provided space for meetings or exhibitions, with
the 1975 addition fully connected to the original hotel building.

The present owner, DSW Broadview, now operates the hotel as the Drury Plaza
Broadview Hotel. After it acquired the hotel, DSW Broadview undertook extensive
renovations, including turning the 1975 addition into a restaurant. The disputed tax
credits relate to the remodeling of the 1975 addition. That work was completed in 2011.

Major renovations of a registered historic building require several government
approvals along the way, but the amount of any tax credits can't be resolved until the
work has been done and expenses totaled up. When DSW Broadview submitted expense
records to seek approval of the tax credit it sought, the request was generally approved
except for costs related to work within the 1975 addition. The Department said it denied
that tax-credit request because those expenditures "were made in connection with new
construction in a historically insignificant addition to the historical structure." We must
determine whether that's a valid legal reason to deny these tax credits.

The statute at issue in our case is K.S.A. 2017 Supp. 79-32,211. As applicable to
our case, it provides a tax credit "in an amount equal to 25% of qualified expenditures
incurred in the restoration and preservation of a qualified historic structure pursuant to a
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qualified rehabilitation plan by a qualified taxpayer." K.S.A. 2017 Supp. 79-32,211(a).
Under that provision, DSW Broadview had to show that it had "qualified expenditures,"
that the building was a "qualified historic structure," that the expenditures were made
under "a qualified rehabilitation plan," and that DSW Broadview was a "qualified
taxpayer." Each of those terms is defined by statute, so the case ultimately depends on
whether DSW Broadview showed it met those definitional requirements.

K.S.A. 2017 Supp. 79-32,211(b) provides statutory definitions for each term:

"(1) 'Qualified expenditures' means the costs and expenses incurred by a qualified
taxpayer in the restoration and preservation of a qualified historic structure
pursuant to a qualified rehabilitation plan which are defined as a qualified
rehabilitation expenditure by section 47(c)(2) of the federal internal revenue
code;

"(2) 'qualified historic structure' means any building, whether or not income
producing, which is defined as a certified historic structure by section 47(c)(3)
of the federal internal revenue code, is individually listed on the register of
Kansas historic places, or is located and contributes to a district listed on the
register of Kansas historic places;

"(3) 'qualified rehabilitation plan' means a project which is approved by the cultural
resources division of the state historical society, or by a local government
certified by the division to so approve, as being consistent with the standards for
rehabilitation and guidelines for rehabilitation of historic buildings as adopted
by the federal secretary of interior and in effect on the effective date of this act.
The society shall adopt rules and regulations providing application and approval
procedures necessary to effectively and efficiently provide compliance with this
act, and may collect fees in order to defray its approval costs in accordance with
rules and regulations adopted therefor; and

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"(4) 'qualified taxpayer' means the owner of the qualified historic structure or any
other person who may qualify for the federal rehabilitation credit allowed
by section 47 of the federal internal revenue code."

Those definitions apply "unless the context clearly indicates otherwise." K.S.A. 2017
Supp. 79-32,211(b). Neither party to this appeal has suggested that the context calls for
the application of definitions other than the ones we've quoted here.

For the most part, there's neither a factual nor a legal dispute that DSW
Broadview's expenditures qualify for the tax credit. The Department of Revenue doesn't
dispute that DSW Broadview is a qualified taxpayer. In fact, the Department approved
most of the tax credits requested on the overall project. Nor does the Department dispute
that "[t]he entire Broadview Hotel structure, without exception and including the 1975
Addition, is a 'qualified historic structure'" or that the entire structure "is the subject of a
'qualified rehabilitation plan.'" The Department admitted these facts in response to DSW
Broadview's summary-judgment motion.

The Department disputes only whether these were qualified expenditures. But
nothing seems to be missing from the statutory requirements for qualified expenditures:
 The costs must be "incurred by a qualified taxpayer." The Department admitted
that DSW Broadview was a qualified taxpayer.
 The costs must be incurred "in the restoration and preservation of a qualified
historic structure." The Department admitted that the entire Broadview hotel
structure, including the 1975 addition, was a qualified historic structure.
 The costs must be incurred "pursuant to a qualified rehabilitation plan." The
Department admitted that the entire structure was "the subject of a 'qualified
rehabilitation plan.'"
 The costs must be "defined as a qualified rehabilitation expenditure by section
47(c)(2) of the federal internal revenue code." The Department agreed to most
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of DSW Broadview's requested tax credits—and there was only a single
building and a single qualified rehabilitation plan—so it would seem that the
Department also agreed that the expenditures that took place within the 1975
addition also constituted qualified rehabilitation expenditures. After all,
nothing in section 47(c)(2) refers to portions of a building or suggests that a
building's parts may be considered separately in determining what's a qualified
rehabilitation expenditure. See Alexander v. Comm'r, 97 T.C. 244, 248-49 (Tax
Ct. 1991) ("None of the relevant Code provisions make explicit or implicit
reference to a portion of a building."), aff'd 968 F.2d 12 (3d Cir. 1992).

So what reasons did the Department give for denying credits for the expenses
associated with the 1975 additional build-out?

The Department's primary reason appears to be that the 1975 addition itself is less
than 50 years old. The Kansas tax-credit program for historic buildings is managed
jointly by the Department of Revenue and the Kansas Historical Society. Its tax-credit
coordinator advised the Department in an email that "[a]nything over 50 years old is
considered historic and contributing. So all but the 1975 and the new construction" would
qualify. The Department apparently concluded, based on that email, that since the 1975
addition did nothing to contribute to the historic character of the building, expenses for
the restaurant build-out within that 1975 addition shouldn't qualify for the historic-
building tax credits.

But we find nothing in the Kansas statute or in the Internal Revenue Code
supporting either this 50-year rule or authorizing split consideration of a "qualified
historic structure" into one part that's more than 50 years old and another part that's not.
The entire structure was a qualified historic structure and the expenditures were made
under a qualified rehabilitation plan.

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The Department also cited a federal regulation, 26 C.F.R. 1.48-12(b)(2)(iv)(2017),
in the cross-motions for summary judgment. That regulation defines "[r]ehabilitation" as
"renovation, restoration, or reconstruction of a building." The Department argued to the
Board that the build-out of the 1975 addition for a modern restaurant wasn't really
rehabilitation because "[s]urely [C]ongress did not intend to fund construction of modern
spaces by allowing their owners to claim historic tax credits." But we are not here to
speculate about the unspoken intentions of Congress; we must interpret a Kansas statute.
Even if we apply the definition of rehabilitation from this federal regulation, the
restaurant build-out work was renovation or reconstruction within the overall Broadview
Hotel building, which is certified in its full footprint as a qualified historic structure.

The Department's other legal authority in the summary-judgment motions was a
general rule that tax-exemption statutes are strictly interpreted in favor of imposing the
tax and against allowing an exemption "for one who does not clearly qualify." In re Tax
Appeal of LaFarge Midwest, 293 Kan. 1039, 1045, 271 P.3d 732 (2012). The Department
argued that "[t]o allow credit for the 1975 addition would be an expansive interpretation
of the statute and therefore inconsistent with the narrow construction that must be applied
to tax credits."

But the Department did not cite statutory language supporting its position. Instead,
much like its attribution of an unspoken Congressional intent, the Department ascribed to
the Kansas Legislature an unspoken intent not to allow credits for work that doesn't
preserve or restore the historic portions of a building:

"The legislature intended to encourage owners and developers of historic buildings to
preserve and restore the historic nature of the buildings—not to get state money for
construction that, while related to a historic building, has no impact on its historic nature
and no guarantee that the improvements will remain part of the building. Is it reasonable
for the state to pay out tax credits intended to preserve historic structures on expenditures
that did nothing of the sort?"
9

Once again, though, we find nothing in the statutory language our Legislature adopted to
support the Department's position. Nothing in K.S.A. 2017 Supp. 79-32,211 suggests
separate treatment for parts of an otherwise "qualified historic structure" based on when
portions of the building were added. To the contrary, the definition of "qualified
expenditures" references expenses made "in the restoration and preservation of a
qualified historic structure." (Emphasis added.) K.S.A. 2017 Supp. 79-32,211(b)(1). And
"qualified historic structure" means "any building" that meets certain criteria, including
ones met here. K.S.A. 2017 Supp. 79-32,211(b)(2). The Legislature made no reference to
parts of a structure or parts of a building.

This Kansas statute simply does not provide for separate consideration of newer
portions of an otherwise qualified historic building. Nor is this a case in which the statute,
as written, makes no sense. DSW Broadview apparently concluded, based on its
substantial investment in the property, that the best way to keep the historic hotel
building occupied by a hotel was both to renovate the hotel portions and to add a
restaurant within the 1975 addition. The Legislature could have wanted to provide
sufficient flexibility to allow needed investments in an entire building—the qualified
historic structure—so that it would retain economic utility, not be left to deteriorate. In
these circumstances, we cannot search out an unexpressed legislative intent to treat
portions of a single structure as separate units under this tax-credit statute.

In sum, the parties presented a very limited issue to the Board of Tax Appeals. The
key factual allegation put forward by the Department in support of its position was that
DSW Broadview "constructed a non-historic restaurant in an existing non-historic 1975
addition to the historic structure." The Board of Tax appeals correctly determined that

"no provisions in the pertinent Kansas Rehabilitation Tax Credit statute . . . allow for the
picking and choosing of parts of a listed building eligible for qualified expenditures. . . .
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[The Department], essentially, is adding requirements that are not present in the statute:
That the [credits] only apply to those portions of a qualified historical structure that are
significant and at least 50 years old."

Since the basis the Department used to deny the tax credits wasn't supported by
statute and there were no factual disputes about whether the underlying costs were
qualified expenditures, DSW Broadview was entitled to the requested credits.

Although we have now resolved the issue before us on appeal, DSW
Broadview's entitlement to the requested tax credits, we will close our opinion by
briefly reviewing the action taken by the district court. Since we had a duty to
review the case independently, without deference to the district court, its view of
the issues ultimately does not affect our review here. Still, its views are a matter of
public record, so we will briefly explain why we disagree with its conclusion.

The district court ruled in favor of the Department of Revenue, but it did so only
because the court raised an issue that had not been raised by either party in their
summary-judgment motions. The district court noted that the definition of "qualified
rehabilitation expenditure" in the Internal Revenue Code, which is incorporated into the
Kansas statute by reference, requires that the United States Secretary of the Interior
certify the rehabilitation as "consistent with the historic character" of the property. See 26
U.S.C. § 47(c)(2)(2012). The district court said that the record before it didn't include a
certification from the Secretary of the Interior, so the taxpayer hadn't met its burden to
show that these were qualified expenditures.

But the Department had never claimed a failure by the Secretary of the Interior to
certify this project. Had they done so, DSW Broadview could have provided that
documentation. That it wasn't a contested matter is established by the Department of
Revenue's approval of the tax credits unrelated to the work in the 1975 addition. All the
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work was done as a single project in a single building, the Broadview Hotel building, a
qualified historic structure.

DSW Broadview had actually provided evidentiary support—an affidavit from
certified public accountant Michael Marsh—for its claim that all the expenditures met the
requirements for qualified rehabilitation expenditures under 26 U.S.C. § 47(c)(2). He
explained that he worked on DSW Broadview's application and had been working on tax-
credit issues for historic buildings in many projects since 1984. Having established a
basis for his knowledge about the DSW Broadview application and about the historic-
building tax-credit program, Marsh swore that to the best of his knowledge, "all
expenditures for which tax credits are being sought . . . meet the requirements of a
'qualified rehabilitation expenditure' pursuant to [Internal Revenue Code] § 47(c)(2)."

In addition, in response to the Department's summary-judgment motion, DSW
Broadview noted that the work to be done within the 1975 addition had been approved by
the National Park Service and had been certified as a certified rehabilitation. DSW
Broadview attached a number of documents showing government approval, including
one signed off on by a representative of the National Park Service in May 2011 certifying
that "The National Park Service has determined that these project amendments meet the
Secretary of the Interior's 'Standards for Rehabilitation.'" That meant the plan for the
work had been approved. What's not in the record is a form that the Secretary of the
Interior or his designee would have signed off on after the work was done certifying that
the work had been completed as called for under the approved plan.

In its summary-judgment response to DSW Broadview's claim that all the
expenditures met the requirements for qualified rehabilitation expenditures under the
Internal Revenue Code, the Department said that it didn't concede this point. But the
Department neither offered any contrary evidence nor suggested any problem with
certification by the Secretary of the Interior:
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"This is the issue to be decided, not a statement of fact. Therefore, it is controverted. Not
all capital expenditures for which DSW is seeking historic tax credit are 'qualified
expenditures' pursuant to the statute. The expenditures at issue here were determined by
the KDR to be unqualified."

As for why the Department determined those expenditures "to be unqualified," the
Department said elsewhere in its response to the taxpayer's motion for summary
judgment that its denial had been because "[t]he KDR, in following the Kansas Historical
Society's guidance, determined that expenditures on a historically insignificant addition
to the hotel do not constitute qualified expenditures for purposes of historic tax credits."

So the only evidence in the record showed that the expenditures were qualified
expenditures under the Internal Revenue Code. The Marsh affidavit said so directly, and
documents showing government approval of the renovation plan supported the
conclusion as well. So long as the work was carried out according to the plan, something
the Department hasn't challenged, the expenditures would have qualified.

Even so, the district court found the Marsh affidavit insufficient because Marsh
was "not referenced as the Secretary of the Interior or the Secretary's Designee." But he
didn't need to be the Secretary to provide evidence in the case. His affidavit presented his
qualifications as an expert witness—a certified public accountant who had substantial
experience with these historic-building tax credits. Even in civil trials, an expert witness
can give an opinion about one of the ultimate factual issues to be decided by the trier of
fact. See K.S.A. 2017 Supp. 60-456(d). Thus, the evidence in the record, which wasn't
controverted by contrary evidence, supported DSW Broadview's claim.

The key point about the district court's ruling, though, is that it raised an issue not
raised by the parties. The Department never challenged the certification either in its
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administrative denial of the tax credits, in its summary-judgment motion to the Board of
Tax Appeals, or in its briefing before the district court. While a district court can enter
summary judgment on its own motion on an issue not raised by the parties, it must give
notice and an opportunity to respond to the party against whom summary judgment might
be entered. See 10A Wright, Miller & Kane, Federal Practice and Procedure § 2720.1
(4th ed. 2016) (noting that the parallel Federal Rule of Civil Procedure had been so
interpreted to allow sua sponte summary-judgment rulings—but only with notice and an
opportunity to respond—even before a 2010 amendment making this rule explicit). The
district court gave no notice to DSW Broadview that the court was considering granting
summary judgment on a basis not raised by either party.

We conclude that our proper role on appeal is to consider the issues joined by the
parties' cross-motions for summary judgment. That's where the parties presented all the
evidence and where they determined the issues.

The Department of Revenue does try in its appellate brief to support the district
court's ruling. We will discuss two of the points it made there.

First, the Department seeks to negate the Marsh affidavit altogether by noting that
he said his conclusion was "[t]o the best of [his] knowledge and belief." The Department
then cites a Georgia case for the proposition that an affidavit based on the best of a
person's knowledge and belief can be ignored as if it were an unsworn allegation with no
established basis of knowledge. See Hodges v. Putzel Electric Contractors, Inc., 260 Ga.
App. 590, 595-96, 580 S.E.2d 243 (2003). Here, though, the Department didn't make that
challenge to Marsh's affidavit either before the Board of Tax Appeals or the district court,
and Marsh showed a basis for his knowledge as a certified public accountant who had
worked on DSW Broadview's tax-credit application.

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Second, the Department cites several federal regulations that it suggests support its
view that expenses fixing up a recent addition to a historic building shouldn't count as a
qualified expenditure. Some of the regulations provide standards for rehabilitation that
the Secretary of the Interior must consider to determine whether a project qualifies for
certification. See, e.g., 36 C.F.R. 67.7(b)(2017). But there is no real dispute here about
the certification, as we have explained, and that issue was not raised by the Department in
the competing summary-judgment motions.

The Department cites another regulation, 26 C.F.R. § 1.48-12, which says in one
part, "Such additions, however, shall not be treated as part of the qualified rehabilitated
building." 26 C.F.R. § 1.48-12(b)(4)(ii). Based on that, the Department argues that "the
1975 addition should not be considered part of the Broadview for purposes of the federal
rehabilitation credit." But the sentence the Department cites is taken out of context—the
provision doesn't apply when a building has been designated a certified historic structure,
as the Broadview Hotel has been. The sentence the Department emphasized from this
regulation applies to buildings placed in service before 1936 only "in the case described
in paragraph (b)(4)(i)(A) of this section." 26 C.F.R. § 1.48-12(b)(4)(ii). But paragraph
(b)(4)(i)(A) provides that this section applies only to "a building other than a certified
historic structure." 26 C.F.R. § 1.48-12(b)(4)(i)(A). So the provision the Department cites
doesn't apply to the Broadview Hotel. We find nothing in the regulations cited by the
Department that changes the statutory analysis we have set out in this opinion.

The judgment of the district court is reversed. The decision of the Board of Tax
Appeals is affirmed.