CNL Hotels & Resorts, Inc. v. Maricopa County

SUPREME COURT OF ARIZONA
En Banc
CNL HOTELS AND RESORTS, INC., a ) Arizona Supreme Court
Maryland corporation; and ) No. CV-11-0072-PR
MARRIOTT DESERT RIDGE RESORT, )
LLC, a Delaware limited ) Court of Appeals
liability company, ) Division One
) No. 1 CA-TX 09-0003
Plaintiffs/Appellants, )
) Arizona Tax Court
v. ) Nos. TX2007-000057
) TX2007-000177
MARICOPA COUNTY, a political ) (Consolidated)
subdivision of the State of )
Arizona, )
) O P I N I O N
Defendant/Appellee. )
)
__________________________________)
Appeal from the Arizona Tax Court
The Honorable Dean M. Fink, Judge and Thomas Dunevant, Retired
Judge
VACATED AND REMANDED
________________________________________________________________
Opinion of the Court of Appeals Division One
226 Ariz. 155, 244 P.3d 592 (2010)
VACATED
________________________________________________________________
BALLARD SPAHR LLP Phoenix
By Brian W. LaCorte
Joseph A. Kanefield
And
GALLAGHER & KENNEDY, P.A. Phoenix
By Mark A. Fuller
James G. Busby, Jr.
Attorneys for CNL Hotels and Resorts Inc and Marriott Desert
Ridge Resort LLC
HELM LIVESAY & KYLE LTD Tempe
By Roberta S. Livesay
Raushanah Daniels
Attorneys for Maricopa County
LASOTA & PETERS, PLC Phoenix
By Donald M. Peters
Kristin M. Mackin
Attorneys for Amicus Curiae Arizona Association of School
Business Officials
GUST ROSENFELD P.L.C. Phoenix
By David A. Pennartz
Attorney for Amicus Curiae Paradise Valley Unified School
District No. 69
JONES SKELTON & HOCHULI, P.L.C. Phoenix
By Timothy J. Bojanowski
Attorney for Amici Curiae Rodger Dahozy, Philip S. Leiendecker,
Chris Mazon, Darlene Adler, Linda Durr, Keith E. Russell, Cammy
Darris, William Staples, Paul Larkin, Felipe A. Fuentes, Jr.,
Pamela J. Pearsall, and Joe Wehrle
THOMAS C. HORNE, ARIZONA ATTORNEY GENERAL Phoenix
By Paula S. Bickett, Chief Counsel, Civil Appeals
Daniel P. Schaack, Assistant Attorney General
Attorney for Amicus Curiae State of Arizona
________________________________________________________________
B R U T I N E L, Justice
¶1 Improvements on land leased from the state qualify for
a reduced ad valorem tax rate if they “become the property of
the . . . state . . . on termination of the leasehold interest
in the property.” A.R.S. § 42-12009(A)(1)(a) (2009). We hold
that this provision applies when, at the time of taxation,
improvements exist on the land that, under the terms of the
lease, would become the state’s property upon lease termination.
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I.
¶2 In 1993, the predecessor-in-interest to CNL Hotels and
Resorts Inc. (“CNL”) entered into two ninety-nine year leases of
state trust land to build the Desert Ridge Resort and Spa and
adjacent golf course. The leases provide that the property “may
only be used for the construction, operation, maintenance,
renovation and/or reconstruction of a hotel or other similar
resort facility.” Although CNL owns all structures and
improvements on the land, at lease termination, CNL must
“surrender peaceable possession of the [p]remises,” including
the improvements, and quitclaim to the state “any right, title
or interest in the leasehold.” During each lease term, CNL has
the right “to remove or demolish all or any part of”
improvements on the property without any obligation to
reconstruct them.
¶3 After the leases were entered into, the legislature
created a property tax classification (“Class Nine”) in which
property is taxed at a rate of one percent, significantly lower
than that generally applicable to commercial property. See
A.R.S. §§ 42-12001, -12009 (defining Class One and Class Nine
properties); A.R.S. §§ 42-15001, -15009 (prescribing lower tax
rate for Class Nine than for Class One). From 2003 through
2006, the tax years at issue here, Maricopa County classified
the Desert Ridge improvements under Class One, the
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classification applicable to general commercial property, and
taxed CNL accordingly.
¶4 CNL appealed the County’s 2006 tax assessment to the
State Board of Equalization, requesting Class Nine
classification. The Board denied the request, concluding that
the improvements would not “unequivocally become the property of
the state” when the leases ended. CNL then filed a declaratory
judgment action in the tax court. The County moved for summary
judgment, arguing that Class Nine did not apply because CNL had
the unqualified right to remove or destroy improvements during
the lease term. Neither the County’s motion nor CNL’s response
addressed whether Desert Ridge is used primarily for the
purposes described in § 42-12009(A)(1)(b) (the “primary use
requirement”) or the appropriate tax classification of the golf
course. See § 42-12001(9) (including golf course property
within Class One); § 42-12002(1)(d) (including golf courses
within Class Two). The tax court granted summary judgment for
the County based on CNL’s failure to meet the requirements of
§ 42-12009(A)(1)(a).
¶5 The court of appeals reversed and directed the tax
court to instead enter summary judgment for CNL. CNL Hotels &
Resorts, Inc. v. Maricopa Cnty., 226 Ariz. 155, 164 ¶ 41, 244
P.3d 592, 601 (App. 2010). It held “that § 42-12009 requires
the existence of a demonstrable reversionary interest at the
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time of taxation,” id. at 160 ¶ 19, 244 P.3d at 597, and that
the CNL leases meet this requirement, id. at 162 ¶ 29, 244 P.3d
at 599. It further concluded that the evidence in the record
supported the tax court’s “finding” that CNL meets the primary
use requirement. Id. at 163 ¶ 35, 244 P.3d at 600. Moreover,
the court of appeals held that the County had waived review on
the primary use issue by not cross-appealing. Id. at 163-64
¶¶ 37-38, 244 P.3d at 600-01. The court also rejected the
County’s argument that CNL was not entitled to seek relief for
back taxes under A.R.S. § 42-16251(3), the “error correction”
statute. Id. at 162-63 ¶¶ 30-33, 244 P.3d at 599-600.
¶6 We granted review to address issues of statewide
importance concerning the interpretation of the property tax
statutes.
II.
A.
¶7 The first issue involves the proper interpretation of
§ 42-12009(A)(1)(a), which applies Class Nine to:
1. Improvements that are located on federal, state,
county or municipal property and owned by the lessee of
the property if:
a. The improvements become the property of the
federal, state, county or municipal owner of
the property on termination of the leasehold
interest in the property.
b. Both the improvements and the property are
used primarily for athletic, recreational,
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entertainment, artistic, cultural or
convention activities.
¶8 To qualify for Class Nine tax status, improvements on
government land must become the governmental landowner’s
property on the lease’s termination. The parties dispute,
however, whether Class Nine applies to improvements that may no
longer exist at the end of a lease, although they will become
the government’s property if they do. CNL asserts, and the
court of appeals held, that sub-paragraph (a) requires only that
the taxed improvement will become government property if it
exists upon lease termination. See CNL Hotels, 226 Ariz. at 160
¶ 18, 244 P.3d at 597 (requiring tax assessment to focus “on the
present existence of a demonstrable reversionary interest”).1
The County, however, argues that the Class Nine statute also
requires proof the improvement will in fact exist at the end of
the lease.
¶9 Both readings are consistent with the language of
§ 42-12009(A)(1)(a); the statute does not specify whether Class
Nine status requires certainty that the government lessor will
receive now-existing improvements when the lease later
terminates. Because § 42-12009(A)(1)(a) is subject to “two
1
The parties and courts below use the term “reversionary
interest” to describe the sub-paragraph (a) requirement of
future ownership, but this terminology is technically inaccurate
because the government could not hold a “reversionary” interest
in improvements it did not previously own.
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plausible interpretations,” it is ambiguous. Hayes v. Cont’l
Ins. Co., 178 Ariz. 264, 268, 872 P.2d 668, 672 (1994).
Accordingly, we must interpret the statute in light of its
“context, subject matter, and historical background; its effects
and consequences; and its spirit and purpose.” Id.¶10 We conclude that CNL’s interpretation is the more
reasonable one. Section 42-12009 is a property tax statute.
Our property tax laws generally do not assign immutable tax
classifications; instead, property taxes are assessed annually.
See A.R.S. § 42-13051 (requiring tax assessor to yearly list
property and assess its value for purposes of the tax roll).
Because a property’s appropriate classification is reevaluated
each year the property is taxed, § 42-12009 is reasonably
interpreted as contemplating that tax classifications will
consider the circumstances at the time of taxation. Speculating
about hypothetical future events is unnecessary. If the
government landowner’s right to receive the improvement at the
termination of the lease, in fact, terminates, so will the
taxpayer’s entitlement to Class Nine status.
¶11 The County’s interpretation also creates
administrative difficulties. Tax assessors would be required to
scrutinize each lease, covenant, contract, and statute governing
the leasehold to determine whether a future contingency could
prevent the lessor from actually receiving the improvement. See
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Killebrew v. Indus. Comm’n of Ariz., 65 Ariz. 163, 168, 176 P.2d
925, 928 (1947) (considering “difficulties in the practical
operation of the law” to discern correct interpretation of
statutory text). The County’s position would also likely
require tax assessors to inquire into rebuilding requirements in
the event of natural or manmade disasters such as fire, flood,
earthquake, war, or terrorist attack.
¶12 The County’s rationale for its interpretation is
equally unpersuasive. It contends that unless the state
actually receives the improvement taxed under § 42-12009, it
will not receive sufficient economic value to justify the
lessee’s tax benefit. We disagree.
¶13 The County characterizes the state’s future ownership
as consideration for the one percent tax rate the lessee
receives. But neither § 42-12009 nor the property tax scheme
generally evinces any legislative intent to require taxpayers to
compensate the government when they benefit from favorable tax
rates. And in any event, it was not unreasonable for the
legislature to determine that reducing property taxes for Class
Nine would benefit the state by encouraging the lease of
government land and spurring development. See Ariz. Const. art.
10, §§ 1-11 (prescribing management of state trust lands); see
also Turken v. Gordon, 223 Ariz. 342, 348 ¶ 23, 349 ¶ 29, 224
P.3d 158, 164, 165 (2010) (acknowledging that city council could
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reasonably conclude increased tax base benefits public).
¶14 In contrast, the court of appeals’ and CNL’s
interpretation of subsection (A)(1)(a) avoids these analytical
and administrative pitfalls. Similarly, it comports with the
state’s duty to responsibly manage trust land.
¶15 Reading § 42-12009(A)(1)(a) to require only that, at
the time of taxation, an improvement exist on the land that,
under the terms of the lease, would become the property of the
government landowner at the lease’s termination results in a
statute that is easy to apply and understand. Tax assessors
would be faced with a manageable task, consistent with their
statutorily defined duties. See § 42-13051 (describing duties
of county tax assessors as determining names of owners and cash
value of properties). Their inquiry would be limited to
examining each tax year what exists on the land and determining
whether the government landowner at that time has the right to
own any improvements upon termination of the lease.
¶16 Applying this interpretation, CNL has satisfied § 42-
12009(A)(1)(a)’s future ownership requirement. Desert Ridge
sits on state trust land. Upon the termination of each lease,
CNL must quitclaim the premises, including any improvements, to
the state.
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B.
¶17 The County also argues that the court of appeals erred
in ordering summary judgment in favor of CNL because no evidence
was presented to show CNL met the primary use requirements of
§ 42-12009(A)(1)(b). The County’s motion for summary judgment
had specifically reserved the right to litigate that issue, and
the County asks that we vacate the court of appeals’ opinion,
allowing it to litigate whether Desert Ridge is used primarily
for “athletic, recreational, entertainment, artistic, cultural
or convention activities.” § 42-12009(A)(1)(b).
¶18 In granting the County’s motion for summary judgment,
the tax court stated that CNL met the primary use requirement,
but did not explain this assertion or cite any authority or
evidence supporting it. The court of appeals interpreted the
tax court’s statement as a finding establishing primary use even
though this issue had neither been briefed nor argued in the tax
court.
¶19 “[I]t is incorrect to direct entry of summary judgment
on issues not raised by the movant in the trial court and on
which the parties have therefore not had an opportunity to
marshal and present evidence.” City of Phoenix v. Yarnell, 184
Ariz. 310, 320, 909 P.2d 377, 387 (1995). The County,
therefore, is entitled to fully litigate this issue in the tax
court on remand.
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¶20 The court of appeals also erred in concluding that the
County was required to file a cross-appeal on the primary use
issue. CNL Hotels, 226 Ariz. at 163-64 ¶ 37, 244 P.3d at 600-
01. Arizona’s long-settled rule is that “if [an] appellee in
its brief seeks only to support or defend and uphold the
judgment of the lower court from which the opposing party
appeals, a cross-appeal is not necessary.” Maricopa Cnty. v.
Corp. Comm’n, 79 Ariz. 307, 310, 289 P.2d 183, 185 (1955). A
cross-appeal is required only if the appellee seeks “to attack
[the] judgment with a view of either enlarging his rights
thereunder or lessening the rights of his adversary.” Id.(internal quotations omitted). Merely seeking to support a
lower court’s judgment for reasons not relied upon by it “is not
attempting to enlarge [an appellee’s] own rights or lessen those
of [an] adversary,” and a cross appeal is unnecessary.
Santanello v. Cooper, 106 Ariz. 262, 265, 475 P.2d 246, 249
(1970); see also Ariz. R. Civ. App. P. 1, 13, State Bar
Committee Note. As a prevailing party not seeking to expand its
own rights, the County was not required to file a cross-appeal.
C.
¶21 We also granted review on the County’s claim that the
Desert Ridge golf course property should be classified
separately from the resort property because golf course property
is listed as belonging to Class One or Class Two under §§ 42-
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12001(9) and 42-12002(1)(d). Rather than decide this issue, we
leave it to the tax court to address in the first instance when
it considers the primary use of the Desert Ridge property for
purposes of § 42-12009(A)(1)(b).
D.
¶22 Finally, we address the County’s argument that CNL was
not entitled to relief under the error correction statute.
Section 42-16251(3) authorizes correction of “any mistake in
assessing or collecting property taxes” when the error is caused
by any circumstance listed in subsections (3)(a) through (3)(e).
The County maintains that the court of appeals wrongly concluded
that the statute applies to the kind of “errors” CNL alleged.
¶23 Subsection (3)(b) includes “[a]n incorrect designation
or description of the use or occupancy of property or its
classification.” The court of appeals correctly concluded that
because Desert Ridge had been wrongly categorized under Class
One, CNL could avail itself of the error correction statute.
CNL Hotels, 226 Ariz. at 162 ¶ 30, 255 P.3d at 599.
¶24 The County, however, contends that subsection (3)(e)
bars CNL’s recovery. Subsection (e) states that error exists
when “a valuation or legal classification [of property] is based
on an error that is exclusively factual in nature or due to a
specific legal restriction . . . and that is objectively
verifiable without the exercise of discretion, opinion or
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judgment.” The County argues that CNL cannot qualify for relief
under subsection (3)(e) because meeting the primary use
requirement for Class Nine involves factual determinations
subject to discretion, opinion, or judgment. But even assuming
arguendo that the County is correct about subsection 3(e),
nothing in § 42-16251 suggests that a taxpayer’s inability to
seek relief under one subsection bars relief under another.
III.
¶25 For the foregoing reasons, we vacate the court of
appeals’ opinion and remand the case to the tax court for
further proceedings consistent with this opinion. We deny CNL’s
request for attorney fees, without prejudice to CNL requesting
the tax court to award it fees for this stage of proceedings if
it prevails on remand. See Ariz. R. Civ. App. P. 21(c); Leo
Eisenberg & Co. v. Payson, 162 Ariz. 529, 535, 785 P.2d 49, 55
(1989).
_____________________________________
Robert M. Brutinel, Justice
CONCURRING:
_____________________________________
Rebecca White Berch, Chief Justice
_____________________________________
Scott Bales, Vice Chief Justice
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_____________________________________
A. John Pelander, Justice
_____________________________________*
*
Before his resignation on June 27, 2012, as a result of his
appointment to the United States Court of Appeals for the Ninth
Circuit, Justice Andrew D. Hurwitz participated in this case,
including oral argument, and concurred in this opinion’s
reasoning and result.
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