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Children's Hospital Colorado v. Property Tax Administrator

Court of Appeals of Colorado, First Division

June 28, 2018

Children's Hospital Colorado, Petitioner-Appellant,
Property Tax Administrator, Respondent-Appellee, and Colorado State Board of Assessment Appeals, Appellee.

          Colorado State Board of Assessment Appeals No. 68840

          Spencer Fane, LLP, Ellen Elizabeth Stewart, Ann M. Schroeder, Denver, Colorado, for Petitioner-Appellant

          Cynthia H. Coffman, Attorney General, Robert H. Dodd, Russell D. Johnson, Assistant Solicitors General, Denver, Colorado, for Respondent-Appellee

          Cynthia H. Coffman, Attorney General, Emmy A. Langley, Assistant Solicitor General, Denver, Colorado, for Appellee



          ¶ 1 Children's Hospital Colorado (Hospital) appeals the final order of the Colorado State Board of Assessment Appeals (BAA) upholding the order of the Property Tax Administrator (PTA) denying the Hospital's property tax exemption application for a child care center (Center) it owns and operates. The Hospital argues on appeal that the BAA exceeded its authority in interpreting section 39-3-110(1)(e), C.R.S. 2017, to conclude that the Center's tuition discount policy did not qualify the Center for an exemption under that section, and that the BAA improperly concluded that the Center was not used for a strictly charitable purpose under section 39-3-108(1), C.R.S. 2017. We affirm the BAA's order.

         I. Background and Procedural History

         A. The Center

         ¶ 2 The Hospital owns and operates the Center, a child care facility on the University of Colorado Anschutz Medical School (CU Anschutz) campus. The Center was developed by the Hospital with assistance from the University of Colorado (the University). The Hospital and the University entered into a contract for construction and operation of the Center, under which the Hospital agreed to operate the Center for the primary purpose of providing child care services to the constituents of the Hospital and CU Anschutz. As acknowledged by the Hospital, both in the administrative proceedings and on appeal to this court, "[t]he purpose of the Center is to provide child care to constituents of the Hospital and [CU Anschutz] as an employee benefit to attract and retain quality employees so that the hospitals can better serve their patients." Accordingly, the record shows that a vast majority of the Center's available enrollment slots are reserved for children of employees, staff, and students at the Hospital and CU Anschutz; there are additional slots allotted to children of employees of Fitzsimons Redevelopment Authority (Fitzsimons) because the Center is located on the site of the old Fitzsimons Army Medical Center. In addition, remaining enrollment slots at the Center are prioritized for children of employees who work at the Center and children from other entities associated with the Hospital and CU Anschutz.

         ¶ 3 The Hospital contracted with Bright Horizons Children's Centers LLC (Bright Horizons) to run the day-to-day operations of the Center. Bright Horizons is a for-profit entity and receives compensation from the Hospital to operate the Center; the amount Bright Horizons receives from the Hospital is determined by contract. Parents pay tuition directly to Bright Horizons.

         ¶ 4 The Center has a written tuition assistance policy that purportedly defines "how enrolled families may be eligible for discounted tuition rates." In this policy, families are informed that "[t]uition assistance, based on a family's income, size, and the number of children in a family enrolled at the Center, is available." The tuition assistance policies at issue in this appeal are "Income Assistance" and "Sibling Discount." The income assistance policy gives all families with an income below 150% of the federal poverty level (federal poverty line) a flat 10% tuition discount. The sibling discount is a flat 5% discount for siblings of enrolled children, regardless of the family's income.

         B. Application Process and Appeal to the BAA

         ¶ 5 The Hospital filed an application for exemption from property tax for the Center under section 39-3-108(1)(b), an exemption for health care facilities. However, because the Center is not a licensed health care facility, that exemption was facially not applicable to the Center.

          ¶ 6 Under the rules and regulations of the Division of Property Taxation (Division), [1] when an application is submitted under a particular statute and that statute is not applicable, an investigator for the Division can consider whether the property qualifies for exemption under a different statute. Div. of Prop. Taxation Rule I.B.11, 8 Code Colo. Regs. 1304-2. Thus, the investigator assigned to the Hospital's application considered the Hospital's application under section 39-3-108(1)(a), an exemption for a nonresidential property operated for strictly charitable purposes, and section 39-3-110, an exemption for qualified child care centers.

         ¶ 7 In October 2014, the PTA issued a tentative determination denying the Hospital's application, finding that the Center was not used for strictly charitable purposes because it did not benefit an indefinite number of persons; the denial was also based on the Hospital's failure to show that the Center provided its services for free or on the basis of ability to pay under section 39-3-110(1)(e). In response to this tentative determination, the Hospital filed supplemental financial information, including information on the Center's tuition discount policy and demographics of the children enrolled at the Center.

         ¶ 8 In April 2016, the PTA issued a final decision denying the Hospital's application for the Center. The PTA denied the application because the Hospital's "financial figures arising from the usage of this property do not qualify it for exemption under subsection (1)(e) of C.R.S. 39-3-110. Furthermore, its usage of the property does not satisfy the requirements under Rule IV.B.1 and C.R.S. 39-3-108(1)(a)."[2]

         ¶ 9 Pursuant to section 39-2-117(5)(b), C.R.S. 2017, the Hospital exercised its right to appeal to the BAA. The BAA held a hearing on the matter in November 2016. The Hospital presented several witnesses at the hearing, including the Hospital's Chief Financial Officer, the Hospital's Director of Human Resource Operations, the Director of the Center, and CU Anschutz's Director of Initiatives. These witnesses testified as to the purposes of the Center, the Center's enrollment demographics, and details of the tuition assistance policy. Relevant to the present appeal and the BAA's order, the Hospital presented the following information at the hearing:

• In her opening statement, the Hospital's counsel stated that the Center "is a daycare center for the faculty and students of the [CU Anschutz] campus. The evidence will show that in order for [CU Anschutz] to recruit and maintain exceptional faculty and students . . . it needs to provide a benefit, such as the [Center]." (Emphasis added.)
• There are 248 enrollment slots available at the Center.
• The majority of enrollment slots at the Center are reserved for children of employees, students, and staff at the Hospital and CU Anschutz.
• Enrollment slots are prioritized in the contract between the Hospital and Bright Horizons as follows: (1) reserved spaces for children of the Hospital's employees, children of CU Anschutz employees, and children of Fitzsimons employees; (2) siblings of the Hospital's employees' children enrolled at the Center; (3) children of Bright Horizons staff employed at the Center; (4) "other priorities agreed to by" the Hospital and Bright Horizons; and (5) children from the community.
• According to testimony from the Hospital's Chief Financial Officer, "children from the community" are considered to be any enrolled children from "outside [CU Anschutz] and then anyone outside of [the Hospital]." This includes children of employees of Fitzsimons; children of employees of the organization that provides billing services for physicians at CU Anschutz (UPI); children of employees of UC Health (UCH), the University of Colorado Hospital Authority; children of Bright Horizons staff; and children from the general community. Thus, "children from the community" primarily includes groups of children whose parents are associated with the Hospital or CU Anschutz, several of which are already included in prioritized categories for enrollment slots.
• An exhibit identifying the above groups as categories showed the breakdown of children enrolled at the center during 2014, the relevant period at issue here. Notably, no children from the general community were enrolled after children in all other prioritized categories (the Hospital, CU Anschutz, Fitzsimons, Bright Horizons, UPI, and UCH) were enrolled.
• As of November 2014, there were 305 children on the waiting list for enrollment at the Center: 281 from the Hospital and CU Anschutz, and only one from the general community (the 23 others were from UCH and UPI).
• The Hospital pays Bright Horizons fees to maintain and operate the Center. Bright Horizons receives a 3 to 5% profit from these fees. However, the Hospital operates the Center at a loss.
• The Hospital's witnesses could not say how many children, if any, received the written tuition assistance discount based on the federal poverty line. However, four children received a 50% tuition discount that was not covered by the written policy and was based entirely on the discretion of the Center's Director. There were no set criteria for this 50% discount, and it was not disclosed on the Center's website or in the enrollment paperwork. At least two of the children who received the 50% discount were children of Bright Horizons employees.
• There are child care centers available on at least two other University campuses. These centers are "auxiliary" programs, which means that they function only on their ability to collect tuition from the parents. The Hospital witnesses could not say if these child care centers were available to the general community or limited to University students and faculty; they also could not say if the centers were run by the University or a third party such as Bright Horizons, or if the centers were "part of the University.

         ¶ 10 Counsel for the PTA called one witness, Stan Gueldenzopf, the Manager of the Division's exemption section. Gueldenzopf testified as to the Hospital's application and why the investigators concluded that the Center was not eligible for exemption under section 39-3-110 or section 39-3-108(1)(a). As to section 39-3-110, Gueldenzopf focused his testimony on subsection (1)(e), which requires that a child care center offer its services at rates based on the recipient's ability to pay, because that was the basis for the PTA's denial as listed on the final determination.

         ¶ 11 Referring to the Division's definition of "charges on the basis of ability to pay" provided in its rules and regulations, Gueldenzopf testified that in his experience, a "scale" that would consider a family's financial status and ability to pay the required tuition would need to be based on multiple factors, such as income and family size, and offer a range of several tuition rates. He concluded that the Center's federal poverty line discount was not "adequate" because it only took into account one element - family income as compared to the federal poverty line. In his testimony, he provided examples of how the Center's federal poverty line discount would actually work, which highlighted the fact that the discount was not "reflective of . . . [a] family's ability to pay." Gueldenzopf concluded that the federal poverty line discount offered by the Center was not a "scale," as referred to in the applicable Division rules and regulations.

         ¶ 12 Throughout the hearing, the Hospital argued that the Center met the requirement of subsection (1)(e) because of its federal poverty line and sibling discount policies. The Hospital focused its argument on the poverty line discount and asserted that the Division had not specified, through its rules and regulations or in its correspondence with the Hospital, a definition of the term "scale," nor had it stated that a scale required a range of tuition options. Thus, it argued, the federal poverty line discount was a scale because it measured a family's ability to pay through income. The Hospital also argued that the Center was used for strictly charitable purposes because it provided a "gift" to the public and because it lessened the burdens of government.

         C. BAA Final Order

         ¶ 13 In February 2017, the BAA issued an order upholding the PTA's determination that the Hospital was not entitled to exemption from property taxes for the Center because it did not charge for its services based on the recipient's ability to pay as required by section 39-3-110(1)(e), and because the Center was not used for strictly charitable purposes as required by 39-3-108(1).

         ¶ 14 Regarding section 39-3-110(1)(e), the BAA found that the Center did not charge families tuition based on their ability to pay. It specifically credited Gueldenzopf's testimony discussing scales that charge on the basis of ability to pay, and it concluded that, based on that testimony and the Division's definition of "charges on the basis of ability to pay" in Division of Property Taxation Rule IV.E.5, 8 Code Colo. Regs. 1304-2, such scales "required the use of a graduated series of total cost for each child based on the financial status of the recipient." The BAA found that the Center's tuition assistance based on the federal poverty line did not meet that requirement because parents with a stronger financial status paid the same as parents with a significantly weaker financial status, and the BAA further provided examples of scenarios to illustrate this point.

         ¶ 15 Under section 39-3-108 and Colorado's constitutional provision on property tax exemptions, the BAA found that, based on the Hospital's own statements, the Center was operated for the business purposes of providing a recruitment tool and employee benefit for the Hospital and CU Anschutz; that the Center's services were not provided to an indefinite number of persons, but were largely, if not solely, dependent on the recipient's voluntary association with certain groups; that the minimal tuition assistance provided indicated that the Center was not being operated for a charitable purpose; that the Center was, at least in part, operated for corporate profit because Bright Horizons made a 3 to 5% profit from the fees paid to it by the Hospital; and that the Center did not lessen the burdens of government because the evidence presented at the hearing did not show that CU Anschutz (i.e., the State of Colorado) would be required to provide a child care center at taxpayer expense if the Hospital did not operate the Center.

         ¶ 16 The Hospital now appeals the BAA's final order pursuant to section 39-2-117(6).

         II. Constitutional and Statutory Framework

         ¶ 17 We begin by summarizing the legal framework that governs property tax exemptions in Colorado and the issues in this case.

         ¶ 18 "Each claim for tax exemption must be determined upon the facts presented and in light of the applicable constitutional and statutory provisions." Bd. of Assessment Appeals v. AM/FM Int'l, 940 P.2d 338, 343 (Colo. 1997).

         ¶ 19 The state's ability to exempt personal and real property from taxes derives from the Colorado Constitution: "Property, real and personal, that is used solely and exclusively for religious worship, for schools or for strictly charitable purposes . . . shall be exempt from taxation, unless otherwise provided by general law." Colo. Const. art. X, § 5 (emphasis added). Courts have consistently concluded that the language "unless otherwise provided by general law" gives the General Assembly the ability and power "to limit, modify, or abolish" constitutional exemptions. McGlone v. First Baptist Church of Denver, 97 Colo. 427, 431, 50 P.2d 547, 549 (1935); Anderson Ranch Arts Found. v. Prop. Tax Adm'r, 729 P.2d 992, 994 (Colo.App. 1986) (citing McGlone, 97 Colo. at 431, 50 P.2d at 549).

         ¶ 20 The BAA concluded that the Center did not qualify for exemption under section 39-3-110's requirements for child care centers. The BAA also determined that the Center was not used for strictly charitable purposes as contemplated by the Colorado Constitution and section 39-3-108(1)(a). ...

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