City of Richmond v. Virginia United Methodist Homes, Inc.

PRESENT: Carrico, C.J., Lacy, Hassell, Keenan, Koontz,and
Kinser, JJ.

CITY OF RICHMOND
OPINION BY
v. Record No. 980498 JUSTICE LAWRENCE L. KOONTZ, JR.
January 8, 1999
VIRGINIA UNITED METHODIST HOMES, INC.

FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND
Melvin R. Hughes, Jr., Judge

In this appeal, we consider whether the trial court erred

in ruling that certain properties were exempt from the

assessment of local real estate taxes because of their status as

charitable “asylums.”

BACKGROUND

Virginia United Methodist Homes, Inc. is a Virginia non-

stock, non-profit corporation operating continuing care

facilities for adults throughout the Commonwealth. 1 Among these

facilities are The Hermitage in Richmond and Snyder Memorial

Home (collectively, the properties), both of which are located

within the City of Richmond. 2 Methodist Homes was chartered in

1945 and acquired the properties in 1948. In 1976, the Via

1
The corporation was originally incorporated in the name of
Virginia Methodist Home for the Aged, Inc. In this opinion we
will refer to the continuing corporation and its predecessor
entity as Methodist Homes.
2
Subsequent to the time relevant to this appeal, Methodist
Homes sold the Snyder Memorial Home property.
Health Care Center, a 115-bed nursing home facility, was added

to The Hermitage in Richmond. The properties presently provide

three levels of care: independent living, assisted living, and

health care. Depending on the needs of an individual resident,

these levels of care are available under continuing care

contracts for the life of the resident or under monthly and

daily leases.

The 1945 articles of incorporation of Methodist Homes

called for the establishment of “a home or homes for the aged

and infirm and needy persons.” As a matter of policy, admission

was limited initially to persons age 65 and older. Individual

contracts of admission were negotiated with each prospective

resident based upon the estimated cost of lifetime care and the

individual’s available income and assets to pay that cost,

generally in monthly installments. However, the ability of the

resident to pay the full cost of care from personal income and

assets was not a requisite factor in determining admission.

Once admitted, no resident was expelled because of the inability

to continue to pay the agreed upon installments.

Over time, greater emphasis was placed on the ability of a

prospective resident “to pay for their cost of care over their

actuary life expectancy.” In 1961, the articles of

incorporation were amended to reflect that the purpose of the

corporation was to provide “a home or homes for aging persons.”

2
As a result of this change in emphasis in the admission policy

and corporate purpose, Methodist Homes began requiring that

prior to admission there be an identified source of funds from

“the individual, the government, family, church, [or] somebody”

adequate to pay for the expected cost of lifetime care.

In the 1980s, Methodist Homes established the “Samaritan

fund,” a charitable account designed to provide “benevolent

care” by funding the shortfall in future anticipated cost of

care of prospective residents who lack sufficient income and

assets to pay that cost at the time of admission. Currently

Methodist Homes is “trying to develop the process where [it] can

fund benevolent care” on a regular basis. However, funds

available for benevolent care are limited and are first applied

to the needs of residents already living in the properties.

The majority of the current residents of the properties are

parties to continuing care contracts that require them to pay an

entrance fee and monthly fees thereafter. Under the fee

schedule pertinent to such contracts, the entrance fees range

from $24,750 to $175,500 depending on the type of accommodation

acquired and the present and prospective health care needs of

the resident. Similarly, the monthly fees range from $1,074 to

$2,979. Continuing care residents who become unable to pay

their monthly fees are nevertheless entitled to residence and

care for life. At the time relevant to this appeal, 29

3
continuing care residents were receiving this contract benefit.

The deficit of their monthly fees is made up from charitable

sources available to Methodist Homes, including the Samaritan

fund.

The remaining residents of the properties are monthly

lessees in independent and assisted living units and daily

lessees who require full nursing care. The monthly lease rates

range from $665 to $2,279; daily rates range from $99 to $135.

Daily and monthly residents who are unable to meet their lease

obligations are not entitled to receive assistance from the

Samaritan fund or other direct assistance from Methodist Homes

and “are asked to relocate.”

Medicare and Medicaid benefits are not accepted from any

resident to fulfill obligations under a continuing care contract

or lease. The properties are not operated for profit and have

never operated at a profit. Although financial gifts are

regularly received from the United Methodist Church, Methodist

Homes is neither operated nor controlled by the Church.

Until 1996, the properties were listed on the tax

assessment rolls of the City of Richmond as tax-exempt. In

1996, and again in 1997, the City assessor determined that the

properties were not eligible for tax-exempt status and assessed

real estate taxes against them. Thereafter, Methodist Homes

filed an application pursuant to Code § 58.1-3984 for relief

4
from those tax assessments and to have the resulting taxes,

previously paid, refunded. 3 The City resisted the application.

The City admitted that “it was incorrectly noted in the City

Assessor’s records that the [p]roperties were asylums and

therefore they were accorded non-tax status” and for that reason

no taxes had been assessed on the properties prior to 1996.

However, the City maintained that the properties had never been

entitled to have tax-exempt status, thus the 1996 and 1997

assessments were proper.

Prior to trial, the City filed a motion to restrict the

evidence of Methodist Homes to proof of the allegation in the

application that the properties are entitled to tax exemption as

“asylums” under the provisions of Code § 58.1-3606(A)(5). The

trial court sustained this motion.

At trial, Methodist Homes acknowledged that under the

express provisions of Code § 58.1-3984 it had the burden to show

that the 1996 and 1997 assessments are “illegal.” Toward that

end, Methodist Homes maintained that the previously related

facts established that the properties were originally exempt

3
Methodist Homes filed its original application on July 26,
1996 challenging the 1996 tax assessment. On October 17, 1997,
it filed an amended application to include a challenge to the
1997 tax assessment. Although in both instances Methodist Homes
styled its application as a “motion for judgment,” specific
reference was made to Code § 58.1-3984 which provides the right
to challenge the assessments.
5
from local taxation because the properties were conducted

exclusively as charities and constituted “asylums” under the

classification exemption provided in Section 183(e) of the 1902

Constitution of Virginia. Continuing, Methodist Homes

maintained that the properties remain tax-exempt under Code

§ 58.1-3606(A)(5), which provides for the same exemption from

local taxation for “asylums” as did Section 183(e) of the 1902

Constitution. This is so, Methodist Homes asserted, because the

“grandfather clause” of Article X, Section 6(f) of the 1971

Constitution, and its codification in Code § 58.1-3606(B),

requires the application of the rule of liberal construction to

the exemption for “asylums,” as that exemption is provided in

Code § 58.1-3606(A)(5), for entities in existence in 1971,

rather than the rule of strict construction, as is required

under Article X, Section 6(f) for tax exemptions generally.

The City essentially took the opposite position and

maintained that, under either rule of construction, the

properties never operated as asylums as contemplated by the

relevant statutory and constitutional provisions. In the

alternative, the City asserted that even if the properties had

been entitled to tax-exempt status in the past, the subsequent

changes in Methodist Homes’ corporate purpose and its admission

policies had removed them from tax-exempt status. Finally, the

City maintained that even if a liberal construction of Code

6
§ 58.1-3606(A)(5) is appropriate with regard to a portion of the

properties, a strict construction was nonetheless required with

regard to the Via Health Care Center wing of The Hermitage in

Richmond, because that facility had not been constructed until

1976.

In its final order, the trial court expressly found that

since their inception the properties had been “used exclusively

as charities [and] as asylums under the law then applicable”

and, thus, it was required by Code § 58.1-3606(B) to apply a

liberal construction to the exemption by classification

provisions of Code § 58.1-3606(A)(5). Applying that standard,

the trial court further found that for the tax years in question

the properties “were used as asylums for nonprofit purposes

exclusively as charities and thus . . . the assessments of the

two aforementioned properties for the year[s] 1996 and 1997

[are] erroneous.” The trial court ordered the City to refund

the taxes already paid, together with costs and interest. We

awarded the City this appeal.

DISCUSSION

On appeal, as was the case at trial, one of the principal

disputes between the parties is whether the provisions of Code

§ 58.1-3606(A)(5) are to be construed with reference to the

properties in question by applying a strict or liberal

construction rule. The distinction between these rules of

7
construction is found in Commonwealth v. Lynchburg Y.M.C.A., 115

Va. 745, 80 S.E 589 (1914). There, with reference to the 1902

Constitution, we stated:

The general rule is that provisions
exempting property of individuals or private
corporations from taxation must be strictly
construed, taxation of such property being
the rule and exemption from taxation the
exception. One of the reasons for this is
that all such persons should bear their fair
share of the burdens of taxation, and that
lessening the burden of one increases the
burdens of others. But as the policy of the
State has always been to exempt property of
the character mentioned and described in
section 183 of the Constitution, it should
not be construed with the same degree of
strictness that applies to provisions making
exemptions contrary to the policy of the
State, since as to such property exemption
is the rule and taxation the exception.

Id. at 747-48, 80 S.E. at 590.

Thus, it is apparent that the application of a liberal

construction rule, that is, one in which exemption is the rule

and taxation the exception, significantly facilitates Methodist

Homes’ assertion that the properties come within the exemption

granted by Code § 58.1-3606(A)(5). Stated alternately, if the

properties do not qualify for this exemption under the rule of

liberal construction, they necessarily would not qualify under

the rule of strict construction, that is, where taxation is the

rule and exemption the exception, because under that rule,

“where there is any doubt, the doubt is resolved against the one

8
claiming exemption.” Golden Skillet Corp. v. Commonwealth, 214

Va. 276, 278, 199 S.E.2d 511, 513 (1973).

This is the fourth instance in which we have been called on

to review an organization’s claim of tax-exempt status by

classification under Code § 58.1-3606. See Mariner’s Museum v.

City of Newport News, 255 Va. 40, 495 S.E.2d 251 (1998);

Children, Inc. v. City of Richmond, 251 Va. 62, 466 S.E.2d 99

(1996); Westminster-Canterbury of Hampton Roads, Inc. v. City of

Virginia Beach, 238 Va. 493, 385 S.E.2d 561 (1989). Although in

each of these prior cases we focused primarily on the charitable

status of the owner’s overall operations and the use of the

property in question in furtherance of that charitable purpose,

rather than the classification of the property itself, these

cases, in large part, guide our resolution of the present

appeal. In contrast, here we must first determine whether the

trial court properly found that the properties are “asylums”

within the classification for tax-exempt property provided in

the applicable constitutional and statutory provisions before we

reach the issue, if necessary, of whether they are operated

exclusively as charities. Our resolution of the rule of

construction to be applied in construing the exemption is

critical to that determination.

Section 183(e) of the 1902 Constitution provided a tax

exemption for

9
 [r]eal estate belonging to, actually and exclusively
occupied and used by, and personal property, including
endowment funds, belonging to young men’s christian
associations, and other similar religious
associations, orphan or other asylums, reformatories,
hospitals and nunneries, conducted not for profit, but
exclusively as charities.

(Emphasis added.)

The 1971 Constitution eliminates this per se tax exemption,

and instead provides in Article X, Section 6(a)(6) that

“[p]roperty used by its owner for religious, charitable,

patriotic, historical, benevolent, cultural, or public park and

playground purposes,” is subject to tax-exemption through

“classification or designation by a three-fourths vote of the

members elected to each house of the General Assembly and

subject to such restrictions and conditions as may be

prescribed.” Under this authority, the tax exemptions of

Section 183 of the 1902 Constitution, including those of

subsection (e), were codified in substantially the same form

first in former Code § 58-12, and subsequently in Code § 58.1-

3606. Subsection (A)(5) of the latter statute, applicable at

the time the assessments in question were made, provides tax

exemptions to property belonging in one of the following

classes:

Property belonging to and actually and
exclusively occupied and used by the Young Men’s
Christian Associations and similar religious
associations, including religious mission boards and
associations, orphan or other asylums, reformatories,

10
 hospitals and nunneries, conducted not for profit but
exclusively as charities (which shall include
hospitals operated by nonstock corporations not
organized or conducted for profit but which may charge
persons able to pay in whole or in part for their care
and treatment).

(Emphasis added.)

Article X, Section 6(f) of the 1971 Constitution provides

that “[e]xemptions of property from taxation as established or

authorized hereby shall be strictly construed; provided,

however, that all property exempt from taxation on the effective

date of this section shall continue to be exempt until otherwise

provided by the General Assembly.” Thus, property that was

entitled to tax-exempt status prior to July 1, 1971, the

effective date of the 1971 Constitution, was “grandfathered” out

of the requirement for strict construction until such time as

the legislature acted to affirm or remove that status.

As we discussed in Children, Inc., supra, under both the

1902 Constitution and the grandfather clause of the 1971

Constitution, the tax exemptions of Code § 58.1-3606 were

liberally construed, whereas, following 1985 amendments to Code

§ 58.1-3606(A), new property exemptions were created by the

General Assembly that no longer required the organization

seeking the exemption to have been in existence and to have

acquired the property prior to July 1, 1971. Accordingly, we

held that the General Assembly also thereby imposed a rule of

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strict construction upon these new tax exemption

classifications. Children, Inc., 251 Va. at 65-66, 466 S.E.2d

at 101-02. Noting that these amendments had the potential to

disrupt the tax exemption that many organizations had previously

enjoyed under the 1902 Constitution and the grandfather clause

of the 1971 Constitution, we went on to observe that

The General Assembly addressed this potential
problem by adding subsection B to Code § 58.1-3606.
That subsection provides:

B. Property, belonging in one of the classes
listed in subsection A of this section,
which was exempt from taxation on July 1,
1971, shall continue to be exempt from
taxation under the rules of statutory
construction applicable to exempt property
prior to such date.

Thus, the rule allowing liberal construction of
exemptions was preserved under certain circumstances.
Those circumstances are plainly and unambiguously set
out, avoiding the uncertainty generated by the word
“property” in the grandfather clause. Property, as
used in subsection B, belongs “to a class”; it does
not mean “a class of property.” Thus, the word
property refers to a specific piece of real or
personal property.

Subsection B limits the use of liberal rules of
construction to circumstances involving a specific
piece of property that (i) belongs to one of the
classes described in subsection A, and (ii) was exempt
from taxation on July 1, 1971. Requiring a piece of
property to be exempt on a specific date presumes that
the property existed on that date. And, because tax
exemptions do not run with property, see Code § 58.1-
3601, an organization must have owned the piece of
property on July 1, 1971, to qualify for a tax
exemption under the liberal construction allowed by
subsection B.

12
Children, Incorporated, 251 Va. at 67, 466 S.E.2d at 102

(footnote omitted).

Turning now to the circumstances of the present case, we

think it is clear both that the properties were in existence and

were owned by Methodist Homes prior to July 1, 1971. 4

Accordingly, we will initially apply a liberal construction to

the exemption in question to determine whether the properties

were “asylums” on or before that date.

We have not previously defined the term “asylums” as used

in Section 183(e) of the 1902 Constitution or Code § 58.1-3606

and its predecessor statute. However, drawing on common

definitions from the time of ratification of the 1902

Constitution, the dissent in Westminster-Canterbury defined an

“‘Asylum’ . . . as ‘a place of refuge and protection . . . a

place of retreat and security: shelter . . . an institution for

the protection or relief of some class of destitute, afflicted,

or otherwise unfortunate persons.’” Westminster-Canterbury, 238

Va. at 504-05, 385 S.E.2d at 568 (Russell, J., dissenting)

4
The City did not apportion its assessment so as to assess
the Via Health Care Center separately, and Methodist Homes
maintains that the Center is an integral part of The Hermitage
in Richmond. Neither party presented evidence at trial that
would have required or permitted the trial court to consider the
tax-exempt status of the Center independently. Therefore, any
issue of apportionment is not properly presented in this appeal.
Cf. City of Richmond v. United Givers Fund, 205 Va. 432, 439,
137 S.E.2d 876, 881 (1964); see also Code § 58.1-3603.
13
(quoting Webster’s Third New International Dictionary)(emphasis

omitted). While we need not, and do not, adopt this as a

comprehensive definition of this term for all purposes, we are

satisfied that it is a commonly accepted definition and adequate

for the resolution of this appeal. This is particularly so in

the absence of any alternate definition offered by Methodist

Homes and when this definition is applied in the context of a

tax exemption that is given the benefit of a liberal

construction.

The original purpose of the properties as defined by the

1945 articles of incorporation was to provide “a home or homes

for the aged and infirm and needy persons.” In the context that

tax exemption is the rule and taxation the exception, we discern

no material distinction between such use of the properties and

the use of property for the protection or relief of some class

of destitute, afflicted, or otherwise unfortunate persons under

the above definition of asylum. Accordingly, we are satisfied

that the properties were exempt from taxation for many years

after they were acquired by Methodist Homes in 1948 because

during that time they came within the definitional

classification of “asylums” in Section 183(e) of the 1902

Constitution.

However, the 1961 amendment of the articles of

incorporation deleted the reference to “the aged and infirm and

14
needy persons,” and replaced it with the term “aging persons.”

This was a significant change in the purpose for which the

properties would be used and requires that we determine whether

as a result the properties continued to qualify for the

exemption for asylums even under a liberal construction of that

exemption. Cf. Mariner’s Museum, 255 Va. at 45, 495 S.E.2d at

253-54 (change in use of property may render otherwise exempt

property taxable). We conclude that they did not.

The term “aging persons” does not necessarily include

disabled or afflicted persons; nor is there any indication in

the amended articles of incorporation that assisting those in

financial need would continue to be a relevant consideration of

the corporate purpose. Indeed, the current requirement that

prospective residents have sufficient financial means from

sources independent of Methodist Homes to meet the cost of care

prior to admission and that daily and monthly lessees unable to

meet their obligations are required to relocate refutes any

notion that the properties are used to serve destitute or

otherwise unfortunate persons. It may be true that many

residents of the properties do suffer from disabilities and

afflictions or ultimately become indirect beneficiaries of the

charitable funds that may be applied to supplement a shortfall

in payment of life care contract fees. However, if the express

purpose of a given institution and the use of its property is to

15
provide residence and care merely for “aging persons” without

special regard for whether they are also “destitute, afflicted,

or otherwise unfortunate persons,” that property cannot, even

under a liberal construction, be termed an “asylum.”

Accordingly, we hold that the trial court erred in ruling that

on July 1, 1971 the properties were used as “asylums” and, thus,

were entitled to tax exemption at that time and to continued

tax-exempt status under a liberal construction of Code § 58.1-

3606.

Because the properties continued to be utilized as “homes

for aging persons” during the time relevant to this appeal, it

is self-evident that they do not qualify as “asylums” under a

strict construction of the exemption in question. Since the

properties do not belong to the class of properties defined in

Code § 58.1-3606(A)(5) and, thus, do not qualify for that tax

exemption, we need not reach the issue of whether they are

operated exclusively as charities. 5

For these reasons, we will reverse the judgment of the

trial court and enter final judgment for the City.

Reversed and final judgment.

5
Nothing in this opinion should be interpreted as
restricting Methodist Homes from obtaining a legislative
exemption from local taxes by designation under Code § 58.1-
3607.
16