Opinion ID: 2592913
Heading Depth: 1
Heading Rank: 2

Heading: Stipulated Facts and Procedural History

Text: Catholic Health is a not-for-profit organization affiliated with the Roman Catholic Church and exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code. To Catholic Health, providing housing and care for the elderly is a religious activity motivated by religious belief. Catholic Health provides services and advocates for the elderly in accordance with its mission, and provides care and housing for the elderly as part of the religious mission of the Catholic Church. To this end, Catholic Health owns and operates Villa Pueblo, a facility providing care and housing to the elderly. Residents at Villa Pueblo have an average age of eighty seven. Villa Pueblo is a full service elderly care community consisting of independent living units, assisted living units, and a nursing facility. Villa Pueblo holds itself out to the general public as a religious organization. Villa Pueblo employees are required to respect and uphold the religious mission of Villa Pueblo and adhere to Catholic Church directives. Villa Pueblo's facilities include a chapel for use by residents. Services are conducted at the chapel on a bi-weekly basis. Villa Pueblo pays for an on-site chaplain who is available twenty-four hours a day, seven days a week. The chaplain interviews and completes spiritual assessments of, and spiritual care plans for, all residents. Residents at Villa Pueblo must pay an entrance endowment, as well as a monthly fee. The entrance endowment consists of an individually specified amount of money in consideration for the life occupancy privilege of an apartment. The independent living units range in size from 476 to 1,092 square feet. Monthly fees for the independent living facilities range from $1,130 to $2,347, depending on the desirability of the unit and the number of residents in the unit. Monthly rates for assisted living and nursing care facilities are higher. From mid-1997 through mid-2000, approximately half of Villa Pueblo's residents were on life-care contracts, paying below market rates for their accommodations. Villa Pueblo is losing money on its life-care contract program. Villa Pueblo accepts some residents who are unable to pay normal and customary charges. Catholic Health's occupancy agreement states: Occupant further agrees to pay said monthly charge at the time and in the manner specified by the Home and upon failure to do so, the Home shall have the right to terminate and cancel this Agreement if any such payment shall be in default more than ninety (90) days without obligation to make refunds of money heretofore paid pursuant thereto. However, so long as the Home is financially able to assume the cost, no Occupant's residency shall be terminated because of the inability of the Occupant to pay this monthly care and service charge or any other payments provided for in this Agreement. Villa Pueblo is open to the general public, but its advertisements target individuals who have sufficient income and assets to bear the monthly fee. Marketing brochures describe Villa Pueblo as everything you want in a retirement lifestyle, and affordable, with many residents finding the cost to be less than the cost of owning and maintaining their former single family home. The City of Pueblo conducted a tax audit of Villa Pueblo for the period of June 1, 1997 through May 31, 2000. As a result of that audit, the City issued a Notice of Assessment in the amount of $106,931.33 in unpaid taxes. Catholic Health protested the assessment and provided documentation to the City that resulted in a reduction in the assessment. [1] Upon review, the City maintained Catholic Health owed $22,587.68 in taxes. [2] Catholic Health challenges the imposition of any assessment, believing Villa Pueblo to be entirely exempt from sales and use tax under section 14-4-76 of the City of Pueblo tax code, which exempts charitable organizations from sales or use taxes incurred in the conduct of their regular religious or charitable functions and activities. § 14-4-76, Pueblo, Colo., Mun.Code (2008). The Pueblo municipal code defines charitable organization: Charitable organization means any entity which: a. Has been certified as a not-for-profit organization under Section 501(c)(3) of the Internal Revenue Code; and b. Is a religious or charitable organization. As used in this definition, a charitable organization is an organization which exclusively, and in a manner consistent with existing laws and for the benefit of an indefinite number of persons, freely and voluntarily ministers to the physical, mental or spiritual needs of persons, and which thereby lessens the burdens of government. § 14-4-21(5) Pueblo, Colo., Mun.Code (italics in original). In a letter dated May 1, 2001, Catholic Health outlined its argument for eligibility under the exemption for the City of Pueblo Finance Director. Catholic Health claimed the third part of this definition, which begins [a]s used in this definition applied only to charitable organizations, thereby exempting religious organizations from its many requirements. Under this interpretation, Catholic Health claimed it was entitled to a sales and use tax exemption for all aspects of the operation of Villa Pueblo because: (1) Catholic Health has a 501(c)(3) tax status, (2) Catholic Health is a religious organization, and (3) the operation of Villa Pueblo is in Catholic Health's regular religious functions or activities. The City of Pueblo Director of Finance replied, rejecting Catholic Health's request for the exemption. The City explained the operation of Villa Pueblo had several characteristics of a for-profit enterprise, suggesting that it did not meet the third paragraph of the charitable organization definition because it did not offer its services freely and voluntarily, in a manner consistent with charity. However, the City went on to state that [t]angible personal property or taxable services sold or used in the charitable activities of Villa Pueblo are exempt from City of Pueblo sales and use tax, implying Catholic Health received some partial exemption, presumably on the basis of their satisfaction of the charitable organization definition. Thus, the City of Pueblo seemed to suggest that although Catholic Health failed to meet the definition of a charitable organization, it was still entitled to at least a partial sales and use tax exemption. Catholic Health appealed the City's assessment to the Executive Director of the Department of Revenue of the State of Colorado, as provided for in section 29-2-106.1(3), C.R.S. (2008). The Department of Revenue held Catholic Health did not operate Villa Pueblo as a religious activity, nor did it fall within the definition of charitable organization as set forth in the City of Pueblo's tax code. Thus, the Department of Revenue characterized the tax code as providing two distinct forms of exemptions: one for religious organizations undertaking religious activity, and one for charitable organizations undertaking charitable activity that met the requirements of the third paragraph of the charitable organization definition. Utilizing this interpretation, the Department of Revenue found Catholic Health was not entitled to either category of exemption. Regarding the religious exemption, the Department found the purpose of Villa Pueblo is to provide housing, not to provide religious services, thus falling outside of regular religious... functions and activities. Final Determination DD-578, 4, Dept. of Revenue of the State of Colo., Mar. 15, 2004. Turning to the charitable exemption, the Department relied heavily on our opinion in United Presbyterian Association v. Board of County Commissioners of the County of Jefferson, 167 Colo. 485, 448 P.2d 967 (1968), and held the operation of Villa Pueblo was not charitable in nature. Noting that [n]ew residents are targeted based on financial resources; fees are based on amenities and services provided; fees are subject to change; accommodations are touted; and, the obligation for financial assistance is highly attenuated, the Department found a quid pro quo permeates the entire operation of Villa Pueblo. Final Determination DD-578, 5. Catholic Health appealed this administrative finding to the Arapahoe County District Court. The parties waived trial and submitted the case to the district court based on stipulated facts. Catholic Health, believing the City's tax code created two distinct types of exemptions, filed a Notice of Waiver, seeking to base its claim for exemption exclusively on its claim that the operation of Villa Pueblo is a religious activity of a religious organization. The trial court interpreted this waiver as limiting Catholic Health's claim on appeal to the issue of religious exemption, as opposed to charitable exemption. The trial court, therefore, did not consider the section of the municipal code defining charitable organizations. Rather, it addressed only whether Catholic Health operated Villa Pueblo in the conduct of their regular religious or charitable functions and activities, pursuant to section 14-4-76 of the code. The trial court found religion did not pervade the operation of Villa Pueblo and thus Villa Pueblo was not, as a whole, a religious function. The trial court held Villa Pueblo's typical religious functions, such as purchases necessary for the operation of the chapel, were exempt from taxation, while its secular functions, such as the purchase of refrigerators or stoves, were not exempt from sales and use taxes. Catholic Health again appealed. Continuing the trial court's focus on the question of what constitutes a religious activity, the court of appeals relied on our decision in Maurer v. Young Life, 779 P.2d 1317 (Colo. 1989), holding every aspect of Villa Pueblo was a religious activity and, as a result, the facility enjoyed complete exemption from sales and use tax under the City of Pueblo tax code. Catholic Health Initiatives Colorado, 183 P.3d at 612-13. In reaching this determination, the court focused on the activities undertaken by Villa Pueblo, as well as the fact that the facility was operating at a loss. Id. at 617-19. The court of appeals did not address whether Catholic Health was a charitable organization as defined by the City of Pueblo tax code. Catholic Health petitioned this court to grant a writ of certiorari, arguing the court of appeals applied an incorrect and unconstitutional test for religious activity. Catholic Health contends the court of appeals erred in determining whether an organization is engaged in religious activity by examining the nature or scope of the organization's activities. Rather, Catholic Health argues reviewing courts may utilize only a bright line test to evaluate whether the activities of an organization are motivated by a sincerely held religious belief. The City of Pueblo filed a cross-petition, arguing Villa Pueblo does not fall within the tax code's definition of charitable organizations entitled to a sales and use tax exemption. The City of Pueblo contends the code creates a single tax exemption for charitable organizations, which may be either religious or secular. Under this interpretation, all organizations must comply with the requirements set forth in the third paragraph of the charitable organization definition in order to qualify for a sales and use tax exemption. We granted certiorari on both petitions [3] and now reverse.