Harris County Appraisal District and Harris County Appraisal Review Board v. Paul E. Nunu

Reversed and Rendered and Memorandum Opinion filed August 27, 2009 Reversed and Rendered and Memorandum Opinion filed August 27, 2009. In The Fourteenth Court of Appeals _______________ NO. 14-08-00528-CV _______________ HARRIS COUNTY APPRAISAL DISTRICT and HARRIS COUNTY APPRAISAL REVIEW BOARD, Appellants V. PAUL E. NUNU, Appellee On Appeal from the 151st District Court Harris County, Texas Trial Court Cause No. 2005-42467 M E M O R A N D U M   O P I N I O N In this ad valorem property tax case, appellants, the Harris County Appraisal District (AHCAD@) and the Harris County Appraisal Review Board (Athe Review Board@), appeal a judgment by which the trial court ordered appellants to Acorrect the tax rolls@ for 2000 through 2004, Ato reflect a 100% homestead tax exemption@ for property that appellee, Paul E. Nunu, uses as a residence and an office (Athe property@). We conclude, as did HCAD and the Review Board, that twelve percent of the property is Aused primarily for purposes that are incompatible with [Nunu=s] residential use.@ Tex. Tax Code Ann. ' 11.13(k) (Vernon 2008). Accordingly, we reverse and render judgment reinstating the Review Board=s orders denying Nunu=s protests to HCAD=s reduction of Nunu=s homestead exemption.[1] I. Factual and Procedural Background Nunu conducts his law practice in the same building in which he and his family live. In 2005, HCAD denied Nunu his residential homestead exemption for approximately twelve percent of the value of the property. Nunu therefore received only an eighty-eight percent exemption. Denial of the 100 percent exemption was retroactive for the tax years 2000 through 2004. Nunu protested, and the Review Board determined he was entitled to only the eighty-eight percent exemption. Nunu then appealed to the district court.[2] Trial was to the court on an agreed statement of facts.[3] The agreed facts included the following: 2. The subject property is located at 1235 Harvard Street in The Heights in Houston, Harris County, Texas. . . . . Nunu acquired the subject property in 1982 and has owned it since. 3. The subject property consists of a lot on which there is a 2‑story house. 4. On the first floor of the 2‑story house, there is a hallway, large kitchen, dining room, a formal living room, study, bedroom and a half‑bath. The second floor consists of a hallway, 2 bedrooms, 2 baths, a sitting room and a bedroom used as a den. 5. During all times relevant to this lawsuit, Nunu and his family occupied the property as their principle [sic] and only residence. 6. Nunu is a licensed attorney. During all times relevant to this lawsuit, Nunu has used the property as both an urban home and as a place to exercise a calling or business, that is as his law office. The portion of the structure used as an office was open and accessible to the remainder of the structure during all relevant time periods. 7. No part of the second floor is used or has ever been used for Nunu=s law practice. On the first floor, the dining room is sometimes used to hold conferences or deposition. The sitting room houses Nunu=s hunting trophies and other memorabilia. Nunu sometimes interviews clients in the sitting room. The study is used entirely for Nunu=s office containing desks, computers, copier and file cabinets. The downstairs bedroom has tables, chairs, and a computer. While used primarily for conducting Nunu=s law practice, his daughters and wife also use this area for personal and/or family matters including homework and school activities. 8. In 2005, pursuant to Section 11.43(h) and (i) of the Texas Tax Code, the District=s Chief Appraiser revoked twelve percent (12%) of Nunu=s residential homestead exemption to reflect that portion of the subject property being used as his law office. This revocation applied to tax years 2000B2004 and following. This left Nunu=s residential homestead exemption intact on the remaining eighty‑eight percent (88%) of the subject property for each of those tax years. . . . . 11. The subject property qualified as an urban homestead as that term is defined in '41.002 of the Texas Property Code for each of the relevant tax years 2000B2004. 12. Pursuant to 26 U.S.C. '280A(c)(1)(A) Nunu deducted on IRS tax returns a percentage of his utilities for that portion of the property used by Nunu for his law office as business expenses for each of the relevant tax years 2000B2004. 13. Nunu maintained tangible personal property that was held or used for the production of income for each of the relevant tax years 2000B2004. The personal property included property that was identified on the Harris County Appraisal District appraisal rolls . . . . Based on these facts, the trial court found Nunu owned and occupied the property as his principal residence. The court further ordered appellees to Acorrect the tax rolls for the years 2000, 2001, 2002, 2003, and 2004 and subsequent years if applicable to reflect a 100% homestead tax exemption for Paul E. Nunu on . . . the real property.@ II. Standard of Review The parties submitted the case to the court on agreed facts. See Tex. R. Civ. P. 263. A[A] case submitted to the court upon an agreed stipulation of facts under [Rule] 263 is in the nature of a special verdict and >is a request by the litigants for judgment in accordance with the applicable law.=@ Unauthorized Practice of Law Comm. v. Jansen, 816 S.W.2d 813, 814 (Tex. App.CHouston [14th Dist.] 1991, writ denied) (quoting Brophy v. Brophy, 599 S.W.2d 345, 347 (Tex. Civ. App.CTexarkana 1980, no writ)). The question on appeal is therefore limited to the correctness of the trial court=s application of the law to the admitted facts. Id. at 814B15. Because the issue is purely a question of law, we apply a de novo standard of review. SLW Aviation, Inc. v. Harris County Appraisal Dist., 105 S.W.3d 99, 102 (Tex. App.CHouston [1st Dist.] 2003, no pet.). III. Analysis In issue one, appellants argue the trial court incorrectly applied the Tax Code to the agreed facts by exempting Nunu=s law office from ad valorem taxation. In issue two, appellants argue that, because only the governmental body of a taxing unit can change a tax roll, the trial court erred in ordering HCAD to correct the tax rolls. For the reasons below, we sustain appellants= first issue. We therefore need not address their second issue. Texas Constitution Article VIII provides the legal authority for imposing ad valorem taxes and exempting residence homesteads from taxation. See Tex. Const. art. VIII, '' 1, 1‑b. The constitution requires taxation to Abe equal and uniform.@ Id. ' 1. Courts therefore narrowly and strictly construe claims for tax exemptions. Davies v. Meyer, 541 S.W.2d 827, 829 (Tex. 1976). As the San Antonio Court of Appeals recently explained: It has long been established that exemptions from taxation are strictly construed and that all doubts are resolved against the exemption. See N. Alamo Water Supply Corp. v. Willacy County Appraisal Dist., 804 S.W.2d 894, 899 (Tex. 1991) (holding that A[s]tatutory exemptions from taxation are subject to strict construction because they undermine equality and uniformity by placing a greater burden on some taxpaying businesses and individuals rather than placing the burden on all taxpayers equally@); see also Hilltop Village, Inc. v. Kerrville Ind. Sch. Dist., 426 S.W.2d 943, 948 (Tex. 1968) ( Atax exemptions are subject to strict construction since they are the antithesis of equality and uniformity@). Accordingly, an exemption cannot be raised by implication, but must be affirmatively shown, resolving all doubts in favor of the taxing authority and against the claimant. Bullock v. Nat=l Bancshares Corp., 584 S.W.2d 268, 272 (Tex. 1979). Jim Wells County Appraisal Dist. v. Cameron Village, Ltd., 238 S.W.3d 769, 772 (Tex. App.CSan Antonio 2007, pet. filed); see also City of Austin v. Univ. Christian Church, 768 S.W.2d 718, 721B22 (Tex. 1988) (Mauzy, J., dissenting) (explaining history of strong sentiment against exemptions and constitutional response to exemptions). Texas Tax Code section 11.13 sets forth the residence homestead exemption and defines Aresidence homestead@ as: a structure (including a mobile home) or a separately secured and occupied portion of a structure (together with the land, not to exceed 20 acres, and improvements used in the residential occupancy of the structure, if the structure and the land and improvements have identical ownership) that: (A) is owned by one or more individuals, either directly or through a beneficial interest in a qualifying trust; (B) is designed or adapted for human residence; (C) is used as a residence; and (D) is occupied as his principal residence by an owner . . . . Tex. Tax Code Ann. ' 11.13(j)(1) (Vernon 2008). Subsection (k) then describes the effect multiple uses of a residence have on the homestead exemption: A qualified residential structure does not lose its character as a residence homestead if a portion of the structure is rented to another or is used primarily for other purposes that are incompatible with the owner=s residential use of the structure. However, the amount of any residence homestead exemption does not apply to the value of that portion of the structure that is used primarily for purposes that are incompatible with the owner=s residential use. Id. ' 11.13(k) (emphasis added). The question in the present case, therefore, is whether Nunu uses any portion of his residence Aprimarily@ for a purpose Aincompatible@ with Aresidential@ use. Accordingly, we must construe section 11.13(k) to determine how it applies to Nunu=s use of the property. In doing so, we are guided by the Code Construction Act. See id. ' 1.03 (stating Code Construction Act applies to the Texas Tax Code). APrimarily,@ Aincompatible,@ and Aresidential@ are not defined in the Tax Code. We therefore read these words in context and construe them according to common usage. Tex. Gov=t Code Ann. ' 311.011(a) (Vernon 2005). Additionally, whether or not the statute is ambiguous on its face, we may consider, among other matters, the object to be attained, administrative construction of the statute, and the consequences of a particular construction. See id. ' 311.023. In common usage, Aprimarily@ means Afundamentally,@ Aprincipally,@ or Ain the first place.@ Webster=s Third New International Dictionary 1800 (1993). AResidential@ refers to a building serving as a residence, a dwelling place, or a home. See id. at 1931. AIncompatible@ refers to an incapability of existing together without discord or disharmony. See id. at 463, 1114. AIncompatible@ may also refer to a situation involving mutually inconsistent demands. See id. at 1114. In the context of physical space, therefore, incompatible would refer to uses that could not occur harmoniously in the same space, uses such as intimate family conversations and client conferences or loud children=s play and legal study. In the present case, Nunu agreed he Asometimes@ held conferences or depositions in the dining room and Asometimes@ interviewed clients in the sitting room. In the United States, the home is generally associated with the freedom to engage in private conduct in which one would not engage before strangers or business acquaintances. It is reasonable to conclude that, when Nunu was using the dining room and sitting room to accommodate business acquaintances or strangers to the family, such use was incompatible with residential use. Nunu also agreed he used the downstairs study Aentirely@ for his office and used the downstairs bedroom Aprimarily@ for conducting his law practice. By virtue of Nunu=s own agreement and the common definitions of the statutory terms, at a minimum, the downstairs study and bedroom were used primarily for purposes that are incompatible with Nunu=s residential use. The preceding interpretation and application of the statute are also consistent with a an attorney general=s opinion and the authority cited therein, particularly interpretations by the comptroller of public accounts. In that opinion, the Texas Attorney General concluded rental constituted a purpose Aincompatible with the owner=s residential use.@ The attorney general reasoned: The first sentence of subsection (k) provides that a qualified residence does not lose its homestead character Aif a portion of the structure is rented to another or is used primarily for other purposes that are incompatible with the owner=s residential use of the structure.@ Tex. Tax Code Ann. ' 11.13(k) (Vernon Supp. 2001) (emphasis added). The second sentence provides that Athe amount of any residence homestead exemption does not apply to the value of that portion of the structure that is used primarily for purposes that are incompatible with the owner=s residential use.@ Id. ' 11.13(k) (emphasis added). Rental of a portion of the structure to another, in the first sentence, is equated with use of the structure Aprimarily for purposes that are incompatible,@ given use of the term Aother@ qualifying the latter phrase. See Osterberg [v. Peca, 12 S.W.3d 31, 38 (Tex. 2000)] (legislative intent discerned from actual language used); Tex. Gov=t Code Ann. ' 311.011(a) (Vernon 1998) (words and phrases are to be Aread in context and construed according to the rules of grammar and common usage@). The second sentence then disallows the exemption for that portion of the homestead used for incompatible purposes. Because rental is equated with incompatible purposes, the second sentence necessarily disallows the exemption for the portion that is rented. See also Carole Keeton Rylander, Comptroller of Public Accounts, Texas Property Taxes: Taxpayer=s Rights, Remedies & Responsibilities, at 2 (Jan. 2000) (ARenting part of your home or using part of it for a business doesn=t disqualify the rest of your home for the exemption.@) (emphasis added); Carole Keeton Rylander, Comptroller of Public Accounts, Texas Property Tax: Appraisal Review Board Manual, at 24 (2000) ( ANormally the exemption applies to those portions of the house actually used for residential, as opposed to business, purposes.@). Our construction above comports with the homestead‑exemption provisions of section 11.13 (j), (k), and (l). See Jones v. Fowler, 969 S.W.2d 429, 432 (Tex. 1998) (legislative intent to be determined from entire act not simply isolated portion of act); Sayre [v. Mullins, 681 S.W.2d 25, 27 (Tex. 1984)] (statute to be read as a whole, giving consideration to entire act, its nature and object, and consequences that would follow from particular construction). The apparent purpose of section 11.13 is to exempt from taxation a residence that the owner uses as his home, in other words, where the owner lives. See Tex. Tax Code Ann. ' 11.13(j) (Vernon Supp. 2001) (Aresidence homestead@ is Aused as a residence@ and Aoccupied as his principal residence by an owner@); id. ' 11.13(l) (residence homestead does not lose that status if owner is temporarily absent, does not establish different principal residence, and intends to return to residence and use it as principal residence). Keeping with this apparent intent, subsection (k) preserves the tax exemption, even if a part of the residence is not used primarily as the owner=s home, but only with respect to that part that the owner continues to use primarily as his or her home. Op. Tex. Att=y Gen. No. JC‑0415, 2001 WL 1141874, at *5B6 (2001). Implicit in this interpretation, and explicit in the cited authority, is the principle that business use of a designated space is incompatible with residential use of the same space. Finally, the conclusion that Nunu used portions of his residence for purposes incompatible with his residential use is consistent with Nunu=s own reporting on his federal tax returns. Nunu agreed that, during tax years 2000 through 2004, he deducted, as a business expense, a percentage of his utilities for that portion of the property he used for his law office. He did so pursuant to 26 United States Code section 280A, which provides in relevant part: (a) General rule.BExcept as otherwise provided in this section, in the case of a taxpayer who is an individual or an S corporation, no deduction otherwise allowable under this chapter shall be allowed with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence. . . . . (c) Exceptions for certain business or rental use; limitation on deductions for such use.B (1) Certain business use.BSubsection (a) shall not apply to any item to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basisB (A) as the principal place of business for any trade or business of the taxpayer, [or] (B) as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business . . . . 26 U.S.C.A. ' 280A(a), (c)(1), (A), (B) (West 2002). Thus, to have claimed a federal income tax deduction for utilities for a portion of his residence, Nunu was required to have Aexclusively@ used that portion Aon a regular basis@ for business purposes. Exclusive use of a designated space for business purposes necessarily means that space is not being used for residential purposes. Nunu, however, relies on the following definition of Ahomestead@ found in Texas Property Code section 41.002(a): AIf used for the purposes of an urban home or as both an urban home and a place to exercise a calling or business,@ the Ahomestead@ consists of not more than ten acres of one or more contiguous lots and the improvements on those lots. Tex. Prop. Code Ann. ' 41.002(a) (Vernon 2000). (emphasis added). Citing section 41.002(c), Nunu observes the foregoing definition Aapplies to all homesteads in this state whenever created.@ Id. ' 41.002(d). Nunu then argues his business use of his homestead Ais expressly authorized and cannot be incompatible [with residential use] as a matter of black letter law.@[4] Nunu, however, overlooks the different policies and protections reflected by the homestead exemptions in the Property and Tax Codes, respectively. In Hutson v. Tri-County Properties, LLC, a case involving an attempted redemption of property after a tax sale, the court rejected the appellant=s arguments that the property code=s definition of Ahomestead@ was irreconcilable with the tax code=s definition of Aresidence homestead@ and that the trial court, in determining the appropriate redemption period, should have applied the property code=s definition instead of the tax code=s. 240 S.W.3d 484, 488B89 (Tex. App.CFort Worth 2007, pet. denied).[5] The court explained: The Constitution itself treats property differently depending on whether it is being sold to pay the owner=s debts or to pay taxes on the property. And nothing in the Constitution prevents the Legislature from defining what property may be kept from forced sale differently from property that may be redeemed after the sale, especially when the protection from forced sale (by general creditors) and opportunity for redemption (after a tax sale) arise in very distinct circumstances. Because the Constitution does not require that Ahomestead@ and Aresidence homestead@ be defined the same, and because it does not define the term Aresidence homestead,@ the Legislature was free to provide such a definition. It did so in Texas Tax Code section 11.13(j)(1). Because the protection given to a Ahomestead@ (the prevention of a forced sale to pay general debts) and the protection given to a Aresidence homestead@ (allowing for redemption after the Constitution‑sanctioned tax sale) arise in distinct contexts, the definition of Ahomestead@ in the property code and the definition of Aresidence homestead@ in the tax code are not irreconcilable. The trial court therefore did not err by relying on the definition of Aresidence homestead@ in the tax code rather than the definition of Ahomestead@ found in the property code. Id. Just as the Hutson court declined to apply the property code homestead definition to a situation involving a tax sale, we decline to apply the property code definition to an ad valorem tax exemption. As discussed above, given the Texas Constitution=s requirement of equal and uniform taxes, we construe tax exemptions narrowly. That exercise of one=s calling or business in one=s Aurban home@ does not nullify the exemption of that home from seizure for creditors= claims does not mean that a taxpayer using part of his home for business purposes should be treated differently from a taxpayer who conducts his business in a building separate from his home or that he should be treated the same as a taxpayer who uses his entire home exclusively for purposes consistent with residential use. For the preceding reasons, we sustain appellants= first issue. Accordingly, we reverse and render judgment reinstating the Review Board=s orders denying Nunu=s protests to HCAD=s reduction of Nunu=s homestead exemption. We therefore need not address appellants= second issue, directed at the trial court=s order directing appellees to Acorrect the tax rolls.@ /s/ Charles W. Seymore Justice Panel consists of Justices Seymore, Brown, and Sullivan. [1] Because the dispositive issues are clearly settled in law, we issue this memorandum opinion. Tex. R. App. P. 47.4. [2] See Tex. Tax Code Ann. ' 42.01 (Vernon 2008). [3] See Tex. R. Civ. P. 263. [4] Nunu also argues that, because no part of the property is Aa separately secured and occupied portion of the structure,@ Tex. Tax Code Ann. ' 11.13(j)(1), all of the property therefore qualifies for the residence homestead exemption. Section 11.13(k), however, specifically carves from the exemption for a Aqualified residential structure,@ the value Aof that portion of the structure@ used primarily for purposes incompatible with residential use. Id. ' 11.13(k). There is no requirement in section 11.13(k) that the portion of the structure be separately secured and occupied for that portion to be capable of use for purposes incompatible with residential use. [5] The statute providing for redemption after a tax sale uses the definition of Aresidence homestead@ found in Tax Code section 11.13(j)(1). Tex. Tax Code Ann. ' 34.21(g)(4) (Vernon 2008).