HomeMy WebLinkAboutBriefa.
William A. Morrow ISB No. 2451
William F. Nichols ISB No. 3496
WHITE PETERSON
5700 E. Franklin Rd., Suite 200
Nampa, Idaho 83687-8402
Phone: (208) 466-9272
Fax: (208) 466-4405
Email: wam@whitepeterson. com
wfn@whitepeterson. com
ATTORNEYS FOR THE CITY OF MERIDIAN
RECENEI)
tau -. ~ zou~
City of M.eridi~n.
City Clerk {)ffic~-
BEFORE THE ADA COUNTY BOARD OF EQUALIZATION
Re: City of Meridian's Appeal of Tax )
Assessment and Denial of Tax Exempt ) BRIEF
Status for City Police Station )
PETITIONER, the City of Meridian, by and through its attorney, WHITE PETERSON,
hereby submits this brief in support of its petition appealing the Ada County Assessor's decision
to subject the City's newly built police station building to assessment for property taxes.
A. FACTS
The City of Meridian purchased a parcel of real property within the city limits for the
purpose of building a police station on it. The deed for the purchase of such property was and
still remains in the name of the city. In order to build and finance the police station, however,
the City used a funding plan with Wells Fargo Bank whereby Certificates of Participation were
sold to investors. Under the funding plan, the city is to redeem the Certificates over a period of
time. Also pursuant to the plan, the building project is in the name of Wells Fargo as Trustee
until the City redeems all outstanding Certificates. The Lease and Trust Agreement (the
"Agreement"), also known as alease/purchase agreement, between the City and Wells Fargo, as
BRIEF IN SUPPORT OF APPEAL -1
C~Opl7
a trustee, contemplates an Option to Purchase whereby, after redemption of the Certificates, the
City's obligation to the Trustee will be extinguished.
The Agreement specifically limits the ability of the City to sell, assign, transfer or
otherwise dispose of its interest in the property without the consent of the owners of the
Certificates of Participation. However, the City has the exclusive right to possession of the
property and quiet enjoyment to the property. The Agreement requires lease payments made
to a trustee to retire the construction debt. The trustee uses the payments to redeem the
Certificates of Participation. In this way, the Agreement treats lease payments as representing
principal and interest payments in connection with the construction of a building on the property,
as opposed to a simple lease of the property.
Further, the Agreement provides that the City is responsible for paying all applicable
assessed taxes on the property, for carrying standard insurance policies on the property, and for
maintaining and repairing the facility. The City also has the ability, under the Agreement, to
make changes and improvements to the facility, as long as such construction does not impair the
value of the property. In light of the City's ownership of the real property upon which the police
station was built; the City's claim to ownership of the facility under the Agreement; and the
City's exclusive use of the property and building as the City's police station, the City of
Meridian sought tax exempt status for the facility pursuant to Idaho Code (hereinafter "I.C.") §
63-602A. The Ada County Assessor, citing an ostensibly similar decision against the City of
Boise earlier this year, denied tax exempt status for the building. This determination has forced
the City of Meridian to appeal the Assessor's decision to the Ada County Board of Equalization
("the Board").
BRIEF IN SUPPORT OF APPEAL - 2
Prior to entering a financing agreement with Wells Fargo (nee, First Security Bank), the
City of Meridian sought and received judicial confirmation of the constitutionality and propriety
of the financing plan. The Fourth District Court, Judge Kathryn A. Sticklen, executed and filed
Findings of Fact, Conclusion of Law and Judgment on April 6, 2001 in Ada County, Case No.
CV OC 0101090D. In addition, Judge Sticklen specifically found that payments pursuant to the
Lease and Trust Agreement "are expenses authorized by the general laws of the State of Idaho
and are ordinary and necessary expenses of the City of Meridian." Findings of Fact, paragraph
10.
B. DISCUSSION
Generally, all property within the state of Idaho which is not expressly exempted by a
particular statutory provision is subject to assessment and property taxation. See I.C. § 63-601;
I.C. § 63-203. However, the Idaho Legislature created several exemptions from taxation, which
include the exemption ax issue in this case. I.C. §63-602A states as follows:
63-602A. Property exempt from taxation-Government property. -{1) The
following property is exempt from taxation: property belonging to the United
States, except when taxation thereof is authorized by the congress of the United
States, this state, or to any county or municipal corporation or school district in
this state.
(emphasis added).
Although the ambiguous nature of the language of I.C. § 63-602A, coupled with the lack
of clear Idaho appellate court guidance on the subject of the scope and application of the
government property exemption, make it difficult to determine how the exemption will be
applied in any given situation; however, even a cursory reading of the statute indicates that the
police station building at issue here is clearly property "belonging to" the City of Meridian.
BRIEF IN SUPPORT OF APPEAL - 3
Based on the legislative purpose and public policies behind I.C. § 63-602A and other provisions
within Title 63, T.C., as well as the decisions of Idaho courts and those of its sister jurisdictions
regarding the scope and applicability of exemption statutes, the City's police station building is
clearly exempt.
1. The City's Police Station is Exempt Because the Cdty Both Holds the Possessory
Interest and Benefits From its Use
The clear purposes of I.C. § 63-602A and Idaho Constitution, Art. VII § 4, are to provide
a tax exemption to property "belonging to" or "property of the government. The Idaho
Supreme Court has interpreted these provisions to embrace the notion that possessory interests in
improvements on land and/or the use of the improvements may be enough to provide tax exempt
status to governmental units. In Russet Potato Co. v. Board of Equalization of Bingham County,
93 Idaho 501, 465 P.2d 625 (19'70), Russet Potato Co. entered into an agreement with the Bureau
of Indian Affairs to lease 12.04 acres owned by the United States and held in trust for certain
members of the Fort Hall Indian Tribe. It was agreed that Russet Potato Co. was to build a
potato storage building upon the premises, which was to become a part of the premises and the
property of the United States. Russet Potato Co. was then to lease the premises from the United
States for twenty-five years, with an option to renew for an additional twenty-five years.
The Bingham County Assessor assessed the building as personal property. Russet Potato
Co. asserted that the building was a part of the realty owned by the United States and exempt
pursuant to I.C. § 63-1O5A, which provided that property belonging to the United States was
exempt from taxation. Russet Potato Co. appealed to the Bingham County Board of
Equalization, the State Tax Commission, the District Court, and finally, the Idaho Supreme
BRIEF IN SUPPORT OF APPEAL - 4
Court. The first three appellate bodies allirmed the tax assessment by Bingham County, but the
Idaho Supreme Court reversed the lower decisions. The Court found that the United States held
title to the premises and that Idaho law made no provision for the taxation of the possessory
rights of the lessee or taxation of the leasehold. Id. at 506. The Court noted that the case would
be decided differently today because "[tJhe 1969 Idaho legislature,... ,amended I.C. § 63-1223 to
read as follows: `All improvements on government, Indian or state land... in which nonexempt
persons have possessory interests shall be assessed as personal property and entered upon the
personal property assessment roll.' (1969 S.L. Ch. 455 §44, p. 1241)." Id. at 505.
The same statutory provision is now found at LC. § 63-309. The legislature added this
provision so that the entity actually possessing and benefiting from the improvements will be
taxed or exempt, as the case may be, regardless of actual ownership by a governmental entity.
The logic behind this statute can be applied to the case at hand in that the City of Meridian is in
possession of and benefiting from the police station, which is being used for a governmental
purpose, and which should accordingly be exempt from taxation. In the Russet Potato Co. case,
a private company had sought and obtained tax exempt status solely because the government
owned the property. Consequently, the predecessor statute to I.C. § 63-309 was passed to avoid
the Russet Potato Co. situation where a private company could end up with the exempt status by
virtue of a long-term lease. In contrast, in this case, the City of Meridian owns the real property
and owns and possesses the police station subject to the Certificate of Participation lien. Hence,
unlike the facts in the Russet Potato Co. case, the facts in this case demonstrate that the legal
ownership and the possessory rights are melded together so that a municipal corporation
(Meridian) meets the full requirements of I.C. § 63-602(A). Since that is the case, T.C. § 63-309
BRIEF IN SUPPORT OF AFFEAL - 5
has no application.
The Assessor determined that the building was owned by Wells Fazgo, a finding which is
inaccurate. Wells Fargo acts as a trustee, holding the trust and lease agreement for the benefit of
the owners of the Certificate of Participation. The trust and lease agreement is a lien on the
building until the loan is paid. The interests are not possessory.. Moreover, since the City is a
governmental unit, it possesses constitutional and statutory powers to pay its debts. Therefore, in
this unique circumstance, there is no conceivable way the City can even fall out of possession
before paying off the loan. Accordingly, the City meets the requirements for tax exempt status
pwsuant to I.C. § 63-602A and meets the requirements for exempt status pursuant to I.C. § 63-
309 as well.
In Russet Potato Co., the agreement could be viewed as a true lease since ownership of
the premises, including the improvements, was to remain with the United States at the expiration
of the lease. Here, the Trustee under the Agreement is not the user of the police station. The
City built the police station for its own purpose and is the exclusive user of the improvements
made to its own land. Therefore, under the Russet Potato standard, the City is entitled to tax
exempt status for the land as well as the improvements.
2. Prior Decisdons of the Ada County Board of Equaddzation and Idaho Case Law Do
Not Apply to the Present Caste
The Ada County Assessor denied tax exempt status to the City based on his reading of a
similar decision handed down by the Board earlier this year. In the City of Boise appeal, the
Board determined that the § 63-602A exemption was based on ownership alone and therefore
denied tax exempt status to three fire stations within the city of Boise. It cited two Idaho cases in
BRIEF IN SUPPORT OF APPEAL - 6
support of this conclusion: Lewiston Orchards Irr. Dist. V. Gilmore County Treasurer, 53 Idaho
377, 23 P.2d 720 (1933) and Immaculate Heart of Mary High School, Inc. v. Anderson, 96 Idaho
226, 526 P.2d 831 (1974). However, neither of the cases cited support and, in any event, the
facts at hand in the present case are distinguishable from those presented in the City of Boise
appeal.
Lewiston Orchards dealt with the question of whether an irrigation district was a
municipal corporation pursuant to Article VII, §4 of the Idaho Constitution. Lewiston Orchards,
supra 53 Idaho at 383. The Court determined that the irrigation district was not a municipal
corporation within the meaning of the constitution. Since it was not a municipal corporation, it
could not qualify for tax exempt status. Thus, the question presented in that case involved a
determination of the scope of what entities would qualify for governmental exemptions. The
case did not address the issue of ownership of property under the predecessor statute to I.C. § 63-
602A.
The Immaculate Heart decision does not apply to the instant case because it dealt with
the strict reading of several tax exempt statutes that were later amended. The Immaculate Heart
court simply construed the statutes as expressly written at the time the court interpreted them:
Thus, the application of the Immaculate Heart is limited to the facts of that case. The
Immaculate Heart decision did not address or hold that the exemption statute construed "is an
exemption based on ownership alone."
In the City of Boise decision, the Board claimed that when an exemption requires
ownership, Idaho law requires that the record title holder is to be determined as the owner of the
property. It cites the Russet Potato Co. case for this proposition. Russet Potato Co. does state
BRIEF IN SUPPORT OF APPEAL - 7
that throughout the statutes dealing with taxation of real property, the "owner of the record title
is the person to be considered as the taxpayer." Russet Potato Co., supra 465 P.2d at 629. In
this case, using this test, the City of Meridian is clearly and undisputedly the record title holder
of the property. Moreover, while the financing plan creates a trustee (Wells Fargo) for the
building project whose primary role is to collect payments under the Lease Purchase Agreement
and redeem Certificates of Farticipation as the payments are made, the trustee is not an owner of
the property. The City's record title ownership of the property, however, is unaffected by the
financing plan.
Regazdless of any difference in interpretation of the rules set forth in the above-cited
cases, the facts in the present case are distinguishable from those in the City of Boise decision.
The most significant difference lies in the ownership of the land on which the buildings involved
are situated. The City of Boise did not own the land on which its fire stations stand. The City of
Meridian, in contrast, does own the land on which the police station was built.
3. Although the Rules Vary for Determining the Tax Exempt Status of Governmental
Property in Idaho, Interpretations of Similar Rules by Idaho's Sister States Favor
Granting Tax Exempt Status to the City of Meridian's Police Station.
Because Idaho case law is uncleaz as to the proper test for determining the tax exempt
status of governmental property, the first logical route is to determine the scope of the phrase
"belonging to" as used in I.C. § 63-602A. Generally, it has been stated that exemption statutes
roughly fall into three categories: (1) Those making ownership of the property by a certain
institution the test; (2) Those making the particular use of the property rather than ownership the
test; (3) Those making both ownership and use the test. See Cooley on Taxation, 4a' Ed. § 690,
pg. 1452; Sunset Memorial Gardens v. Idaho State Tax Comm'n, 80 Idaho 206, 327 P.2d 766
BRIEF IN SUPPORT 4F APPEAL - 8
(1958).
In Idaho, the test for determining tax exempt status varies depending on the entity asking
for the exemption. For instance, the test for qualifying for a religious and/or charitable
organization tax exemption is ownership of the property by the institution and exclusive use by
such institution for the purposes of the tax exemption. See Malad Second Ward of the Church of
Jesus Christ of Latter Day Saints v State Tax Comm'n, 75 Idaho 162, 269 P.2d 1077 (1954). Of
course, this ruling was bolstered by the fact that I.C. § 63-602B, the Idaho exemption for
religious societies, requires that property "belong" to the institution as well as exclusive use of
the property by the institution for religious purposes. Further, a tax exemption for public
cemeteries only applies when the entity applying for the exemption owns the property on which
the cemetery is situated and uses the property exclusively for that public purpose and not for a
profit-making endeavor. See Sunset Memorial, supra 327 P.2d at 774. Finally, at least one
Idaho case has held that exempt status for public hospitals depends exclusively on the use of the
property. See Bistline v. Bassett, 4? Idaho 66, 272 P. 696 (1928). Therefore, in that type of case,
ownership is generally immaterial.
The determination of the category in which I.C. § 63-602A is placed in is not altogether
as clear. Russet Potato Co., supra, suggests that ownership alone is the key test in determining
qualification for the governmental exemption under I.C. § 63-602A. Another Idaho case, Ada
County Assessor v. Taylor, 124 Idaho 550, 861 P.2d 1215 (1993), accepted a definition of
ownership such that possession of a "deed, contract, or other muniment of title," would
determine ownership for qualification of Idaho's homeowner exemption statute. Id. at 553.
However, that definition was proffered for purposes of that case only and has not subsequently
BRIEF IN SUPPORT OF APFEEIL - 9
been expanded to include ownership for purposes of governmental property exemptions.
The general rule that seems to accurately reflect the rule a majority of jurisdictions use is
that ownership for tax purposes means:
The general and beneficial owner-the person whose interest is
primarily one of possession and enjoyment in contemplation of an
ultimate absolute ownership-and not the person who retains the
legal title and does not contemplate the use or enjoyment of the
property as such but holds his title primarily as the means of
enforcement of the payment of the balance of the contract price.
Hoover Requipment v. Board of Taz cold Corrections of Adair County, 436 P.2d 645 (Okla.
1968); See also State v. White Furniture Co., 90 So. 896 (Ala. 1921); Municipal Acceptance
Corp. v. Canole, 119 S.W.2d 820 (Mo. 1938); General Electric Credit Corp. v. Andreen, 326
P.2d 731 (Nev. 1958). Cleazly, this case would fall under this majority rule.
The rule in Texas is that an entity qualifies for a tax exemption based upon a showing of
equitable title (present right to legal title) to certain property, whereas a more strict rule requiring
legal title would defeat the legislative purpose behind such exemption statutes because many
modern finance agreements require a trustee to hold actual title as a vehicle to securing financing
and obligations under a contract or mortgage. Harris County Appraisal Dist. v S.E. Texas
Housing Finance Corp., 991 S.W.2d 18 (Ct.App.Tx.1998). Even Washington has avoided the
record title rule in determining ownership for tax exemption purposes because "legal title does
not determine who benefits from ownership." City of Kennewick v. Benton County, 935 P.2d
606 (Wash.1997). Colorado has followed by stating that whether the governmental unit has the
most significant incidents of ownership is the test behind qualifying for an exemption, and not
who has formal legal title. Mesa Yerde Co, v. Bcl; Of County Commissioners, 495 P.2d 229
BRIEF IN SUPPORT OF APPEAL -10
(Colo.1972). The same rule has been followed in Utah and Florida, where the status of legal title
is not controlling in the determination of ownership. See Interwest Aviation v. County Bd. Of
Equalization of Salt Lake County, 743 P.2d 1222 (Utah 1987); R.K. Overstreet v. Indian Creek
Village, 248 So.2d 2 (Fla. 1971 }.
The foregoing suggests that the more principled approach is to determine ownership
based on other factors in addition to the record title holder. This rule is more realistic with
today's more complex financing arrangements for property ownership. It is commonplace for an
entity to finance purchase of real property or improvements upon such property by entering into
agreements whereby a trustee will be involved to assist the success of a financing plan. Further,
even Idaho has acknowledged that record title can be a confusing way to determine ownership
for tax purposes. This is why I.C. § 63-307(1) allows the tax assessor to determine ownership
through other means separate from identification of the record title holder.
In addition to record title, the City of Meridian in this case also holds all possessory
rights, notwithstanding the unique financing plan. The following indicia of ownership rights
clearly shows that the City holds the possessory interests in the police station: (1) the City has
exclusive possession and enjoyment of the facility; (2) the facility is used exclusively for the
benefit and protection of the residents of the City; (3) the City has equitable title to the building
as the lease/purchase agreement evidences an intent to become the absolute owner of the
structure after redemption of all Certificates of Participation; (4) under the Agreement, the City
shall redeem all outstanding Certificates to become the absolute owner of the police station; (5)
the City has the right to make improvements to the facility; (6) the City must carry all applicable
insurance on the property; (7) the lease/purchase agreement shows an intent by all parties that the
BRIEF IN SUPPORT OF APFEAL -11
City is the owner of the station; (8) the building was placed on land purchased by the City for the
exclusive purpose of placing a city police station upon it; (9) there is no other purpose to be
served by the facility other than that of providing police protection to the residents of Meridian, a
valid municipal purpose; and (10) the construction agreements between the City and the
architect, as well as between the city and the construction manager, reference the City of
Meridian as the "owner" of the improvements. The only limitation is the grant of a security
interest as part of the financing plan. Such a grant, however, does not create a possessory
interest. Thus, the City should be granted tax exempt status for its police station.
4. Public Policy Favors Granting the City's Request for Tax Exempt Statute
The legislative purposes behind the exemption statute and public policy favor granting
the City's tax exemption. The Board is correct in stating that statutory tax exemptions are to be
strictly construed. Andrews v. North Side Canal, 52 Idaho 117, 12 P.2d 263 (1932). However,
this does not mean that such statutes should be unreasonably construed against a taxpayer. A
strict construction principle requires a taxpayer to clearly establish the existence of an exception
within the statute to which the taxpayer qualifies. See Ada County Assessor v. Taylor, 124 Idaho
550, 861 P.2d 1215 (1993). This does not mean that all ambiguities must be absolutely resolved
against the taxpayer. Id.; See also SunsetMemoriad Gardens, supra 80 Idaho at 219.
Once a decision has been affirmatively made that a valid claim for exemption has been
made by the taxpayer, the only remaining question is whether the taxpayer's situation and
circumstances falls into the exception. Considering that ambiguities may exist in determining
whether a taxpayer falls into an exception, Idaho law allows extrinsic evidence to be considered
to ascertain the intent of the parties and whether a given factual scenario fits into a recognized
BRIEF IN SUPPORT OF APPEAL -12
exception. See Taylor, supra 124 Idaho 553-54.
Given the foregoing analysis, it is clear that the City has a valid claim for an exemption.
First, the City is a municipal corporation, and I.C. § 63-602A clearly allows exemptions to
property belonging to such municipalities. Because the statute is vague on the term "belonging
to" and because the City's interest in the building is tied to the financing plan, there are
ambiguities in determining whether the police station fails into the I.C. § 63-602A exception.
However, the Board should accept all relevant extrinsic evidence that tends to show that the
lease/purchase agreement was intended by the parties as the method of financing the police
station for the benefit of the City of Meridian. Indeed, Fourth District Judge Kathryn Sticklen
found that the financing arrangement for the police station was an ordinary and necessary
expense of the City. Further, evidence should be allowed to show that the City possesses all the
essential indicia of ownership. These ambiguities should be resolved in the City's favor and will
show that the police station is property "belonging to" the City.
Next, an unreasonably strict interpretation of I.C. § 63-602A would defeat the legislative
purpose behind the exemption statute. The purpose of such exemption statutes is an attempt by
the legislature to promote the public welfare. Williams v. Baldridge, 48 Idaho 618, 284 P. 203
(1930j. Further, such exemptions act as a subsidy to the qualifying entity, so that the effect of
the savings can be passed on to others. Id. In the case of a municipality, the exemption serves as
a subsidy allowing municipal services to be rendered to citizens efficiently and at the lowest
possible cost. Also, it would make little sense for municipal property placed in the service of the
public to be taxed by the county when portions of that same tax money are then directed back to
the taxpaying municipality for the benefit of its citizens. Such a result produces undue waste and
BRIEF IN SUPPORT OF APPEAL -13
inefficient use of resources.
The current appeal should be based upon common sense as much as it is about legal
definitions and precedent. It is obvious that a governmental property tax exemption is generally
warranted by the fact that no benefit inures by taxing the entity providing the very services for
which taxes are collected. Such tax exemptions recognize that government property should be
exempted because such property is pressed into service exclusively for the benefit of the public.
Here, the City of Meridian owns the property the police station was built upon. The
police station was built exclusively to provide for the protection and safety of residents of the
City. Police protection is a valid, even essential, governmental function. In today's world, the
building of such structures is an expensive and detailed process. This is why the City chose to
finance the project by selling Certificates of Participation and providing security to such
investors by allowing Wells Fargo to act as the Trustee in the transaction. However, in every
other important and relevant way, the police station belongs to and is owned by the City of
Meridian, The City's financing method is no different than a homebuyer placing a mortgage
loan on his/her house. Thus, in the interest of public policy, the Board should grant the City's
exemption for its police station.
C. CONCLUSION
Although the rules for determining ownership for exemption purposes vary, prior case
law, the language of the exemption statute itself, and public policy favor granting the Meridian
police station tax exempt status. As explained previously, the City clearly has the possessory
interest in its police station as evidenced both by the structure of the financing agreement and the
City's exclusive possession and enjoyment of the facility. Further, public policy and the
BRIEF IN SUPPORT OF APPEAL -14
purposes of statutory tax exemptions fall in the City's favor
More importantly, the cases relied on by the Board in its City of Boise decision, and the
City of Boise case itself, are distinguishable from the facts at hand. Here, the City owns the land
on which the police station was built. In addition, the structure of the financing agreement
evidences an intent by the parties that .the City is the owner of the police station. Given the
foregoing analysis, the only appropriate conclusion is that the City's police station requires tax
exempt status.
Based on the foregoing, the police station belongs to the City of Meridian and is exempt
from taxation pursuant to I.C. §63-602A.
DATED this ~ day of October, 2003.
WHITE PETERSOAT
By:
William A. Morrow, of the Firm
Attorneys for the City of Meridian
Z:\Wodc\M\Meridian\Meridian 15360MiTax Appeal-0IS\Brief support AppeaLdoo
BRIEF IN SUPPORT OF APPEAL -15