Harris Charitable Remainder Annuity Trust v. Shipman (St. Charles)

State Tax Commission of Missouri

 

HARRIS CHARITABLE REMAINDER)

ANNUITY TRUST)

)

Complainant,)

)

v.) Appeal Number 07-32687

)

SCOTT SHIPMAN,ASSESSOR,)

ST. CHARLES COUNTY, MISSOURI,)

)

Respondent.)

 

 

ORDER SETTING ASIDE HEARING OFFICER DECISION

AND AFFIRMING BOARD OF EQUALIZATION

 

HOLDING

Upon review of the entire record, the Commission sets aside the Hearing Officer Decision and sustains the decision by the Assessor and approved by the Board of Equalization that the property is not exempt under Section 137.100(5), RSMo.

HISTORY

On May 26, 2009, Senior Hearing Officer W. B. Tichenor entered his Decision and Order (Decision) setting aside the assessment by the St. Charles County Board of Equalization.

Respondent timely filed (June 26, 2009) his Application for Review of the Decision.Complainant timely filed (August 24, 2009) its Response.Respondent replied on August 27, 2009.The Application for Review raised the following points:

(1)The facts of the case are misstated in that the nature of a charitable remainder annuity trust and the relationship of that trust to the people and the property involved in this appeal are erroneous, and

 

(2)The Decision and Order embodies a disparate legal analysis from that applied to past exemption cases decided by the Commission, at once overlooking a critical limit on exemptions under the Missouri Constitution and violating it.

 

Misstatement of Facts

The Hearing Officer set forth the following in Paragraphs 3 and 4 of his Findings of Fact:

“3.Complainant is a Charitable Remainder Annuity Trust (CRAT) organized under Internal Revenue Code Section 664.[1]It is a separate legal entity that is recognized as being a tax-exempt entity by the Internal Revenue Service.The trust is irrevocable.It is further recognized by the IRS as a charity under Section 501 (c) (3) of the Internal Revenue Code.The trustee, Dale L. Rollings, is charged with carrying out the terms of the trust.Complainant was created on October 12, 2004.There is a single charitable remainderman to the trust – the Wentzville R-IV School District (District).[2]

 

4.A Charitable Remainder Annuity Trust promises to pay to the donor an annuity for a term of years in monthly payments.At the end of the trust period the CRAT is required to turnover all of its assets to the beneficiary/remainderman.[3]The amount of each payment to be made from an annuity trust becomes fixed at the inception of the trust and may not be changed; such amount remains constant irrespective of changes in the underlying trust assets.[4]

 

Additional information may be necessary to fully explain and detail the parties and their relationship.Edward L. Harris and Mary Lou Harris owned the subject parcel.Edward and Mary Lou Harris entered into a lease agreement with the Wentzville School District for the subject parcel.The Harris’s established the Harris Charitable Remainder Annuity trust.They deeded the subject parcel to the trust.They assigned the lease with the school district to the trust.The school district makes monthly lease payments to the trust.The trust makes monthly payments to the Harris’s in an amount equal to the lease payment set forth in the lease agreement.The total lease payments are equivalent to the fair market value of the property at the inception of the lease.

A charitable remainder trust as defined by Black’s Law dictionary is a trust that consists of assets that are designated for a charitable purpose and that are paid over to the trust after the expiration of a life estate or intermediate estate.A charitable remainder annuity trust is defined by Black’s Law dictionary as a charitable remainder trust in which the beneficiaries received for a specified period a fixed payment of 5% or more of the fair market value of the original principal, after which the remaining principle passes to a charity.

To establish a charitable remainder annuity trust, paperwork is filed with the IRS.The IRS reviews to the documents to ensure that the trust is established for organizations that have received prior designation as a 501(c)(3) charity.(Tr. P 5 lines 23)A charitable remainder annuity trust receives automatic approval by IRS because the trust does not engage in fundraising.

When a charitable remainder annuity trust is initially established it is an “empty basket”.After the trust is established, assets are transferred into the trust.The transfer to the trust is treated as a charitable deduction.(Tr. P. 8 line 9.)In this case, the Harris’s transferred the subject parcel, land and improvements, to the trust.The trust will hold the subject parcel for a ten year period.At the end of the 10 year period, the parcel will transfer to a charity that is designated as a 501(c)(3) organization.(Ex. A Article 4 and Article 12)

The school district will make monthly payments pursuant to the lease agreement.The payments made to the trust are transferred to the Harris’s as fixed annuity payments.The trust provides an income stream to the Harris’ for the ten year life of the lease. If the school district complies with the terms of the lease for the entire ten years, the trust will transfer the property to the school district.If the property would sell either to the school district or anyone else during the lease period, the Harris’s would only get the amount set forth as their annuity payment, ie the total lease payments over the 10 year lease or the market value of the property. Any additional funds from the sale of the property would go to the school district or other qualified charitable organization.

Legal Analysis of Charitable Exemptions.

Exemptions should be narrowly construed against the claimant and that any deviation from the statutory and constitutional requirements for property to be deemed exempt be strictly construed in favor of taxation.[5]“The law disfavors claims for exemption from taxation. The substantial burden of establishing the property falls within the exempted class is on the person claiming exemptions under the referenced constitutional and statutory provisions. To prevent the curtailing of the purpose and intended scope of a tax exemption, the tax exemption statute is to be strictly but reasonably construed.” [6]Accordingly, in order to prevail, Complainant must demonstrate by substantial and persuasive evidence, that it is entitled to an exemption.

Substantial evidence is that evidence which, if true, has probative force upon the issues, i.e., evidence favoring facts which are such that reasonable men may differ as to whether it established them, and from which the Commission can reasonably decide an appeal on the factual issues.[7] Persuasive evidence is that evidence which has sufficient weight and probative value to convince the trier of fact. The persuasiveness of evidence does not depend on the quantity or amount thereof but on its effect in inducing belief.[8]

Properties which can be exempted from taxation are set out within our Constitution and the statutes enacted to enforce that Constitution, to wit:

“. . .all property, real and personal, not held for private or corporate profit and used exclusively for religious worship, for schools and colleges, for purposes purely charitable, . . .may be exempt from taxation by general law but any such law may provide for approximate restitution to the respective political subdivisions of revenues lost by reason of the exemption. All laws exempting from taxation property other than the property enumerated in this article, shall be void.”[9]

In support of this Constitutional provision, the Legislature has enacted Section 137.110, RSMo 1994, which provides in relevant part:

The following property shall be exempt from taxation:

(5) All property, real and personal, actually and regularly used exclusively for religious worship, for schools and colleges, or for purposes purely charitable and not held for private or corporate profit, except that the exemption herein granted does not include real property not actually used or occupied for the purpose of the organization but held or used as investment even though the income or rentals received therefrom is used wholly for religious, education or charitable purposes;[10]

In order for a property to be exempt from taxation for state, county or local purposes, the following tests must be met:

1. The property must be actually and regularly used exclusively for a charitable purpose. “Charity” is therein defined as “. . .a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their hearts under the influence of education or religion, by relieving their bodies of disease, suffering or constraint, by assisting them to establish themselves for life, or by erecting or maintaining the public buildings or works or otherwise lessening the burdens of government.” [11]

2. The property must be owned and operated on a not-for-profit basis. The property “must be dedicated unconditionally to the charitable activity in such a way that there will be no profit, presently or prospectively, to individuals or corporations. Any gain achieved in use of the building must be devoted to achievement of the charitable objectives of the project.” [12]

3. The dominant use of the property must be for the benefit of an indefinite number of persons and must directly or indirectly benefit society generally. “It is required that there be the element of direct or indirect benefit to society in addition to and as a result of the benefit conferred on the persons directly served by the humanitarian activity”. [13]

The test for whether ownership is on a not-for-profit basis is that the property must be dedicated unconditionally to the charitable activity in such a way that there will be no profit presently or prospectively to individuals or corporations.In this case, the annuity payments every month belie the unconditional dedication of the property to educational purposes.The purpose of this trust was not to donate property to a school district but to facilitate the sale of property, at market value, to the school district.The school district was not able to pay for the property immediately or become additionally indebted at the time of the transaction.The trust was a method to avoid these legal restraints.The Harris’s, as settlers and trust beneficiaries, receive a profit, the purchase price of the property, during the 10 year intermediate estate.There is nothing inherently charitable of a sale or lease of property at market value to a school district.“[W]hen the owner leases his land to the public for a public use or charitable use and applies the rents derived from the land to his own personal advantage he contributes nothing to the public or to the charity, he loses nothing by the use, he stands before the law as anyone who leases his land for any other purpose.”[14]

Further, there is no guarantee that the school district will ultimately own the subject parcel.Although the property may transfer to the school district either during the ten year lease or after the expiration of the lease, there is no guarantee. (Tr. p. 32-33)Pursuant to the terms of the lease, the school district may terminate the lease at the end of each school year.Also, the property may be sold to another party during the term of the lease.Lastly, under the terms of the lease and trust, the property may be transferred to another organization that is designated, by the IRS,as a charitable organization.The charitable organization that may be the future owner of the property may not qualify for an exemption.In order to qualify for a charitable purpose exemption under Section 137.100, RSMo, the property must:

(1)be dedicated unconditionally to the charitable activity;

(2)               Be owned and operated on a not for profit basis; and

(3)               the dominant use of the property must be for the benefit of an indefinite number of people and directly or indirectly benefits society generally.[15]

 

Since the property is not being held on a not-for-profit basis and since no Section 137.100, RSMo qualified organization is guaranteed to be the owner of the property at the end of the intermediate estate, the Complainant has failed to prove by substantial and persuasive evidence that the property should be exempted.

ORDER

The Decision of the Hearing Officer is SET ASIDE.The determination approved by the Board of Equalization is AFFIRMED.The Clerk of St. Charles County is hereby ordered to put the parcel on the tax books as commercial property for the subject property for tax years 2007 and 2008.

Judicial review of this Order may be had in the manner provided in Sections 138.432 and 536.100 to 536.140, RSMo within thirty days of the date of the mailing of this Order.

If judicial review of this decision is made, any protested taxes presently in an escrow account in accordance with this appeal shall be held pending the final decision of the courts unless disbursed pursuant to Section 139.031.8, RSMo.

If no judicial review is made within thirty (30) days, this decision and order is deemed final and the Collector of St. Charles County, as well as the collectors of all affected political subdivisions therein, shall disburse the protested taxes presently in an escrow account in accord with the decision on the underlying assessment in this appeal.

SO ORDERED September 30, 2009.

STATE TAX COMMISSION OF MISSOURI

Bruce E. Davis, Chairman

Jennifer Tidwell, Commissioner

 

 

 

DECISION AND ORDER

HOLDING

 

Assessment by Assessor that subject property was not tax exempt was sustained by County Board of Equalization.Hearing Officer finds subject property to be exempt under Section 137.100 (5), assessment SET ASIDE.

Complainant appeared by Counsel, John Shaw, St. Charles, Missouri.Respondent appeared by Assistant County Counselor, Charissa Mayes.Case heard and decided by Senior Hearing Officer, W. B. Tichenor.

ISSUE

The Commission takes this appeal to determine whether the subject property is exempt from taxation under Section 137.100(5), RSMo for the tax years 2007 and 2008.More specifically the issue is whether a property owned by a charitable remainder trust and used exclusively by a governmental entity for a school purpose is exempt from ad valorem taxation.

SUMMARY

Complainant appeals the decision of the St. Charles County Board of Equalization.Respondent assessed the subject property as commercial property.This assessment was sustained by the Board of Equalization.Complainant contends the subject property is exempt from taxation under the provisions of Section 137.100(5).An evidentiary hearing was conducted on December 2, 2008, before W. B. Tichenor, Senior Hearing Officer, at the St. Charles County Administration Building, St. Charles, Missouri.Attorney for Complainant filed Memorandum of Points and Authorities.[16]Attorney for Respondent filed Respondent’s Brief.[17]Attorney for Complainant filed Complainant’s Reply Brief on April 17, 2009.

The Hearing Officer, having considered all of the competent evidence upon the whole record and the Briefs filed by the parties, enters the following Decision and Order.

Complainant’s Evidence

The following exhibits were received into evidence on behalf of Complainant.

 

Mr. Rollings testified at the hearing.

 

Respondent’s Evidence

The following exhibits were received into evidence on behalf of Respondent.

 

Mr. Brown testified at the hearing.

FACTS

1.Jurisdiction over this appeal is proper.Complainant timely appealed to the State Tax Commission from the decision of the St. Charles County Board of Equalization.

2.The subject property is located at 717 West Pearce Boulevard, Wentzville, Missouri.The property is identified by parcel number 4-013D-S024-00-25.5, Assessor’s Account Number 636510A000.[18]The property is used as the district offices for the Wentzville R-IV School District.[19]

3.Complainant is a Charitable Remainder Annuity Trust (CRAT) organized under Internal Revenue Code Section 664.[20]It is a separate legal entity that is recognized as being a tax-exempt entity by the Internal Revenue Service.The trust is irrevocable.It is further recognized by the IRS as a charity under Section 501 (c) (3) of the Internal Revenue Code.The trustee, Dale L. Rollings, is charged with carrying out the terms of the trust. Complainant was created on October 12, 2004. There is a single charitable remainderman to the trust – the Wentzville R-IV School District (District).[21]

4.A Charitable Remainder Annuity Trust promises to pay to the donor an annuity for a term of years in monthly payments.At the end of the trust period the CRAT is required to turnover all of its assets to the beneficiary/remainderman.[22]The amount of each payment to be made from an annuity trust becomes fixed at the inception of the trust and may not be changed; such amount remains constant irrespective of changes in the underlying trust assets.[23]

5.Complainant is required to pay to the donors Edward L. Harris and Mary Lou Harris for a period of ten years a monthly amount of $13,322.46.In the event of the death of both Mr. and Mrs. Harris prior to the end of the trust term, the annuity amount is to be paid to the Harris’s children, Edward L. Harris, Jr. and Linda Gail Harris Cacavas.Mr. and Mrs. Harris do not have any ability to control or withdraw any assets out of the CRAT. The Harrises do not have any control over the use of the subject property. The only source of income for the Complainant is the rental payments from the District under the lease which was assigned to the Complainant.At the end of the trust term (10 years) and with no additional consideration, Complainant is required to convey the subject property to the beneficiary/remainderman, i.e. District.[24]

6.Complainant came into existence as a result of the desire of Mr. and Mrs. Harris to sell the property under appeal to the District.The District had been renting most of the space in the office building for school purposes and wanted to expand to use the entire building.An agreed upon purchase price was negotiated and the School District and the Harrises were ready to complete the transaction.The District did not have sufficient cash to purchase the subject property and it did not have adequate bonding capacity to float bonds to raise the cash.The District could not purchase the property on an installment sale because of the prohibition of Missouri Constitution Article VI, Section 26(a), which requires governments to operate on an annual cash basis and prohibits long-term financing without the use of bonds or other similar devices approved by the voters.It was determined that a CRAT would be created for the sole benefit of the District.The Harrises would donate the subject property to the CRAT, the District would lease the property from Complainant for its offices for ten years, at the end of which Complainant would convey, without additional charge, the subject property to the District.[25]

7.The Harrises donated the subject real estate by Quit Claim Deed on October 12, 2004, to Complainant.[26]The Harrises assigned the lease of the subject property with the District to Complainant on October 12, 2004.[27]

8.Complainant is a charity for legal and tax purposes whose sole function is to hold the asset – subject property – for the District, and then to convey the property to the District.The result to the Harrises is the same as if they had sold the property to the District and taken back a promissory note; but because of the Missouri Constitutional Prohibition against long-term financing by school districts, except with bonds, a promissory note was not possible.The use of the CRAT allowed the District to acquire the subject property and pay for it through its regular cash flow rather than the cumbersome and costly method of a bond issue.The only difference to the Harrises is that the income they receive from Complainant as an annuity payment is taxed at their ordinary marginal income tax rate; whereas, if they were able to make an installment sale to the District, promissory note payments would have been a combination of interest (taxed at ordinary marginal rates) and principal (taxed at capital gains rates).[28]

9.Complainant is the legal owner of the property under appeal.The District is the beneficial or equitable owner[29] of the property under appeal, as the remainderer or remainderman.[30]

CONCLUSIONS OF LAW

Jurisdiction

The Commission has jurisdiction to hear this appeal and correct any assessment which is shown to be unlawful, unfair, arbitrary or capricious.The hearing officer shall issue a decision and order affirming, modifying or reversing the determination of the board of equalization, and correcting any assessment which is unlawful, unfair, improper, arbitrary, or capricious.[31]

Burden of Proof

Complainant has the burden to present substantial evidence to rebut the presumption of correct assessment by the Board of Equalization.[32]In order to meet this burden in an appeal seeking exemption from taxation, the Complainant must meet the substantial burden to establish that the property falls within an exempted class under the provisions of Section 137.100.[33] It is well established that taxation is the rule and exemption from taxation is the exception.Exemption is not favored in the law.[34]

Exemption under Section 137.100, RSMo

Complainant seeks exemption from taxation pursuant to Section 137.100(5) for the property under appeal.Section 137.100(5) reads as follows:

The following subjects are exempt from taxation for state, county or local purposes:

 

****

(5) All property, real and personal, actually and regularly used exclusively for religious worship, for schools and colleges, or for purposes purely charitable and not held for private or corporate profit, except that the exemption herein granted does not include real property not actually used or occupied for the purpose of the organization but held or used as investment even though the income or rentals received therefore is used wholly for religious, educational or charitable purposes;

 

The case presented is one of first impression before the Commission, as well as within the jurisprudence of the state of Missouri.That is, whether real property legally owned by a charitable remainder annuity trust and beneficially owned by a governmental entity, i.e. public school district, and used by the governmental entity for a charitable/governmental purpose meets the statutory standard to be exempt from ad valorem taxes.It also appears no similar case has been decided in any sister jurisdiction by either a state tax review board or commission or any appellate court of another state.Accordingly, it is necessary to first make an analysis of Section 137.100(5) as it relates to the facts presented.

Section 137.100(5) Analysis

The focus of the exemption statute is on the actual and regular use of the property seeking exemption.It is important to note there is no requirement as to the nature of the ownership of the property contained in subsection (5).The Missouri Supreme Court has held “the statute clearly makes the use of the property the focus of the exemption and such is unquestionably the focal point of [former cases].”[35]The Court went on to state “The foregoing is not to say that the factors analyzed in the [former cases] will be irrelevant.However, their relevance is strictly

confined to the extent to which they may indicate the purpose for which the property is used and whether such purpose is charitable.”[36]

Furthermore, there is nothing in subsection (5) addressing how the property was acquired by the entity owning the property.It must be concluded, as far as the plain language of the statute goes, there is no inquiry necessary with regard to either the nature of the ownership or how the property was acquired.The statute sets a standard as to the actual and regular use of the property.That use must be “exclusively”[37] for one of three things.The use must be for: (1) religious worship; (2) schools and colleges; or (3) for purposes purely charitable and not held for private or corporate profit.

Subject Property’s Use – School Use

There is no factual dispute as to the actual, regular and exclusive use of the subject property.The use of the property is as offices for the School District.Respondent concedes that the use of a building by a school district constitutes a use for an exempt purpose.[38]In the plain language of subsection (5) the subject property is real property actually and regularly used exclusively for a school, by providing the space for the administrative offices of the entire school district.This is a use satisfying the second classification of use established in the statute. There is no issue as to the use by the School District only being a secondary or incidental use.No such claim was asserted by Respondent.The primary and inherent use,[39] indeed the only use, made of the subject property is the use by the School District.[40]Therefore it is exempt from taxation.

The fact that legal ownership is in Complainant and the beneficial ownership is in the School District as the remainderman under the trust is irrelevant under the plain language of the statute.Likewise, how Complainant and the School District came to be the legal owner and the remainderman, respectively, of the subject property has no bearing on the issue of exemption.

Not Held for Private or Corporate Profit

The phrase appearing in subsection (5) “not held for private or corporate profit” does not as a matter of grammatical construction modify the terms “religious worship” or “schools and colleges”.It is connected to the phrase “for purposes purely charitable” by the word “and”.It is not set off by a comma.If a comma had been inserted after the word “charitable” then the phrase “not held for private or corporate profit” would have modified and applied to each of the three exempt uses, i.e. religious worship, school and colleges, and purposes purely charitable.The absence of the comma results in the applicability of the phrase being only to real or personal property held for private or corporate profit and not to property used for religious worship or for schools and colleges.

For Purposes Purely Charitable

As has been determined, the actual use of the subject property for a school purpose qualifies it for exemption under Section 137.100(5).Furthermore, an analysis of the statue as applied to the use of the subject property, as well as a review and examination of the third category qualifying a property as exempt supports this determination.The construction of the subsection sets off this third category or classification of a property use that qualifies as exempt from ad valorem taxation.The three categories of use are set out in the disjunctive, not the conjunctive.The property uses recognized under the statute for exemption are “ … for religious

worship, for schools and colleges, or for purposes purely charitable and not held for private or corporate profit, …”Emphasis Added.

Property used for purposes purely charitable is property used for something other than religious worship or schools and colleges, although property used for either of these two classifications of use may also be used for purposes purely charitable.However, for property use falling outside of religious worship or schools and colleges the requirement to establish an exempt use is in two inseparable parts.The use must be for a purely charitable purpose and not held for private or corporate profit.

The statute’s language qualifies a use for a purely charitable purpose by recognizing that if the property is held for private or corporate profit, then the primary and inherent use cannot be for a “purely charitable purpose.”A perfect illustration is two hospitals, one being a for-profit corporation and the other being a not-for-profit corporation.The services performed by both entities are the same.Therefore the use of the property as far as the actual activity carried on is the same for both.However, the for-profit hospital has shareholders and pays out dividends.The not-for-profit hospital does not have shareholders.It pays no dividends.

The for-profit hospital is operated in order to not only provide an otherwise charitable service, but also to make a profit payable to shareholders.The not-for-profit hospital is not operated for the purpose of realizing a profit to pay out to shareholders.Any income over expenses made by the not-for-profit hospital is retained and goes back to the providing of its charitable service.This critical distinction is the basis for the exemption of not-for-profit hospitals from ad valorem taxation.

Franciscan Tertiary Test

This third classification of property use qualifying for exemption was delineated by the Missouri Supreme Court in its 1978 decision in Franciscan Tertiary Province v. STC.[41]Since Complainant’s property is used for a school purpose, which is exempt under the second classification of subsection (5), this analysis under the Franciscan case is admittedly superfluous.However, in order to address the various points raised in the briefs of the parties, good judgment dictates the analysis should be performed.

In addressing how the phrase “… purposes purely charitable, and not held for private or corporate profit … .” was to be applied in ad valorem taxation cases, the Court established a three part test.The three tests to be met under Franciscan are:

1.Property must be owned and operated on a not-for-profit basis;

 

2.Property must be actually and regularly used exclusively for a charitable purpose; and

 

3.Property must be used for the benefit of an indefinite number of persons and for society in general, directly or indirectly.

 

Complainant’s Property is owned and operated on a not-for-profit basis

Complainant’s ownership is a not-for-profit ownership.The legal ownership vested in the Harris CRAT is not an income-producing ownership.The ownership is in the simplest of terms a substitute for a sale on a long term promissory note.The payment schedule under the Lease was set up under a ten-year amortization at a 6% interest note.[42]Complainant’s ownership is nothing more than the legal conduit for the exchange of a sale price and the subject property.Had the state constitution and statutes allowed the School District to execute a promissory note and deed of trust to the Harris’s Trusts, this matter would not be before the Commission.The payments to the Harris’s Trusts are not payments of profits realized from the operation of the subject property.The payments are no different than payments of principal and interest under a sale on a note and deed of trust.

Any tax benefits that accrued to the Harrises are irrelevant in the present proceeding.Any capital gain that might have been realized on the sale of the subject property is also irrelevant to a determination of the tax exempt status of the property under appeal.Complainant does not exist to make a profit on the subject property.The use of the property by the School District generates no profit to Complainant.The property is not being held by Complainant for profit.Complainant holds title to the property to make the contractual payments to the Harrises and at the end of the School District’s lease term to distribute the trust asset – subject property – to the remainderman, i.e. School District.The property under appeal meets the first Franciscan test.

Actually and Regularly Used Exclusively for a Charitable Purpose

This part of the test has been previously addressed above.The actual, regular and exclusive use of the subject property is not disputed.The property is exclusively[43] used by the School District for its administrative offices.Charitable use encompasses a use that brings the heart of individuals under the influence of education.[44]The exclusive use of the property under appeal by the School District is a use by a school.It is an exempt use under the statute.The property under appeal meets the second part of the Franciscan test.

Used for the Benefit of an Indefinite Number of Persons and for Society in General

The subject property’s use as the administrative offices for a public school district benefits directly the students, parents of students, and patrons of the Wentzville R-IV School District.This class of beneficiaries of the property’s use comprises an indefinite number of persons because it is an open class that changes from year to year.

The use of the subject property as an inseparable part of the school system is a benefit to society in general.The importance of free public schools has been long recognized within the Constitution of Missouri as set forth in the following language.

“A general diffusion of knowledge and intelligence being essential to the preservation of the rights and liberties of the people, the general assembly shall establish and maintain free public schools for the gratuitous instruction of all persons in this state within ages not in excess of twenty-one years as prescribed by law.”[45]

 

The subject property’s use is instrumental in carrying out the stated constitutional objective to benefit the citizens of Missouri.Society in general is directly benefited by providing the opportunity for students in the School District to improve their knowledge and intelligence for the preservation of the rights and liberties of the people.The use to which Complainant’s property is being put satisfies the third prong of the Franciscan test.

Respondent’s Arguments Against Exemption

Respondent presents a number of arguments against the subject property coming under the provisions of Section 137.100(5).[46]The arguments are all encompassed within the boundaries of the Franciscan tests which have just been addressed.It is noted, Respondent did not address the conceded fact that Complainant’s property is “actually and regularly used

exclusively for” a school.Therefore, as developed above, the property is brought under this specific language of subsection (5), irrespective of the tests established in Franciscan.

Payment for the Property to the Harrises

Respondent admits the conveyance of the property into the Harris CRAT was to facilitate the sale to the School District, but then asserts that the monthly payments “belie the unconditional dedication of the property to educational purposes with no present or prospective individual profit as required by” Franciscan.Respondent goes on to contend that “There is nothing inherently charitable about selling one’s property to a school district.”This is an important observation, but not for the point Respondent seeks to advance.

The standard for granting an exemption is not whether an entity received its title by gift or sale.It is not the method by which property is transferred that is determinative for exemption.It is the use of the property, as addressed above.Neither Section 137.100(5) or the various cases decided there under connect the charitable use of property to the particular mechanism by which it was acquired, or whether it was sold or donated.It is simply a factor that is not material to the present inquiry.

Respondent’s witness concurred that the payments by the School District to Complainant and the payments then to the Harris’s Trusts are “roughly equivalent to the market value of the fee simple interest in the property.”[47]In other words, Mr. and Mrs. Harris are being paid over the course of ten years the sale price of the property, plus interest.As previously addressed, this is a situation which is essentially no different than if the Harrises had financed the purchase of the

property by the School District, had the law so permitted.The testimony on this point established how an entity acquired the property is irrelevant to the determination on exemption.

Under cross-examination, Mr. Brown testified as follows:[48]

“CROSS-EXAMINATION BY MR. SHAW:

 

Q.Mr. Brown, I’ve got a couple–just a few questions for you.

A.Okay.

Q.If I understand correctly, you, or your office is responsible for determining whether property in St. Charles County is exempt from property tax; is that correct?

A.That’s correct.

Q.And do you make that determination yourself typically, or is someone else in your office?

A.I make that determination myself–

Q.Okay.

A.–along with a, in some cases, a recommendation to the assessor.

Q.Okay.When you make that determination, do you typically look and see how an organization received that property in making your determination, whether it’s exempt or not from property taxes, or that it’s by a gift, or they bought it?Is that a factor that you look at?

A.Are you asking me how they acquired the property–

Q.Yes.

A.–through purchase or–

Q.Yeah.

A.–or–

Q.Uh-huh.

A.No.

Q.That doesn’t make a difference to your office?

A.No.

Q.One way or the other?Do you typically look at whether they were able to pay cash for the property or whether they’ve making payments on the property?

A.No.

Q.Okay.Is it a factor that that charitable organization may, in fact, sell the property to a non-charitable organization in the future?

A.I’m sorry, the question again?

Q.Does it make a difference if the charitable organization has the right to sell that property at any point in the future?

A.I’m not quite sure I understand the question–

Q.Okay.

A.–because to my knowledge, all own–I mean, if you have ownership, you have the right to sell.

Q.Right.You’ve got the right to sell.

A.Correct.

Q.And virtually, everyone who owns property, unless there’s a restriction on the property, can sell that property to anyone?

A.That’s correct.

Q.Does that make a difference if they can sell the property?

A.No.

Q.No.So it doesn’t matter that it may end up five years or 10 years down the road in somebody’s hands who is not a charity; is that right?

A.That’s correct.

Q.Okay.You indicated that it didn’t matter how the charity acquired the property, whether by gift or by purchase, whether they paid cash or they’re making payments on it, does that mean that the use of the property is the determining factor?

A.In exemptions, when determining exemptions we do have to consider ownership and use.

Q.Okay.And is the use of a building by a school district an exempt purpose?

A.Yes.”

 

This testimony establishes how a property is obtained has no relevance to a determination of whether it is being used for an exempt purpose under the practice of the Respondent’s office.Therefore, the financial arrangement existing in this instance to effectuate the transfer of the property under appeal to the School District is of no import.A simple illustration should suffice to demonstrate the fallacy of Respondent’s argument on this point.

Assume that Mr. and Mrs. Harris had simply sold the subject property to a parochial school to be used for religious and school purposes and had taken back a 10 year promissory note.This fact would not even enter into any discussion on whether the property should be granted tax exempt status.The fact that the Harrises would be getting market value for conveyance of their fee simple interest in the property would mean nothing under either the statute or Franciscan.

It is very likely a great deal of the exempt real property in St. Charles County and indeed in Missouri owned by churches and non-profit schools was purchased and not donated to the religious and educational entities.Such a factor does not defeat a claim of exemption.As previously addressed it is the use of the property that must be the focus of the exemption inquiry.

Profit from Exempt Activity

Respondent’s argument is that because Mr. and Mrs. Harris are, in effect, receiving the purchase price for the property this violates the stricture of Franciscan that property must be dedicated to the exempt activity so that there is no profit.[49]The present case is clearly distinguishable from the facts in Franciscan, which gave rise to the Court’s language upon which Respondent bases this argument.In Franciscan, the Court was dealing with the operation of an apartment building for low-income elderly persons.The Court determined “an exemption will not be granted covering property which houses a business operated for the purpose of gaining a profit.”[50] (Emphasis Added) In the case at bar, the property for which the exemption is sought does not operate as a “business.”[51]The property is used to provide a governmental service.The activity of the school district is not to generate a profit and does not in fact generate profit or even income.Therefore, the mandate the Court put forth in Franciscan does not apply to the present case.

Complainant (Harris CRAT) does not operate a business on the subject property.Complainant does not carry out the exempt activity conducted at the subject property.Complainant exists for a single purpose.It must, through its Trustee, transfer each month the lease payments, which have been established to equate to the purchase price of the property under appeal, from the School District to the E.L. Harris Trust and the M. L. Harris Trust and then after the final payment in September 2014 transfer legal title to the equitable owner – the School District.That is all the legal owner – Harris CRAT – is required or authorized to do.

The use of the subject property by the School District does not generate a profit to Complainant.Complainant serves as nothing more than the conduit through which the transfer of the subject property from the Harrises to the School District is being effectuated.The payments made to the CRAT equate to the payments the CRAT is required to make.There is no excess of income over expenses to Complainant in this transaction.

Benefit to Society

Respondent’s argument on this point is that Complainant does not confer any benefit on society.It is the use of the property under appeal and not the existence of the CRAT to effectuate the transfer of the property to the School District that confers the societal benefit.Respondent’s assertion that the educational benefit to the society by the School District using the property would be otherwise be provided if the subject property was not being used is beside the point.It is the simple fact that this particular piece of property is being used for its educational (school) purpose that does confer the benefit on society at large and an indefinite number of persons, as discussed above.

State ex Rel. Hammer v. Macgurn

Respondent cites to the case of Hammer v. Macgurn[52] and argues that because Complainant is leasing the property to the School District prior to donating the property outright, the property does not qualify for exemption.Macgurn is distinguishable from the present case on one critical basis.In Macgurn, the Lessor/Owner was under no legal or contractual obligation to gift the property to the school.The Lessor in Macgurn was free to take the income produced by the leasing of the property and use it in any form or fashion.At the end of the lease term there was no requirement that Macgurn would then transfer title to the school.In other words, in Macgurn, the school was not the beneficial or equitable owner of the property.At the end of the lease term, the property would remain with Macgurn.That is not the situation in the case at bar.At the end of the lease term, Complainant must transfer legal title to the equitable owner and Complainant will then cease to exist.The present case is not one of an owner simply leasing property to a government entity.As has now been addressed at length, the “lease arrangement” in the present case is the mechanism by which title transfers to the School District.This was not the case in Macgurn.

Transfer of the Property to the School District

Respondent next advances the argument that there is no way to determine if the property will actually be donated to the school district.Respondent’s argument is grounded in speculation not supported by the evidence.The only way the property will not transfer to the School District at the end of the lease term is if the District ceases to exist at the end of the ten year term.Absent the Wentzville R-IV School District being abolished the property must transfer to it.In the highly unlikely event of the School District not existing at the end of the ten year term, then the property must be transferred to a qualifying charitable organization as required and defined by the Internal Revenue Code.[53]In short, there is no basis to conclude that this state public school district is going to cease to exist in the next ten years.Such a surmise provides no basis for the denial of exemption for the current school use of the property under appeal.

Title to the property has been transferred from the Harrises to Complainant.The unconditional obligation of Complainant to transfer the property to the School District is absolute.It cannot be altered.There is no set of circumstances whereby the property can be returned to the Harrises by the Complainant.

Future Ownership and Use

Respondent argues from the foregoing assertion that there is no way to know how the property will be actually and regularly used by some future owner.The argument is irrelevant.The current actual and regular use of the property is not in dispute.That use over the remaining years of the existence of the Trust is very easy to establish from year to year.The fact that at some point in the future the use of the property changes from a school use to a for-profit use no defeats the exemption, than the fact that a property now established as exempt is sold next year and no longer used for an exempt purpose.

If at the end of the term the School District after receiving legal title to the property sells it to a for-profit entity, the property naturally would go back on the tax rolls.This is no different than if a religious entity sells the property where its building for worship is located, which has been exempt for any number of years, and the property’s use then becomes something other than an exempt use.The fact that such a scenario can happen is not a basis for the religious entity to be denied exemption on its property.Once the property is no longer being used for the exempt purpose, it is no longer exempt.

If the School District were to terminate the lease and vacate the subject property, Complainant would be able to then sell the property.However, any proceeds from that sale, less the required payment of the annuity to the Harrises’ Trusts, would have to go to the School District.No profit from the sale of the subject property can be transferred anywhere except to the School District, or if it is no longer in existence, to another contingent charitable beneficiary.Such a hypothetical and most unlikely occurrence does not alter the critical fact that the actual and regular use of the property by the School District is not for the purpose of making a profit.

Property Being Sold For A Profit

Respondent next argues that because the Complainant is essentially selling the property to the School District for a price higher than the value used by the Respondent for assessment purposes, the property is essentially being sold for a profit.The argument has no relevance on the issue of the exempt status of the subject property.As has already been discussed, the fact that an entity may sell a piece of real estate to a tax exempt entity to be used for a tax exempt purpose and realize a profit on the sale is not a factor to be utilized in the analysis of whether the property is actually and regularly used for an exempt purpose.

Respondent has conceded that if the School District had simply been able to purchase the property outright, the fact that the Harrises would have made money on the sale would not keep the property from being exempt.As previously noted the same result would apply if a sale had been made to a parochial school instead of a public school district.The exemption would be required because of the use and could not be denied simply because the seller made money in the transaction.Respondent’s argument is essentially whether a seller gains, loses, or breaks even when property is sold to a charity determines tax exempt status of the property.That is simply not the law.It is the use of the property, not how it was acquired by the charitable owner that is controlling.The language used by the Franciscan Court regarding no profit addresses, not the purchase of the property for which exemption is sought, but the use and operation of the property.There is no provision in the statute, constitution or case law to establish that property must be received by gift rather than by sale for the property to be exempt.

Summary and Conclusion

The subject property is “actually and regularly used exclusively for” a school, as the administrative offices of the Wentzville R-IV School District.It is exempt under the plain language of Section 137.100(5).The ownership by Complainant and the use of the property under appeal meets the criteria established under the Franciscan Test.Accordingly, Complainant has met its burden of proof to establish the subject property to be exempt from ad valorem taxation.

ORDER

The assessment of the subject property made by the Assessor and sustained by the Board of Equalization for St. Charles County for the subject tax day is SET ASIDE.

The county clerk is ordered to enter the subject property on the list of exempt property into the supplemental tax book for the county for the tax years 2007 and 2008.

A party may file with the Commission an application for review of this decision within thirty days of the mailing date set forth in the Certificate of Service.The application shall contain specific facts or law as grounds upon which it is claimed the decision is erroneous.Said application must be in writing addressed to the State Tax Commission of Missouri, P.O. Box 146, Jefferson City, MO 65102-0146, and a copy of said application must be sent to each person at the address listed below in the certificate of service.

Failure to state specific facts or law upon which the appeal is based will result in summary denial. [54]

The Collector of St. Charles County, as well as the collectors of all affected political subdivisions therein, shall continue to hold the disputed taxes pending the possible filing of an Application for Review, unless said taxes have been disbursed pursuant to a court order under the provisions of Section 139.031.8, RSMo.

Any Finding of Fact which is a Conclusion of Law or Decision shall be so deemed.Any Decision which is a Finding of Fact or Conclusion of Law shall be so deemed.

SO ORDERED May 26, 2009.

STATE TAX COMMISSION OF MISSOURI

W. B. Tichenor

Senior Hearing Officer