HENRY COUNTY WATER COMPANY, )
v. ) Appeals No. 01-59500 through 01-59508
JAMES KECK, ASSESSOR, )
HENRY COUNTY, MISSOURI, )
DECISION AND ORDER
An evidentiary hearing was held in the above matter on July 24, 2002, at the Henry County Courthouse, Clinton, Missouri, before Hearing Officer Luann Johnson. Complainant appeared through counsel, Wayne Tenenbaum. Respondent appeared through counsel, John Kopp.
The only issue in this case is whether or not a not-for-profit corporation, by the act of hiring a for-profit corporation to manage some of the day-to-day business, loses its tax exemption under Section 137.100(5), RSMo. We find that property owned by Complainant is tax exempt, and Complainant’s decision to hire an expert to assist in the running of its water plant does not destroy its entitlement to a tax exemption.
FINDINGS OF FACT
1. Complainant, Henry County Water Company, is a not-for-profit corporation created for the sole purpose of providing a safe water source for the residents of Clinton, Missouri and the surrounding county. Complainant owns the property under appeal identified as parcels number 012-4.0-19-000-000-002.000; 013-7.0-35-004-002-005.006; 018-2.0-03-004-002-001.000; 018-2.0-03-004-034-008.000; 018-2.0-10-002-007-010.000; 018-6.0-13-000-000-002.001; 048-8.0-08-000-000-073.000; 048-8.0-08-000-000-074.000; and 053-7.0-36-000-000-001.000.
2. Under the terms of its Articles of Incorporation, “All income, revenues, receipts and profits received or collected by the Company from the operation of the Water System, which it is herein authorized to acquire, shall be held and disposed of for the purpose of paying the cost of operation of such Water System and other proper corporate expenses, and for the purpose of paying the interest and principal on any evidences of indebtedness. . .the Company shall . . operate such property substantially without profit and any smaller profit which may accrue through such operation shall be paid to the City of Clinton or shall be rebated to customers of water purchase from the Company”
3. Complainant’s purchase and operation of the water plant is funded through a bonded indebtedness approved by the Board of the City of Clinton.
4. Under the terms of the bond indenture, the physical plant must be transferred to the City of Clinton, Missouri, when the bonded indebtedness is retired. Further, at any time prior to the retirement of the bonds on said property, the City of Clinton may demand and receive possession of the water plant from Complainant, Henry County Water Company. Additionally, no physical improvements can be made to the plant without the express permission of the City of Clinton.
5. Water rates and any increase in water rates, are approved by the Board of Aldermen of Clinton, Missouri.
6. Henry County Water Company is operated pursuant to policies promulgated by a Board of Directors, which board includes residents of the City of Clinton, Missouri. Each Board member receives a remuneration of $1,000 per year for attending Board meetings, and the Board meets approximately 12 times per year.
7. In order to handle the day-to-day operation of the facility, the Board of Directors have hired Alliance Water Resources, Inc. a for-profit corporation with expertise in providing safe water to users. The Board of Directors also contracts out other services, such as auditors, plumbers and lawn care specialists.
8. The contract between Complainant and Alliance Water Resources, Inc. is based upon a flat fee, paid monthly, which fee is renegotiated every year based upon a budget approved by the Board of Directors. There is no provision which allows Alliance to share in any profits that the water company may make. However, if Alliance operates in such a way that some expense items come in under the budgeted amount, Alliance will refund fifty percent of the savings to Complainant. If Alliance exceeds the budgeted expenditures, it is not entitled to additional reimbursement.
CONCLUSIONS OF LAW
Burden of Proof
Although a taxing statute is construed strictly against the state, an exemption statute is strictly construed against the one claiming the exemption. State ex rel. Union Electric Co. v. Goldberg, 578 S.W.2d 921, 923 (Mo. banc 1979).
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. Cupples-Hesse Corporation v. State Tax Commission, 329 S.W.2d 696, 702 (Mo. 1959).
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. Brooks v. General Motors Assembly Division, 527 S.W.2d 50, 53 (Mo. App. 1975).
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. Article X, Section 6, Mo. Const. Of 1945.
In support of this Constitutional provision, the Legislature has enacted Section 137.110, RSMo, 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; Section 137.110, RSMo.
Case Law on Charitable Use
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, as charity is defined by Salvation Army v. Hoehn, 188 S.W.2d 826 (Mo. banc 1945). “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.” Salvation Army at 830.
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.” Franciscan Tertiary Province v. State Tax Commission, 566 S.W.2d 213, at 224 (Mo. banc 1978).
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”. Franciscan at 224. See also, Barnes Hospital v. Leggett, 589 S.W.2d 241 (Mo. banc 1979).
Complainant is a not-for-profit corporation organized to benefit an indefinite number of persons through the provision of a safe and sufficient water supply. In so doing, the Complainant has lessened the burden of government, by providing a function that should be provided by the City of Clinton, Missouri. Indeed, the City of Clinton actively participates in the management of the facility by approving water rates, placing a city leader on the Board, and controlling Complainant’s ability to change the physical structure of the premises. Additionally, at any point in time, the City of Clinton may demand that title to the physical plant be transferred to the City. Finally, under the Articles of Incorporation, any profit realized through the operation of the water company must be rebated to the consumers or paid to the City of Clinton. In all respects, the dominant use of the property is for a charitable purpose.
Respondent argues that Complainant’s decision to hire a for-profit corporation to handle the operation of the plant in some way destroys the charitable use of the facilities. We disagree. The operation of the plant is governed by the policies enacted by the Board of Directors, who meet on a monthly basis to oversee the operation of the plant and who determine and approve the budgetary requirements for operation.
The fact that the Board of Directors has elected to hire individuals experienced in the operation of water plants to carry out the day-to-day operations of the facility does not destroy the charitable nature of the operation of the plant. Likewise, the fact that the company hired to run the plant may realize a profit through its efforts to run the plant, is not sufficient to destroy the charitable nature of the operation of the plant. Where the Board of Directors of Complainant are essentially volunteers with no expertise in providing a safe water system, prudence would dictate that they seek out and employ organizations which have the requisite experience and technical expertise to enable the Directors to fulfill the corporate purpose.
The assessment is hereby SET ASIDE. The Clerk of Henry County is hereby ordered to place this property on the tax rolls as exempt.
A party may file with the Commission an application for review of a hearing officer decision within thirty (30) days of the mailing of such decision. The application shall contain specific detailed grounds upon which it is claimed the decision is erroneous. Failure to state specific facts or law upon which the appeal is based will result in summary denial.
If an application for review of a hearing officer decision is made to the Commission, any protested taxes presently in an escrow account in accordance with these appeals shall be held pending the final decision of the Commission. If no application for review is received by the Commission within thirty (30) days, this decision and order is deemed final and the Collector of Henry 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 these appeals. If any protested taxes have been disbursed pursuant to Section 139.031(8), RSMo, either party may apply to the circuit court having jurisdiction of the cause for disposition of the protested taxes held by the taxing authority.
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 October 24, 2002.
STATE TAX COMMISSION OF MISSOURI
AFFIRMING HEARING OFFICER DECISION
UPON APPLICATION FOR REVIEW
On October 24, 2002, Hearing Officer, Luann Johnson, entered her Decision and Order (Decision) setting aside the assessments by the Henry County Board of Equalization and finding Complainants properties to be exempt from taxation under Section 137.100(5), RSMo.
Respondent filed his Application for Review of the Decision (11/25/02). Complainant filed Response in Opposition to Application for Review (1/2/03).
Respondent’s Grounds for Review
Respondent set forth four grounds for review. They are:
1. The Hearing Officer in her Decision and Order and in her consideration of the matter failed and refused to consider the State Tax Commission’s own criteria for considering the tax exempt status of an entity.
2. The finding of fact by the Hearing Officer that the Henry County Water Company did not confer upon its operator, Alliance Water Resources, Inc., an element of profit is not supported by the record.
3. There was no evidence that the activities of the Henry County Water Company provided a direct or indirect benefit to society in addition to the benefit conferred on the persons directly served as required by applicable case law.
4. The activities of the Henry County Water Company are not exclusively charitable as required by applicable case law.
Complainant’s Response in Opposition
Complainant opposed granting the relief sought in Respondent’s application for review on the grounds that Respondent (1) misstated the law with regard to the grant of charitable exemptions; and, (2) applied circular and inconsistent reasoning to the facts in the case in an attempt to make its interpretation of the law appear reasonable.
Respondent’s Point 1
The argument raised by Respondent under his first point is not well taken. Respondent asserts that the testimony of Respondent set forth that the Commission had provided an “Exemption Analysis” for use by the assessors in the state. Respondent further argues that this analysis is “tantamount to a rule because it announces the Commissions’s statement of policy or interpretation of law of future effect which acts on unnamed or unspecified facts.” The argument is defective on at least two grounds.
First, none of the testimony of Respondent, written direct (Exhibit 14) or cross-examination and redirect testimony (Tr. 43, Line 1 – Tr. 57, Line 16) contain any reference to an “Exemption Analysis.” None of the exhibits (Exhibits 1-13) prefiled with the Commission on behalf of Respondent is a copy of the “Exemption Analysis.” Nothing in Respondent’s testimony referenced or related to the issue of exemption. The only reference to an exemption analysis provided by the Commission is in the opening statement of Counsel for Respondent. Opening statements, closing arguments and other statements of counsel for a party are not testimony or evidence before the Commission. The Commission’s exemption analysis is not part of the record in this appeal.
Point 1 is not well taken for another basic reason. The exemption analysis provided to assessors by the Commission is neither a rule, nor is it “tantamount to a rule.” The exemption analysis is nothing more or less than a summary of factors which an assessor should consider in a given case in addressing exemption issues. It is not intended as a statement of the applicable law, nor a rule by which the Commission will decide exemption cases. Each exemption case must be decided upon the specific facts involved in that case.
The Hearing Officer correctly applied the existing law on exemption to the facts of this case. The record in this case clearly establishes that the use of the subject properties by Complainant meets all three tests for exemption as set forth by the Supreme Court of Missouri in its interpretation of the State’s constitution and statutes. The Hearing Officer did not err in her determinations as challenged by Respondent in Point 1.
Respondent’s Point 2
The second argument raised by Respondent is, likewise, not well taken. Respondent’s argument ignores the plain, uncontested record in these appeals. Finding of Fact No. 8 (Decision, p. 3) is clearly established by the evidence and is controlling on this point. The fact that Alliance Water Resources, Inc. is a for profit corporation is not the question at issue in these appeals. The question at issue is whether a not-for-profit corporation, by the act of hiring a for-profit corporation to manage some of the day-today business, loses its tax exemption under Section 137.100(5), RSMo.
Respondent, in essence, argues that Complainant could not hire any profit making entity to perform services for it. If this were the case, not-for-profit organizations could not exist because they could hire no outside services or, by extension of the argument to the extreme, even pay their employees, for that would be a prohibited benefit to an individual from the operations of an otherwise exempt organization. In other words, under Respondent’s argument, only organizations operated totally by volunteers could be granted tax exempt status. This plainly and simply is not the applicable case law.
The Hearing Officer did not err in her determinations as challenged by Respondent in Point 2.
Respondent’s Point 3
The argument put forth in Point 3 of Respondent’s Application for Review is also unpersuasive. The controlling explanation of the third test set forth in Franciscan Tertiary Province of Missouri, Inc. v. STC, 566 SW2d 216 (S.Ct. 1978) was supplied in the case of Affiliated Medical Transport, Inc. v. STC, 755 SW2d 646 (Mo. App. E.D. 1988). The court stated, “Additionally, the dominate use of the property must benefit society generally or an indefinite number of people.” Affiliated, Id., p. 650.
The provision of a clean and sanitary water system to the citizens of Clinton, Missouri both benefits society in general, as well as an indefinite number of people (any and all people who may have occasion to use water in Clinton). If the city of Clinton did not have a clean, sanitary water system as is provided by Complainant, disease would run rampant in the community. The provision of a public work, such as a water system, which assists in the elimination, eradication and prevention of disease is clearly a benefit to society in general. If Complainant’s water system were not in place, the citizens of Clinton would be required to take steps to put such a system in place. By the very fact that Complainant’s water system is a public work and as such lessens the burden of the government of Clinton, this establishes a benefit to society in general.
The Hearing Officer did not err in her determinations as challenged by Respondent in Point 3.
Respondent’s Point 4
The final point asserted by Respondent is not persuasive for two reasons. Respondent’s argument does not account for the court decisions which have defined the phase “actually and regularly used exclusively,” and Respondent is in error as to the proper definition of charity.
The phrase “actually and regularly used exclusively” has been interpreted and defined in various court decisions. The phrase has reference to the primary and inherent use as opposed to a mere secondary and incidental use. Central States Christian Endeavors Ass’n v. Nelson, 898 S.W.2d 547 (S. Ct., 1995); Missouri United Methodist Retirement Homes v. STC, 522 S.W.2d 745 (S. Ct. 1975); Community Memorial Hospital v. City of Moberly, 422 S.W.2d 290 (S. Ct. 1967). In the present appeals, the primary and inherent (exclusive) use of Complainant’s properties is the providing of a public work (water system) and thereby lessening the burdens of government.
Respondent’s argument based on a definition of charity dependent upon the ability of Complainant’s customers to pay for the services Complainant provides is fallacious and does not follow the law, as set forth in decisions of Missouri Courts. Respondent’s reliance upon Westminister Gerontology Foundation, Inc. v. STC, 522 SW2d 754 (1975) and Paraclete Manor of Kansas City v. STC, 447 SW2d 311 (1969) is misplaced, in light of the Missouri Supreme Court’s decision in Franciscan, supra, pp. 223-224.
In like manner, Cape Retirement Community, Inc. v. Kuehl, 798 SW2d 201 (Mo. App. E.D. 1990) is not applicable to the present appeals. In Cape Retirement it was established that the application procedure of the retirement and nursing facility was structured to avoid providing services to the low-income elderly. Cape Retirement, Id., p. 203. There is nothing in the present record to even remotely suggest, let alone, establish as a fact, that Complainant has an application procedure or a payment structure for its water service which is structure to avoid providing services to low-income persons.
Respondent also seeks support for this line of argument from Callaway Community Hospital Association vs. Craighead, 759 SW2d 253 (Mo. App. W.D. 1988). Callaway only provides support for the Decision of the Hearing Officer. In Callaway, there was no substantial evidence to support a conclusion that the hospital did not treat both rich and poor. Callaway, Id., p. 256. In like manner in the present case, there is no evidence that water services are not provided to rich and poor alike.
Complainant provides what is, for all intents and purposes, a government service. The standard to be applied is that the service is available to all. If the city of Clinton were operating this service it would not be required to keep providing water service to non-paying customers. In like manner in this instance, the test is not whether Complainant will provide water free of cost. Complainant is providing a benefit to all of the citizens of Clinton irrespective of their economic status. In any case, economic status of the beneficiaries of Complainant’s service is not a criterion for determining whether to grant tax exempt status. Not-for-profit activities are not limited solely to the relief of the destitute. Affiliated, supra, p. 651.
The Hearing Officer did not err in her determinations as challenged by Respondent in Point 3.
A review of the record in the present appeals provides support for the determinations made by the Hearing Officer. There is competent and substantial evidence to establish a sufficient foundation for the Decision of the Hearing Officer. A reasonable mind could have conscientiously reached the same result based on a review of the entire record. The Commission finds no basis to support a determination that the Hearing Officer acted in an arbitrary or capricious manner or abused her discretion as the trier of fact and concluder of law in this appeal. Hermel, Inc. v. STC, 564 S.W.2d 888 (Mo. 1978); Black v. Lombardi, 970 S.W.2d 378 (Mo. App. E.D. 1998); Holt v. Clarke, 965 S.W.2d 241 (Mo. App. W.D. 1998); Smith v. Morton, 890 S.W.2d 403 (Mo. App. E.D. 1995). Phelps v. Metropolitan St. Louis Sewer Dist., 598 S.W.2d 163 (Mo. App. E.D. 1980).
The Hearing Officer properly applied the law relating to tax exemption based upon the facts of these appeals.
The Commission upon review of the record and Decision in this appeal, finds no grounds upon which the Decision of the Hearing Officer should be reversed or modified. Accordingly, the Decision is affirmed.
Judicial review of this Order may be had in the manner provided in Sections 138.470 and 536.100 to 536.140, RSMo within thirty days of the date of the mailing of this Order.
SO ORDERED January 28, 2003.
STATE TAX COMMISSION OF MISSOURI
Sam D. Leake, Chairman
Bruce E. Davis, Commissioner
Jennifer Tidwell, Commissioner