WISDOM FISHING CAMP, INC. v. Coop
v.
Billy Joe COOP, in his Official Capacity as the Clinton County Property Administrator; the Clinton County Board of Assessment Appeals; Donald R. Neal, Robbie Davis, Eddie K. Stearnes, and Jim Elmore in their official capacity as members of the Clinton County Board of Assessment Appeals; and the Kentucky Board of Tax Appeals, Appelees.
Court of Appeals of Kentucky.
Bruce F. Clark, David M. Stout, Frankfort, Kentucky, Briefs for Appellant.
Wanda Albertson White, Albany, Kentucky, Brief for Appellees.
Before: COMBS, Chief Judge; DIXON, Judge; and BUCKINGHAM,[1] Senior Judge.
Not to be Published
OPINION
DIXON, Judge.
Appellant, Wisdom Fishing Camp, Inc., appeals from an order of the Clinton Circuit Court granting summary judgment in favor of Appellees regarding a property tax assessment sought to be imposed by Clinton County and the Kentucky Department of Revenue.
Wisdom is located on Dale Hollow Lake in Clinton County, Kentucky, and includes a fishing camp and full service marina. All but eight acres of the real property upon which the business is located is leased from the federal government through the United States Corps of Engineers, by lease dated July 30, 1992. Pursuant to the lease terms, Wisdom pays to the federal government a percentage of its total gross receipts each year. Since 1992, Wisdom has added substantial improvements to the property, including rental cabins, floating docks, as well as other floating structures.
On July 20, 2007, Wisdom received a Notice of Property Owner Assessment from the Clinton County PVA, assessing Wisdom's improvements and structures for the purpose of state and local property taxation. The assessment of $2,300,000 resulted in a state and local tax liability of approximately $16,000. Wisdom thereafter appealed the assessment to the Clinton County Board of Assessment Appeals claiming that either (1) the subject property should be considered a constituent of the federal leasehold interest, or (2) the PILOT payments related to the property should be credited against any tax liability. On September 17, 2007, the Board ruled that it did not have jurisdiction to decide the matter. Wisdom thereafter appealed to the Kentucky Board of Tax Appeals, who likewise determined that it did not have jurisdiction.
On January 23, 2008, Wisdom filed an action in the Clinton Circuit Court seeking a ruling on all tax issues involved. The parties thereafter filed motions for summary judgment. On January 30, 2009, the trial court granted summary judgment in favor of Appellees, finding that Wisdom's property did not constitute "federal property" as provided in KRS 132.195, and thus was not exempt from state and local taxation. This appeal ensued.
On appeal, Wisdom argues that the trial court erred in granting summary judgment against it because (1) the Supremacy Clause, Article VI of the United States Constitution, exempts the federal land leased by Wisdom from state taxation and (2) its leasehold interest, including the improvements, are exempt from state and local property taxes pursuant to KRS 132.195(2)(b).
Summary judgment serves to terminate litigation when there is no issue of material fact and the moving party is entitled to summary judgment as a matter of law. CR 56. On a motion for summary judgment, the trial court must view the evidence in the light most favorable to the nonmoving party, and summary judgment should be granted only if it appears impossible that the nonmoving party will be able to produce evidence at trial warranting a judgment in his favor. Steelvest, Inc. v. Scansteel Service Center, Inc., 807 S.W.2d 476, 480 (Ky. 1991). Summary judgment "is only proper where the movant shows that the adverse party could not prevail under any circumstances." Id. (Citing Paintsville Hospital. Co. v. Rose, 683 S.W.2d 255 (Ky. 1985)).
The standard of review on appeal when a trial court grants a motion for summary judgment is "whether the trial court correctly found that there were no genuine issues as to any material fact and that the moving party was entitled to judgment as a matter of law." Scifres v. Kraft, 916 S.W.2d 779, 781 (Ky.App. 1996). Because summary judgment involves only legal questions in the absence of any disputed material issues of fact, an appellate court need not defer to the trial court's decision and will review the issue de novo. Lewis v. B & R Corporation., 56 S.W.3d 432, 436 (Ky.App. 2001) (internal footnotes and citations omitted). See also Goldsmith v. Allied Building. Components, Inc., 833 S.W.2d 378, 381 (Ky. 1992).
Wisdom correctly points out that under the Supremacy Clause, Article VI of the United States Constitution, federal property is exempt from state taxation. This exemption was initially recognized in the seminal case of M'Culloch v. Maryland, 17 U.S. 316, 432 (1 Wheat) (1819), wherein the United States Supreme Court held,
If the States may tax one instrument, employed by the government in the execution of its powers, they may tax any and every other instrument. . . . [T]hey may tax all the means employed by the government, to an excess which would defeat all the ends of government. This was not intended by the American people. They did not design to make their government dependent on the states.
However, Congress, recognizing that the Supremacy Clause created a void in the revenue streams of states and counties where a significant amount of federal property is located, has passed statutory provisions, such as 33 U.S.C. § 701c-3, that require the federal government to pay the states for the loss in tax revenue through "payments in lieu of taxes," otherwise known as PILOT payments. Herein, the federal government has sent a PILOT payment to Kentucky representing 75% of the amount paid by Wisdom to the federal government under the lease each year. In 2007, Wisdom paid $50,000 to the federal government under the lease and, in return, the federal government made a PILOT payment to Kentucky of approximately $37,500.
Wisdom argues that since the federally-owned real property upon which its business is located is exempt from state and local taxation, all of the structures and improvements thereon are exempt as well. Wisdom relies upon KRS 132.195, which provides in relevant part:
(1) When any real or personal property which for any reason is exempt from taxation is leased or possession otherwise transferred to a natural person, association, partnership, or corporation in connection with a business conducted for profit, the leasehold or other interest in the property shall be subject to state and local taxation at the rate applicable to real or personal property levied by each taxing jurisdiction.
(2) Subsection (1) of this section shall not apply to interests in:
...
(b) Federal property for which payments are made in lieu of taxes in amounts equivalent to taxes which might otherwise be lawfully assessed . . . .
Thus, to qualify for an exemption under KRS 132.195, the burden is on the lessee to demonstrate that (1) the leasehold interest is in federal property; (2) PILOT payments were made on behalf of said property; and (3) the PILOT payments were equivalent to taxes that could have otherwise been lawfully assessed.
It is Wisdom's position that its lease with the federal government is not merely a lease of land, but rather that the federal government is the equitable owner of all improvements located on property. Citing to Kentucky Tax Commission v. Jefferson Motel, Inc., 387 S.W.2d 293 (Ky. 1965), and Hobart Manufacturing Company v. Kentucky Board of Tax Appeals, 515 S.W.2d 232 (Ky. 1974), Wisdom argues that its improvements must be included as a component of its federal leasehold interest and thus exempt from state and local taxation.
In its order granting summary judgment, the trial court concluded that although PILOT payments equivalent to what could have been otherwise assessed were, in fact, made, the property sought to be taxed did not constitute "federal property" as set forth in KRS 132.195:
The threshold question to be utilized in determining this property's exempt status is whether or not it qualifies as "federal property." Clearly, the land itself is federal property although it is being leased to Wisdom. However, state and local taxes in question were levied on Wisdom's improvements to the federal land, not on the federal land itself. The improvements in question legally belong to Wisdom. Because of this, Wisdom must show that the United States is the "equitable owner" of this property in order to qualify as "federal property" under KRS 132.195(2)(b). This Court rules that this burden has not been attained.
...
[T]his Court does not believe Wisdom has proven the federal government to be the equitable owner of the property in question. This court is of the opinion that rather than being of legal assistance to Wisdom, Section 13[2] operates to its detriment. By the terms of most lease agreements, the lessee is responsible for the removal of any additions to the property within a reasonable amount of time or said additions become a component of the property, and thus belong to the lessor. Additionally, in this case, most of the additions are in the form of floating property, meaning they could be removed from the federal land with relative ease upon any termination of the lease.
There is additional support of this proposition within the four corners of the lease document. The lease sets forth that all structures and equipment furnished by the Lessee shall be and remain the property of the Lessee. (Section 5c). The lease further differentiates between the structures and improvements belonging to the Lessee as opposed to the structures and improvements on the land already belonging to the federal government. (Section 12b). The subject property in this case surely falls under the ambit of improvements to the land.
Of significant importance is the language found in Section 16 of the lease. Section 16 provides as follows: "Payment of any and all taxes imposed by the state or political subdivisions upon the property or business of the Lessee on the premises is the responsibility of the Lessee." This Court concludes that this provision of the lease document encompasses the state and local taxes imposed on Wisdom in the present situation. This paragraph, alone, without additional evidence, would likely be dispositive of the taxation issue subjudice as it relates to KRS 132.195(2)(b).
In the case relied upon by Wisdom, Hobart Manufacturing Company v. Kentucky Board of Tax Appeals, the City of Mount Sterling, Kentucky, leased a tract of municipal land to Hobart Manufacturing Company in 1966. The city issued revenue bonds that provided funds to construct buildings and make improvements on the leased tract. The lease specified that title to the leased premises remained in the city and upon termination of the lease, the city would become the owner of all buildings and improvements unless Hobart exercised its option to purchase the land and improvements thereon. In 1972, following the construction of additional improvements to the property, the Montgomery County Property Evaluation Administrator assessed tax liability upon the improvements at $933,441. Hobart appealed the assessment and the matter eventually reached our then-highest court. In holding that the improvements were not subject to ad valorem taxation, the Court cited to its prior opinion in Kentucky Tax Commission v. Jefferson Motel, Inc, which "made it clear that leasehold improvements (as distinguished from a leasehold interest) were not the proper subject of ad valorem taxation." Hobart, 515 S.W.2d at 234.
In distinguishing Hobart, the trial court herein noted that Hobart concerned leasehold improvements made by a lessee at its expense to buildings constructed with funds provided by the city on land leased from the city. The trial court further explained:
In Hobart, the issue dealt exclusively with municipal property leased to a private entity. There was no mention of the holding extending to . . . federal property. . . . Further the Hobart opinion makes no mention of the terms of the lease from which Hobart Manufacturing Company leased municipal land from Mount Sterling. In the present case, the tax liability is fleshed out within the four corners of the lease document itself.
Under [KRS 132.195(2)(b), in order for certain property to be exempt from state and local taxation, it must qualify as "federal property for which payments are made in lieu of taxes in amounts equivalent to taxes which might otherwise be lawfully assessed." In order for Wisdom's improvements to fall under the penumbra set forth, it would be necessary for the federal government to be the equitable owner of those improvements. . . . [B]ased on many of the provisions of the lease, Wisdom was the equitable owner of the improvements made to the federal land. Therefore the improvements are not exempt from ad valorem taxation.
In examining the four corners of the lease document entered into by Wisdom and the United States, Section 16 states as follows: "Payment of any and all taxes imposed by the state or its political subdivisions upon the property or business of the Lessee on the premises is the responsibility of the Lessee." In plain language, within the lease document itself, Wisdom agreed to any tax liability to the state of Kentucky or its political subdivisions. Further, in Section 12b, the lease differentiates between the structures and improvements belonging to the Lessee as opposed to the structures and improvements already on the property. These two provisions work hand in hand to assure that any tax liability stemming from improvements made by Wisdom to the land in question would be their responsibility.
Kentucky law is clear that tax exemptions are disfavored and will be narrowly or strictly construed, with all doubts resolved against the exemption's application, and with the burden placed on the party claiming the exemption to show the party's entitlement to it. Popplewell's Alligator Dock No. 1, Inc. v. Revenue Cabinet, 133 S.W.3d 456, 461 (Ky. 2004); Camera Center, Inc. v. Revenue Cabinet, 34 S.W.3d 39, 41 (Ky. 2000); Revenue Cabinet v. Hubbard, 37 S.W.3d 717, 719 (Ky. 2000). Furthermore, contrary to Wisdom's interpretation, Hobart and Jefferson Motel, Inc. establish that a privately owned leasehold interest in real estate owned by a tax exempt entity is subject to taxation if it has a fair cash value. As noted by our Supreme Court in Kentucky Department of Revenue v. Hobart Manufacturing Company, 549 S.W.2d 297, 299-300 (Ky. 1977)[3]:
To put the problem in its simplest perspective, fee simple title to real estate and the improvements thereon is no more than a bundle of all of the rights one could have in and to the property. The result of the sifting process, which is required in this peculiar class of cases, is the tax-exempt lessor pays no ad valorem tax on those rights which it retains but the non-exempt lessee must pay ad valorem tax on those rights which it obtains. The rights conferred by the lease being a part of the bundle of total rights in and to a parcel of realty and not otherwise listed for taxation, the leasehold is taxable as real estate at its fair cash value.
We agree with the trial court that the lease herein controls whether or not Wisdom's property is tax exempt. The lease clearly delineates the federal government's property from that owned by Wisdom, thus distinguishing this case from those cited by Wisdom. Under the plain language of the lease terms, we cannot conclude that the government is the equitable owner of Wisdom's property. Therefore, we agree with the trial court that Wisdom's improvements do not constitute part of the federal leasehold interest and, as a result, are subject to state and local taxation.
The order of the Clinton Circuit Court granting summary judgment in favor of Appellees is affirmed.
All Concur.
[1] Senior Judge David C. Buckingham sitting as Special Judge by assignment of the Chief Justice pursuant to Section 110(5)(b) of the Kentucky Constitution and Kentucky Revised Statute (KRS) 21,580.
[2] Section 13 provides that upon termination of the lease, if Wisdom does not remove the property, it shall become the property of the United States or, in the alternative, can be removed by the District Engineer, leaving no remedy for collection of damages for said removal.
[3] This decision is the second appeal following the remand to the circuit court in the earlier Hobart case cited herein.
