Evergreen Aviation & Space Museum v. Dept. of Rev.

No. 1 December 19, 2014 1

IN THE OREGON TAX COURT

REGULAR DIVISION

EVERGREEN AVIATION & SPACE MUSEUM,

and the Captain Michael King Smith

Education Institute,

Plaintiffs,

v.

DEPARTMENT OF REVENUE,

Defendant.

(TC 5129-31)

Plaintiffs (taxpayer) appealed from a Magistrate Division decision as to prop-

erty tax exemption for certain spaces used by taxpayer at its site in Yamhill

County. Taxpayer owns and leases property in Yamhill County (the county) that

is operated generally as a museum relating to air and space equipment, activ-

ity and exploration and related scientific educational activity. The county and

Defendant Department of Revenue (the department) acknowledged that much

of the property was exempt from taxation as being related to scientific activity,

but the department asserted that some of the property for which taxpayer claims

exemption did not qualify for exemption, and also questioned exemption for por-

tions of the land parcels on which the museum and theatre are located. Following

trial, the court found that the department could not in connection with an appeal

by taxpayer assert a counterclaim that, in effect, sought to do what the assessor

never purported to do—disqualify from exemption certain land. The court made

decisions as to other areas involving mixed uses and further ruled that the mat-

ter be continued for consideration of final resolution of outstanding issues.

Trial was held September 11, 2013, in the courtroom of

the Oregon Tax Court, Salem.

Kevin L. Mannix, Attorney at Law, Salem, argued the

cause for Plaintiffs (taxpayer).

Douglas M. Adair, Senior Assistant Attorney General,

Department of Justice, Salem, argued the cause for Defen-

dant Department of Revenue (the department).

Decision rendered December 19, 2014.

HENRY C. BREITHAUPT, Judge.

I. INTRODUCTION

This property tax exemption case is before the court

after trial and post-trial briefing.

2 Evergreen Aviation & Space Museum v. Dept. of Rev.

II. FACTS

Many of the background facts were agreed upon

in a partial stipulation. Plaintiffs (taxpayer) own and lease

property in Yamhill County (the county) that is operated

generally as a museum relating to air and space equipment,

activity and exploration, and related scientific educational

activity.1 The county and Defendant Department of Revenue

(the department) acknowledge that much of the property is

exempt from taxation as being related to scientific activity.

However, the department asserts that some of the

property for which taxpayer claims exemption does not

qualify for exemption. More particular facts are set forth in

the following discussion of each category or item of property

that the department asserts is taxable.

A. Theatre

This space is used primarily to play movies of two

types. The first type of movie can be described as related

to the subjects that form the basis for the conclusion that

most of the museum space is exempt—aeronautics, history

of flight, etc. The other type of movie can more correctly be

described as having an entertainment function unrelated to

flight or science. This borderline can be difficult to establish

completely. For example, the department questions whether

science includes history and suggests that a film about

Lewis and Clark should not be considered related to science.

The court considers the department’s views in this regard to

be too grudging. The boundaries of “science” and “history”

are simply not that well defined. Consider that President

Thomas Jefferson was a man of the Enlightenment and a

movie about the expedition he commissioned might well

touch on matters suggested by this report of the National

Park Service (http://www.nps.gov/nr/travel/lewisandclark/

encounters.htm, last visited Dec 16, 2014):

“Between 1804 and 1806, Lewis and Clark made the first

systematic reports, based on scientific measurement and

observations, of the Missouri River—not only its course,

but its flora and fauna, depth and current, tributaries

1

Taxpayer leases real property in different tax accounts and owns personal

property thereon.

Cite as 22 OTR 1 (2014) 3

and inhabitants. They continued onward to document

their observations in the Rocky Mountains and the Pacific

Northwest. Lewis and Clark described for science at least

120 mammals, birds, reptiles and fish, as well as at least

182 plant species. They made the first attempt at a system-

atic record of the meteorology of the West, and less success-

fully attempted to determine the latitude and longitude of

significant geographical points. These facts set them apart

from other contemporary expeditions, most notably those

of Zebulon Pike, which made no new scientific discoveries.”

That said, there is no question that films having no

connection, even indirect, with the purposes of the museum

are shown in the theatre.

In addition, the theatre was rented out to others.

These included for-profit business operations using the

space for meetings unrelated to the purpose of the museum.

The department has demonstrated in its post-trial submis-

sion, and taxpayer has not rebutted, that the revenue from

rental of the theatre, at least for the 2010 calendar year,

exceeded the amount of revenue generated from showing of

films related to the purpose of the museum.

The department argues that a relative revenue test

be used to determine whether the nonexempt use of the the-

atre space is such as to disqualify the space for exemption

purposes. The court is of the view that an analysis of the

time used for exemption-related movies as compared with

time used for nonexemption-related movies and rentals to

third parties would be the better analysis for purposes of

determining whether any portion of the space is exempt.

After all, revenue may well be indirectly related to the

actual use of space. The use of property, not revenue from

property, is the focus of the statute and case law.

Neither party had the benefit of the court’s view on

the proper approach to the allocation of space in the theatre

as between exempt and nonexempt uses. Accordingly, the

court will continue the case for the purpose of allowing the

parties to consider whether they can agree on a conclusion

as to partial exemption. If they cannot, the matter will be

addressed in a further evidentiary hearing.

4 Evergreen Aviation & Space Museum v. Dept. of Rev.

B. Cafés, Kitchen, and Concession Stand

The café space is used by patrons of the museum,

volunteers who provide services at the museum, and other

visitors. One need not be a museum visitor to enter or use

the café space.

The kitchen area is used for preparation of food for

the café space and also for preparation of food that is catered

to special events that occur on the museum grounds.

The concession stand area is used to sell typical

movie concessions of food and drink items. The area is used

in part for ticket sales to the movie theatre.

The department asserts, and taxpayer does not

deny, that there is no discount element in the pricing of the

items sold in any of these areas. The revenues for the 2011

year for all such activities were approximately $1,025,000.

Of this amount, the catering activity amounted to approx-

imately $195,000. Meals provided to staff or volunteers

amounted to approximately $117,000 in 2011.

The department asserts, and the taxpayer does not

deny, that there is nothing scientific about the activities

carried on in these spaces. Rather, taxpayer contends that

food service is necessary to retain patrons at the museum.

Taxpayer points out that the nearest alternative source of

food is over one mile away and access to that food would

entail leaving the museum grounds. As to both food service

and concessions, taxpayer argues that these items have

become things expected by persons who attend museums or

theatres.2

The department asserts that the argument regard-

ing retaining museum customers on site is not well taken

given the fairly healthy admission prices that would tend to

cause those attending the museum to return from nearby

food service facilities if the museum visit had not been

completed.

2

Taxpayer expressly does not rely on the argument that such spaces are

exempt because the income from these areas and activities goes to support the

concededly exempt portions of the property. Oregon does not allow such consider-

ations in considering exemption. Corp. of Presiding Bishop v. Dept. of Rev., 276 Or

775, 777-78, 556 P2d 685 (1976) (citations omitted).

Cite as 22 OTR 1 (2014) 5

Taxpayer put on witnesses from the management

of the museum regarding their views on why food service

was needed. Taxpayer also put on a witness who has studied

museums and their patrons. This witness talked about what

museum patrons have come to expect in the overall museum

experience. However, even if these witnesses have accu-

rately described the expectations of the public, the expecta-

tions of patrons or potential patrons is not an element that

the Oregon tax statutes consider to be directly relevant on

the question of exemption.3 Such expectations may well out-

distance the decisions of legislators as to what properties

should contribute to the revenues of government and what

properties are exempt.

Case law in this area offers important guidance.

Taxpayer invokes the decision of the Oregon Supreme Court

in YMCA v. Dept. of Rev., 268 Or 633, 522 P2d 464 (1974). In

that case the YMCA maintained at its urban facility a cafe-

teria which served food, at “reasonabl[e]” prices, to persons

staying at the facility, persons using the facility, staff, and

business persons active in the support of the facility. Id. at

635. The cafeteria was also used for job training. Id. at 636.

The court found the cafeteria space to be exempt, observing

that the food service activity implemented the exempt objec-

tives of the YMCA in a substantial way. Id. The court noted

the connection of the meals to the residential activity of the

YMCA, the fact that the food service facilitated the use of

the property for the exempt recreational purposes and the

convenience of the service for supporters of the organization

when they attended meetings on site. Id. The facility was in

the downtown urban area of Portland and other places to

obtain food were obviously present. Id. at 634.

Application of this governing precedent requires

first an identification of the exempt purposes of the tax-

payer. On this score, the department takes a narrow view,

distinguishing the YMCA case in saying “By contrast, a sci-

entific institution is necessarily engaged in ‘scientific work,’

which does not include providing meals.”

3

There was no evidence supplied from anyone who actually has attended the

museum.

6 Evergreen Aviation & Space Museum v. Dept. of Rev.

The department has conceded the exempt status

of most of the property owned or used by taxpayer. That

property does not include laboratories or other places where

“scientific work,” in any strict sense, takes place. The court

therefore finds no basis for the department’s unsupported

conclusion that a scientific institution, or stated differently,

an institution entitled to an exemption under the scien-

tific prong of ORS 307.130, must carry on “scientific work.”4

Rather, exemption is also available for property used to

educate or expose the public to scientific concepts, events,

principles and the application of science to the problems

and opportunities of human life.5 Under the YMCA case,

the question then becomes whether the food service activ-

ity that exists at the museum implements the objectives of

taxpayer in a substantial way. The fact that the activity is

not strictly necessary to the accomplishment of the exempt

objectives is not fatal. Nor is the fact that the food is avail-

able to the general public or that the activity may compete

in some way with taxable properties. These are all teach-

ings of the YMCA case.

Applying these principles, the court concludes that

the food-service-related property is exempt. While it is true

that other food is available nearby, the revenue numbers

indicate that a substantial number of visitors to the museum

make use of the facilities.6 Provision of meals to staff paral-

lels a similar fact in the YMCA case. Here, taxpayer makes

substantial use of volunteer services to accomplish its goals.

Those volunteers are provided meals in the facilities.

It is true that the kitchen facilities are used to

provide catering to outside events. Persons attending

such events are often, if not always, permitted to visit the

museum areas. While the revenues from such activities are

4

The court’s references to the Oregon Revised Statutes (ORS) are to 2011.

5

Indeed, the department in its briefs acknowledges that a combined

educational/scientific use is exempt.

6

The record includes numbers on total revenue, revenue from catering, and

the value of meals provided to volunteers. The record does not appear to identify

how many, if any, patrons of the cafés are member of the public who are not

museum patrons. However, the location of the museum, at some distance from

other food service facilities, supports a conclusion that the number of persons

coming to the cafés solely for food is small.

Cite as 22 OTR 1 (2014) 7

not insignificant they are a relatively small portion of the

overall revenue of the kitchen and café operations. The court

is of the opinion that this use of the kitchens is not such as

to disqualify the kitchen-related property from exemption.7

As to the concession stand for the theatre, no part of

the stand space used for sale of concessions is exempt. This

property is analogous to the barbershop space in the YMCA

case.

C. Gift Shops

The legislature has addressed gift shop property

and allowed exemption in a number of situations. See ORS

307.130(2)(d), (e), and (h). None of those apply here. The leg-

islature has also specifically disallowed exemption in the

case of gift shops in art museums. ORS 307.130(2)(f). For

religious organizations, those portions of property used as a

store or shop are taxable. ORS 307.140(1).

It is clear that the operation of a shop cannot make

the shop property exempt merely because the proceeds of

the shop go to support the activities of a taxpayer. This

court has, however, indicated that a shop might be exempt

if it substantially contributes to the accomplishment of the

exempt purposes of a taxpayer. Mercy Medical Center, Inc. v.

Dept. of Rev., 12 OTR 305, 308-09 (1992). The department

argues that the holding in Mercy Medical should be limited

in its application to hospitals. The court disagrees. The

approach of the court in Mercy Medical was basically the

same as the substantial factor test of the YMCA case, a case

that the department concedes is authority for the decision in

this case.

Some of the inventory in the gift shop seems clearly

related to the goals of taxpayer to introduce and interest

visitors in the science and history of aviation. Models of

planes are the most obvious example. Other items such as

7

Taxpayer’s income statement from 2011 shows $196,496 in catering sales.

Total café food sales for that year were $1,023,090.23. Special events include

weddings, birthday parties, dances, receptions, business meetings, and wine fes-

tivals. Special event customers “may rent all or portions of the museums, the

theatre, and the grounds, and the Museum offers catering for most functions.”

Some events were public, whereas others were private.

8 Evergreen Aviation & Space Museum v. Dept. of Rev.

items with the logo of a related business, general merchan-

dise, items of clothing clearly directed at visitors to Oregon

and garden and housewares are unrelated to the exempt

purposes of the museum. The evidence relied upon by the

department demonstrates that the sale of items related to

the purpose of the museum are a small fraction of the total

sales of the shop. The gift shop space does not meet the sub-

stantial factor test.

D. Classrooms 213 and 214 and Mezzanine

The department objects to exemption for these

spaces on the grounds that they are primarily rented out to

third-party users. The department acknowledges that such

rental does not occur in only one location of the buildings. It

also requests that all personal property used for such out-

side group rentals be found to be nonexempt. The depart-

ment’s basis for objection is an analysis of revenues from

outside rentals and a record of usage that the author testi-

fied was not accurate.

Taxpayer presented testimony of credible witnesses

that the primary use of these spaces was for educational

programs and usage related to the purpose of the museum.

The court concludes that taxpayer has borne its

burden of proof as to the building space usage. However, the

department position as to personal property used in connec-

tion with rental of space to third parties is sustained.

E. Land-Exemption Issues

The department questions exemption for portions

of the land parcels on which the museum and theatre are

located. Some of the area is subject to concessions by the

department in this case that are to be given effect. In addi-

tion, however, taxpayer argues that a stipulation entered

into in the Magistrate Division proceedings should be bind-

ing on the department in this division.

The stipulation in question did not purport to

bind the parties at all levels of litigation in this court.

Accordingly, the de novo characteristic of a trial in this divi-

sion requires that the stipulation entered into at the level

of the Magistrate Division be given no effect unless both

Cite as 22 OTR 1 (2014) 9

parties agree that it should be given effect. Dept. of Rev. v.

Guardian Management Corp., 16 OTR 17, 20 (2002).

Nor are taxpayer’s arguments relating to preclusive

effect of a different decision of the magistrate persuasive.

That case involved different property and different issues

from those present here.

However, as to tax lot 601, the initial action of the

assessor was to notify taxpayer that all of the land was

exempt (not the conclusion or action of the assessor as to

tax lot 600). It is the assessor, and not the department, who

is charged with making this decision. Therefore, the court

concludes that no appeal as to that land has been taken as

there was no adverse action to appeal.

The opinion of the court is that the department may

not in connection with an appeal by taxpayer assert a coun-

terclaim that, in effect, seeks to do what the assessor never

purported to do—that is, disqualify from exemption certain

land.8 While it is true that taxpayer did not raise this issue

in connection with opposition to the motion seeking leave to

amend and add a counterclaim, the court views this mat-

ter as in the nature of a question of subject matter jurisdic-

tion that can and must be raised by the court. This tax lot

appears to include the driveway or access road about which

other arguments, now moot, have been made.

As to tax lot 600, the position of the department is

that the land adjacent to the museum, with the exception of

an “arrow” shaped parcel on this tax lot, is not used for the

purposes of the museum and must therefore be considered

nonexempt. Taxpayer responds that this land helps to cre-

ate a campus atmosphere that is related to the purposes of

the museum. Taxpayer also argues that a berm area should

be exempt as it is required by land use regulations and that

the road leading to the museum is necessary to the opera-

tion of the museum.

The court is of the view that while a campus atmo-

sphere may be desirable, that alone is not sufficient to

8

This situation differs from certain matters that by statute may be raised

by an assessor or the department even when the initial decision of the assessor

was not objectionable to the taxpayer. Cf. ORS 305.287.

10 Evergreen Aviation & Space Museum v. Dept. of Rev.

support exemption. With respect to the berm area, the posi-

tion of taxpayer in its Urban Growth Boundary Amendment

application was inconsistent with the position now argued.

The court is of the opinion that the berm area is not quali-

fied for exemption. Other land not covered by stipulations in

this division of the court and extending beyond the footprint

of the generally exempt improvements is taxable, except for

such a border portion as may be agreed upon by the parties

and, absent such agreement, by further trial proceedings

as to what a typical border for such a building is. As to land

beneath structures on tax lot 600, a portion is exempt equal

to the relative square footage of exempt use and square foot-

age of nonexempt use as determined in this opinion.

F. Parking

There are a significant number of parking spaces

adjacent to the museum and theatre building. Taxpayer

claims the benefit of ORS 307.130(2)(b), an apparently broad

grant of exemption for parking on property owned or being

purchased by exempt organizations. The department cor-

rectly observes that because the property in question is

being leased by the museum, ORS 307.130(2) does not apply.

Taxpayer points out that ORS 307.112 also can

serve as a basis for exemption and the court accepts this

position. The remaining question is whether some allocation

of exempt and nonexempt space is needed as the record indi-

cates that some use of parking spaces is made by employees

of a for-profit organization that makes use of the theatre

building.

The court is of the opinion that an allocation is

required and should be done on the basis of the ratio of space

occupied by the for-profit entity and otherwise found to be

nonexempt (such as the space in the theatre allocated to

nonexempt use by reason of display of nonexempt movies) as

compared with the total space in the museum and theatre

properties.

G. Basement Area

Taxpayer claims that it has been surprised by the

post-trial assertion that a basement area in the theatre

building is not exempt. It appears to the court that, given

Cite as 22 OTR 1 (2014) 11

the assessor’s actions in expressing exemption conclusions

as a percentage of the total improvements, specification was

needed in connection with the trial. That occurred as to

most of the spaces. It appears not to have occurred as to the

basement area.

The court is of the opinion that unless the parties

are able to come to agreement as to this space, the matter

should be the subject of further brief proceedings, to be cou-

pled with any other matters that the court has indicated in

this opinion should go to hearing if the parties are not able

to reach an agreed upon solution.

III. CONCLUSION

This matter is continued for consideration by the

parties of final resolution of outstanding issues, further

hearing if necessary on outstanding issues. The court under-

stands that the parties reached a framework of agreement

as to personal property and expects a report as to the out-

come of applying that framework and the necessity of any

further proceedings in that regard. Now, therefore,

IT IS THE DECISION OF THIS COURT that this

matter is continued for consideration by the parties of final

resolution of outstanding issues, further hearing if neces-

sary on outstanding issues.