Gables Realty Limited Partnership v. Travis Central Appraisal District

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-01-00651-CV

Gables Realty Limited Partnership, Appellant

v.

Travis Central Appraisal District, Appellee

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 201ST JUDICIAL DISTRICT

NO. 99-09733, HONORABLE LORA J. LIVINGSTON, JUDGE PRESIDING

The question presented by this appeal is whether, under section 25.07 of the Texas

Tax Code, state-owned property remains tax exempt after it is leased "for compensation to a private

business enterprise . . . for a purpose not related to the performance of" state duties and functions.

See Tex. Tax Code Ann. §§ 11.11 (d), 25.07(a) (West 2002). Gables Realty sued the Travis Central

Appraisal District seeking a reduction of the ad valorem taxes assessed on two tracts of land it leased

from the State. Appealing from an adverse ruling, Gables Realty asserts that, even though it uses

the properties for non-public purposes, the properties are tax exempt in the hands of their owners;

therefore, pursuant to section 25.07, Gables Realty should properly be taxed only on the value of the

leasehold estate, not the fee simple estate. We hold that Gables Realty's private commercial use of

the property vitiates the state owner's prior tax exempt status; therefore, section 25.07 does not

provide Gables Realty the relief it seeks. We affirm the district court's judgment.

The Controversy

Gables Realty constructed and operates apartment complexes on two leased tracts of

land--one owned by The University of Texas, the other by Austin State Hospital. (1) The University

property is subject to a fifty-year lease and the Hospital property to a seventy-year lease. (2) The lease

terms on both properties provide that Gables Realty is obligated to pay any ad valorem taxes assessed

on the properties and, upon termination of the leases, all improvements revert free and clear to the

respective landowners. Because the Appraisal District's tax rolls list the land and the improvements

separately, Gables Realty is responsible for two separate assessments. Only the land appraisals are

at issue in this appeal.

The Appraisal District listed both land accounts in each of the fee owner's respective

names and assessed taxes based on the lands' fee simple market value. Gables Realty protested the

appraisal value, contending that the land should be listed in its name, not the owners', and appraised

at the market value of the leasehold estates, not the market value of the fee simple estate. The

Appraisal District's Review Board denied Gables Realty's protest. Gables Realty subsequently filed

suit in the district court, where both parties moved for partial summary judgment. Gables Realty's

motion asserted that, based on Tax Code sections 25.07 and 23.13, the land accounts were tax

exempt properties in the hands of their respective owners and, as such, in the hands of Gables Realty,

the property should be assessed only at the market value of its leasehold estates. The Appraisal

District's motion sought a determination that, because Gables Realty uses the properties for private

commercial purposes, neither the University's nor the Hospital's property is exempt from taxation;

thus, fair market value on the fee simple estate represents the appropriate appraisal value. The trial

court granted the Appraisal District's motion, denied Gables Realty's motion, and signed an order

of severance, thereby making the summary judgment final and appealable. It is from that judgment

that Gables Realty now appeals.

DISCUSSION

The parties do not dispute the facts material to this case. Consequently, the propriety

of summary judgment is a question of law and we review the district court's decision de novo . See

Natividad v. Alexsis, Inc. , 875 S.W.2d 695, 699 (Tex. 1994); Nixon v. Mr. Prop. Mgmt. Co. , 690

S.W.2d 546, 548-49 (Tex. 1985). Where both parties file a motion for summary judgment, and one

is granted and one is denied, we determine all questions presented and render such judgment as the

trial court should have rendered. See Commissioners Court v. Agan , 940 S.W.2d 77, 80 (Tex. 1997).

The section at the heart of this dispute, Tax Code section 25.07, provides in pertinent

part:

[A] leasehold or other possessory interest in real property that is exempt from

taxation to the owner of the estate or interest encumbered by the possessory interest

shall be listed in the name of the owner of the possessory interest if the duration of

the interest may be at least one year.

Tex. Tax Code Ann. § 25.07 (a). The parties stipulated for summary judgment purposes that, prior

to Gables Realty's lease agreements, the properties were tax exempt in the hands of their respective

owners. The parties disagree, however, on the tax consequences of Gables Realty's use of the

property after executing the lease agreements. Gables Realty contends that the property remains

exempt even though the lease agreements permit Gables Realty to use the properties for a non-public

purpose. The Appraisal District argues that, at all times, the use to which the property is put

determines whether it is tax exempt. Because the land is now being used for a commercial, non-public purpose, the Appraisal District contends that the property is not exempt in the hands of its

owners.

As a preliminary matter, Gables Realty asserts that "[t]his is not an exemption case."

At oral argument, Gables Realty urged that this could not be an exemption case because the Tax

Code provides for no de facto exemptions. It further argued that, because it is only attempting to

reduce its tax appraisal, as opposed to claiming entitlement to an exemption provision, it is merely

asserting its right to contest the Appraisal District's tax assessment. The Appraisal District responds

that this is an exemption case because section 25.07 applies only if the leased property is tax exempt

to the owner and that, unless we first determine whether the property is exempt, we cannot reach

Gables Realty's further issue concerning the applicability of section 25.07. Whether we characterize

the issue as one involving an exemption determines who bears the burden of proving its application.

Statutes imposing a tax must be strictly construed against the taxing authority and liberally construed

in favor of the taxpayer. See Upjohn Co. v. Rylander , 38 S.W.3d 600, 606 (Tex. App.--Austin

2000, pet. denied). Exemptions, on the other hand, are matters of legislative "grace." See

Commissioner v. Sullivan , 356 U.S. 27, 28 (1958). "[T]o promote uniformity and equality in

taxation, we construe tax exemptions--and provisions tantamount to tax exemptions--strictly

against the taxpayer and in favor of the taxing authority." (3) Texas Utils. Elec. Co. v. Sharp , 962

S.W.2d 723, 726 (Tex. App.--Austin 1998, pet. denied); accord Bullock v. National Bancshares

Corp. , 584 S.W.2d 268, 271-72 (Tex. 1979).

The issue here is whether Gables Realty is entitled to the tax consequences afforded

by section 25.07. (4) Gables Realty cites no authority in which a statute providing for a favorable tax

assessment by its terms has been treated as an imposition of a tax rather than an exemption from the

tax. Instead, Gables Realty contends that, because section 25.07 pertains to listing and valuing

leasehold interests, it is merely trying to avail itself of a favorable tax assessment, not a tax

exemption. We disagree. Although it is true that Gables Realty did not apply for a tax exemption

on its own behalf, the provisions on which it relies require us to construe the Tax Code to make an

initial determination of whether the state-owned property remains exempt after Gables Realty's

leases. Whether the property is exempt in the first instance, and if so, the extent to which Gables

Realty benefits from our construction of the exemption provisions, is primarily a challenge to the

taxing authority's application of the Tax Code not, as Gables Realty contends, a challenge of the

taxing authority's valuation of the property. Because the nature of the disputed provisions concerns

matters of public policy and statutory interpretation, we believe this case cannot readily be classified

as a simple assessment challenge; to do so would ignore the interrelationship of the various Tax

Code sections. Under the facts of this case, we conclude that the application of section 11.11 in the

context of leaseholds is "tantamount" to an exemption and must be strictly construed in the taxing

authority's favor. See Texas Utils. Elec. Co. , 962 S.W.2d at 726 (holding that a deduction

authorizing provision was "tantamount" to an exemption).

In further construing these statutes, we are mindful of the rules of statutory

construction. One of the cardinal rules is that we must ascertain and give effect to the Legislature's

intent of the provision we are construing. See Fleming Foods of Tex. v. Rylander , 6 S.W.3d 278, 284

(Tex.1999); Union Bankers Ins. Co. v. Shelton , 889 S.W.2d 278, 280 (Tex. 1994); Calvert v. Texas

Pipe Line Co. , 517 S.W.2d 777, 780 (Tex. 1974). The Legislature's intent should be determined by

reading the language used in the particular statute and construing the Act in its entirety. See In re

Bay Area Citizens Against Lawsuit Abuse , 982 S.W.2d 371, 380 (Tex. 1998); Taylor v. Firemen's

& Policemen's Civil Serv. Comm'n , 616 S.W.2d 187, 190 (Tex. 1981). Further, we should read

every word, phrase, and expression in a statute as if it were deliberately chosen, and presume the

words excluded from the statute are done so purposefully. See City of Austin v. Quick , 930 S.W.2d

678, 687 (Tex. App.--Austin 1996), aff'd , 7 S.W.3d 109 (Tex. 1999) (citing Cameron v. Terrell &

Garrett, Inc. , 618 S.W.2d 535, 540 (Tex. 1981)); State v. Evangelical Lutheran Good Samaritan

Soc'y , 981 S.W.2d 509, 511 (Tex. App.--Austin 1998, no pet.); see also 2A Norman J. Singer,

Sutherland Statutory Construction § 47.25 (6th ed. 2000) (stating that there is generally an inference

that omissions in a statute are intentional).

The supreme court cautions that, in construing statutes:

Courts must take statutes as they find them. . . . They should search out carefully the

intendment of a statute, giving full effect to all of its terms. But they must find its

intent in its language and not elsewhere. . . . They are not responsible for omissions

in legislation. They are responsible for a true and fair interpretation of the written

law.

RepublicBank Dallas, N.A. v. Interkal, Inc. , 691 S.W.2d 605, 607 (Tex. 1985) (quoting Simmons v.

Arnim , 220 S.W. 66, 70 (1920)). Because canons of statutory construction may be cited to support

conflicting interpretations of a disputed statute, we look to "the good sense of the situation and a

simple construction of the available language to achieve that sense, by tenable means, out of the

statutory language." Karl N. Llewellyn, Remarks on the Theory of Appellate Decision and the Rules

or Canons About How Statutes are to be Construed , 3 Vand. L. Rev. 395 , 401 (1950).

We continue our analysis, then, with an examination of the language of section 25.07.

While section 25.07 specifies that, so long as the property is exempt in the hands of its owner, a

lessee should only be taxed on its possessory interest, i.e. , the leasehold estate, it is silent regarding

how to ascertain whether the property "is exempt from taxation to the owner of the estate." Tex. Tax

Code Ann. § 25.07 (a). Examining the Tax Code, however, it is clear that in a case involving state-owned property, the Legislature intended the provisions of Chapter 11, entitled Taxable Property and

Exemptions, to govern the determination of whether state-owned property is exempt in the first

instance. See id. §§ 11.11(a), (d), 25.07(a).

In Texas, property owned by the State "that is not used for public purposes is

taxable." Id. § 11.11(a). Section 11.11(d) specifically addresses the situation here: "[I]f the

property is . . . leased for compensation to a private business enterprise" and used for a purpose not

related to the owner's functions or duties as an entity of the State, then the property is not exempt.

Id. § 11.11(d). The language used by the Legislature in section 11.11(d) is clear and unequivocal:

property owned by the State but not used for public purposes is taxable to its owner. Id. § 11.01(d).

Gables Realty contends that, under section 25.07, "the tax-exempt status of the owner

must be determined before a lease is entered; that is, without consideration of any lease in place."

This is so, according to Gables Realty, because any private commercial lease would automatically

negate the State's tax-exempt status and render section 25.07 a nullity for state leases. The Appraisal

District responds that, because state property is exempt only if used for a public purpose, Gables

Realty's argument impermissibly ignores the lessee's use of the property. Reading section 25.07 as

Gables Realty urges would require us to ignore the plain language of section 11.11(d). See

Evangelical Lutheran Good Samaritan Soc'y , 981 S.W.2d at 511 (recognizing that each section must

be construed in the context of the entire statutory scheme). Had the Legislature intended for the

owner's tax-exempt status to be determined without regard to the lessee's use of the property, it

could easily have done so. Further, to accept Gables Realty's reading of section 25.07, we would

have to presume that the Legislature intended to include language that is conspicuously absent,

namely, that section 25.07 applies without regard to section 11.11. The rules of statutory

interpretation countenance against such a construction. See Quick , 930 S.W.2d at 687 (stating "every

word excluded from a statute must be presumed to have been excluded for a purpose"). Giving full

effect to section 11.11(d), we cannot say that the Legislature intended section 25.07 to apply without

first considering the lessee's private commercial use of the property.

The resolution of this appeal requires us to determine whether Gables Realty's state-leased property is exempt under section 11.11 so that section 25.07 becomes operative; therefore,

we must strictly construe the exemption provision and the situations to which it applies. In so doing,

we reject Gables Realty's construction which would permit property that is leased for a non-public

purpose to retain its tax-exempt classification, even though the same property would be taxed if used

by its owner in an identical manner. Such a result cannot be proper. If we interpret section 25.07

as Gables Realty requests, then we are effectively bestowing upon a private commercial lessee using

state land for non-public purposes a more favorable tax status than that available to the state entity

from which it leased the property. We are unaware of any authority that would permit us to reach

such a result. See Tex. Const. art. VIII, § 1(a) ("Taxation shall be equal and uniform."). Rather, the

Tax Code ensures that land that is exempt to the State will become taxable at its full fee value to any

lessee putting the land to private commercial use. (5) See Tex. Tax. Code Ann. § 11.11 .

Even if we assume this is not an exemption case and instead construe section 25.07

in Gables Realty's favor, based on the case law, we cannot say we would reach a different result.

Texas law requires all property to be taxed unless it is exempt. See Tex. Const. art. VIII, § 1. To

be exempt, however, "[i]t is essential . . . that the property be used for public purposes." Leander

Indep. Sch. Dist. v. Cedar Park Water Supply Corp. , 479 S.W.2d 908, 912 (Tex. 1972). Here, there

is no dispute that the lands are not used for public purposes. When property taxes are assessed, the

law generally taxes the property owner on the value of the fee estate, regardless of whether the land

is leased to another party. See Tex. Tax Code Ann. § 25.06 ("Except as provided by Section 25.07,

property encumbered by a leasehold . . . shall be listed in the name of the owner of the property so

encumbered."); Martin v. City of Mesquite , 590 S.W.2d 793, 798 (Tex. Civ. App.--Dallas 1979, writ

ref'd n.r.e.). Section 25.07 is an exception to the general rule that leasehold interests are typically

subsumed and taxed as part of a fee estate; thus, only when the fee estate is exempt from taxation

does section 25.07 become operative to authorize taxation of the leasehold estate. Tex. Tax Code

Ann. § 25.07 ; see also Martin , 590 S.W.2d at 798 . In this manner, the constitutional directive that

all non-exempt property be taxed is complied with--if property is not exempt and leased, the lease

is subsumed by the fee estate; if the property is leased and the fee remains exempt, the non-exempt

leasehold becomes the taxable estate. See County of Dallas Collector v. Roman Catholic Diocese

of Dallas , 41 S.W.3d 739, 744 (Tex. App.--Dallas 2001, no pet.) ("Unless the leasehold involves

exempt property, the leasehold is not independently taxed, but rather, it is subsumed within the value

of the fee simple estate."); see also Op. Tex. Att'y Gen. No. JM-59 (1983) (determining whether

state park's concession rights were tax exempt).

Gables Realty argues that our decision in University Christian Church v. City of

Austin , 789 S.W.2d 361 (Tex. App.--Austin 1990, no writ), "necessarily recognized the application

of . . . section 25.07 to a situation like the case at bar." We disagree. In that case, University

Christian Church owned two parking lots across the street from its sanctuary building, near The

University of Texas at Austin campus. Id. at 361 . The church entered into a commercial parking

venture with Allright Parking of Austin, Inc., whereby Allright paid the church a minimum monthly

rental plus a percentage of gross receipts. Id. On remand from the supreme court, we determined

that the evidence was factually sufficient to support the jury's verdict that the parking lots were not

exempt. Id. at 363 . In upholding the jury verdict, we commented, "The evidence shows that

Allright's lease has not significantly altered the actual use of the lots, except to the extent that there

is now a profit made from that use." Id. at 365 . We went on to "note that [the taxing authority]

could tax Allright's leasehold estate instead of the church's property interest." Id.

Gables Realty seizes upon this language and offers it as support for its position.

Christian Church , however, is distinguishable. In that case, the issue before this Court involved a

jury verdict for delinquent taxes. Because we did no analysis regarding the application of sections

23.13 and 25.07, any statement regarding the taxing authority ability to tax the leasehold interest was

dictum . Further, in that case, it was clear that Allright's use of the property did not differ

significantly from the church's. Here, the property is being put to an entirely different use--a private

non-public use. Because the very issue presented in this case turns on the changed use of the

property, Christian Church does not apply.

Thus, we hold that whether state property is exempt in the hands of its owner under

section 25.07 must be determined by applying section 11.11, taking full account of the lessee's use

of the property. (6) Because Gables Realty uses the leased properties for private commercial use, the

State's lands are not exempt from taxation, thereby precluding application of section 25.07.

Accordingly, we overrule Gables Realty's first issue. Because this issue is dispositive of the appeal,

we do not address Gables Realty's remaining issues. See Tex. R. App. P. 47.1.

CONCLUSION

Having concluded that section 25.07 is inapplicable to the facts of this case, we

overrule Gables Realty's issues on appeal and affirm the judgment of the district court.

Jan P. Patterson, Justice

Before Justices Kidd, Patterson and Puryear

Affirmed

Filed: May 31, 2002

Publish

1. The parties' briefs refer to the Austin State Hospital property as the Texas Department of

Mental Health and Mental Retardation property; however, Gables Realty's first amended original

petition and the Appraisal District's tax records reflect that the actual ownership interest in the

property is listed in Austin State Hospital's name. We refer to the property as it appears in the

Appraisal District's records.

2. The Hospital property is actually being subleased from West 38th Street, Ltd., a Texas

limited partnership, which is leasing the property from the Department of Mental Health and Mental

Retardation for a term of seventy-five years.

3. We apply a contrary rule only if doubt about the applicability of a tax remains after we

employ the dominant rules of statutory construction. In that circumstance, we resolve ambiguities

in favor of the taxpayer. See Calvert v. Texas Pipe Line Co. , 517 S.W.2d 777, 781 (Tex. 1974);

Wilburn v. State , 824 S.W.2d 755, 760 (Tex. App.--Austin 1992, no writ). Gables Realty does not

dispute that its business is subject to taxation.

4. The issue of the leasehold's market value is not before this Court.

5. That section 25.07 may have very limited application is consistent with the well-settled law

that leasehold estates are rarely taxed because they are typically subsumed within the assessment on

the fee estate. See Daugherty v. Thompson , 9 S.W. 99, 101 (Tex. 1888) (recognizing that property

exempted from taxation to its owner generally remains exempt while used for the purposes on

account of which the exemption is given, but becomes subject to taxation if used for a purpose which

does not itself give the exemption); County of Dallas Tax Collector v. Roman Catholic Diocese of

Dallas , 41 S.W.3d 739, 744 (Tex. App.--Dallas 2001, no pet.).

6. Our conclusion does not mean that a party in Gables Realty's situation will always be

burdened by a tax appraisal based on the full value of the fee estate. Courts recognize that, due to

the contractual nature of lease agreements, often "the ultimate tax burden is left to the process of

bargaining between the parties." Martin v. City of Mesquite , 590 S.W.2d 793, 798 (Tex. Civ.

App.--Dallas 1979, writ ref'd n.r.e.). While parties are free to challenge tax assessments in court,

they may also protect themselves by negotiating favorable contract terms. To be sure, a lessee does

not automatically waive its rights under the Tax Code by agreeing to be responsible for the owner's

taxes. Instead, as here, where a party believes that it is being wrongly taxed, it may file suit for a

judicial determination of its rights.