Present: All the Justices 

THE MARINER'S MUSEUM, ET AL. 

 OPINION BY JUSTICE A. CHRISTIAN COMPTON 

v. Record No. 970833 January 9, 1998 

CITY OF NEWPORT NEWS 

 FROM THE CIRCUIT COURT OF THE CITY OF NEWPORT NEWS 

W. Park Lemmond, Jr., Judge Designate 

 This is an appeal from a judgment in an action for relief 

from alleged erroneous assessment of local taxes. The central 

issue is whether a charitable corporation, eligible for an 

exemption from real estate taxes, forfeits that exemption when it 

leases realty to another charitable corporation and the lease is 

"a source of revenue or profit" to the lessor under Code § 58.1-

3603(A). 

 In July 1994, appellants The Mariner's Museum and Riverside 

Healthcare Association, Inc., filed against appellee City of 

Newport News an application, pursuant to Code § 58.1-3984, for 

relief from erroneous tax assessment. The plaintiffs asserted 

they are nonstock, nonprofit corporations exempt from taxation. 

They also asserted the Museum owns real estate located in the 

City that is leased to Riverside, which occupies and uses the 

property exclusively as a hospital conducted not for profit. 

 The plaintiffs alleged that the City erroneously has 

assessed the Museum for real estate taxes and that Riverside (the 

Hospital) has paid the taxes on behalf of itself and the Museum 

under protest. They asked the court to enter an order declaring 

the tax assessment erroneous, invalid, and illegal, and 
- 2 - 

exonerating the plaintiffs from any liability for payment of the 

taxes. They also sought a refund in the amount of approximately 

$2.8 million with interest. 

 Responding, the City denied the plaintiffs are entitled to 

the relief sought. It asserted "that the aforesaid real estate 

is leased or was otherwise a source of substantial revenue or 

profit" to the Museum and, accordingly, it is liable to taxation 

pursuant to Code § 58.1-3603. 

 The parties entered into a stipulation of facts and 

submitted the case to the trial court on issues of law. 

Following argument of counsel, the court, in a letter opinion, 

denied the plaintiffs' application for relief. The plaintiffs 

appeal from the February 1997 final order adjudicating that the 

taxes in issue had not been erroneously assessed. 

 According to the stipulation, the Museum was organized in 

1930 to operate, in what is now the City of Newport News, "a 

museum and library pertaining to nautical subjects" and 

"otherwise to advance learning, the arts and sciences relating to 

or bearing on water craft, the marine and marine navigation." 

The Museum is owner of a substantial amount of realty located on 

the east and west sides of Warwick Boulevard in the City, and has 

leased a part of the property on the east side to the Hospital 

and its predecessor corporation. The plaintiffs are exempt from 

taxation of their income pursuant to the federal Internal Revenue 

Code. 
- 3 - 

 Since February 1963, a medical center known as Riverside 

Hospital has been operated on the land leased from the Museum. 

The Hospital always has been conducted not for profit and 

exclusively as a charity. All buildings, parking lots, and 

related structures are used by the Hospital for charitable, 

literary, scientific, or educational purposes. 

 Over the years, the Hospital has expanded existing 

structures, constructed additional buildings, and leased more 

property from the Museum as its hospital operations have grown. 

In September 1989, the Museum and Hospital entered into a lease 

superseding all prior leases. In 1990 and 1993, construction of 

additional hospital facilities was completed on the leased 

property. 

 The September 1989 lease covers about 36 acres and is for a 

term ending on December 31, 2061. It provides that the Hospital 

is leasing the property "for the purpose of conducting its 

medical facilities and such other allied purposes." 

 The total rent for the 72-year term is $5 million, with $2 

million to be paid upon execution of the lease, $2 million in 

January 1990, and $1 million in January 1991. These sums were 

paid in a timely fashion. 

 In an April 1994 letter, the City's Chief Assessor notified 

the Museum that "it has been determined that the land that was 

the subject of the 1989 lease is no longer exempt from taxation 

pursuant to the provisions of" Code § 58.1-3603. Prior to April 
- 4 - 

1994, no effort had been made by the City to assess real estate 

taxes against any land covered by the several leases between the 

parties. The letter enclosed "the assessment for the current tax 

year and the three (3) most recent tax years." This action 

ensued. 

 Settled principles applicable here should be reviewed. The 

general policy in the Commonwealth is to tax all property. See

Va. Const. art. X, § 1. But the Constitution creates certain 

exemptions, see id. § 6(a), and authorizes the General Assembly 

to establish others. See id. § 6(b). And, the legislature is 

permitted to restrict or condition, in whole or in part, but not 

extend, any or all of the exemptions created in the Constitution. 

Id. § 6(c). 

 Furthermore, the Constitution provides that all exemptions 

shall be strictly construed against the taxpayer. Id. § 6(f). 

"Under this rule, exemption from taxation is the exception, and 

any doubt is resolved against the one claiming the exemption." 

DKM Richmond Assocs. v. City of Richmond, 249 Va. 401, 407, 457 

S.E.2d 76, 80 (1995). The burden is upon the taxpayer to 

establish that it comes within the terms of the exemption. Id.

 The Constitution authorizes the General Assembly to exempt 

from taxation property used by its owner for charitable, 

historical, benevolent, or cultural purposes "subject to such 

restrictions and conditions as may be prescribed." Art. X, § 

6(a)(6). 
- 5 - 

 The General Assembly implemented the foregoing 

constitutional provisions in Title 58.1, Chapter 36, of the Code. 

 "Property of any nonprofit corporation organized to establish 

and maintain a museum" is exempt by classification from taxation. 

 Code § 58.1-3606(A)(8). 

 However, § 58.1-3603, the main focus of this appeal, 

restricts exemptions under certain circumstances. The statute 

provided at the time of this dispute that: "Whenever any 

building or land, or part thereof, exempt from taxation pursuant 

to this chapter . . . is leased or is otherwise a source of 

revenue or profit, all of such buildings and land shall be liable 

to taxation as other land and buildings in the same county, city 

or town." § 58.1-3603(A) (1991 Repl. Vol.). The statute further 

provided: "In assessing any building and the land it occupies 

pursuant to subsection A, the assessing officer shall only assess 

for taxation that portion of the property subject to any such 

lease or otherwise a source of profit or revenue . . . ." 

§ 58.1-3603(B) (1991 Repl. Vol.) (statute amended in part by Acts 

1996, ch. 534). 

 On appeal, the plaintiffs claim that the trial court 

"reached its decision that the subject property was not exempt 

from taxation based solely on the provisions of Section 58.1-

3603." The plaintiffs note the court concluded that the payment 

of $5 million as consideration for the 1989 lease constituted 

"revenue or profit" within the meaning of the statute and that 
- 6 - 

the property therefore was not exempt. 

 Continuing, the plaintiffs argue that the decision below 

was reached "without regard for" certain provisions of the 

Constitution of Virginia "as it existed both before and after its 

amendment in 1971, other provisions of the Code of Virginia which 

deal with the subject of tax exempt property, and a decision by 

this Court which is on all fours with the case at bar." 

Concluding, the plaintiffs contend the judgment of the trial 

court "was contrary to the law and the evidence and should be 

reversed." We disagree. 

 The existence of the 1989 lease between the Museum and the 

Hospital has been stipulated. However, the mere existence of a 

lease will not work a forfeiture of the exempt status that the 

leased property may otherwise enjoy. Board of Supervisors of 

Wythe County v. Medical Group Found., Inc., 204 Va. 807, 812, 134 

S.E.2d 258, 262 (1964). Rather, the lease must generate a 

"substantial" net revenue or profit before the exemption is 

forfeited. See City of Newport News v. Warwick County, 159 Va. 

571, 593-94, 166 S.E. 570, 578 (1932). 

 In the present case, as the trial court found, the 1989 

lease generated a substantial net revenue or profit. The lease 

yielded $5 million in revenue for the Museum during the first 16 

months of its term. 

 Under the lease, the Museum incurs no expenses for the 

leased property. For example, Section Eight of the lease 
- 7 - 

provides: "It is the intent of the parties that the Lessee is to 

pay all charges and expenses of every nature that may be imposed 

upon the Premises and its appurtenances in any manner during the 

term of this Lease and that may arise during the term of this 

Lease from the use and/or misuse of the Premises in any manner." 

 Therefore, we hold that the Museum's receipt of a 

substantial net revenue or profit from the lease to the Hospital 

renders the otherwise exempt property taxable under § 58.1-3603. 

 The plaintiffs rely heavily upon the Wythe County case, 

which, they say, "is on all fours with the case at bar." That 

case is not controlling. Actually, it supports the trial court's 

ruling in this case. 

 In Wythe County, decided under § 183 of the 1902 

Constitution, before adoption of the current 1971 Constitution, 

the Court considered a real estate tax exemption involving a 

lease between two charitable corporations. The first issue was 

whether the realty owned by one charitable corporation and leased 

by it to another charitable corporation to be operated as a 

hospital, exclusively as a charity, was property "belonging to" 

the lessee within the meaning of a constitutional and statutory 

provision, so as to affect the tax exempt status of the property. 

 204 Va. at 808, 134 S.E.2d at 259. The "belonging to" phrase 

now appears in Code § 58.1-3606(A)(5). 

 The term of the lease was 15 years, with a right of 

renewal, at a monthly rental of $2,400. The rent was an amount 
- 8 - 

that the lessor anticipated would be required to curtail a 

$100,000 loan, obtained to fund construction of the hospital 

building, and to meet expenses of equipping the hospital. Id. at 

809, 134 S.E.2d at 259. The lessee encountered financial 

difficulties and the lessor wrote off some of the amounts due it 

under the lease, refinanced the loan, and negotiated a new 15-

year lease at a monthly rental of $2,500, the amount needed to 

amortize the refinanced mortgage. Id., 134 S.E.2d at 260. 

 This Court held that the subject property "belonged to" the 

lessee, "so long as it has the exclusive right to its possession 

under the lease," id. at 812, 134 S.E.2d at 261-62, and hence was 

qualified for exemption. 

 The first issue in Wythe County, of course, is not 

presented in this case; the City always has conceded that, but 

for the 1989 lease and the application of the provisions of Code 

§ 58.1-3603, all the Museum's property would qualify for 

exemption. 

 The second issue addressed in Wythe County, however, is 

presented here. The Board of Supervisors contended that, even if 

the hospital property were exempt, the exemption was lost by 

virtue of the leases. The Board relied on a paragraph in § 183 

of the 1902 Constitution providing that exempted real estate 

shall be liable to taxation whenever it "shall be leased or shall 

otherwise be a source of revenue or profit." 204 Va. at 812, 134 

S.E.2d at 262. Similar language now appears in Code § 58.1-3603 
- 9 - 

("a source of revenue or profit, whether by lease or otherwise"). 

 Focusing on the renegotiated lease, we held it did not 

affect the tax exempt status of the hospital property. The Court 

reasoned that the rent the lessee agreed to pay tended 

"immediately and directly to promote the objects and purposes for 

which the [lessor] was chartered. Indeed, the amount to be 

received by the [lessor] under the lease was to pay on the loan 

secured by the property in order to prevent a foreclosure and 

assure the continued existence of hospital facilities. Thus the 

lease . . . was not a source of revenue or profit." Id. at 813, 

134 S.E.2d at 262. 

 The Wythe County facts are not present here. Unlike the 

lessor in Wythe County, the Museum, as we have said, does realize 

substantial net revenue or profit from the lease. Indeed, 

implicit in Wythe County is the conclusion that, but for the fact 

the revenue received by the lessor was "incidental," not 

substantial, the property would have been taxable. Id. at 814, 

134 S.E.2d at 263. 

 Additionally, there is no evidence that the $5 million rent 

tended "immediately and directly to promote the objects and 

purposes" for which the Museum was chartered. Certainly, one may 

assume that any funds received by a museum will promote its 

charitable purposes, a fact not in evidence here. But that makes 

no difference because the Museum no longer uses its leased 

property for museum purposes; it leases the land as a means of 
- 10 - 

generating substantial net revenue or profit. It is the use to 

which property is put, not the use to which profits that are 

realized from such property are put, that determines whether the 

property shall be exempt. Commonwealth v. Trustees of Hampton 

Normal and Agric. Inst., 106 Va. 614, 621-22, 56 S.E. 594, 597 

(1907). See County of Hanover v. Trustees of Randolph-Macon 

College, 203 Va. 613, 617, 125 S.E.2d 812, 815 (1962). This 

principle applies even though, as here, the lessee of an exempt 

owner also enjoys a tax exempt status. See Commonwealth, 106 Va. 

at 621, 56 S.E. at 598. 

 The remaining issues raised by the plaintiffs merit only 

brief comment. They point to a "grandfather clause" in the 1971 

Constitution, which provides "that all property exempt from 

taxation on the effective date of this section shall continue to 

be exempt until otherwise provided by the General Assembly as 

herein set forth." Va. Const. art. X, § 6(f). See Code § 58.1-

3606(B) (certain property exempt on July 1, 1971 shall continue 

to be exempt under rules of statutory construction applicable to 

exempt property prior to such date). 

 The plaintiffs argue the "subject property was clearly 

exempt on July 1, 1971," the effective date of the present 

Constitution, and the property "has continued to be exempt until 

the present time pursuant to the current Constitutional and 

statutory provisions." We do not agree. 

 This contention assumes the property was exempt in 1971, a 
- 11 - 

conclusion that is questionable given the evidence in this case. 

 And, the property was not rendered exempt merely because the 

City did not tax the property prior to the assessments in issue 

here. 

 Even assuming the property was exempt in 1971, however, the 

Museum is not eligible for protection under the grandfather 

clause. The execution of the 1989 lease was a defining and 

controlling event that operated as a forfeiture under Code 

§ 58.1-3603. Property exempt under a 1971 grandfather clause 

does not remain perpetually exempt regardless of post-1971 

actions by the property owner. 

 Finally, we reject the plaintiffs' contention that the 

subject property is exempt under portions of Code § 58.1-3203, 

which deals with taxation of leasehold interests. This case does 

not involve leasehold taxes. Therefore, the statute is 

inapplicable. 

 Consequently, we hold that the plaintiffs failed to carry 

their burden to show they qualify for the tax exemption, that the 

City properly imposed the taxes upon the Museum, and that the 

trial court did not err in denying the plaintiffs' application 

for relief. Thus, the judgment below will be 

 Affirmed.