CASE 38. — ACTION BY COMMONWEALTH BY AUDITOR’S AGENT AGAINST THE TRUSTEES OF HAMILTON COLLEGE FOR TAXES.

April 16.

#### Commonwealth v. Trustees Hamilton College

Appeal from Fayette Circuit' Court.

Watts Parker, Circuit Judge.

Judgment for defendant. Plaintiff appeals.

Affirmed.

Taxation — Educational Institutions — Leased Property — Const, sec. 170, exempts from taxation, property of educational institutions not used or employed for private gain, but the income of which is devoted solely to the cause of education. Held that the words “private gain” had reference only to the gain of the person, corporation, or stockholders owning the property, and hence college property was not rendered liable for taxation, because the trustees leased it to a person who maintained a school therein for a profit, the rentals derived by the trustees being wholly applied to the cause of education.

HAWKINS & WILLIAMSON for Appellant.

SYNOPOSIS AND AUTHORITIES CITED.

1. Taxation is the rule, exemption the exception. (Ky. Constitution 174).

*3302. All acts, general or special, granting immunity from taxation are to be strictly construed against the grantee. (6 Ky. Law Rep., 495 and 773; 12 Ky. Law Rep., 398).

3. The grant must be supported by the consideration of public service, and unless the legislature may lawfully aid by appropriation, it cannot grant exemption. (Ky. Constitution 3 and 189; Cooley on Taxation, p. 148; 6 Ky. Law Rep., 775; Philadelphia v. Overseers Public Schools, 29 L. R. A., 600).

4. The use, not the ownership is the determinate factor. (66' S.W., 32).

5. The property of an eleemosynary institution is exempt from taxation, even though it be rented out for commercial purposes, provided^ the income derived is used to support the institution as such in its work, but where the institution itself is leased and used by another for gain its eleemosynary character is lest and its property becomes the subject of taxation. (State ex rel Hammer v. Magurn, 86 S. W., 138 (Mo: and Ky. Statutes, compared).

MAT WALTON and C. J. BRONSTON for Appellee.

SYNOPSIS.

1. The charter of Hamilton College, admitted by consent as evidence in this proceeding, shows that it is an educational institution not “used or employed for gain by a corporation, and the income of which is devoted solely to the cause of education.”

2. The “agreed statement of facts” shows that no dividends were ever declared on its Capital Stock by appellee and that none of its officers or stockholders ever received any personal profit from the rental or other revenue derived from said school or property, and that all of said rents and revenues have been used during its entire history in paying the interest on its mortgage debt and for maintaining the College and for the repairs and betterment of its property.

3. The words “private gain” as used in the Constitution has reference to gain by the corporation, or some personal profit to the stockholder, and not gain by a lessee and, if the facts show .that the entire income was used purely for educational purposes, it is exempt from taxation.

AUTHORITIES CITED.

Section 170, Constitution of Kentucky, sec. 51, Constitution. *331cf Kentucky; section 37, Third Constitution of Kentucky; Ky. Female Orphan School v. City of Louisville and .Ky. Female Orphan School v. Bell, Sheriff, 19 Ky. Law Rep., 1091; City of Louisville v. Southern Baptist Theological Seminary, and the Southern Baptist Theological ■ Seminary v. Claggett, Sheriff, 19 Ky. Law Rep., 1100; City of Louisville, etc. v. Board of Trustees of Nazareth, Literary and Benevolent Institutions; Same v. St. Xavier’s College; Commonwealth, etc. v. St. Mary’s College; same v. Loretta, Literary and Benevolent Institution; Board of Education ofi the Common School District No. 1 of Pike county v. Trustees of the Pikeville Collegiate Institute, 19 Ky. Law Rep., pages 1102, etc.; Henderson v. McCullough, 89 Ky., 448; Commonwealth, hy etc., v. Gray, Trustee, 25 Ky. Law Rep., page 52; Commonwealth hy, etc. v. Pollitt, 25 Ky. Law Rep., 790; Wathen et al v. City of Louisville, S. W. Rept. page 1195; Kentucky Statutes, section 4026; German Gymnastic Association .v City of Louisville, *SO*S. W. Rept., 201; Louisville College of Pharmacy v. City of Louisville, 82 S. W. Rept., 610; Commonwealth hy, etc. v. Young Men’s Christian Association & The City of Louisville v. the Young Men’s Christian Association, 25 Ky. Law Rep., 940; Vanderbilt University v. Chaney, 94 S. W. Rept., 90; section 879, article 8, Kentucky Statutes).

Opinion op the Court by

John D. Carroll, Commissioner

Affirming.

This is an effort hy the commonwealth, through its auditor’s agents, to tax the property of Hamilton College for the years 1898 to 1902, inclusive, it being conceded that the property thus sought to bn taxed was not assessed or taxed for the years named. The appellee claims that it is exempt from taxation under section 170 of the Constitution, providing in part that “there shall be exempt from taxation * ** **institutions of education not used or employed for gain by any person or corporation, and the income of which is devoted solely to the cause of education.” The following agreed state of facts is filed with the record: “It is agreed between the parties hereto that the following .facts are to be taken as true in the *332consideration of this ease: That during the years-1898, 1899, 1900, 1901, 1902, and on the 15th day of each of said years, the property under consideration, which is sought to be assessed for taxation, was run by Prof. B. C. Hagerman at a yearly rental of $-, and that during said years, and on the 15th day of each of said years, and during the months of January and June, inclusive, of the year 1903, the said Hagerman conducted said school as a private enterprise, and that he secured therefrom a personal pecuniary profit over and above the rental paid to said corporation, which profit was used by him for his own personal benefit.” It was further agreed that during the years mentioned, and for many years prior thereto, “Hamilton College has never declared any dividend on its capital stock, and that no one of its officers or stockholders as such has ever received any personal profit from the rental or other funds or revenues derived from said school or property, and that all said rents or revenues have -used in paying interest on the mortgage debt, and maintaining the school known as Hamilton College, and for the repairs and betterment of said college property;” and that during said years a majority of the stock in the college was owned by the Kentucky University, which is purely an educational institution, not used or employed for gain by any person or corporation, its income being devoted solely to the cause of education.”

Appellant bases its right to tax this institution for the years mentioned upon the theory that during those years it was leased to a private individual, who conducted it as a private school, and made for his own benefit a pecuniary profit therefrom over and above the amount of rental paid to the trustees of the college. It is therefore argued that during those years *333Hamilton College was not “an institution of education not used or employed for gain by any person or corporation;” but, on the contrary, was used and enjoyed by an individual who made profit therefrom for his private and personal gain. And it is said that if educational property used in this manner can be exempted from taxation, that all the private schools and educational institutions in the State now being operated for private gain, and hence subject to taxation, will become incorporated institutions and lease their property to same favored person, the stockholders not deriving from the lease any benefit, but securing by the arrangement, exemption of the property from taxation. For appellee it is said, and the agreed statement of facts show, that no dividend was ever declared on the capital stock of the college, and. that none of its officers or stockholders ever received any personal profit from the rental or other revenue derived from the property, and that all the rents or revenues received were used in paying interest on its debts, and for the maintaining and repairing the property, thereby devoting them to the cause of. education. The words “private gain,” as used in the Constitution, have reference to gain by the person, corporation, or its stockholders who own the property, and not a lessee.

The constitutional test of exemption from taxation depends, not upon the question whether some lessee of the property makes a profit as a result of his efforts, but whether or not any person or corporation who owns or has a pecuniary or financial interes 1 in the educational institution, derives from it any private gain. An institution of education not used or employed for gain by any person or corporation owning, holding, or controlling the property, and the income *334of which, when received by them is devoted to the cause of education, will be exempt from taxation, although the person or corporation who does own it may lease the property to an individual who derives some private gain or profit from the arrangement. If the owner of a private school now subject to taxation should organize a corporation under an arrangement by which the corporation or its stockholders should not receive any profit from the property or the conduct of the institution, but should rent the property to the person who owned it before the corporation was formed, permitting him to make and receive the income, we would have no hesitation in holding that a scheme or device of this character would not be permitted to exempt the property from taxation. .But, in the ease before us, the arrangement or contract under which the property is leased or managed is free from any suspicion that it was made either to escape taxation or to result in private gain to the real owners of the property. If the trustees of Hamilton College during the years mentioned had not leased the property to Hagerman, but managed and controlled it themselves, it is conceded that it would be exempt from taxation; and the mere fact that it was in good faith, and not with any purpose of obtaining exemption., leased to him during this period, will not affect its status under the revenue laws of the State, or result in causing the property to be assessed for taxation.

The Constitution does not mean that no person connected with an educational institution shall not receive private gain. This interpretation would result in nullifying completely the constitutional provision allowing exemptions to educational institutions; because there are persons connected with every edu*335cational institution in the State in some capacity or other who receive from it private gain, such as principals, teachers, and employes. But, so long as the institution is not used or employed for gain by any person or corporation or the stockholders of any corporation who own it, and the income derived from it is devoted solely to the cause of education, it will be exempted, although other persons may derive gain and profit from its conduct and operation. This construction of the Constitution is in entire harmony with the rulings of this court upon this question. Trustees of Female Orphans’ School v. City of Louisville, 100 Ky. 470, 36 S. W. 921, 19 Ky. Law Rep. 1091, 40 L. R. A. 119; City of Louisville v. Southern Baptist Theol. Sem., 100 Ky. 506, 19 Ky. Law Rep. 110, 36 S. W. 995; Comth. v. Gray, 25 Ky. Law Rep. 52, 74 S. W. 702, 115 Ky. 665; Comth. v. Pollit, 76 S. W. 412, 25 Ky. Law Rep. 790; Commonwealth v. Y. M. C. A., 76 S. W. 522, 25 Ky. Law Rep. 940, 116 Ky. 711, 105 Am. St. Rep. 234; German Gym. Ass’n v. City of Louisville, 80 S. W. 201, 25 Ky. Law Rep. 2105, 117 Ky. 958, 65 L. R. A. 120, 111 Am. St. Rep. 287; City of Louisville v. Werne, 80 S. *W.*224, 25 Ky. Law Rep. 2196; Louisville College of Pharmacy v. City of Louisville, 82 S. W. 610, 26 Ky. Law Rep. 825. From these various decisions it may be gathered that it is the purpose of the State under its tax laws to deal liberally with and foster and encourage all charitable and educational institutions when their conduct and operation does not result in private gain to the persons or corporations or the stockholders therein that own them; and when all the income derived from educational institutions is devoted solely to the cause of education. But the spirit in which this exemption from the bur*336dens of taxation is allowed cannot be trifled wtb or evaded by any scheme or device that might defeat the purpose of the exemption, and enable persons owning or having an interest in the institution to reap some private gain or profit from its conduct.

The judgment of the lower court' is affirmed.