-. .-.. ._

Hon. William Schneider, Jr. opinion No. V-1399 county Attorney Gillespie County Re: Taxability of Fredericksburg, Texas leasehold es-

I- tate of tenant -, ~. of an independ-

‘-~-ent school disDear Sir: tri.ct

.

You have requested the opinion of this office as to the taxability of the leasehold estate -of a tenant of the Fredericksburg Independent -------+hool-District., ~Thecertified copy of the lease

“contract which you enclosed with your’request shows that the lease is for a primary term of fifty years.

Article 7173, V.C.S., provides:

“Property held under a lease for a term of ‘three years or more, or held under a contract for the purchase thereof, belonging to this State, or that is exemptby law from taxation in the hands of the owner thereof, shall be considered -for all the purposes of taxation, as the
-,,_-------property of the person so holding the

same d except as otherwise specially provide by law.

. . .e Your specific question is stated as follows:

“In construing Article 7173, is the '\ estate of the tenantacquired under the lease contract with Fredericksburg Inde: ‘, pendent School District subject to rendltion and taxation as a leasehold estate?” While the Legislature could subject leasehold Interests in nonexempt property to taxation if It in this State the owner of the freehold of nonexempt so chose, under the present scheme of taxation in force property is liable for taxes on the entire value of theI



## 86 HoneWilliam Schneider, Jr., page 2 (v-1399)

property, even though it is under lease.’ T r”~x.h$~096 Taxation iec:66

D q 71 Tex. 192 9 S.W. 99 (1888) leasehold inEerest in the propeity in question to be taxable, it must comewithin the provisions of Artitle 7173. If this property is “exemp~tby law from taxation in the hands of the owner’thereofe and if the Legislature has the power to tax a leasehold interest in the property it would follow that the estate of the tenant wou d be taxable. It maybe I noted that the courts construe Article 7173 as authorizing the assessment of the property against the lessee not%t the value of the freehold but only at the -value of the leasehold’ estate. Dauphertv v. Thomuson, sunra. The property involved is a block of land located In the town of Fredericksburg. Originally designated and dedicated by the GermanImmigration .Companyas public property for educational purposes, .this property has been under the control of the ~Fredericksburg Independent School District since its incorporation in 1885. The school di.strictls title to the property was confirmed by a district court judg- .ment rendered in 1920.

Thelease contract shows that theRederL&sburg Independent School District has leased the land to an individual for a primary term of fifty years, iktyles~see agreeing to erect a building on the prop-

. Thelessee is to pay a stipulased monthly rental for a period of fifty years. rental is to be determined by a rental hereafter, the committee appointed in a manner set out in ~thecontract, the tenant having the privilege of surrendering the lease if the rental is not satisfactory to him. You state in your letter that the lessee has erected an office building on the premises.

It is evident that the school district is nowusing the property In question to produce revenue. The facts which have been submitted to us .suggest that the school board has abandoned any plans which mayhave been formulated in the past to use the property as a school site; however, the present intention of the board in this regard presents a fact question whi c h.this office does not have the authority to decide. 1us0, weare not here passing on the liabilityHon. William Schneider, Jr., page 3 (V-1399)

of the lessee for taxes on the improvements which he has placed on the land, since that question likewise depends upon the intention and agreement of the parties respecting title to the improvements. Edwards v. Thannisch, 254 S.W. 523 (Tex. ~. **CIV. ’**  Ap,. 1923); Ropers V. Fort Worth Poultrv % gg @. , 1i5 S.W.2d 165 (Tex. Civ. App. 1945). If t?tle to the building has presently vested’in the school district, the building would be taxable in the same way as the land. Onthe other hand, if it remains the property of the lessee during the existence of Fk,“,i;;se,, he’would be liable ‘as owner for taxes

. Independent school districts are empowered by statute to receive conveyances of property

“for the benefit of the public schools,” and their power of ownership Is not limited to property actually used as school sites. Art. 2756, V.C.S.; Adamsv. Miles, 35 S.W.2d 123 (Tex. Comm.App. 1931); Hushes v. Gladewater County Line Indenendent School &g&., 124 Tex. 190, 76 S.W.2d 471 (1934). Cf. Art. 2773a, V.C.S. It is clear, therefore, that the ownership and use of this property by the school district for a purpose other than as a school e..t;$; authorized by the statutes of this State. opinion we shall assume that the revenue derived” from property belonging to a school district becomes a part of the local funds of the district and must be used for school purposes in accordance with the provisions of Article 2827 V.C.S. In any event, you have informed us that the rent from this property Is being deposited to the local funds of the district and is being expended under the provisions of Article

- 28.27. The Constitution of Texas contains two provisions relating to the exemption of public property from taxation. Section 9of Article XI provides:

_

“The property of counties, cities and towns, ownedand held only for public purposes,, such as public uildings and the sites therefor. WQ Fire engines and the furniture thereof, and all property used, or intended for extinguishing fires, public grounds and all other property devoted exclusively to 

## 8%‘~ ’

## ‘88 Bon. William Schneider, Jr., page 4 

### (V-1399) ,

the use and benefit of the public shall be exempt from forced sale and from taxation, provided, nothing herein shall prevent the enforcement of the vendors lien, the mechanics or'builders lien, or other liens now stisting." ,This provision of the Constitution is selfexecuting and accords an absolute exemption to property coming within its terms. A. &M. Consolidateq v. Citv of Brvan 143 Tex. In m &Trust co., 144 Tex. 326, 190 S.W.2d 48 (1945), it was held that the Lower Colorado River Authority was a governmental agency serving a public purpose and that its property was exemut from taxation under Section 9 of Article XI. Onthe authority of that case and State v. City of SanAntonio, 

### 147Tex. 1, 209 S.W.2d 

### 756(1948) this .-office held in Att*y Gen. Op. 

### v-1308(195l) th&llthe exemption accorded ~bythis constitutional~provision extends to the property of any governmental agency which is devoted exclusively to the public use" and that the property of an independent school district .~..nsedas a public school site was thereby exempt from all forms of taxation, including spe,cial assessments for improvements.

Court In pauffhertv v. Thompson, m, the Supreme held that the Legislature does not have the power to impose a tax upon a leasehold estate in property which is exempt under this constitutional provision, whether imposed on the owner or the lessee. This deci-

--“sion has been followed in Davis v. 

### 13S.W. 

### 61 (X390), and Rurnett, 

### 77Tex. 

### 3, &Cattl C v. hoard, a0Tex. 489, It n”,ceZI sarilp follows that if Article XI, Section 9 exempts the property in question from taxation in the hands of the school district, the leasehold estate likewise is exempt. paushertu v. Thomnsoginvolved county school lands alloted to co'lpties under Article VII, Section 

### 6 of the Constitution. Whilettze&&sin thepresentinquiry

JJ Under a constitutional amendmentadopted in 1926, agricultural and grazing lands which counties ownas school lands are nowtaxable, except for State purposes to the sameextent as lands privately owned. Tex. Consc Art. VII, Sec. 6a. .,Hon. William Schneider, Jr., page 5 

### (V-1399).

mayappear at first blush to be analogous to those in the pauehertv case, wehave reached the conclusion that the character of county school lands held under grant from the State .is different from that of lands held by an independent school district for the production of revenue., In that case the court observed that even in the absence of the provision in Article XI, Section 9, "looking to the policy which this state has steadily pursued in granting lands to counties for educational purposes, it could not veil be he1 that the legislature intended by Article 4691 R.S. 1879, nowArt. 

### 7173, 2 R.C.S. 1929 to impose a tax on school lands owned by counties even whenleased; for taxes levied on such lands, while owned by counties, whether imposed on the counties or their lessee would but diminish 'the rental value of such lands, which it is not reasonable to suppose was intended whenthe sole purpose for which such liberal donations were madewas to furnish the counties with a school fund."

While independent school districts are empowered to o+.nland for the purpose of producing income, this method of raising revenue is extraneous to the established means of support of their schools. .Independent school districts in the main derive their support from the State Available School Fundar.4 sther appropriations of State moneys, from the County Available School Fund (income from the permanent fund created under Article VII, Section 

### 6of the Conctitu--/ tion), and from local taxatioil. It is only in isolated and sporadic instances that school districts derive even a small part of their revenue from income on property which they own. The considerations of policy in the exemption of county school lands do not support a similar exemption for income-producing pro,-- erty of independent school districts. Weconclude that Daunhertv v. Thomcson is not compelling authority for holding that the property in question is exempt from taxation. Consequently, wemust makean independent determination of whether this property is lldevoted exclusively to the use and benefit of the public.1t

The second constitutional provision relating to exemption of public property is Section 2 of Article / VIII, Constitution of Texas, which provides, in part:

'1. *

. the legislature may, by general law's, exempt from taxation public property

--Iion. IEl.liam Schneid~er, Jr., page ,6 0I-139)

used for public pnrpose~s; actual plac.es or ,@ religious worship, also any property owned by a church or'by a strictly religious society for ~th.sexclusive 'use as a dwelling'place for th~eministry of such church or religious soc~iety, Andy which yields no 'revenue whatever to such church or religious society; provided that such exemption shall not extend to more property than is reasonably necessary for a dwelling place and .inno event more thau one acre of laud; places of burial not held for private or corporate profit; all buildings~used exclusively and ownedby persons or associations of persons for school purposes and the necessary furniture of all schools andproperty used exclusively andreasonably necessary In conducting any association engaged in promoting the religious, educational and -_--~_~-physical development of-~boys, girls,-young

menor young womenoperating 

### under a State or National organization of like character; also the endowmentfunds of such institn- .tions of learning and religion not 

### nsea .w~itha view to profit; andwhenthe same are invested in bonds or mortgages, or ?.n land or other property which has be-enartd shall hereafter be bought in by such institutions under foreclosure sales madeto satisfy or protect such bonds or mortgages, that such exemption of such land andproperty shall continue only for twoyears af- ~.,~,-__~-.t.er~the

purchase of the same at such sale by such institutions andno longer, and institutions of purely public Charity; and all laws exempting property from taxation other than the property above mentioned shall be null andvoid." Thissection of the Constitution does not Itself exempt any property from taxation, but authorzL;L; the Legislature to exempt certain types of propActing under this authorization, the Legislature-enacted Article 7150, V.C.S., which contains the.

Bon. William Schneider, Jr., page 7 

### (V-1399)

following provision:2

"The following property shall be exempt from taxation, .to-Wit:

. . . "4. All property, whether real or personal, belonging exclusively to

-.this State, or any political subdivi-

. sion thereof, or the United States, I,

. . .Article 

### 7150provides for an exemption of 'I&, property belonging exclusively to this State, '-"or any political subdivision thereof." Anindependent school district is a political subdivision of the State. Kins~s Estate v. School Trustees of Willacv Count :333 S.W.2a 783 (Tex. civ. App. 1930 error ref. If the exemption in subdivision 2,of Article 7150 could be given effect according to its terms, the property in question would be exempt from -'?e&ation inthe handsof~-the owner. However, the property exempt under Section 9 of Article XI is property of counties, cities and towns owned andheld snf-v for oublic ourooses and other property devoted x lusi Iv to the u na benefit of the oubliq and "-Ehz proikty which tg ~tegislature mayexempt under Se;tiF 2 of Article VIII.is public property B ed fez pu 1 uurooses. Although the attempted exemption in 

# :

2J Article 7150 also contains a provision relating to,exemption of property used for school purposes. Assuming that this provision includes property of an ~:~ --------~--independent school district, the property in question clearly does not satisfy the conditions for exemption set .out in thenConstitution andArticle 7150. 2/ While school districts are in a sense State agencies in that they are created for the purpose of carrying out a function of the State government, their status in relation to the State government is expressed in the following language from Hatcher v. State, 125 Tex. 84, 81 S.W.2d 499, 500 (1935): llSchool districts, whether independent districts or commonschool districts, are not primarily agencies of the state, but they are local public cor;oorations of the samegeneral character as munlci al G -~~oorations." his opinion is not to be understood as passing on the &ability of property ownedby the State ItasU which is not used for a public purpose..


## 92 Hon. William Schnsider, Jr., page 

### 8 (V-1399)

Article 

### 7150is broader than authorized, the provision is operative to the extent of the Legislature’s power, that is, to exempt such property whenused for public pur oses. City of Abilene State 113 S.W.2d 

### 631,63%(Tex. Civ. App. 1937, &?or di&u.).

The authority to exempt property under ‘Section 2 of Article VIII is to be exercised by the Legislature, and the Legislature has the power, within constitutional restrictions, to prescribe the conditions upon which an exemption is accorded. Since the Legislature could either grant or withhold the exemption imthe first place, it might also provide that the-.exemption would not extend to property which~an exempt owner has leased to another person. It follows that if property is exempt from taxation under Article 

### 7150,V.C.S.,solely by virtue of the authorization in Article VIII, Section 2 of the Constitution, the leasehold is properly taxable under Article 

### 7173.

These two constitutional provisions, as well as the decisions construing them, makeit clear that there are sometypes of publicly ownedproperty which are not and cannot be exempt from taxation.

Wetherefore have three possible situations in respect to the property under consideration: (1) if it is exempt by virtue of Article XI, Section 

### 9of
&/ Article VIII, Section 1, Constitution of Texas,
trovides that “all property in this State, whether owned y natural.. persons or corporations, other than municiphi, shall be taxed in proportion to its va1ue.l’ In Daugherty vDThomusou, m, the court stated that Section 1 of Article VIII l’does not require property belonging to municipal corporations to be taxed.” However, Section 2 of.Article VIII, after setting out the types of property which maybe exempt, provides that

“all laws exempting property from taxation other than the property above mentioned shall be null andvoid.” It would appear that only such property as is exempt by the Constitution itself or as maybe exempt by the Legislature under .Section 2 of Article VIII can be relieved from taxation. This is the only construction under which we can explain the numerous cases Involving municipally ownedproperty where the court found it necessary to decide whether the property was being used for a public purpose.. 

### .~,

Hon. William Schneider, Jr., page 

### 9 (V-1399) 

### 93

the Constitution, the leasehold estate is also ex" empt; (2) if the property is exempt in the 

### handsof the school district by virtue of Article 7150, V.C.S., enacted purmant to the authorization contained in' Section 2 of Article VIII, the leasehold is taxable under Article 71733 

### (3)if the property is not being "devoted exclusively to the use and benefit of the public" or is not being "used for public purposes," it is not exempt in the hands of the school district andArticle, 

### 7173has no application.

Wehave not found where the courts of this State have ever,been called upon'to consider the precise question here involved. Indeed, not often has it been necessary for the courts to decide whether public property which has been held to be exempt came under Article XI, Section 

### 9of the Constitution or unthe Constitution and example, A. &M. ConDist. v. Citv of BrYan suma.> Wemaystate somegeneralizations, however: which are pertinent to a solution of this question. In the first place, the exemption under either of these provisions is not limited to property which is used for governmental purposes. A. &M. Consolidateg Independent School Dist. v. C itY of ~BrYau,Suora. Secondly, the fact that the property produces revenue does not of.itself prevent its being exempt, if the use to which the DroDertY is DUt meets the reauired test of being a public use. 8. & 14.Consolidated mdooendent School Dist. v. Citv of Brvaq, suura: Lower Colorado River Authoritv v. Chemical Bank&Trust Co., SUDraj Citv of Abilene v. State, suDra* State V. City of Houstoq, 140,S.W.2d 277 (Tex. Civ. App. 1940, error ref.).

y In Lower Colorado River Authority v. ChmiCal B&.Trust.,suDra, the court repeated,d&um in Daunhertv v. Thomosog to the effect that Article VIII, Section 2 applied to "property held in private ownership but used for purposes which give to it a public character." Under this view the Legislature would be powerless to tax the leasehold estate in any publicly ownedproperty which is exempt in the hands of the owner. The property involved in that case was actually being used in the performance of the functions for ._ which the public agency was created and accordingly camewithin the exemption of property "devoted exclusively to the use and benefit of the public" under Section 

### 9of Article XI.

# 94‘

I Hon. William Schneider, Jr., page 10 (V-1399)

Uponreviewing all the cases which have been decided under the Constituti6n and statutes of this State, wefind that publicly ownedproperty which has been held to be exempt from taxation may be classified as~follows:

1. Property used by the public or actually being put to use exclusive,ly in carrying out a public function performed under the powers of a governmental agency, whether the function b,egovernmental or proprietary. In this category wefind such cases as Lower Colorado River Authority v. Chemical

Citv of Brvaq, B. such a use, although used in part for other purposes, w~ouldalso be exempt. 'Butma. See City of Abilene v. State,.

Conceivably, this latter exemption might in some situations comeunder Section 

### 9, of Article XI and in others under Section 2 of Article VIII, but it is not necessary here to consider the exact ~boundaries of the exemption under each of the constitutional provisions in such instances.



### 2. Property which is a part of or stands in public fund. Cases illustr&tive of the place of a this classification include Dauahertv v. T mm Sh mard 144 Tex. %l ?$&=' ,"i other caies holding tdt prop- 'delinquent tax foreclosures is exempt

. Cf. State v. Cl y ous man v. William, 8:~

### T~kH421~of$ ~b0~). %;s;xemption likewise results from Section 

### 9 of Arti-

. 

### 3. Property which is intended for actual use in carrying out a public function where there has not been an abandonment of the intended use, although iz act,ual use for that purpose is temporarily suspendCases of this nature include Citv of Abilene V. Stite, suura; State v. City of Beaumont, 161 S.W.2d WTex. Civ. App. 1942). This exemption is by virtue of Article VIII, Section 2 of the Constitution andAI?- title 7150 of the Revised Civil Statutes.-...

Bon. William Schneider, Jr., page 11 (V-1399)

It is obvious that the property leased'by the Fredericksburg Independent School District for '. commercial development does not comewithin,the first class of exempt property. Nor dowe think it comes within the second class. All the cases in this class which have held such property to be exempt involve funds raised by taxes or other public money or, as in the ~case of Daugherty v. Thomnson, property which is itself madea part of a fund created by law. The fact that the income from a school district's propertyheld under a permissive ownership becomes a part of a fund used for the support of the public schools after~it is ctillected is not sufficient to makethe 'property itself a part of the fund or to makeit represent any part of the fund.

As noted above, the courts of this State 'have never been'called upbn to decide the precise question presented in your r,equest. Opinions of.the Attorney General's Office have reached apparently conflict- -~-'-----'--..ing results. .-Opinion O-4459 (1942) .held that property

devised to a county, the income from which was to be used for the supqort of a county hospital, was exempt .while Opinion o-4285 (1942) held that property devise B

_ --,,,to a city, .the income from which was to be used for the support and improvement of the city's public parks, was not exempt. In Opinion V-447 (1947), rendered during the present administration
, it was held that land originally acquired by a county- for use as a poor farm rnfas not exempt whare the intended use had been abandoned., although the income from~the property went into the county's charity fund. --~~~---The

prevailing view in other jurisdictions is that prdperty which is being held and used solely for the production of income is not exempt from taxation under constitutional and statutory provisions similar to those in force in this State, even though the income is

See Notes, 

### 3A. L. R. 787; 129 A.L.R. 480. 1439; 

### iq49;101 A.L.B.

After considering all the authorities herein discussed, wehave reached the conclusion that property 

### 95

## ,. ..* / 94%

, / whichan independentschooldist2ictmms mily&r

thepurposeofproducing~income *i:s not?be%frrgused fora publicpurposewithinthe:maaning:oftheCOP stitutionandisnotexempt from-taxation in-the handsoftheowner, Consequently, theLeasehold interestunderalease:for at:ermmfthre-e

:yaars ror morewouldnotbetaxabletozthe lessee..:fIowever, if thepropertyis ~h&ld

### for theeventu&l:purpose -of beingusedasapart,oftheschool-facilities, {even thoughit isbeingleasedte@porar'ily, :it.Ts exempt fromtaxationinthe.hands ofthe schooldistrict undertheprovisionsofArticleVIII,Section2 -of theConsti,tution

andArticle7130of the.Revised CivilStatutes,but itisnotexemptunderArticle XI, Section9 oftheConstitution.Ihthis -event, thevalueofthe.leasehold interest,zhder

:a:lease foratermofthreeyearsor.more:is taxable:to;the lesseeunderArticle7173. ,.y -4,

..- 

### -.~-:.--~-- ---++opertywhich ah 'inde~peniient school districtownsandholdsonlyforthe :pu.rposeofproducingincomeis :not:exempt fromtaxationin thehands.ofthe.owner., andthe 'leasehold interest

under .a

lease

~~~-. ~--fora termofthreeyears:or.more is :not ., caxableto theYlessee.Property~whichis held fortheeventualpur,pose ofbeing usedasapartofthe school:facilities~, thoughleasedtemporarily taxationinthehandsof4is exemptfrom heowner;and thevalueoftheleaseholdestate.mdera leasefora termofthreeyears ormore

_ . ...-$L7ex.bteStothelesseeunder .Article 9 *

. . APPROVEO: %ur.sxe~y *LiUIy,
W.V.Geppert TaxationDivision
E. 

### Jacobson ReviewingAssistaut
CharlesD. i<athews FirstAssistant Assistant MIQI:wb