Although all the parties to this action are citizens of the same
state, the circuit court of the United States had jurisdiction
because the case arises under the Constitution of the United
States, as complainant insists that the tax sought to be restrained
is imposed under a state statute that impairs the obligation of a
legislative contract for exemption from taxation.
A charter exemption from taxation of land and buildings to be
erected thereon so long as they belong to the educational
institution exempted does not exempt from taxation the separate
interests of parties to whom the institution leases portions of the
property, and who erect buildings thereon, and a subsequent act of
the legislature taxing such separate leasehold interest does not
amount to taxing the property owned by the institution, and is not
unconstitutional under the contract clause of the Constitution of
the United States as impairing the obligation of the exemption
provision in the charter. So
held as to the act of
Tennessee of 1903
This Court, while not bound by the construction placed on a
state statute by the state court as to whether a contract was
created thereby, and if so how it should be construed, gives to
such construction respectful consideration, and unless plainly
erroneous generally follows it; a decision of the state court,
however, that a leasehold interest in exempted property cannot,
during the exemption, be taxed against the owner of the fee, is not
authority to be followed by this Court on the proposition that the
leasehold interest cannot be taxed without impairing the obligation
of the contract of exemption against the lessee in his own name and
against his particular interest in the land.
A charter exemption from taxation cannot be extended simply
because it would, as so construed, add value to the exemption, and
an exemption from taxation of property belonging to an institution,
so long as it belongs thereto, will not be extended to also exempt
the leasehold interest of parties to whom the owner leases the
same.
This Court will not construe a state statute assessing
leaseholds and making the tax a lien upon the fee as creating a
lien on property exempted from taxation, and thereby violating the
contract clause of the Constitution,
Page 208 U. S. 490
when the state court has not so construed the statute and the
taxing officers of the state disclaim any intention of so
construing it or levying any tax on exempted property. An exemption
of real property from taxation will not be construed as extending
to the interest of the lessee therein because a forced sale of the
lessee's interest might put the property in the hands of parties to
whom the exempted owner objects. Under the terms of the lease, the
owner can prevent such contingency by reentering for nonpayment of
taxes. The fact that the lessee does not own the building erected
by him on leased property doe not affect the right to tax his
leasehold interest; it is material only on the question of value of
his interest.
155 F. 182 reversed.
This is a suit in equity brought in the United States Circuit
Court for the Middle District of Tennessee by the University of the
South, a corporation, and by the several individual complainants
named in the bill, who are residents of the County of Franklin in
that state and lessees of certain lands from the university, to
obtain an injunction against the individual defendants, who are a
state revenue agent and a trustee of Franklin County, and also
against the County of Franklin, in the above-named state, to
restrain them from taking any proceedings to collect taxes from the
lessees of the university within the limits of the thousand acres
mentioned in the complainants' bill.
The bill having been filed, a preliminary injunction was issued
restraining the collection of the taxes as prayed for.
Thereafter a demurrer to the bill was filed by the defendants on
several grounds -- among others, on the ground that, as to the
individual complainants, the bill could not be maintained and the
court had no jurisdiction to hear and determine the cause on their
behalf.
The defendants also answered.
The demurrer was sustained as to the individual complainants and
the bill dismissed, but was overruled as to the university
itself.
After a trial between the university and the defendants, a final
decree was entered in favor of the university, restraining the
defendants from assessing, or attempting to assess, taxes
Page 208 U. S. 491
on the property and leasehold interests described in the bill,
and situated within the thousand acres already referred to.
From this final decree, the defendants have taken an appeal
directly to this Court under the fifth section of the act of 1891,
26 Stat. 826, c. 517, as involving the application of the
Constitution of the United States.
The material facts are as follows:
The University of the South is a Tennessee corporation, under a
charter granted by the legislature of that state, January 6, 1858,
and amended January 19, 1858. The corporation was created for the
purpose of establishing a seminary of learning, to be located at
Sewanee, on the Cumberland Mountain, in Tennessee.
The tenth section of the act, under which the question arises,
is set forth in the margin. [
Footnote 1] That question is whether the assessments made
against the lessees upon their interests in that portion of the one
thousand acres of the lands leased to them respectively are valid,
or whether they are not a violation of the exemption from taxation
granted by that section.
The Civil War coming on soon after the charter was granted, very
little work was done under it, but after peace was restored, the
university authorities, aided by subscriptions from those
interested in the work, went on with it, and in process of time the
one thousand acres were duly surveyed and marked out and many
buildings were erected for the university. Leases were also granted
by it of lots within the one thousand-acre limit to persons who,
under such leases, built upon the lots severally leased to them. By
this method, a population of about 1,000 or 1,200 people had been
gathered within the village called
Page 208 U. S. 492
Sewanee, situated within the limit stated, and which was a
barren wilderness when the charter was granted. In fact, the very
existence of the village is the result of the efforts of the
university.
In the summer of 1906, proceedings were taken to assess taxes
upon the interests of the lessees occupying various lots under the
leases mentioned, and a hearing was had before the trustee of
Franklin County, within which the lots were situated, and he held
that, under the act of the legislature of Tennessee passed January
10, 1903, c. 258, being the general assessment act, the lessee of a
leasehold interest of a lot in Sewanee was taxable on the value of
such interest, and he thereafter assessed the tax in the case of an
individual named, and announced his intention of doing the same
with reference to all lessees similarly situated. This bill was
then filed before any further assessments were made.
The several leases under which the various lessees of the
university held their lots, among other things, provided that the
lessees would pay the rent specified in the lease "and all taxes
and assessments upon said premises." It was also provided in the
leases that the premises should not be sublet or transferred
without the consent of the commissioner of land and buildings of
the university, and that, for any violation of the restrictions and
provisions made in the lease, the lessor might end and determine
the lease and reenter upon the premises. Each lease also contained
the following, the blanks being filled up in accordance with the
terms which might be agreed upon between the parties:
"And at the expiration of the present term, the University of
the South shall have the option of taking the premises by paying
for all such improvements made thereon, or may renew the lease for
another term of __ years, on such terms as may be agreed upon by
the parties respectively, and may also give a second renewal for __
years, and in case the parties cannot agree upon the value of the
improvements or the rental to be paid for the new term, the same
shall be determined
Page 208 U. S. 493
by arbitration, one of the arbitrators to be selected by the
commissioner of buildings and lands and the other by the lessee;
and, in case they cannot agree, they shall call in an umpire . . .
provided, however, that in fixing the rental for the new term, the
value of the improvements shall not be taken into account as
against the said party of the second part . . . , heirs or assigns.
And it is further agreed that the improvements to the value of ___
hundred dollars be made and kept on said premises by the party of
the second part."
At the time of the passage of the act of 1858 (the charter of
the university) there was no statute providing for the separate
taxation of the interest of a lessee in real estate, but the whole
value of the entire real estate was assessed against the owner of
the fee. The act of 1903, already mentioned, provided in
subdivision 5 of § 5 that the interest of a lessee should be
assessed to the owner of such interest separately from other
interests in the real estate.
Section 32 of the same act provided that all taxes should be a
lien upon the fee in the property, and not merely upon the interest
of the person to whom the property was, or ought to be, assessed,
and it was provided that the whole proceeding for the collection of
taxes, from the delinquency to the sale, should be a proceeding
in rem.
It is also asserted by complainant as a further ground of
invalidity that § 2, subd. 2, of the act of 1903, providing a
general exemption from taxation of religious, educational, and
other named classes of institutions, as therein stated, does not
provide as broad an exemption as the special exemption granted the
university by its charter, and if it be held that the above general
exemption does not reach the complainant, while at the same time it
is claimed to repeal the special exemption provided by the charter,
it impairs the contract between the state and the university, and
is therefore void.
Page 208 U. S. 498
MR. JUSTICE PECKHAM, after making the foregoing statement,
delivered the opinion of the Court.
The appellants insist that the circuit court had no jurisdiction
of this suit, because all the parties are citizens of Tennessee. We
think, however, that jurisdiction existed, because the case is one
arising under the Constitution of the United States, the
complainant insisting that, under such Constitution the law of the
State of Tennessee, passed in 1903, is invalid, because it impairs
the obligations of a contract protected by that instrument.
Illinois R. Co. v. Adams, 180 U. S.
28,
180 U. S. 35. We
therefore pass to the merits of the controversy.
As the complainant maintains that the exemption clause in the
tenth section of its charter is broader than that contained in the
second section of the act of 1903, we may at once refer
Page 208 U. S. 499
to the charter exemption, and if the contention of complainant
is not justified by that exemption, it is unnecessary to consider
that which is given by the act of 1903. It is by the charter
exemption that we are to judge that matter.
Upon the question of the proper construction of the exemption
clause in the charter, the case of the
University of the South
v. Skidmore, 87 Tenn. 155, is cited, and it is urged that
within that case no tax can be assessed against the lessees of this
property within the one thousand acres. While in such a case as
this we form our own judgment as to the existence and construction
of the alleged contract, and are not concluded by the construction
which the state court has placed on the statute that forms such
contract, yet we give to that construction the most respectful
consideration, and it will, in general, be followed, unless it
seems to be plainly erroneous.
Looking at the
Skidmore case, we find that it does not
uphold the contention maintained by the complainant. In that case,
the university filed a bill against Skidmore, trustee of Franklin
County, to enjoin him from assessing for taxation against the
university the property belonging to it within the one thousand
acres. In answer to the bill the state contended that the one
thousand acres would be exempt from taxation so long only as they
were substantially owned by the university, but that, when it gave
a lease of the kind described in the case before us, it ceased,
during the term of the lease, to be the real and substantial owner
of the land so leased, which, by the lease, was taken out of the
exemption granted by the statute, and was, from that time, taxable
against the university. The supreme court, however, held that the
assessment made was void because the property, the land owned by
the university, was exempt from taxation so long as it belonged to
that corporation, and the making of the leases did not permit the
property to be taxed against the university.
This is a different proposition from the one asserted by the
complainant, and is not authority for its contention that the
assessment cannot be made against the lessee in his own name
Page 208 U. S. 500
for his particular interest in the land while the university
continues to own the fee.
It is plain that the state court has not construed the statute
of 1858 as a contract that the interest of the lessee in the land
granted to him for a term of years by the university cannot be
assessed or taxed against him because of the exemption in
question.
Counsel for appellee, placing the
Skidmore case aside
for the moment, assert that, when this exemption was granted,
leasehold interests were only assessable against the owner of the
fee as part of the whole estate, and it was therefore a part of the
estate exempted from taxation by the charter. We think this is not
a correct construction of the contract of exemption.
As long as different interests may exist in the same land, we
think it plain that an exemption granted to the owner of the land
in fee does not extend to an exemption from taxation of an interest
in the same land, granted by the owner of the fee to another person
as a lessee for a term of years. The two interests are totally
distinct, and the exemption of one from taxation plainly does not
thereby exempt the other. The fact that, at the time when the
exemption was granted to the owner of the fee, the state had not
provided for taxation against the lessee in his own name is not
important. The different interests of an owner of the fee and an
owner of an estate for years, as lessee, existed, and such
existence was recognized. An exemption of one did not necessarily
include the exemption of the other. The contract of exemption did
not imply in the most remote degree that the state would not
thereafter, through its legislature, so change its mode of
assessment as to reach the interest of a lessee directly, and not
through the owner of the fee. In so doing, the state does not tax
the owner of the land in fee, nor the fee itself. It taxes what it
had a right to tax -- a separate and distinct interest in the land,
although the fee thereof be in the university, which cannot be
taxed therefor. The doctrine that laws which are in force when a
contract is made will generally enter into its obligations
(
Oshkosh
Page 208 U. S. 501
Waterworks Co. v. Oshkosh, 187 U.
S. 437) is not denied, but it has no application. The
laws existing when the contract was made have not been altered so
as to impair the obligations of that contract by the passage of the
act of 1903. Those obligations remain precisely as they were prior
to its passage. The change wrought by the act affected third
persons only (the lessees of real estate), and, instead of leaving
them to be taxed in the name of their lessor for their interest in
the land as such lessees, the act provided for their separate
taxation. Such act impaired no obligation of contract between the
state and the university.
Nor is such an assessment the same in substance as one against
the owner in fee of the land. We cannot see that
Pollock v.
Farmers' Loan & Trust Co., 157 U.
S. 429, touches the case. This is not a tax on the rents
or income of real estate. The university receives the rents or
income free from any tax. The tax is, in both form and substance,
upon a separate interest in real estate granted by the lessor, and
is assessed against the owner of such separate interest. If the
university could lease its lands and could also effectually provide
that the interest of the lessee in the land so leased should be
exempt from taxation, it may readily be seen that the amount of
rent which it would receive would be larger than if no such
exemption could be obtained, but that is a matter which is wholly
immaterial upon the question of the impairment of the contract of
exemption that was really made. That contract cannot be extended
simply because it would, as so construed, add value to the
exemption. The language used does not include the exemption
claimed.
The lessee also agreed in the lease to pay the taxes in any
event, and the claim that the agreement was intended only to refer
to municipal taxation which might be provided for by the university
cannot prevail against the plain words of the agreement.
That part of § 32 of the act of 1903 which makes the tax a lien
upon the fee, even if void in that particular, does not make
Page 208 U. S. 502
the section void which provides for the separate assessment of
the interest of the lessee. It is proper to mention that the
appellants did not and do not claim that the thirty-second section
gives a lien upon the fee for the tax against the lessee in cases
where the fee is itself exempt from taxation, but they assert that
the correct construction of that section is to apply the lien to
the fee only in cases where the fee itself may be taxed, and in
their answer they expressly aver that, under that section, neither
the state nor county can have a lien upon any property which is
exempt from taxation, and that no claim has ever been made, or was
made in the proceedings instituted by the state revenue agent, that
the interest of the university in the leased premises could be
assessed for taxation or could in any way be affected by the
proceedings so instituted, and the defendants disclaimed any
intention of assessing or levying any tax whatsoever against the
property of the complainant university, and they denied that the
assessment of the interests of the several lessees of the
complainant university in the buildings and improvements erected by
them upon said property would in any manner affect the interest of
the university. What is the proper construction of that section on
this point is not a matter of importance as to future assessments,
because the state, having these objections before it, and, as we
may presume, in order to avoid nay such objection, even though
possibly not well founded, passed another assessment act in 1907,
repealing the one of 1903, and recognizing as valid all charter
exemptions, and also providing that the lien of the tax should not
apply to or affect any fee in property where the same was exempt
from taxation. The question, however, remains so far as the
assessment here involved is concerned, and we are of opinion that
the construction contended for by the defendants is the correct
one. We cannot assume that the state would endeavor to create a
lien upon property which it recognized as exempt from taxation, for
the purpose of thereby attempting to obtain such a security for the
payment of a tax due from another upon different property which is
not exempt.
Page 208 U. S. 503
This never could have been the intention of the framers of the
act of 1903.
Again, it is urged that, if the interest of the lessee can be
taxed, it might be sold for the nonpayment of the tax, and thus
someone might get into possession who would not be a proper person
to be in such place, and the chief purpose of the charter in this
respect would fail. If the interest of the lessee in the land could
be sold for nonpayment of the tax assessed thereon, such result
would arise from the act of the university in creating it. But the
lessor might, under the terms of the lease, at once reenter for
nonpayment of taxes.
What is the exact interest of the lessee in the land leased to
him it is not necessary to here determine. It is plain that he has
some interest in it, and that interest is distinct from the fee,
and may be taxed when the fee is exempt from taxation.
See
cases to that effect in the margin. [
Footnote 2] In
Elder v. Wood, ante, p.
208 U. S. 226, it
was held that a mere possessory right in a mining claim in land to
which the United States had title was a right separate from the
fee, and might be taxed under a state statute, although the fee
could not, because it was in the government.
New Jersey
v. Wilson, 7 Cranch 164, is not in point. The
exemption was assumed to be absolute, unconditional, and unlimited
in time. It seems that there was an act (that of 1796) which
authorized the lands to be leased, but that act was not brought to
the attention of the court.
See Given v. Wright,
117 U. S. 648,
117 U. S. 655,
where a more full history of the case is given. The act repealing
the exemption, passed after the sale of the lands by the Indians,
was held void because it impaired the obligations of a contract. In
the case before us, the exemption lasts only so long as the
university owns the lands, and, when it conveys a certain interest
in them
Page 208 U. S. 504
to a third person, it no longer owns that interest, which at
once becomes subject to the right of the state to tax it. When the
state exercises that right, as it did under the act of 1903, and
taxes the interest in the name of its owner, the state thereby
violates no contract, and the tax is valid.
It is said that, although the lessee is bound to make
improvements, yet he does not own them, even though their value is
not to be taken into consideration against him until the same are
paid for at some time is not material upon the question of the
separate interests of the lessee and the owner of the fee, the
ownership of the improvements being only material upon the question
of the value of the interest of the lessee. Even if the university
was entitled to become and was the owner of such improvements at
the end of the second renewal, without paying for them, the
question still remains as to the value of the separate interest of
the lessee, which, even upon that assumption, might be greatly more
than the rent to be paid. The value of whatever interest he has is
to be assessed as real estate under the statute, and that value
must be determined by the assessing officer. All we can say is that
it is a separate and distinct interest from that of the owner of
the fee, and the assessment of that interest for taxation is not an
assessment upon the interest of the university, and is not a
violation of the exemption granted to it by the statute of
1858.
The decree of the Circuit Court must be reversed, and the case
remanded to that court with directions to dismiss the bill.
Reversed.
[
Footnote 1]
"SEC. 10.
Be it further enacted, That said university
may hold and possess as much land as may be necessary for the
buildings, and to such extent as may be sufficient to protect said
institution and the students thereof from the intrusion of
evil-minded persons who may settle near said institution, said
land, however, not to exceed ten thousand acres, one thousand of
which, including buildings and other effects and property of said
corporation, shall be exempt from taxation as long as said lands
belong to said university."
[
Footnote 2]
People v. Brooklyn Assessors, 93 N.Y. 308;
People
v. Tax Commissioners, 80 N.Y. 573;
Parker v.
Redfield, 10 Conn. 490;
Russell v. New Haven, 51
Conn. 259;
Brainard v. Colchester, 31 Conn. 407;
Lord
v. Litchfield, 36 Conn. 116;
Philadelphia, R. Co. v.
Appeal Tax Court, 50 Md. 397;
Zumstein v. Coal Co.,
54 Ohio St. 264;
Bentley v. Barton, 41 Ohio St. 410.
