Opinion
No. 29580
Decided April 26, 1944.
Taxation — Exemption — Public property used for public purpose — Public use must be exclusive — Section 5351, General Code — Section 2, Article XII, Constitution — Property owned by instrumentality of United States not ipso facto immune from taxation — Such federal property used in proprietary function taxable by state — Function proprietary where property contains private residences, administrative offices and leased storerooms — State or federal property exempt only when used exclusively for public purpose.
1. Under the provisions of Section 5351, General Code, and Section 2 of Article XII of the Constitution of Ohio relating to the exemption of public property used for a public purpose, such public use must be exclusive. (Paragraph 2 of the syllabus in the case of Pfeiffer v. Jenkins, 141 Ohio St. 66, approved and followed.)
2. Property owned by an instrumentality of the United States is not ipso facto immune from taxation irrespective of whether it is being used in the exercise of a governmental or proprietary function.
3. When such property is in fact used in the exercise of a proprietary function it is subject to taxation by the state and the political subdivisions thereof in which it is located.
4. The function is proprietary when the property consists of a heating plant, 21 residence buildings containing 1039 apartments leased for private residences, and 2 administration buildings containing administrative offices and 18 retail storerooms the latter being leased to the highest bidders for private business purposes.
5. The first part of Section 5351, General Code, exempting from taxation real or personal property belonging exclusively to the state or the United States is limited by the terms of Section 2 of Article XII to property used exclusively for any public purpose.
APPEAL from the Board of Tax Appeals.
The appellant, the Federal Public Housing Authority, formerly operating under the name of the United States Housing Authority, filed an application with the Tax Commission of Ohio, the predecessor of the Board of Tax Appeals, asking that certain land and buildings located in the city of Cincinnati, Ohio, and known as Laurel Homes be exempted from taxation for the year 1939.
The matter was submitted on a stipulation of facts, and the application was denied in a decision in which it was held that the property "is owned by the United States Housing Authority as lessee and is used for private residences and private business; that said property is not used exclusively for public purposes within the meaning of Section 5351, General Code, and Article XII, Section 2 of the Constitution, and under the provisions thereof is not exempt from taxation merely because title is in the United States Housing Authority, an instrumentality of the United States; that said property is not used exclusively for charitable purposes within the meaning of Section 5353 and Article XII, Section 2 of the Constitution; that said property is not immune from taxation by the state of Ohio and its political subdivisions by virtue of title being in the United States Housing Authority, an instrumentality of the United States; and that it is not exempted from taxation by the state of Ohio or its political subdivisions by Section 1405, Title 42, U.S. Code, and therefore is not legally exempt from taxation."
The case is in this court for review upon the claim that the order of the Board of Tax Appeals is unreasonable and unlawful.
Mr. Norman M. Littell, Mr. Vernon L. Wilkinson, Mr. Thomas L. McKevitt, Mr. David L. Krooth and Mr. Charles N. Malone, for appellant.
Mr. Carson Hoy, acting prosecuting attorney, Mr. Frank M. Gusweiler and Mr. W. Ray Skirvin, for appellees.
One of the appellant's contentions is that its property is exempt from taxation under favor of Section 5351, General Code, which provides in part that "public property used for a public purpose shall be exempt from taxation." This legislative enactment is based upon Section 2 of Article XII of the Constitution of Ohio which authorizes the passage of general laws to exempt from taxation "public property used exclusively for any public purpose." (Italics supplied.) This court frequently has held, as it did in the second paragraph of the syllabus in the case of Pfeiffer et al., Trustees, v. Jenkins et al., Bd. of Tax Appeals, 141 Ohio St. 66, 46 N.E.2d 767, that "under the provisions of Section 5351, General Code, and Section 2 of Article XII of the Constitution of Ohio, relating to the exemption from taxation of public property used for a public purpose, such use must be exclusive."
Are the appellant's land and buildings "public property used exclusively for any public purpose?"
According to the stipulation of facts it appears that the land involved was acquired by the United States by ordinary purchase from the various owners; that the construction of buildings was started by the Federal Emergency Administration of Public Works in the year 1936; that in 1937 the property was transferred to the United States Housing Authority whose name has been changed to the Federal Public Housing Authority; that in 1938 the construction of the buildings was completed and the property was leased to the Cincinnati Metropolitan Housing Authority, an Ohio corporation; that said property has since been in continuous operation by this lessee; that the property consists of a heating plant, 21 residence buildings containing 1039 private apartments, and 2 administration buildings containing offices and 18 retail storerooms; that the storerooms were advertised and rented to the highest bidders; that the auditor of Hamilton county entered the property on the tax duplicate for the year 1939; that previously the project manager for the Federal Emergency Administration of Public Works entered into an agreement with the city of Cincinnati whereby the full amount of taxes would be paid on the property as if it were privately owned; and that in return the city contributed the sum of $750,000 to the project.
This question was squarely decided by this court in the case of Columbus Metropolitan Housing Authority v. Thatcher, Aud., 140 Ohio St. 38, 42 N.E.2d 437, in which the circumstances were similar. The chief difference in the facts is that in the earlier case the title to the property was in the Columbus Metropolitan Housing Authority, an Ohio corporation, while in the instant controversy the title is in the Federal Public Housing Authority. However, the mere ownership of property manifestly is not determinative of its use. The decision in the Thatcher case was approved and followed recently by this court in Dayton Metropolitan Housing Authority v. Evatt, Tax Commr., ante, 10. Perhaps it should be added that this court is not permitted to concern itself with any question of policy involved in either the constitutional provision or the building project. Whether the members of this court approve or disapprove of either or both is of no moment whatsoever. The clear duty of the court is to accept the requirement the people of this state have placed in their organic law providing that "general laws may be passed to exempt * * * public property used exclusively for any public purpose * * *." If the word "exclusively" is to be eliminated or if benefit instead of use is to made the test, the people alone have the power to do so. Under the circumstances of this case it would constitute the plainest contradiction in terms for this court to hold that the use is exclusively public when in fact the property is occupied by sublessees for private residences or for privately owned and operated businesses.
According to the opinion of the Board of Tax Appeals the appellant's second contention before that body was that the property is immune under Section 5353, General Code, providing for the exemption of "property belonging to institutions used exclusively for charitable purposes." However, in this court the appellant has abandoned that contention and the Board of Tax Appeals manifestly was correct in holding that this privately occupied residence and business property is not being used exclusively for charitable purposes.
A third contention of the appellant is that it is an instrumentality of the United States and that therefore its property is ipso facto immune from taxation irrespective of whether it or its lessee may be using the property in a governmental or proprietary function. Assuming the correctness of the appellant's theory that it is an instrumentality of the United States, no provision of either the federal or the state constitution is cited as a basis for the claimed exemption; and it is axiomatic that exemptions from taxation are not favored by law but an intention therefor must be expressed clearly. Furthermore, it is a settled rule of law that when a government or its agency undertakes a proprietary or nongovernmental function it divests itself of its sovereign character and forfeits its immunity from taxation. In the case of State of Ohio v. Helvering, Commr., 292 U.S. 360, 78 L.Ed., 1307, 54 S.Ct., 725, it was held in the opinion written by Mr. Justice Sutherland that the challenge to the validity of the tax imposed by the federal government on the sale and distribution of intoxicating liquors by the state of Ohio "seeks to invoke a principle, resulting from our dual system of government, which frequently has been announced by this court and is now firmly established, — that 'the instrumentalities, means and operations whereby the states exert the governmental powers belonging to them are * * * exempt from taxation by the United States.' * * * But, by the very terms of the rule, the immunity of the states from federal taxation is limited to those agencies which are of a governmental character. Whenever a state engages in a business of a private nature it exercises nongovernmental functions, and the business, though conducted by the state, is not immune from the exercise of the power of taxation which the Constitution vests in the Congress. * * * If a state chooses to go into the business of buying and selling commodities, its right to do so may be conceded so far as the federal Constitution is concerned; but the exercise of the right is not the performance of a governmental function, and must find its support in some authority apart from the police power. When a state enters the market place seeking customers it divests itself of its quasi-sovereignty pro tanto, and takes on the character of a trader, so far, at least, as the taxing power of the federal government is concerned."
Likewise, in the case of Graves et al., Tax Commrs., v. New York, ex rel. O'Keefe, 306 U.S. 466, 83 L. Ed., 927, 59 S.Ct., 595, 120 A. L. R., 1466, Mr. Justice Stone in referring to the earlier case of Helvering, Commr., v. Gerhardt, 304 U.S. 405, 82 L.Ed., 1427, 58 S. Ct., 969, commented:
"It was there pointed out that the implied immunity of one government and its agencies from taxation by the other should, as a principle of constitutional construction, be narrowly restricted. For the expansion of the immunity of the one government correspondingly curtails the sovereign power of the other to tax, and where that immunity is invoked by the private citizen it tends to operate for his benefit at the expense of the taxing government and without corresponding benefit to the government in whose name the immunity is claimed. * * *
"* * * The burden on government of a nondiscriminatory income tax applied to the salary of the employee of a government or its instrumentality is the same, whether a state or national government is concerned."
Inasmuch as the federal government has repudiated the doctrine of intergovernmental immunity from taxation, there is no apparent reason for discriminating between the federal and state governments with reference thereto. Otherwise, if both governments were to engage in similar proprietary functions such as the liquor business, two such establishments side by side would present the anomaly of the one being subject to taxation and the other enjoying a wholly unjustifiable immunity therefrom. It would seem that if the one is taxable when it "enters the market place seeking customers" the other should have no just cause for complaint when it places itself in exactly the same category. Furthermore, in the instant case it was expressly agreed that the full amount of taxes would be paid on the property as if it were privately owned, and relying thereon the city of Cincinnati contributed the sum of $750,000 to the project. The appellant is in the position of seeking to evade its obligation after the city has performed its part of the contract. It is true that after the appellant refused to pay the taxes regularly assessed on its property the agreement with the city was modified when the city accepted the appellant's offer to pay annually one fourth of the assessed amount in lieu of taxes, but the appellant now disclaims even this liability. Of course if the appellant's realty is taxable it is subject to the full amount of the levy; but if it is not taxable nothing should be paid. The appellant owes either the full amount or nothing, and, like other realty owners, it has no authority whatsoever to determine for itself what part, if any, of a duly assessed tax it will pay.
The appellant further insists that the distinction between governmental and proprietary functions is not applicable to the federal government and that every function the latter or its agency may undertake is necessarily and inherently governmental. This is to say that when similar functions are exercised by each government the one may be arbitrarily classified as a proprietary function and the other as governmental. Significantly no constitutional or statutory authority is cited to sustain this view. In the instant case the appellant is engaged in the business enterprise of being a landlord — a fact the true nature of which cannot be changed arbitrarily by mere legislative enactment alone. Clearly the appellant is a proprietor, and as such cannot be heard to complain when its property is not permitted to escape the tax burden common to all proprietors.
The appellant places reliance upon the first part of Section 5351, General Code, which in its entirety reads as follows:
"Real or personal property belonging exclusively to the state or United States, and public property used for a public purpose shall be exempt from taxation."
As previously observed with reference to the latter part of this section, the entire statute is based upon Section 2 of Article XII of the Constitution of Ohio which authorizes the passage of general laws to exempt "public property used exclusively for any public purpose." It is fundamental that a statute may not exceed the breadth of the constitutional provision upon which it is bottomed. The latter contains no suggestion that property may be exempted simply by virtue of exclusive ownership by the state or the United States. Not only must the property be owned by the Public but it must be used exclusively for any public purpose. Hence, if it be owned exclusively by the state or the United States but not used exclusively for a public purpose, the General Assembly is without power to exempt it. When a statute is susceptible to two constructions, the one constitutional and the other unconstitutional, the former will be adopted in order to sustain the validity thereof. Therefore the effect of Section 5351 must be limited to property belonging exclusively to the state or the United States and used exclusively for any public purpose. As already stated, the appellant's property falls far short of meeting the latter test.
The Board of Tax Appeals was not in error in denying the appellant's application for the exemption of its realty from taxation, and the decision must be affirmed.
Decision affirmed.
MATTHIAS, HART, BELL and TURNER, JJ., concur.
ZIMMERMAN and WILLIAMS, JJ., dissent.
This cause involves the question whether, the real property, known as Laurel Homes, which is owned by the Federal Public Housing Authority, formerly the United States. Housing Authority, and leased by it to the Cincinnati Metropolitan Housing Authority, is exempt from state taxation. The question, relating as it does to the taxation of property owned by an agency or instrumentality of the federal government, is entirely different from that presented in Columbus Metropolitan Housing Authority v. Thatcher, Aud., 140 Ohio St. 38, 42 N.E.2d 437, and Dayton Metropolitan Housing Authority v. Evatt, Tax Commr., ante, 10, in which the property of the projects, was owned by agencies organized under the state enabling act.
The government of the United States is a political entity with limited authority. The only powers possessed by it are those expressly conferred by the federal Constitution plus such implied powers as are necessary to carry the express powers into execution. All other powers are in unequivocal terms reserved to the states. Within its proper sphere of activity, however, the federal government is supreme.
In keeping with the doctrine of federal supremacy it is well established in constitutional law that no state can tax the lawfully owned property of the United States without its consent. Van Brocklin v. State of Tennessee, 117 U.S. 151, 29 L.Ed., 845, 6 S.Ct., 670. The principle on which this pronouncement is based was early applied to corporate agencies, the shares of stock of which were privately owned. It was settled more than a century ago that Congress may incorporate a bank to carry out power granted by the federal Constitution; and that the state governments have no authority to tax any of the means employed by the federal government in the exercise of its constitutional powers. McCullough v. State of Maryland, 17 U.S. (4 Wheat.), 316, 4 L. Ed., 579.
With the creation of the national banking system the same principle of immunity from state taxation was applied to national banks and to their property and shares of stock. "National banks are not merely private moneyed institutions, but agencies of the United States created under its laws to promote its fiscal policies; and hence the banks, their property and their shares cannot be taxed under state authority except as Congress consents and then only in conformity with the restrictions attached to its consent." First National Bank of Guthrie Center v. Anderson, Aud., 269 U.S. 341, 347, 70 L.Ed., 295, 46 S.Ct., 135. See, also, Des Moines National Bank v. Fairweather, Mayor, 263 U.S. 103, 106, 68 L.Ed., 191, 44 S.Ct., 23; First National Bank of Hartford v. City of Hartford, 273 U.S. 548, 71 L.Ed., 767, 47 S.Ct., 462, 59 A. L. R., 1, and annotation. If a privately owned bank, created as an agency of the United States, enjoys this tax immunity under the federal Constitution, a fortiori a lawful corporate agency governmentally owned and controlled should have the same immunity. Moreover, this statement is warranted by the pronouncement in Graves et al., Commrs., v. State of New York, ex rel. O'Keefe, 306 U.S. 466, 83 L.Ed., 927, 59 S.Ct., 595, 120 A. L. R., 1466. We quote from the latter case at page 477: "When the national government lawfully acts through a corporation which it owns and controls, those activities are governmental functions entitled to whatever tax immunity attaches to those functions when carried on by the government itself through its departments." See, also, Pittman v. Home Owners' Loan Corp., 308 U.S. 21, 84 L.Ed., 11, 60 S.Ct., 15, 124 A. L. R., 1263; Meredith v. Tax Commission, 163 Ore., 305, 96 P.2d 1082, 125 A. L. R., 1417; Clallam County v. United States, 263 U.S. 341, 345, 68 L.Ed., 328, 44 S.Ct., 121. We shall inquire, then, into the nature of the corporate instrumentality, with which we are dealing, and the objective sought to be accomplished by the exercise of its corporate power.
The Federal Public Housing Authority is a governmental corporation wholly owned and controlled by the federal government. It is administered by a Federal. Public Housing Commissioner, a public officer, and is an agency and instrumentality of the United States, empowered to acquire and own real estate in the establishment of low-rent housing and slum-clearance projects. The purpose is to furnish to substandard families good housing facilities which they cannot afford, and thus promote public health and morals. This course is equivalent to furnishing partial relief to the needy.
In pursuance of the power conferred by federal law, the Laurel Homes housing project was established. That the Federal Public Housing Authority, the owner of the property involved in that project, is a lawful instrumentality of the federal government cannot, under the holding of this court, be questioned. State, ex rel. Ellis, City Solicitor, v. Sherrill, City Manager, 136 Ohio St. 328, 25 N.E.2d 844. That case involved a contract in which, inter alia, there was a provision for the expenditure of a sum of money which "would be employed to add a specified number of dwelling units to the existing Laurel Homes project [the project we are concerned with herein] for occupation by negro families, and to be considered as a part of the negro slum-clearance plan." The lawfulness of such governmental agency is, then, established by a decision of this court which has never been overruled. Moreover, the pronouncements therein are sustained by principle and precedent.
In the annotation to the case of Housing Authority of City of Dallas v. Higginbotham ( 135 Tex. 158, 143 S.W. [2d], 79), 130 A. L. R., 1053, at page 1075, the following appears:
"Since the passing of the United States Housing Act of 1937, and the subsequent enactment in many states of slum-clearance enabling acts, an entire series of decisions has been handed down by the courts, in the various jurisdictions, upholding the constitutionality of such slum-clearance and low-cost housing legislation. The list of jurisdictions, and recent cases, wherein the constitutionality of slum-clearance and low-cost housing statutes and ordinances has been upheld is as follows: * * *." Then appears a list of 23 states, including Ohio, with citation of authorities. Like holdings have been made in four other jurisdictions: Hogue v. Housing Authority of North Little Rock, 201 Ark. 263, 144 S.W.2d 49; People, ex rel. Stokes, v. Newton, 106 Colo. 61, 101 P.2d 21; Keyes v. United States (Dist. of Col.), 119 F.2d 444; Mumpower v. Housing Authority of City of Bristol, 176 Va. 426, 11 S.E.2d 732.
It is settled law that the government of the United States has power to expend money in promotion of the general welfare. In upholding the validity of "Federal Old-Age Benefits" set up by Title II of the Social Security Act, the Supreme Court of the United States, speaking through Mr. Justice Cardozo, in Helvering, Commr., v. Davis, 301 U.S. 619, 640, 81 L.Ed., 1307, 57 S.Ct., 904, 109 A. L. R., 1319, said:
"Congress may spend money in aid of the 'general welfare.' Constitution, Art. I, Section 8; United States v. Butler, 297 U.S. 1, 65; Steward Machine Co. v. Davis, supra [ 301 U.S. 548]. There have been great statesmen in our history who have stood for other views. We will not resurrect the contest. It is now settled by decision. United States v. Butler, supra [ 297 U.S. 1]. The conception of the spending power advocated by Hamilton and strongly reinforced by Story has prevailed over that of Madison, which has not been lacking in adherents. Yet difficulties are left when the power is conceded. The line must still be drawn between one welfare and another, between particular and general. Where this shall be placed cannot be known through a formula in advance of the event. There is a middle ground or certainly a penumbra in which discretion is at large. The discretion, however, is not confided to the courts. The discretion belongs to Congress, unless the choice is clearly wrong, a display of arbitrary power, not an exercise of judgment. This is now familiar law. 'When such a contention comes here we naturally require a showing that by no reasonable possibility can the challenged legislation fall within the wide range of discretion permitted to the Congress.' United States v. Butler, supra, p. 67. Compare Cincinnati Soap Co. v. United States, ante, p. 308; United States v. Realty Co., 163 U.S. 427, 440; Head Money Cases, 112 U.S. 580, 595. Nor is the concept of the general welfare static. Needs that were narrow or parochial a century ago may be interwoven in our day with the well-being of the nation. What is critical or urgent changes with the times." In this opinion Chief Justice Hughes and Justices Van Devanter, Brandeis, Sutherland, Stone and Roberts concurred.
The principle has application here. The expenditure of money to lift substandard families, who would otherwise be doomed to live under slum conditions, to a higher standard of living, is as much in the interest of the general welfare as is the giving of old-age pensions to help the needy and advanced in years establish and maintain their former standard of living.
The nature of the use and purpose of the Laurel Homes project is settled in many outside jurisdictions. In Housing Authority v. Higginbotham, supra, the court, in holding that slum-clearance and low-rent housing are in the nature of a public use, employed this language: "The question has been presented to the courts of last resort in the following jurisdictions and has been determined * * * to be a public use." Then follows the citation of cases from 19 states. Furthermore, it has been held that the United States cannot lawfully own any property in a proprietary capacity ( Van Brocklin v. Tenn., supra), and that all valid federal action is governmental ( Graves v. N.Y., supra). In the latter case the court said: "Its [the federal government's] every action within its constitutional powers is governmental action." Therefore, according to the many authorities cited and referred to, the present project involved a public use, and the establishment and operation of the Federal Public Housing Authority was an exercise of a governmental function. The inevitable conclusion is that property lawfully owned by the Federal Public Housing Authority (including Laurel Homes) is immune from state taxation except by consent of the federal government.
The federal government, however, has done more than withhold consent. Title 42, Section 1405, paragraph (e), U.S. Code, exempts such projects from state taxation. In its material part it reads at follows:
"The authority [that is, the United States Housing Authority now the Federal Public Housing Authority], including but not limited to its franchise, capital, reserves, surplus, loans, income, assets, and property of any kind, shall be exempt from all taxation now or hereafter imposed by the United States or by any state, county, municipality, or local taxing authority."
In addition this state has by statute exempted property of the United States from taxation. Section 5351, General Code (110 Ohio Laws, 78), provided:
"Real or personal property belonging exclusively to the state or United States, and public property used for a public purpose shall be exempt from taxation."
This latter statute, insofar as it relates to federal property, is in accord with similar provisions adopted by most of the states. See case note, 29 L.Ed. 852.
Unless these statutes are unconstitutional and void, there is express provision for tax immunity. To hold that Congress cannot pass such an exemption statute would be to deny federal supremacy in a field which this court has deemed to be within the power bestowed by the federal Constitution. State, ex rel. Ellis, City Solicitor, v. Sherrill, City Manager, supra. And, again, though the state may not tax property lawfully owned by the federal government without its consent, there is no reason why a state may not by statute exempt federal property used for a purely public purpose, such as partial relief, in the absence of inhibition by the state constitution. Unless these statutory provisions are declared unconstitutional and void, state taxation upon such property properly and lawfully held by the federal government is forbidden. No such binding declaration has yet been made.
Are the storerooms lawfully owned?
Title 42, Chapter 8, Section 1402, paragraph (9), U.S. Code, a section of the low-rent housing act, provides: "The term 'non-dwelling facilities' shall include site development, improvements and facilities located outside building walls (including streets, sidewalks, and sanitary, utility, and other facilities)."
Included in the Laurel Homes project are retail storerooms constructed for the purpose of being leased to private persons at the highest rent obtainable. Nowhere in the federal act is there any provision for non-dwelling facilities of this character. We are, therefore, presented with an instance where the federal government through an agency or instrumentality, without statutory authority, spends federal funds to build buildings to rent for a private purpose in competition with other owners of strictly private property.
The federal government has no power to engage for gain in a purely private enterprise. It is fundamental that the ownership of federal property, not put to a public use but devoted to a gainful pursuit in competition with private business, is in violation of the organic law of the nation. Van Brocklin v. State of Tenn., supra, at page 159. The government might as well undertake to build a factory or any other building to lease in competition with the owners of like private property. In the construction and rental of the retail storerooms, there was no public purpose, no element of public utility, no governmental function, no relation to the general welfare.
When, as has been pointed out, the "national government lawfully acts through a corporation, which it owns and controls, * * * tax immunity attaches * * *." Graves v. New York, supra. Conversely, when the government acts unlawfully through such a medium the immunity does not attach. The construction of the storerooms and the leasing thereof in the manner specified are not undertakings that properly come within the legislative power conferred by the federal Constitution, and Congress has not authorized such a course in the low-rent housing act. That course (being an attempt to hold storeroom property in a nongovernmental or proprietary capacity) was unlawful.
We are forced to the conclusion that the property lawfully included in what is known as the Laurel Homes project is immune from state taxation not only upon principle settled by adjudication but, also, in terms, by statutes, state and federal. The storerooms, however, not being lawfully owned are subject to state taxation to the extent permitted by the state Constitution and required by state statutes.
ZIMMERMAN, J., concurs in the foregoing dissenting opinion.