Knowledgebase-County Taxing Rental Property Owned by the Utility District


Information Product

Title:County Taxing Rental Property Owned by the Utility District
Summary:MTAS was asked whether the county can tax rental property owned by the utility district.
Original Author:Hemsley, Sid
Co-Author:
Product Create Date:01/26/96
Last Reviewed on::03/19/2010
Subject:Purchasing--Lease agreements; Taxes--Personal property; Utilities--Utility districts
Type:Legal Opinion
Legal Opinion:

Reference Documents:

Text of Document: January 26, 1996

Your question is, can the county tax rental property owned by the utility district?

The answer is probably yes, but one case leaves a crack in the door.

Look at article II, sec. 28 of the Tennessee Constitution, Tennessee Code Annotated, sec. 67-5-203(a)(1), and these cases: principally City of Chattanooga v. Marion County, 315 S.W.2d 407 (1958), but also Johnson City v. Booth, 261 S.W.2d 820 (1953), Johnson City v. Weeks, 180 S.W. 327 (1915), Metropolitan Government of Nashville and Davidson County v. Schatten Cypress Co., 530 S.W.2d 277 (Tenn. 1975), and State ex rel. Beeler v. City of Nashville, 157 S.W.2d 839 (1942). [City of Chattanooga gives a good synopsis of all those cases, except Metro v. Schatten Cyprus Co.]

City of Chattanooga and the two Johnson City cases work against you. However, in my view it is dicta in Metro v. Schatten Cyprus Co. that probably does you the most damage. With respect to the latter case, the Nashville Airport Authority leased certain property it owned to a business. The county did not tax the property. One of the questions in that case was whether the assessor was required to make a separate assessment against the reversionary interest. No, said the Court, but in some "Oh, by the way," language:

The argument by appellee that the Assessor failed to make a separate assessment against the reversionary interest is, in our opinion, without merit. The property is owned by the Metropolitan Government, which is the taxing authority. At the time of the lease in question was entered into, there were two taxing authorities in Davidson County, one of these being the City of Nashville and the other the County of Davidson. It was conceivable that Davidson County might place this property upon its tax rolls at the time of the original lease, because some question might have been made as to whether the City of Nashville was using the property for a "public" or "municipal" purpose within the meaning of T.C.A. sec. 67-502(1) in the making of such a lease as is here involved.

There are a number of cases in this state holding that one public body may tax the property of another public agency if that property is not being used for public purposes. So long as Davidson County was a separate taxing entity from the City of Nashville, there was a possibility that the interest of both the lessee and that of the lessor City of Nashville might be subject to county taxes. [At 281-282.]
[Emphasis is mine.]

That was not so now with respect to the taxation of the interest of the lessor [the City of Nashville], said the Court, because the two governments had consolidated.

The above dicta seems to me a strong indication that the court thought the property was probably taxable before the consolidation.

State ex rel. Beeler leaves the crack in the door. In that case the question was whether valuable business property in Nashville willed to the state was exempt from city property taxes. Under the terms of the will the state used the income from the business property to support a certain state school. The Court held the property was not taxable, declaring that, “Investment property of the State, however, used elusively for public purposes is exempt and such property is used elusively for public purposes when the income therefrom is exclusively so applied. [At 841.]

Given the language ague of article II, section 28 of the Tennessee Constitution, and Tennessee Code Annotated, section 67-5-203(a)(1) no reason is immediately apparent to me why under State ex rel. Beeler municipal investment property would not be exempt from taxation; provided, of course, the income was used for a public purpose. Arguably, if a utility district or other utility used the income from rental property to help support the utility function, the investment income would be used for a public purpose. But, once again, you have the cases cited above working against you.

Incidentally, there is a threshold question you may have to consider: Does a utility district have the authority to be a landlord? I have never had a reason to look into that question with respect to utility districts. Generally the acquisition of property by municipalities is required to meet a two prong test:

1. Is the acquisition for a public purpose?

2. Does the municipality have the express or implied authority in its charter or the general law to acquire the property?

I suspect the same or similar rules apply to utility districts.

I have had reason to research the question of whether a municipality can be a landlord. My opinion is that generally municipalities in Tennessee cannot engage in the real estate business or other businesses unless expressly authorized to do so by statute or charter, but that it can be a landlord provided the acquisition of the property in question meets the two-prong test, the property either contains leasehold property at the time of the acquisition, or it is reasonable for the municipality to lease out all or a part of the property pending the future public use, and the municipality's function as a landlord is temporary. I think the meaning of "temporary" would turn upon the facts in each case.

Sincerely,

Sidney D. Hemsley
Senior Law Consultant

SDH/

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