Duwamish Warehouse Co. v. Hoppe

• Decision Date: 26 July 1984
• Docket Number: No. 49266-2,49266-2
• Citation: 684 P.2d 703,57 A.L.R.4th 939,102 Wn.2d 249
• Parties: , 57 A.L.R.4th 939 DUWAMISH WAREHOUSE COMPANY, Appellant, v. Harley H. HOPPE, Respondent.
• Court: Washington Supreme Court

Page 249

102 Wn.2d 249

684 P.2d 703, 57 A.L.R.4th 939

DUWAMISH WAREHOUSE COMPANY, Appellant, v. Harley H. HOPPE, Respondent.

No. 49266-2.

Supreme Court of Washington En Banc.

July 26, 1984.

Skeel, Henke, Evenson & Roberts, Eric Richter, Seattle, for appellant.

Norman K. Maleng, King County Prosecutor, William C. Severson, Sandra Cohen, Deputy Pros. Attys., Seattle, for respondent.

ROSELLINI, Justice.

Duwamish Warehouse Company appeals the trial court's summary judgment affirming the King County Assessor's valuation of private lessee's improvements on leased public land. We reverse.

Facts

The taxpayer, Duwamish Warehouse Company (Duwamish), is the lessee of certain lands from the Port of Seattle (Port). The property at issue is a warehouse building constructed by Duwamish on the leased property. The term of the ground lease is 26 years and is scheduled to expire in 1991. Under that ground lease, Duwamish was required to construct the warehouse. During the pendency of the ground lease, ownership of the warehouse is vested in Duwamish. Duwamish leases the main portion of the warehouse building back to the Port and the 1968 addition thereto to the Lockheed Shipbuilding Company. At the termination of the ground lease, ownership and possession of the warehouse building transfers automatically and without further consideration to the Port. The warehouse is a permanent, fixed improvement on the land and has a useful life far longer than the term of the lease. The Port insures the subject building. If the building burns, the Port has the election to rebuild or not. If the Port were to elect not to rebuild, the Port collects the insurance proceeds less only the lessee's unamortized costs.

While the structure of these lease arrangements is somewhat complex, the effect, for purposes of taxation, is fairly straightforward. The rent paid by Duwamish to the Port under the ground lease is subject to the leasehold excise tax under RCW 82.29A. No rent is paid by Duwamish for the warehouse building, and the building is not defined as "contract rent" for purposes of RCW 82.29A.020. Rather, under RCW 82.29A.160, the improvement is separately assessed and valued by the King County Assessor under RCW Title 84. The assessor valued the warehouse for Title 84 property tax purposes at its full market value, without consideration of the Port's reversionary interest.

Issue

Whether the publicly owned reversionary interest is a factor which the assessing officer must consider in determining the true and fair market value of the taxable private interest in a permanent improvement on leased public land.

Decision

A proper resolution of the valuation question before the court requires an understanding of the historical background of the applicable statutory provisions. Const. art. 7, § 1 provides, in part, that "[p]roperty ... of the state, counties, ... and other municipal corporations ... shall be exempt from taxation." In 1906, the taxability of leaseholds of state-owned, tax-exempt land was presented to the court in Moeller v. Gormley, 44 Wash. 465, 87 P. 507 (1906). In an action to restrain King County from collecting personal property taxes on leasehold interests in state-owned, tax-exempt tidelands, the court held that under existing statutes, the leasehold was not taxable as personal property but was taxable as real property, subject to the general rule of taxation. The court noted, however, that the then existing revenue law was probably inadequate to enforce tax collection when the leasehold of state-owned property was assessed as real property.

In response to Moeller, the Legislature in 1907 amended the statutory definition of personal property (now codified in RCW 84.04.080) for the purposes of taxation "to embrace and include ... all leases of real property and leasehold interests therein". See Pier 67, Inc. v. King Cy., 78 Wash.2d 48, 53-54, 469 P.2d 902 (1970). Until 1970, leasehold interests in public property were valued for property tax purposes according to a set of standards developed from four early court decisions commonly referred to as the Metropolitan Building Company cases. See Metropolitan Bldg. Co. v. King Cy., 62 Wash. 409, 113 P. 1114 (1911); Metropolitan Bldg. Co. v. King Cy., 64 Wash. 615, 117 P. 495 (1911); Metropolitan Bldg. Co. v. King Cy., 72 Wash. 47, 129 P. 883 (1913); In re Metropolitan Bldg. Co., 144 Wash. 469, 258 P. 473 (1927). These standards provided that in determining the taxable value of leasehold interests, rents reserved and mortgage indebtedness were to be deducted from the fair market value of the leasehold.

Pier 67 overturned these standards and held that under RCW 84.04.080, which provided that leasehold interest and improvements on state-owned, tax-exempt land shall be taxed as personal property, the proper method of assessment is to determine the true cash value, or market value, of the leasehold using the same standards as for valuing taxable property in general. The court reasoned that ad valorem property taxes are primary in rem in character and the "unit assessment" structure of valuation required inclusion of both the leasehold and the improvements to derive the value of the right to use the property over the period of the lease.

In Clark-Kunzl Co. v. Williams, 78 Wash.2d 59, 469 P.2d 874 (1970), we held that the authorization contained in RCW 84.04.080 to tax leasehold interests separately from the fee applied only to leases of state-owned, tax-exempt land. Where private land is leased, the entire estate including the fee, the leasehold and any improvements thereon, is assessed and taxed as a unit with the burden of paying the taxes being a matter of contract between the lessor and lessee. The court additionally reaffirmed the holding of Pier 67 that the valuation of leases of state-owned land required the primary lease and improvements be valued as a unit and not be separated into separate assessments.

When the fee interest is privately owned, a single tax is imposed on the entire estate. When title to the fee interest is owned by the state, and therefore tax exempt and indefeasible by tax lien, the taxable possessory interest must be taxed separately. The imposition of the tax on the possessory interest is effected by making the lessee personally obligated to pay the tax. This statutory framework, however, does not intend to create the very complicated fragmentization which would arise if each of a myriad of subleases under a long-term lease of highly developed state owned land were to be separately assessed and taxed as a possessory interest. The unit assessment rule requires that a lease of state land must be assessed and taxed on the value of the primary leasehold as a unit.

Clark-Kunzl, at 64, 469 P.2d 874.

In summary, the holdings of Pier 67 and Clark-Kunzl in regard to leaseholds of state-owned, tax-exempt land are: (1) under RCW 84.04.080, a permanent building erected by a lessee upon leased public property is taxable only as a lesser interest within the supporting taxable leasehold interest; and (2) valuation of the taxable leasehold (including the building) under RCW 84.40.030 should reflect the market value of the right created by the lease to possess the property for the term of the lease, without deduction for rent reserved or other associated costs.

While both Pier 67 and Clark-Kunzl recognize that ad valorem property taxes are primarily in rem in character, they also recognize that the private possessory interest was not to be assessed a tax based upon the State's tax-exempt interest in the property. The "unit assessment" rule under this tax structure was intended both to avoid fragmentation of the value of the leasehold among lessees and the sublessees and to arrive at a full and fair valuation of the primary leasehold interest. Clark-Kunzl, at 64, 469 P.2d 874; Pier 67, 78 Wash.2d at 57-58, 469 P.2d 902.

In response to these holdings, the Legislature enacted the exemption (RCW 84.36.451) and the "in lieu" excise tax for leases of public land (RCW 82.29A).

Under the new tax structure, these cases retain validity only insofar as they prohibit fragmentation of value between private lessor/lessee property interests or between the lessees and sublessees of tax-exempt public property. The 1976 amendments were specifically intended to permit the assessor to tax separately any improvements on leased publicly owned lands. Japan Line, Ltd. v. McCaffree, 88 Wash.2d 93, 99, 558 P.2d 211 (1977). Accordingly, insofar as the older cases view improvements as simply part of the value of a leasehold of public property, those cases are not helpful.

A more useful and simpler approach is to rely on ordinary rules of statutory construction. The most pertinent of those rules is that if there is any doubt as to the meaning of a tax statute, it must be construed against the taxing power. Mac Amusement Co. v. Department of Revenue, 95 Wash.2d 963, 966, 633 P.2d 68 (1981). Applying this rule, we must define the phrase "full and fair value of the property" when that phrase is applied to an improvement on publicly owned land. Ordinarily, full and fair value means the amount a willing buyer would pay a seller who is willing but not obligated to sell. See, e.g., Carkonen v. Williams, 76 Wash.2d 617, 458 P.2d 280 (1969). Where private land is leased, the willing buyer is contemplated to be purchasing the entire fee, including leasehold and improvements. See Clark-Kunzl, 78 Wash.2d at 63, 469 P.2d 874. In the circumstances of state-owned interests in the land, however, the State's ownership interest cannot be purchased. Thus, a willing buyer would not logically pay a price for the entire fee. Moreover, when the Legislature separated improvements as a taxable unit, it did not expressly state that the entire fee value of the improvement is taxable to the lessee. When there is doubt as to whether the Legislature intended to tax the fee value, the statute must be...