Krupp Place 1 Co–op Inc. v. Bd. of Review of Jasper County

• Decision Date: 29 July 2011
• Docket Number: No. 09–0654.,09–0654.
• Citation: 801 N.W.2d 9
• Parties: KRUPP PLACE 1 CO–OP, INC. and Krupp Place 2 Co–Op, Inc., Appellees,v.BOARD OF REVIEW OF JASPER COUNTY, Iowa, Appellant.
• Court: Iowa Supreme Court

801 N.W.2d 9

KRUPP PLACE 1 CO–OP, INC. and Krupp Place 2 Co–Op, Inc., Appellees,

v.BOARD OF REVIEW OF JASPER COUNTY, Iowa, Appellant.

No. 09–0654.

Supreme Court of Iowa.

July 29, 2011.

Michael K. Jacobsen, County Attorney, and James W. Cleverley, Jr., Assistant County Attorney, for appellant.James E. Nervig of Brick, Gentry, Bowers, Swartz & Levis, P.C., West Des Moines, and Craig R. Hastings of Hastings, Gartin & Boettger, LLP, Ames, for appellee.Eleanor M. Dilkes, City Attorney, and Eric R. Goers, Assistant City Attorney, for amicus curiae City of Iowa City, and Terrence L. Timmins, General Counsel, for amicus curiae Iowa League of Cities.ZAGER, Justice.

In this case, we are presented with an appeal of the district court's decision to classify two multiunit apartment buildings as “residential cooperatives” entitling the properties to be taxed at residential, rather than commercial, property tax rates. The Board of Review of Jasper County appeals, contending the two properties are cooperatives in form only and should be classified as commercial property for purposes of property taxation. The court of appeals affirmed the district court, and we granted further review. We now affirm the decision of the district court and the court of appeals.

I. Background Facts and Proceedings.

This case involves the proper classification of two parcels of real estate for property tax purposes. Krupp Place 1 Co-op, Inc. and Krupp Place 2 Co-op, Inc. are both corporations organized as multiple housing cooperatives under Iowa Code chapter 499A (2007), and each corporation has filed its articles of incorporation with the Iowa Secretary of State. Each cooperative subsequently obtained title to real estate designated as Krupp Place 1 and Krupp Place 2. Both Krupp Place 1 and Krupp Place 2 are improved with a building containing twenty-four apartment units.

Larry and Connie Krupp are the only members of the cooperatives. Pursuant to Iowa Code section 499A.11, certificates of membership have been issued to Larry and Connie Krupp in each of the cooperatives certifying their membership interests. These certificates entitle Larry and Connie Krupp to two property rights: (1) an undivided fifty percent interest in each of the cooperative housing corporations which carries with it the right to participate in the management of the corporation, and (2) a proprietary leasehold interest in one-half of the apartments in Krupp Place 1 and Krupp Place 2.

As members of the cooperatives, Larry and Connie Krupp have entered into proprietary leases with the cooperatives requiring them to pay rent. Neither of the Krupps have ever resided in the cooperative properties. Instead, they have subleased the apartments to subtenants who use the properties for residential purposes. The Krupps use the net rental income from subtenants to pay the rent they owe to the cooperatives under the proprietary leases. The cooperatives in turn use the rent paid by the Krupps to meet cooperative expenses. Any net income left after payment of expenses is retained by the cooperatives as they are prohibited by Iowa Code section 499A.4 from distributing net income to its members. Additionally, both Larry and Connie Krupp pay their proportionate fifty percent shares of all taxes on the subject real estate consistent with their respective fifty percent membership interests.

Neither of the cooperatives operate under a tax exempt status pursuant to section 501(c)(3) of the Internal Revenue Code. Nor is either cooperative a for-profit corporation under Iowa Code chapter 504. Each is a specialized corporation created under Iowa Code chapter 499A. The accountant for the cooperative corporations has made a subchapter S election for each corporation under the Internal Revenue Code. As a result of this election, Larry and Connie Krupp must report any net income from these cooperatives on their individual income tax returns even though it is not, and cannot by statute, be distributed to them.

On March 18, 2008, the Jasper County Assessor mailed Larry and Connie Krupp a notice of the 2008 Real Estate Assessment Roll for Jasper County wherein the cooperative real estate was classified as commercial real estate for property tax purposes. The cooperatives appealed the classification of their real estate as commercial and the corresponding assessments to the Board of Review of Jasper County. The board adjusted the assessed value of the properties but did not alter its classification of the properties as commercial. The cooperatives appealed the board's decision to the district court.

During the course of the appeal, the parties entered into a stipulation of facts, after which time the cooperatives filed for summary judgment on the issue of classification of the real estate. Originally, the district court issued its decision affirming the classification of the real estate as commercial. The district court recognized that under Iowa Code section 441.21(11), “all land and buildings of multiple housing cooperatives organized under chapter 499A” are to be classified as residential property for tax purposes. The district court, however, concluded the Krupps had not complied with “the spirit of the law.” Although the district court found that the real estate fell within the definition of a multiple housing cooperative under chapter 499A, it stated that like any corporation, the corporate entity may be disregarded and the corporate veil pierced if the entity is a sham or if corporate formalities are not followed. The court noted that there was no evidence in the record that corporate meetings had been held or the existence of any bylaws.

While the district court recognized that members of a housing cooperative have the power to sublease their units under Iowa Code section 499A.5, the district court concluded that the manner in which Connie and Larry Krupp have “subleased” the premises “reeks of impropriety.” The district court was concerned the Krupps each received one membership unit representing a one-half ownership in each building, and then in effect subdivided their units and subleased them. The district court was also concerned the record did not establish how much the Krupps paid to the cooperatives under the proprietary leases. As a result, the district court did not know the difference between the amounts paid by the Krupps to the cooperatives and the amount the Krupps received from their subtenants. The district court was therefore concerned the Krupps may have been making a profit as a result of the arrangement, something cooperatives are not authorized to do under Iowa Code section 499.1. The district court concluded that the facts revealed “two people, seeking to minimize their tax liability, forming a shell multiple housing cooperative under chapter 499A while actually operating a standard rental property.” The district court affirmed the board's determination the real estate held by the cooperatives should be taxed as commercial property.

The cooperatives filed a combined motion under Iowa Rules of Civil Procedure 1.904 and 1.1004 for amendment and enlargement of findings and for a new trial. At the time of the filing of the combined motions, the cooperatives provided substantial additional documentation to the district court, including the 2008 income tax returns for the cooperatives and various corporate documents.

In light of the joint motion and additional filings, the cooperatives argued the district court had made additional findings of fact that were beyond the parties' stipulation that “[a]ll of the material facts in this case are undisputed.” The cooperatives pointed out that there was no evidence regarding compliance with corporate formalities because the issue was not in dispute. As a result, the cooperatives argued the court's previous piercing of the corporate veil was erroneous. The cooperatives further reiterated that because all of the statutory prerequisites of Iowa Code chapter 441 were met, the court had no choice but to follow the legislative directive that residential cooperative property be classified as residential for property tax purposes. While the cooperatives recognized the court was concerned with compliance with the spirit of the law, they noted that the district court's ruling ran contrary to the fundamental principle that a taxpayer has a legal right to arrange his affairs in such a manner as to minimize taxation.

After its receipt of numerous evidentiary documents, and after further hearing, the district court granted the rule 1.904 motion for reconsideration, correction, amendment and enlargement of findings and conclusions filed on behalf of the cooperatives. In light of the new evidence, the district court concluded the cooperatives had followed all proper corporate formalities, and the multiple housing cooperatives were set up exactly as prescribed by Iowa law. Accordingly, the district court reversed its prior ruling and concluded the cooperative real estate should properly be classified as residential pursuant to Iowa Code section 441.21(11).

The board appealed. Our court of appeals affirmed the district court. We granted further review. We now affirm the court of appeals and district court in all respects.

II. Standard of Review.

Appeals from tax assessments are triable in equity. Iowa Code § 441.39. Therefore, the court's review is de novo. Iowa R.App. P. 6.907. In this case the parties have stipulated to the underlying facts. A stipulation of facts is binding on the parties. Iowa Supreme Ct. Att'y Disciplinary Bd. v. Gailey, 790 N.W.2d 801, 803 (Iowa 2010).

We construe factual stipulations by attempting to determine and give effect to the parties' intentions. In doing so, we interpret the stipulation “with reference to its subject matter and in light of the surrounding circumstances and the whole record, including the state of the pleadings and issues involved.”

Id. at 803–04 (quoting Graen's Mens Wear, Inc. v....