Kunes v. Samaritan Health Service

• Decision Date: 23 January 1979
• Docket Number: No. 13580,13580
• Citation: 121 Ariz. 413,590 P.2d 1359
• Parties: Ken R. KUNES, Assessor, County of Maricopa, State of Arizona, Glenn O. Stapley, Treasurer, County of Maricopa, State of Arizona, County of Maricopa, Richard F. Hillman, Assessor, County of Coconino, Rose Stacy, Treasurer, County of Coconino, County of Coconino, and Arizona Department of Revenue, Appellants, v. SAMARITAN HEALTH SERVICE, an Arizona Non-Profit Corporation, Valley National Bank, an Arizona Corporation, Flagstaff Community Hospital, an Arizona Non- Profit Corporation, Litton Industries Credit Corporation, Ziegler Leasing Corporation, General Leasing Co., and Transunion Medical Leasing Co., Appellees.
• Court: Arizona Supreme Court

Page 1359

590 P.2d 1359

121 Ariz. 413

Ken R. KUNES, Assessor, County of Maricopa, State of Arizona, Glenn O. Stapley, Treasurer, County of Maricopa, State of Arizona, County of Maricopa, Richard F. Hillman, Assessor, County of Coconino, Rose Stacy, Treasurer, County of Coconino, County of Coconino, and Arizona Department of Revenue, Appellants, v. SAMARITAN HEALTH SERVICE, an Arizona Non-Profit Corporation, Valley National Bank, an Arizona Corporation, Flagstaff Community Hospital, an Arizona Non- Profit Corporation, Litton Industries Credit Corporation, Ziegler Leasing Corporation, General Leasing Co., and Transunion Medical Leasing Co., Appellees.

No. 13580.

Supreme Court of Arizona, In Banc.

Jan. 23, 1979.

Rehearing Denied Feb. 27, 1979.

Bruce E. Babbitt, John A. LaSota, Jr., former Attys. Gen., Robert K. Corbin, Atty. Gen., by James D. Winter, Asst. Atty. Gen., Beer, Kalyna & Simon by Olgerd W. Kalyna and Donald P. Roelke, Phoenix, for appellants.

Lewis & Roca by Roger W. Kaufman, Jay S. Ruffner and Paul G. Ulrich, Phoenix, for appellees.

HOLOHAN, Justice.

This case presents the question whether equipment owned by profit-making corporations and leased to charitable organizations is exempt from Ad valorem property tax. Two cases, one from Maricopa County and the other from Coconino County, have been consolidated for purposes of this appeal.

Appellee Samaritan Health Service is a nonprofit charitable corporation which operates several nonprofit hospitals in Arizona. It finances the purchase of much of its equipment through the Valley National Bank. The agreement between the bank and Samaritan calls for the bank to purchase equipment according to the hospitals' order, which equipment the bank then leases to the hospitals. The bank retains title to the property at all times, but delivery of the equipment is made directly to the appropriate hospital, and the hospital retains sole possession of the equipment for the duration of the lease. Flagstaff Community Hospital finances its equipment by similar agreements with a number of profit-making corporations operated for the specific purpose of leasing such equipment to institutional users. The lease agreements in both cases require any Ad valorem property taxes to be paid by the appellee hospitals. Consequently any tax exemption would be a financial benefit to the hospitals.

The county assessors for Maricopa and Coconino Counties included this equipment on the Ad valorem property tax rolls in 1975. The financing institutions and hospitals joined in applying for tax exemptions based upon A.R.S. § 42-271(4), which exempts "hospitals . . . and the lands appurtenant to such buildings, with their fixtures and equipment, not used or held for profit." Both county assessors denied the tax exemptions, stating that the property was owned by profit-making organizations which are not entitled to the exemption. Appellees then paid the taxes under protest and brought an action to recover these payments. The cases were consolidated in Maricopa County Superior Court. That court granted summary judgment in favor of appellees. The tax authorities appeal. We have jurisdiction pursuant to 17A A.R.S. Rules of Civil Appellate Procedure, rule 19(e). For the reasons which follow we reverse the decision of the Superior Court.

There are no disputes as to the material facts in this case. Only one issue is presented for us to resolve: Is personal property owned by profit-making organizations but leased to and used exclusively by nonprofit hospitals for charitable purposes exempt from Ad valorem property taxation?

A.R.S.Const. art 9 § 2 reads in pertinent part:

"Property of educational, charitable and religious associations or institutions not used or held for profit may be exempt from taxation by law."

Pursuant to this constitutional authorization the legislature has enacted A.R.S. § 42-271(4), which exempts "hospitals . . . and the lands appurtenant to such buildings, with their fixtures and equipment, not used or held for profit."

The constitution reads further:

"All property in the state not exempt under the laws of the United States or under this constitution, or exempt by law under the provisions of this section shall be subject to taxation to be ascertained as provided by law."

In considering the issue before us, we must keep in mind a statement made earlier by this court "The constitutional provision does not of itself exempt any property from taxation. It merely permits the legislature to exempt such of the property of 'charitable . . . associations or institutions' as is not used or held for profit. And under this the legislature cannot grant more, but may give much less than the exemption permitted by the constitution." Conrad v. County of Maricopa, 40 Ariz. 390, 393, 12 P.2d 613, 614 (1932).

The rule of law is clear that the legislature cannot exempt from Ad valorem taxation any property or class of property not specified in the constitution. Miners and Merchants Bank v. Board of Supervisors of Cochise County, 55 Ariz. 357, 101 P.2d 461 (1940). We must therefore interpret the meaning of A.R.S. § 42-271(4) in such a way that it conforms to the limitations of A.R.S.Const. art. 9 § 2. Thus, the issue becomes whether the constitution's words "property of . . . charitable . . . institutions" includes property leased to hospitals by nonexempt organizations. We hold that it does not.

In Arizona, laws exempting property from taxation are to be strictly construed and interpreted in light of the presumption that tax exemptions are not favored. Lois Grunow Memorial Clinic v. Oglesby, 42 Ariz. 98, 22 P.2d 1076 (1933).

In State of Arizona v. Yuma Irrigation District, 55 Ariz. 178, 99 P.2d 704 (1940), an irrigation district attempted to claim exemption from property tax based upon A.R.S.Const. art. 9 § 2. The legislature had passed laws establishing irrigation districts as "municipal corporations," and these statutes, if valid, would have allowed the irrigation district in question a tax exemption equivalent to that enjoyed by any municipality. However, this court held that the constitutional provision did not extend to corporations established for business rather than political purposes. ¹ Finding that the legislature had exceeded its constitutional authority in attempting to give a tax exemption to irrigation districts, the court stated:

"The legislature can exempt only that property the constitution provides it may exempt by law. It cannot do indirectly what it cannot do directly." 55 Ariz. at 184, 99 P.2d at 706.

The same reasoning applies to the case before us. The constitution mandates that only "property of" appellee hospitals can be given tax-exempt status. The legislature cannot expand its constitutional authority by merely redefining the term "property of" to include leased property.

The Supreme Court of Utah faced the very question before us in University of Utah v. Salt Lake County, 547 P.2d 207 (Utah, 1976). Holding that the phrase "Property of the institutions" does not encompass property leased to the tax-exempt institutions by profit-making organizations, the Utah Supreme Court denied the University of Utah a tax exemption on equipment leased from Picker X-ray Company. That court held, as we do here, that the phrase "property of" requires that a property tax be imposed upon and exemptions granted to the title owner of property, not the user. In following Utah's decision, we conform to what appears to be the uniform rule of law. See Hoover Equipment Company v. Board of Tax Roll Corrections of Adair County, 436 P.2d 645 (Okla., 1967); People v. St. Mary's Roman Catholic Hospital, 306 Ill. 174, 137 N.E. 875 (1922); Annot. 55 A.L.R.3d 430 § 9 (1974).

Prior Arizona case law also appears to mandate such an interpretation. In Maricopa County v. Fox Riverside Theatre Corp., 60 Ariz. 260, 135 P.2d 513 (1943), this court interpreted the application of A.R.S.Const. art. 9 § 2 to a leasehold. In that case the parties were reversed. The City of Phoenix leased a parcel of real property to a profit-making corporation. The lessee made improvements on the property which were declared by the lease agreement to be the property of the lessor. All parties agreed that, to the extent that it was the property of the City of Phoenix, the real estate was exempt from taxation under the constitutional provision exempting municipal property. The tax assessor argued that the leasehold held by the profit-making corporation was a separate, identifiable property interest which was subject to taxation. This court agreed that the leasehold was an independently recognizable property interest. However, because the legislature had not specifically provided for taxation of the leasehold apart from the underlying fee title, no tax could be imposed upon the private corporation. In coming to this decision, the court was predisposed toward a finding that the Use of the property rather than legal title should be the determinative factor. ² Nevertheless, the court could not overcome the clear meaning of the constitutional provision exempting "municipal property." We reach the same conclusion as to the meaning of "property of . . . charitable . . . institutions." The phrase clearly and unambiguously means property Owned by such institutions.

In State Tax Commission v. Shattuck, 44 Ariz. 379, 38 P.2d 631 (1934), this court considered a number of constitutional attacks upon the Intangible Property Tax Act of 1933. Laws 1933, 1st Spec.Sess. ch. 16. One...