Nabisco, Inc. v. Korzen

• Decision Date: 20 September 1977
• Docket Number: PEPSI-COLA,Nos. 48251 and 48313,s. 48251 and 48313
• Citation: 369 N.E.2d 829,12 Ill.Dec. 122,68 Ill.2d 451
• Parties: , 12 Ill.Dec. 122 NABISCO, INC., Appellee, v. Bernard KORZEN, County Treasurer, et al., Appellants.GENERAL BOTTLERS, INC., Appellant, v. Thomas TULLY, County Assessor, et al., Appellees.
• Court: Illinois Supreme Court

Page 829

369 N.E.2d 829

68 Ill.2d 451, 12 Ill.Dec. 122

NABISCO, INC., Appellee, v. Bernard KORZEN, County Treasurer, et al., Appellants.

PEPSI-COLA GENERAL BOTTLERS, INC., Appellant, v. Thomas TULLY, County Assessor, et al., Appellees.

Nos. 48251 and 48313.

Supreme Court of Illinois.

Sept. 20, 1977.

Rehearing Denied Nov. 23, 1977.

Bernard Carey, State's Atty., Chicago (Sheldon Gardner, Henry A. Hauser, Arnold F. Block, and Michael F. Baccash, Asst. State's Attys., of counsel), for appellants.

James B. Wilson, Aaron J. Kramer, Beth B. Davis, Schiff Hardin & Waite, Chicago for Pepsi-Cola General Bottlers, Inc., plaintiff-appellant.

Devoe, Shadur & Krupp, Chicago, for Lake Forest College, amicus curiae; Neil H. Adelman, Arthur W. Friedman, Chicago, of counsel.

Howard J. Trienens, William H. Thigpen, R. Eden Martin, Richard L. Miller, Jr., Chicago, for Northwestern University, amicus curiae; Michael C. Weston, Evanston, Sidley & Austin, Chicago, of counsel.

GOLDENHERSH, Justice:

In 1855 Northwestern University's corporate charter, granted in 1851, was amended to provide "That all property of whatever kind or description belonging to or owned by said corporation shall be forever free from taxation for any and all purposes." (1855 Ill.Laws 483, 484.) In earlier litigation (see Northwestern University v. People ex rel. Miller, 99 U.S. 309, 25 L.Ed. 387; In re Assessment of Northwestern University, 206 Ill. 64, 69 N.E. 75; Northwestern University v. Hanberg, 237 Ill. 185, 86 N.E. 734; and People ex rel. County Collector v. Northwestern University, 51 Ill.2d 131, 281 N.E.2d 334) attacks on the exemption were rejected. These appeals arise out of the efforts of the taxing authorities of Cook County to assess and tax leasehold estates under the provisions of section 26 of the Revenue Act of 1939 (Ill.Rev.Stat. 1967, ch. 120, par. 507), which provides: "When real estate which is exempt from taxation is leased to another whose property is not exempt, and the leasing of which does not make the real estate taxable, the leasehold estate and the appurtenances shall be listed as the property of the lessee thereof, or his assignee, as real estate."

In cause No. 48251, Nabisco, Inc., in count III of its fourth amended complaint, sought to enjoin defendants, the County of Cook, its assessor, county clerk and treasurer, from assessing, levying or collecting $38,074.82 in 1974 taxes upon its leasehold estate in two parcels of real estate leased by Nabisco from Northwestern under leases, the initial terms of which expire in 1977 and 1978. In its complaint Nabisco alleged that Northwestern was chartered by the State of Illinois in 1851; that the terms of its charter authorized it to sell or lease its property but precluded it from holding more than 2,000 acres of land at one time, with the provision that any excess received by gift must be sold within 10 years; the 1855 amendment to the charter; that, as a result of decisions of this court and the United States Supreme Court construing its charter exemption, Northwestern has never paid taxes upon its real estate; that the university currently owns 434 acres of land, of which 71 are leased and the revenues used for educational purposes; that Nabisco's leases contain provisions authorizing the lessee to deduct from the rent paid Northwestern the amount of any taxes upon the real estate paid by the lessee, and that the aggregate amount lost to Northwestern if the tax here in question is sustained may be $1,000,000 or more; that by their terms many of Northwestern's leases terminate within 20 years or at the will of the lessees, and that renegotiation of those leases will result in a rental reduced by the amount of tax, approximating $1,000,000, which the lessees must pay upon their leasehold interests if the levy of such taxes is sustained; that the leasehold tax attempted to be assessed pursuant to section 26 violates the equal protection guarantees of the Federal and State constitutions in that application of the leasehold tax against lessees of tax-exempt property without a similar application against lessees of non-tax-exempt property is arbitrary and discriminatory; that section 26 violates the uniformity requirements of article IX, section 4, of the Illinois Constitution of 1970; and that plaintiff has no adequate remedy at law. Count III concluded with a prayer for an injunction against assessing or collecting the taxes, and that section 26 be declared unconstitutional.

Upon allowance of Nabisco's motion for preliminary injunction, the circuit court enjoined defendants from assessing, levying or collecting any tax on the leaseholds for the year 1974 "during the pendency of this litigation." Defendants appealed (58 Ill.2d R. 307) and we allowed their motion to appeal directly to this court (58 Ill.2d R. 302(b)).

In its complaint Pepsi-Cola General Bottlers, Inc., alleged that it was the lessee of real estate owned by Northwestern under a lease which "exclusive of option periods" expires in 1981; that the lease contained a clause reciting the tax-exempt status of the leased land and requiring lessee to pay as additional rent, in lieu of taxes, an amount agreed upon by the parties as representing the approximate amount which would be payable in taxes were the property not exempt; that such amount was to be recomputed at the end of the first 10 years and every four years thereafter; that the additional rent claimed by Northwestern for 1974 in lieu of taxes was $87,150; that it has never been required to pay any real estate or other type of property tax since 1956, the inception date of the lease, but has always paid additional rent in lieu of such taxes; that in October 1973 it received from the assessor a notice of assessed valuation of the improvements on the land in the amount of $662,297, and in August 1974 received the 1973 tax bill in the amount of $83,498.10. Further alleging that the tax violates Northwestern's charter exemption and sections 97 and 104 of the Revenue Act of 1939 (Ill.Rev.Stat. 1973, ch. 120, pars. 578 and 585) relating to publication, notice and an opportunity to be heard prior to an increase in assessed values, is fraudulently excessive because based on the value of Northwestern's improvements rather than plaintiff's leasehold, denies due process and equal protection, and that there exists no adequate remedy at law, the complaint concluded with a prayer for a temporary and permanent injunction against any attempt to collect the tax.

The circuit court issued a temporary restraining order enjoining defendants from attempting to collect the 1973 taxes pending the further order of the court. Upon subsequent allowance of defendants' motion to dismiss, the circuit court dismissed the case but provided in its final order that the temporary injunction previously entered should remain in force pending disposition of the appeal. We allowed the joint motion of the parties for direct appeal (58 Ill.2d R. 302(b)) and consolidated the cases for argument and opinion.

Although our earlier cases established that Northwestern's tax exemption constitutes a contract between the State and the University which cannot be impaired by subsequent legislation imposing taxes upon its property whether that property be directly used for school purposes or leased to others and the proceeds used for school purposes, we have not heretofore considered the question whether a property tax assessed to the lessees under section 26, upon the value of their leasehold estates in property owned by Northwestern, is a constitutionally impermissible impairment of the contract.

We consider first defendants' contention that plaintiffs are not third-party beneficiaries of the charter contract entered into between Northwestern and the State, and are therefore without standing to challenge the tax upon their leasehold estates as being an unconstitutional impairment of Northwestern's contract. We do not agree. Whether the leasehold estates are taxable depends upon the scope of the tax exemption granted in the charter, and the right to pass on to Northwestern as lessor the amount of any taxes which they are called upon to pay is in dispute. Under these circumstances plaintiffs clearly have standing to invoke the charter exemption as a ground for holding the tax invalid. Mutual Tobacco Co. v. Halpin, 414 Ill. 226, 229, 111 N.E.2d 155.

Nabisco contends that the exemption to Northwestern is in the nature of "a broad subsidy exemption" and that therefore La Salle County Manufacturing Co. v. City of Ottawa, 16 Ill. 418, Chicago v. University of Chicago, 302 Ill. 455, 134 N.E. 723, Goodyear Tire and Rubber Co. v. Tierney, 411 Ill. 421, 104 N.E.2d 222, cert. denied, 344 U.S. 825, 73 S.Ct. 24, 97 L.Ed. 642, and People ex rel. Korzen v. American Airlines, 39 Ill.2d 11, 233 N.E.2d 568, which upheld the taxation of leasehold interests in land owned by governmental bodies are distinguishable. We do not agree. The leading case of Jetton v. University of the South, 208 U.S. 489, 28 S.Ct. 375, 52 L.Ed. 584, presented a factual situation similar to this case. The charter granted by the State of Tennessee authorized the University of the South to own 10,000 acres of land "one thousand of which, including buildings and other effects and property of said corporation, shall be exempt from taxation as long as said lands belong to said university." The university leased some of its exempt land and the county taxing official sought to tax the leasehold interest of one lessee, and announced the intent to tax "all lessees similarly situated." In holding the leasehold interest was not exempt from taxation, the Supreme Court stated the rule, as follows:

"As long as different interests may exist in the same land, we think it plain that an exemption granted to the owner of the land in fee does not extend to an exemption from taxation of an interest in the same land, granted by the owner of the fee to...