People ex rel. Korzen v. American Airlines, Inc.

Decision Date30 November 1967
Docket NumberNo. 40607,40607
Citation39 Ill.2d 11,233 N.E.2d 568
PartiesThe PEOPLE ex rel. Bernard J. KORZEN, County Collector, Appellant, v. AMERICAN AIRLINES, INC., Appellee.
CourtIllinois Supreme Court

John J. Stamos, State's Atty., Chicago (Edward J. Hladis, Chief of Civil Division, and Theodore M. Swain, Asst. State's Atty., of counsel), for appellant.

Spray, Price, Hough & Cushman, Chicago (Robert S. Cushman and John M. Betts, Chicago, of counsel), for appellee.

SCHAEFER, Justice.

After an unsuccessful appeal to the Board of Appeals of Cook County, American Airlines paid under protest the 1963 property taxes levied upon its leasehold interest in a hangar and hangar site located at Chicago-O'Hare International Airport. Its objections to the County Collector's application for judgment fixing the correct amount of taxes paid under protest were disposed of on American's motion for summary judgment, which was sustained in part and overruled in part. The Collector has appealed directly to this court, and American has cross-appealed. The revenue is involved.

The land and hangar are owned by the City of Chicago and have been leased to American for a term of forty years. American's rental payments are $4,996 per month for the site and an additional $54,845 per month for the hangar. Its obligation to pay the latter sum ceases if revenue bonds issued to construct certain improvements at O'Hare are retired before the term of the lease expires.

The County Assessor treated the land as exempt. But after determining that the term of the lease will exceed the useful life of the hangar, he valued American's leasehold interest at the value of the hangar and related improvements. Multiplying this amount, $1,575,097, by the relevant equalization factor of 1.42, he arrived at an equalized assessed valuation of $2,236,638, on which a tax of $116,752 was levied. The trial judge valued American's leasehold at $934,539, a figure at which he arrived by multiplying the annual rental under the lease by the equalization factor. He therefore concluded that the assessment was excessive and directed a refund of $67,968.

American argues that a refund of all taxes paid under protest is required, first, because its leasehold is exempt from taxation, and second, because it is valueless. The Collector disputes these contentions and urges that the Assessor's original valuation is correct.

Two provisions of the Revenue Act of 1939 are relevant. Section 19.6 exempts from taxation '* * * all property owned by any city or village located within the incorporated limits thereof, except such as heretofore has been leased or may hereafter be leased by such city or village to lessees who are bound under the terms of the lease to pay the taxes on such property.' (Ill.Rev.Stat.1965, chap. 120, par. 500.6.) Section 26 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.' Ill.Rev.Stat.1965, chap. 120, par. 507.

The relevant provision of the lease is as follows: 'Taxes on demised premises. City shall pay any and all taxes or special assessments, if any, which may be levied or assessed upon the demised premises; provided, however, that the foregoing shall not apply to taxes on any personal property or leasehold of Airline located on the demised premises.'

Section 19.6 relates only to the taxability of the City. It provides that property owned by the City is exempt unless it is leased to another under a lease on the requires the lessee to pay the taxes on the property owned by the City. American is not bound under the terms of its lease to pay taxes on that property, and the City's fee interest in the demised premises remains tax exempt.

The tax in question, however, was not levied on the demised premises, which are owned by the City, but on the leasehold estate, which is the property of the lessee, American. The statutory design to tax leasehold interests in tax-exempt properties is clear and it has often been applied. See e.g., People ex rel. Paschen v. Hendrickson-Pontiac, Inc., 9 Ill.2d 250, 137 N.E.2d 381 (1956); City of Chicago v. University of Chicago, 302 Ill. 455, 134 N.E. 723, 23 A.L.R. 244 (1922); People v. International Salt Co., 233 Ill. 223, 84 N.E. 278 (1908); see also Annot., 23 A.L.R. 248 (1923).

American argues, however, that under Illinois State Toll Highway Com. v. Korzen, 32 Ill.2d 338, 205 N.E.2d 433 (1965), its leasehold is not subject to taxation. In that case the leasehold interests of those who operate restaurants and service stations, called oases, upon toll highway property, were held to be exempt from taxation. That decision, however, did not purport to abrogate section 26, or to narrow it by creating a broad principle of exemption for all leasehold interests devoted in some way to a public purpose of the tax-exempt lessor.

The Illinois State Toll Highway Commission, the owner of the property in that case, is a separate and distinct unit of government created to discharge a single responsibility, and the court expressed the view that 'the General Assembly, in providing that 'all property belonging to the Commission' without regard to its use, shall be exempt from taxation, meant to include the property here in question.' 32 Ill.2d at 340, 205 N.E.2d at 434.

The lease involved in that case expressly provided that the lessee's annual rental would be reduced by an amount equal to any Ad valorem taxes assessed against his leasehold and improvements. Consequently, the ultimate burden of the taxes was shifted, by the terms of the lease, directly to the Commission. In contrast, the impact upon the city of any tax levied against American's leasehold is at most indirect. Moreover, in view of the demand for commercial air service the likelihood that if the exemption is denied tax-exempt municipalities will be forced to negotiate future hangar leases for appreciably lower rentals is extremely remote. Thus, although in the toll road case there was no doubt that under the lease the exact amount of the taxes paid would be lost to the Commission, the same conclusion can not be reached in this case.

The necessity for avoiding such a shift in the burden of taxation to the Toll Highway Commission is more readily apparent upon considering Walter Reade, Inc. v. Dennis Township, 36 N.J. 435, 177 A.2d 752 (1962), upon which we relied heavily in the Toll Highway case. Walter Reade held the New Jersey oases exempt. Although the court did not disclose whether the New Jersey highway authority was obligated to reimburse its lessees for taxes levied against their leaseholds, it based its decision on a fear that if the oases were held taxable 'quite obviously the burden must ultimately be upon the Authority * * *' (177 A.2d at 755.) in the form of lower rents. The court found that in granting a tax exemption to toll road properties the New Jersey legislature was concerned with the 'fiscal success of the authorized project * * *,' and observed that '(t)he experience of the restaurant facilities is of course a part of the total fiscal picture.' 177 A.2d at 755.

In view of the clear language of section 26, the absence in this case of the unique fiscal problems confronting toll road projects, and this court's consistent adherence to the principle that '(s)tatutes exempting property from taxation must be strictly construed and cannot be extended by judicial interpretation * * *' (Follett's Illinois Book & Supply Store, Inc., v. Isaacs, 27 Ill.2d 600, 606, 190 N.E.2d 324, 327 (1963)), the Toll Highway case must be similarly limited. We hold that American's leasehold is not exempt from taxation. Accord, Delta Air Lines, Inc. v. Coleman, 219 Ga. 12, 131 S.E.2d 768 (1963).

We turn, therefore, to American's contention that its leasehold has no value. Section 20 of the Revenue Act provides that 'Each taxable leasehold estate shall be valued at its fair cash value, estimated at the price it would bring at a fair, voluntary sale.' (Ill.Rev.Stat.1965, chap. 120, par. 501(2).) American asserts that the value of a leasehold is to be ascertained by capitalizing the amount by which the present market rental value exceeds the rent called for by the lease. It says: '* * * if the fair rental value exceeds the rents reserved in a lease, then the leasehold has a 'bonus value' which measures its fair market value. If the rents reserved in the lease exceed the fair rental value of the premises, the leasehold has no bonus value and no fair market value.'

For this position American relies on Corrigan v. City of Chicago, 144 Ill. 537, 33 N.E. 746, 21 L.R.A. 212, in which the court said: '* * * The measure of compensation for the estate of the tenant taken is the value of her leasehold estate, subject to the rent covenanted to be paid. If the value exceeds the rental she will be entitled to recover the excess. If it does not exceed the rent reserved, she will be entitled to nothing.' (144 Ill. at 458--459, 33 N.E. at 749.) The Corrigan case involved the compensation to be paid to a tenant in an eminent domain proceeding when the entire property was taken. American asserts that 'The concept of fair cash value or fair market value does not depend upon the kind of judicial proceeding in which its determination becomes necessary.' That is true, but the concept of fair cash value does depend upon what is being valued. What was being valued in the Corrigan case was the equity of the lessee in a lease that had been abrogated. What is being valued here is the right to occupy and use the leased property until the expiration of the lease.

The distinction was clearly drawn by Mr. Justice Traynor in Texas Company v. County of Los Angeles, 52 Cal.2d 55, 338 P.2d 440 (1959):

'A leasehold is not less...

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