Phillips Chemical Company v. Dumas Independent School District

• Court: United States Supreme Court
• Citation: 80 S.Ct. 474,361 U.S. 376,4 L.Ed.2d 384
• Docket Number: No. 40,40
• Parties: PHILLIPS CHEMICAL COMPANY, Appellant, v. DUMAS INDEPENDENT SCHOOL DISTRICT
• Decision Date: 23 February 1960

361 U.S. 376 80 S.Ct. 474 4 L.Ed.2d 384 PHILLIPS CHEMICAL COMPANY, Appellant,

v.

DUMAS INDEPENDENT SCHOOL DISTRICT.

No. 40. Argued Nov. 17, 18, 1959. Decided Feb. 23, 1960.

Mr. Clark M. Clifford, Washington, D.C., for appellant.

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Mr. John F. Davis, Washington, D.C., for the United States, as amicus curiae, by invitation of the Court.

Mr. Jack N. Price for State of Texas, as amicus curiae, pro hac vice, by special leave of Court.

Mr. Earnest L. Langley for appellee.

Mr. CHIEF JUSTICE WARREN delivered the opinion of the Court.

In this case, among other issues which we need not reach, we are asked to decide whether a Texas tax statute, Article 5248 of the Revised Civil Statutes of Texas, as amended in 1950,¹ discriminates unconstitutionally against the United States and those with whom it deals. We hold that it does.

Appellant, Phillips Chemical Company, engages in the commercial manufacture of ammonia on valuable industrial property leased from the Federal Government in Moore County, Texas. The lease, executed in 1948 pursuant to the Military Leasing Act of 1947, 61 Stat. 774, is for a primary term of 15 years and calls for an annual rental of over $1,000,000. However, it reserves to the Government the right to terminate upon 30 days' notice in the event of a national emergency and upon 90 days' notice in the event of a sale of the property.

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In 1954, appellee, Dumas Independent School District, assessed a tax against Phillips for the years 1949 through 1954. The tax, measured by the estimated full value of the leased premises, was assessed in accordance with the District's ordinary ad valorem tax procedures.

When the District assessed the tax, Phillips commenced the present action in the state courts to enjoin its collection. Phillips contested both the District's right to levy the tax and the valuation figure upon which the amount of the tax was calculated. The latter issue was severed by the trial court for later decision and is not involved in this appeal. The lower state courts denied relief for the years subsequent to the effective date of the 1950 amendment to Article 5248, and on writ of error the Supreme Court of Texas, by a divided court, affirmed. 316 S.W.2d 382. Phillips appealed from the decision, and we noted probable jurisdiction. 359 U.S. 987, 79 S.Ct. 1118, 3 L.Ed.2d 977.

The District's power to levy the tax was found to lie in amended Article 5248. Before 1950, Article 5248 provided a general tax exemption for land and improvements 'held, owned, used and occupied by the United States' for public purposes. In 1950, the Texas Legislature added two provisions to Article 5248, one providing for taxation of privately owned personal property located on federal lands, and the other reading as follows:

'(P)rovided, further, that any portion of said lands and improvements which is used and occupied by any person, firm, association of persons or corporation in its private capacity, or which is being used or occupied in the conduct of any private business or enterprise, shall be subject to taxation by this State and its political subdivisions.'

As construed by a majority of the Texas court, this provision is an affirmative grant of authority to the State and its political subdivisions to tax private users of gov-

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ernment realty. While the subject of the tax is the right to the use of the property, i.e., the leasehold, its measure is apparently the value of the fee.² The constitutionality of the provision, thus construed, depended upon the court's interpretation of our decisions in the Michigan cases two Terms ago, where we held that a State might levy a tax on the private use of government property, measured by the full value of the property. United States v. City of Detroit, 355 U.S. 466, 78 S.Ct. 474, 2 L.Ed.2d 424; United States v. Township of Muskegon, 355 U.S. 484, 78 S.Ct. 483, 2 L.Ed.2d 436; cf. City of Detroit v. Murray Corp., 355 U.S. 489, 78 S.Ct. 458, 2 L.Ed.2d 441.

However, three members of the Texas court, joined by a fourth on petition for rehearing, were of the opinion that under the majority's construction the statute discriminates unconstitutionally against the United States and its lessees. Their conclusion rested on the fact that Article 7173 of the Revised Civil Statutes of Texas³ imposes a distinctly lesser burden on similarly situated lessees of exempt property owned by the State and its political subdivisions. We agree with the dissenters' conclusion.

Article 7173 is the only Texas statute other than Article 5248 which authorizes a tax on lessees. It provides in part that:

'Property held under a lease for a term of three years or more, or held under a contract for the pur-

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chase thereof, belonging to this State, or that is exempt by law from taxation in the hands of the owner thereof, shall be considered for all the purposes of taxation, as the property of the person so holding the same, except as otherwise specially provided by law.'

As construed by the Texas courts, Article 7173 is less burdensome than Article 5248 in three respects. First, the measure of a tax under Article 7173 is not the full value of leased tax-exempt premises, as it apparently is under Article 5248, but only the price the taxable leasehold would bring at a fair voluntary sale for cash—the value of the leasehold itself.⁴ Second, by its very terms, Article 7173 imposes no tax on a lessee whose lease is for a term of less than three years. Finally, and crucial here, a lease for three years or longer but subject—like Phillips'—to termination at the lessor's option in the event of a sale is not 'a lease for a term of three years or more' for purposes of Article 7173. Trammell v. Faught, 74 Tex. 557, 12 S.W. 317. Therefore, because of the termination provisions in its lease, Phillips could not be taxed under Article 7173.

Although Article 7173 is, in terms, applicable to all lessees who hold tax-exempt property under a lease for a term of three years or more, it appears that only lessees of public property fall within this class in Texas. Tax exemptions for real property owned by private organizations—charities, churches, and similar entities—do not survive a lease to a business lessee. ⁵ The full value of

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the leased property becomes taxable to the owner, and the lessee's indirect burden consequently is as heavy as the burden imposed directly on federal lessees by Article 5248. Under these circumstances, there appears to be no discrimination between the Government's lessees and lessees of private property.

However, all lessees of exempt public lands would appear to belong to the class defined by Article 7173.⁶ In view of the fact that lessees in this class are taxed because they use exempt property for a nonexempt purpose, they appear to be similarly situated and presumably should be taxed alike. Yet by the amendment of Article 5248, the

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Texas Legislature segregated federal lessees and imposed on them a heavier tax burden than is imposed on the other members of the class by Article 7173. In this case the resulting difference in tax, attendant upon the identity of Phillips' lessor, is extreme; the State and the School District concede that Phillips would not be taxed at all if its lessor were the State or one of its political subdivisions instead of the Federal Government. The discrimination against the United States and its lessee seems apparent. The question, however, is whether it can be justified.

Phillips argues that because Article 5248 applies only to private users of federal property, it is invalid for that reason, without more. For this argument, it relies on Miller v. Milwaukee, 272 U.S. 713, 47 S.Ct. 280, 71 L.Ed. 487; see also Macallen Co. v. Massachusetts, 279 U.S. 620, 49 S.Ct. 432, 73 L.Ed. 874. Macallen might be deemed to support the argument, but to the extent that it does, it no longer has precedential value. See United States v. City of Detroit, supra, 355 U.S. at page 472, note 2, 78 S.Ct. at page 477. Miller was a rather different case. In Miller it was thought that a State had attempted indirectly to levy a tax on exempt income from government bonds. Phillips' use of the Government's property, by way of contrast, is not exempt. 10 U.S.C. § 2667(e), 10 U.S.C.A. § 2667(e);⁷ United States v. City of Detroit, supra. It is true that in Miller the ostensible incidence of...