Shaia v. City of Richmond

• Decision Date: 06 March 1967
• Citation: 207 Va. 885,153 S.E.2d 257
• Court: Virginia Supreme Court
• Parties: Harry SHAIA at al. v. CITY OF RICHMOND.

Page 257

153 S.E.2d 257

207 Va. 885

Harry SHAIA at al. v. CITY OF RICHMOND.

Supreme Court of Appeals of Virginia.

March 6, 1967.

Rehearing Denied April 24, 1967.

Harry Shaia, Jr., Linwood T. Wells, Jr., Richmond (Blanton, Lumpkin & Shaia, Richmond, on brief), for plaintiffs in error.

Jack N. Herod, Asst. City Atty. (J. Elliott Drinard, City Atty., on brief), for defendants in error.

Robert Y. Button, Atty. Gen., Richard N. Harris, Asst. Atty. Gen., for the Commonwealth of Virginia amicus curiae.

Before EGGLESTON, C.J., and SPRATLEY, BUCHANAN, SNEAD, I'ANSON, CARRICO and GORDON, JJ.

GORDON, Justice.

The substantial issues in this case present two questions: Can the City of Richmond tas a tenant's leasehold interest in real estate owned by the State of Virginia? If so, how should the leasehold interest be appraised and assessed?

The Medical College of Virginia, an instrumentality of the State of Virginia, holds fee simple title to land known as 400 North Twelfth Street, Richmond. By a lease dated January 8, 1959, it demised this property to Harry and Zackia Shaia. The lease provided for a two-year term, April 1, 1960 to March 31, 1962, with an automatic extension of the term to March 31, 1990 unless the landlord (the Medical College) or the tenants (the Shaias) should elect to terminate the lease at an earlier date.

In lieu of annual rent of $3,000, the lease required the tenants to convey a nearby parcel of real estate, which the tenants owned, to the Medical College of Virginia in fee simple. The consideration for this conveyance, as recited in the lease, was $43,773 'representing the present worth of the annual rental of $3,000.00, payable in advance, at the beginning of each lease year, for a period of thirty (30) years, discounted at 6% Interest'.

The lease further required the tenants to construct a building on the leased premises, suitable for use as a restaurant, according to plans and specifications approved by the Medical College and the Art Commission of Virginia. The tenants constructed the building at a cost of $127,064.75.

Before the lease was made, the Shaias had operated a restaurant in the same vicinity for about forty years. During all or part of that period their restaurant was known as the 'Skull and Bones Restaurant'. The lease permitted the Shaias to sublet the new building at 400 North Twelfth Street to their sons. The sons have operated a restaurant, also known as the Skull and Bones Restaurant, in this building since the beginning of the term of the lease under an oral understanding with their parents. The understanding, which is cancellable at will, provides for the payment of $1,000 a month by the sons to their parents. (Our references to the 'Shaias' are to the parents, not the sons.)

The City of Richmond assessed the Shaias' leasehold interest or estate at $146,800 for each of the years 1961, 1962 and 1963, with $33,800 allocated to land and $113,000 to the building. ¹ The City levied a tax of $2,759.84 for each year against the Shaias.

The Shaias brought this action for correction of the allegedly erroneous assessments for the years 1961, 1962 and 1963, contending that the tax levied for each year was unconstitutional or, if constitutional, was based upon an excessive valuation. The trial court dismissed their application, holding the tax was constitutional and the leasehold interest had been assessed at fair market value for each of the years in question.

The City levied the taxes pursuant to Code § 58--758, which provides:

'All taxable real estate having been segregated by law for local taxation only, such taxable real estate shall be assessed for local taxation in accordance with the provisions of this chapter and other provisions of law. For the purposes of this chapter, and other provisions of law relating to the assessment of real estate for taxation the term 'taxable real estate' shall include a leasehold interest in every case in which the land or improvements, or both, as the case may be, are exempt from assessment for taxation to the owner. * * *' ² (Emphasis supplied)

Va.Code Ann. § 58--758 (Repl. vol. 1959).

The Shaias contend that the emphasized sentence of Code § 58--758 is unconstitutional because it provides for the taxation of property owned by the State, which is forbidden by § 183 of the Constitution of Virginia. Section 183 reads in part:

'Unless otherwise provided in this Constitution, the following property and no other shall be exempt from taxation, State and local, including inheritance taxes:

'(a) Property owned directly or indirectly by the Commonwealth or any political subdivision thereof * * *'

In considering whether the tax levied by the City of Richmond violates § 183(a) of the Constitution, we should first point out the property interests possessed by the Medical College and the Shaias.

The Medical College holds fee simple title to 400 North Twelfth Street; it is the owner of the land and building. Its title and ownership is subject, however, to the leasehold or possessory interest of the Shaias. The Shaias do not own the land or building. They own a leasehold interest in the property.

The tax levied by the City of Richmond is not a tax on the land and building owned by the Medical College. If the Shaias should fail to pay the tax, the City cannot proceed to have the land or building sold because of delinquent taxes. The tax is levied on the Shaias' leasehold interest. 'When an interest in land, whether freehold or for years, is severed from the public domain and put into private hands, the natural implication is that it goes there with the ordinary incidents of private property, and therefore is subject to being taxed'. Trimble v. City of Seattle, 231 U.S. 683, 690, 34 S.Ct. 218, 219, 58 L.Ed. 435, 439 (1914). Because the tax with which we are concerned is levied on the Shaias' leasehold interest, and not on property owned by the Commonwealth, it does not violate § 183(a) of the Constitution.

Counsel for the Shaias argue that the tax contravenes § 183 because 'the certain and obvious effect would be receipt by the State, as a lessor, of reduced rentals from lease contracts executed thenceforth because of a lessee's additional expense in the form of a local tax'. They argue that the tax is unconstitutional because it places a burden upon the State contrary to the intent of § 183 of the Constitution.

The General Assembly of Virginia had the right to enact Code § 58--758, providing for taxation of the Shaias' leasehold interest, since the enactment was not prohibited by the Constitution of Virginia or the United States. See Carter v. City of Norfolk, 206 Va. 872, 147 S.E.2d 139 (1966). The enactment of Code § 58--758 being within the discretion of the General Assembly, the section is not rendered invalid because the imposition of taxes thereunder may result in reduced rentals on properties leased by the State.

The United States Supreme Court has rejected an argument similar to that advanced by counsel for the Shaias: 'It is undoubtedly true, as the Government (the United States) points out, that it will not be able to secure as high rentals if lessees are taxed for using its property. But * * * the imposition of an increased financial burden on the Government does not, by itself, vitiate a state tax'. United States v. City of Detroit, 355 U.S. 466, 472, 78 S.Ct. 474, 477--478, 2 L.Ed.2d 424, 428--429 (1958); see also Texas Company v. County of Los Angeles, 52 Cal.2d 55, 338 P.2d 440 (1959).

The City of Detroit case involved a tax imposed by Michigan on the lessee of property owned by the United States. The Michigan statute provided that the lessee should be 'subject to taxation in the same amount and to the same extent as though the lessee or user were the owner of such property'. Even though the tax against the lessee was based on the fee simple value of the property owned by the United States, the Court held it did not contravene the constitutional tax immunity of the United States.

The Shaias contend further that the following paragraph of § 183 of the Constitution of Virginia precludes the tax levied by the City:

'Whenever any building or land, or part thereof, mentioned in this section, And not belonging to the State, shall be leased or shall otherwise be a source of revenue or profit, all of such buildings and land shall be liable to taxation as other land and buildings in the same county, city or town. But the General Assembly may provide for the partial taxation of property not exclusively used for the purposes herein named.' (Emphasis supplied)

But this paragraph prescribes only that property owned by an exempt organization described in § 183, other than the State, loses its exemption when such an organization leases the property for profit. In such case, the locality is permitted to levy a tax on the otherwise exempt property. As pointed out in Citizens' Foundation of Richmond Professional Institute v. City of Richmond, 207 Va. 174, 148 S.E.2d 811 (1966), property owned by the State does not lose its exemption when it is leased because § 183 preserves the exemption in all cases. We are not concerned in this case, however, with a tax against an instrumentality of the State levied on property owned by it. We are concerned here with a tax against persons who are not exempted under § 183 (the Shaias) levied on a leasehold interest owned by them. Section 183 does not prohibit such a tax.

We now turn to the question how the Shaias' leasehold interest should be appraised and assessed. The general rule can be easily stated: The value of a leasehold interest for tax assessment purposes is 'the price * * * (the leasehold) would bring on an open market under conditions in which neither the buyer nor seller could take advantage of the exigencies of the other'. De Luz Homes v. County of San Diego, 45 Cal.2d 546, 566, 290 P.2d 544, 557 (1955). The difficulty lies in applying the general rule in a given case. When...