Sisters of Providence in Washington, Inc. v. Municipality of Anchorage, No. 6938

• Court: Supreme Court of Alaska (US)
• Writing for the Court: Before BURKE, C.J., RABINOWITZ, MATTHEWS and COMPTON, JJ., and DIMOND; BURKE; MOORE; DIMOND, Senior Justice, joined by RABINOWITZ
• Citation: 672 P.2d 446
• Parties: SISTERS OF PROVIDENCE IN WASHINGTON, INC., Appellant, v. MUNICIPALITY OF ANCHORAGE, Appellee.
• Decision Date: 14 October 1983
• Docket Number: No. 6938

Page 446

672 P.2d 446 SISTERS OF PROVIDENCE IN WASHINGTON, INC., Appellant,
v.
MUNICIPALITY OF ANCHORAGE, Appellee. No. 6938. Supreme Court of Alaska. Oct. 14, 1983.

Page 447

Robert J. Dickson, Atkinson, Conway, Bell & Gagnon, Anchorage, for appellant.

Julie Garfield, Deputy Municipal Atty., Jerry Wertzbaugher, Municipal Atty., Anchorage, for appellee.

Before BURKE, C.J., RABINOWITZ, MATTHEWS and COMPTON, JJ., and DIMOND, Senior Justice. ^*

OPINION

BURKE, Chief Justice.

This appeal concerns a claim of exemption, under AS 29.53.020(a)(3), from a municipal ad valorem personal property tax.

Appellant, the Sisters of Providence in Washington, Inc. [Providence], is a non-profit corporation which owns and operates Providence Hospital, located in Anchorage, Alaska. In 1976, Providence completed construction of its North Tower addition. Construction cost overruns, however, left Providence with insufficient capital to equip the new hospital addition. Providence was precluded from borrowing additional funds because of a debt limitation contained in its corporate charter. It, therefore, entered into an agreement with Crocker McAlister Equipment Leasing Inc. [Crocker] to obtain beds, televisions and x-ray equipment.

The appellee, Municipality of Anchorage [Municipality], assessed an ad valorem personal property tax against Crocker on the "leased" equipment in 1979 and 1980. Crocker, in turn, notified Providence that Providence was obligated under the lease agreement, to "pay all taxes ... imposed against ... the leased equipment." Thus, it is only by virtue of Providence's lease agreement with Crocker that Providence is involved in this tax dispute.

Providence sought a tax exemption under AS 29.53.020(a)(3), based upon its use of the property exclusively for non-profit hospital purposes. On July 17, 1980, the Municipality of Anchorage Board of Equalization denied the request for tax exemption. Providence appealed the decision to the superior court, which affirmed the Board's decision. Providence now appeals the superior court's decision.

Providence bears the burden of demonstrating that the property in question falls within the claimed exemption. Furthermore, the exemption provision will be strictly construed against Providence and in favor of the Municipality. Greater Anchorage Area Borough v. Sisters of Charity of the House of Providence, 553 P.2d 467, 469 (Alaska 1976); McKee v. Evans, 490 P.2d 1226, 1230 (Alaska 1971); Harmon v. North Pacific Union Conference Association of Seventh Day Adventists, 462 P.2d 432, 436 (Alaska 1969). This canon of strict construction, however, "is an aid to, not a substitute for statutory interpretation; the interpretation must still be a reasonable one." McKee, 490 P.2d at 1230 n. 18.

Providence's claim for exemption is founded upon its use of the property exclusively for non-profit hospital purposes. AS

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29.53.020(a)(3) provides: "The following property is exempt from general taxation: ... (3) property used exclusively for non-profit ... hospital ... purposes." Providence clearly uses the beds, televisions and x-ray equipment exclusively for non-profit hospital purposes. The issue, rather, is whether Crocker's "leasing" of the property for profit renders the statutory exemption inapplicable.

Providence's first argument on appeal is that the trial court erred in finding that the agreement between Providence and Crocker was a true lease rather than a security agreement. Providence asserts that Crocker's interest in the property is solely that of a secured creditor and, as such, should be disregarded for purposes of tax assessment. The Municipality responds by arguing that the agreement constituted a true lease and that Providence should be estopped from arguing otherwise.

Providence argues, in the alternative, that should the agreement be construed as a lease, the lessor's nonpossessory use of the leased equipment should be disregarded in determining whether the property was used exclusively for hospital purposes. The Municipality argues in response that all uses of the property, regardless of the identity of the user, should be considered in determining the exclusivity of the property's use; that Crocker's leasing of the property for profit is a use which is not for non-profit hospital purposes; and that, therefore, the property is not being used exclusively for non-profit hospital purposes. ¹

We first address Providence's argument that the agreement between Providence and Crocker, entitled "Equipment Lease," was in fact a security agreement and that Crocker's "use" of the property as a security holder was therefore, irrelevant for purposes of tax assessment. Ordinarily, "whether a lease is intended as security is to be determined by the facts of each case." AS 45.01.201(37). See Western Enterprises, Inc. v. Arctic Office Machines, Inc., 667 P.2d 1232 (1983) (per curiam). While the circumstances surrounding the execution of the agreement and the agreement's express language indicate that the lease-security agreement determination is a very close question, we do not resolve the issue on this basis. ² Rather, we conclude that Providence, which freely chose the form of this transaction, may not be heard to repudiate it.

This conclusion is in accordance with the general rule that a taxing authority may penetrate the form of a transaction to determine its substance, but a taxpayer may not. E.g., Higgins v. Smith, 308 U.S. 473, 60 S.Ct. 355, 84 L.Ed. 406 (1940); United States v. Morris & Essex Railroad, 135 F.2d 711, 713 (2d Cir.), cert. denied, 320 U.S. 754, 64 S.Ct. 61, 88 L.Ed. 449 (1943). Our recent decision in State v. Alaska Pulp America, Inc., Op. No. 2735 (Alaska, September 30, 1983), is an example of a case in which a taxpayer was precluded from utilizing the substance-over-form doctrine. In a statement referring to a taxing context, we noted that:

Generally, courts refuse to look through the corporate veil and consider separate corporations a single unit even when inter-corporation transactions are mere bookkeeping entries.

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Slip Op. at 13. We also quoted with approval the following language from Cook Export Corp. v. King, 617 S.W.2d 879, 881 (Tenn.1981):

It is untenable for the parent to contend that this subsidiary does not effectively exist for purposes of state taxation and yet insist that it does exist as a viable legal entity for purposes of federal taxation....

The fact that parties may conduct business transactions in such a way as to take advantage of federal taxation does not necessarily entitle them to exemption from state taxation under other and different statutes.... Nor will parties that have deliberately adopted a corporate structure in form be permitted to disregard these when they become disadvantageous.

Slip Op. at 19-20.

The rule which precludes a taxpayer from challenging the form of a transaction has exceptions, as where the transaction was entered into in ignorance, or the form was either not wanted or not controlled by the taxpayer, but none of the exceptions are applicable here. ³ For purposes of resolving the taxation issue involved in this case, we therefore hold Providence to the characterization of the transaction which it chose at the time the transaction was entered into. In short, we treat the transaction as a lease.

We next address whether Crocker's use of the property as lessor to derive profit renders AS 29.53.020(a)(3) inapplicable.

Under AS 29.53.020(a)(3), property "used exclusively for nonprofit ... hospital ... purposes" is exempt from taxation. We interpreted this statutory provision in the context of a leasehold arrangement in Greater Anchorage Area Borough v. Sisters of Charity of the House of Providence, 553 P.2d 467 (Alaska 1976) (hereinafter Sisters of Charity). In that case, Providence, as owner of a professional building, rented three floors of office space to private doctors, and sought a tax exemption for the leased office space, based upon Providence's use of the property for non-profit hospital purposes. We rejected Providence's argument, stating:

While the exempt and the commercial uses of the Professional Building are not as clearly separable as were the uses in Evangelical, the lesson of that case is applicable here: when the property in question is used even in part by non-exempt parties for their private business purposes, there can be no exemption.

Sisters of Charity, 553 P.2d at 471.

In the case at bar, Providence argues that the rule in Sisters of Charity is that only the lessee's use of the property should be considered, and not the owner's. The rule in Sisters of Charity, however, is that all uses of the property should be considered to determine whether or not the property is used exclusively for exempt purposes. Therefore, Crocker's ownership and use of the property to derive profit was relevant to the trial court's inquiry into the applicability of AS 29.53.020(a)(3).

Authority is split on the issue of whether the owner-lessor's leasing of the property for profit renders the property's usage not exclusively for exempt purposes. The majority of the cases upon which Providence relies are unpersuasive in that they do not address the issue raised in this appeal. In Anniston City Land Co. v. State, 160 Ala. 253, 48 So. 659 (1909), Scott v. Society of Russian Israelites, 59 Neb. 571, 81 N.W. 624 (1900), and Cox v. Dillingham, 184 P.2d 976 (Okla.1947), the issue facing the courts was

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whether the exempted user of the property must also be the owner. In Cleveland State University v. Perk, 26 Ohio St.2d 1, 268 N.E.2d 577, 579 (1971), the exemption involved did not require "exclusive use." Instead, it provided that "public colleges and academies and all buildings connected therewith, ... shall be exempt from taxation." Oates v. County of Sacramento, 78 Cal.App.3d 745, 143 Cal.Rptr. 337 (1978), is also distinguishable in that the court's holding turned not on the...