State v. North Star Research and Development Institute

• Decision Date: 07 July 1972
• Docket Number: No. 42163,42163
• Citation: 294 Minn. 56,200 N.W.2d 410
• Parties: In re Proceedings to Enforce Payment of Real Estate Taxes for the Year 1964 Remaining Delinquent on the First Monday in January 1965. STATE of Minnesota, Respondent, v. NORTH STAR RESEARCH AND DEVELOPMENT INSTITUTE, Appellant.
• Court: Minnesota Supreme Court

Page 410

200 N.W.2d 410

294 Minn. 56

In re Proceedings to Enforce Payment of Real Estate Taxes for the Year 1964 Remaining Delinquent on the First Monday in January 1965 STATE of Minnesota, Respondent, v. NORTH STAR RESEARCH AND DEVELOPMENT INSTITUTE, Appellant.

No. 42163.

Supreme Court of Minnesota.

July 7, 1972.

Syllabus by the Court

1. Real property owned by a public school is not subject to ad valorem taxes where:

(a) It is leased to a nonprofit corporation organized and operated in accordance with the Minnesota Nonprofit Corporation Act, Minn.St. c. 317;

(b) such nonprofit corporation is not connected with a business conducted for profit, Minn.St. 272.01, subd. 2; and

(c) the nonprofit corporation holds the real property under a lease for a term of less than 3 years. Minn.St. 273.19, subd. 1.

2. This court having determined that the public school property in question was not subject to ad valorem taxes, it is not necessary to decide whether or not defendant is a 'purely public charity' and whether property leased from a public school was used by defendant 'exclusively for any public purpose,' thereby being exempt from taxation by virtue of Minn.Const. art. 9, § 1, and Minn.St. 272.02, subd. 1(6, 7). Where it is unnecessary to pass upon constitutional questions, this court refrains from doing so.

Faegre & Benson, Hayner N. Larson and Jack D. Gage, Minneapolis, for appellant.

George M. Scott, County Atty., David E. Mikkelson, Asst. County Atty., Minneapolis, for respondent.

Reheard and considered en banc.

KELLY, Justice.

Appeal by defendant, North Star Research and Development Institute, a nonprofit corporation, from a judgment of the Hennepin County District Court holding that defendant is not exempt from ad valorem taxes on real estate occupied and leased by it from a public school district. We reverse.

Our decision is based upon our conclusion that North Star, organized in 1963 under the Minnesota Nonprofit Corporation Act, Minn.St. c. 317, is a nonprofit corporation within the meaning of Minn.St. 317.02, subd. 5. A 'nonprofit corporation' is defined there as one (a) formed for a purpose not involving pecuniary gain to its shareholders or members, and (b) paying no dividends or other pecuniary remuneration, directly or indirectly, to its shareholders or members as such. North Star has no shareholders, and there is no way in which, under its articles or bylaws or under the laws of this state, North Star could pay any dividends or other pecuniary remuneration directly or indirectly to its 'members'; there is no way in which it could be said that North Star was formed for pecuniary gain to them; nor is there any evidence that its 'members' received any pecuniary gain.

As pointed out in plaintiff's brief, the parties stipulated to the basic facts in this case. The evidence adduced beyond the stipulated facts is for all practical purposes uncontradicted.

North Star's genesis is found in a joint study conducted by Upper Midwest Research and Development Council (Upper Midwest) and the University of Minnesota. Upper Midwest was a nonprofit corporation organized to promote the economy of the area comprising the Ninth Federal Reserve District. The joint study was funded by a $350,000 grant from the Ford Foundation and by matching contributions of $220,000 raised by Upper Midwest and the University. The purpose of the study was 'to help finance and develop a continuing economic study of the upper Midwest region.' Pursuant to that goal, the study fostered a proposal for the organization of a research institute. While there are approximately a dozen nonprofit research centers located around the country, none previously existed in the area comprising the Ninth Federal Reserve District. ¹ In June 1962, Upper Midwest resolved 'jointly with the * * * University of Minnesota (to) take steps to incorporate * * * a research institute to be located in the Twin Cities metropolitan area.'

The plans involving the research center came to the attention of certain officers of Minneapolis Area Development Corporation (MADC) in 1962. MADC, a profitmaking corporation, had been organized for the purpose of stimulating the economy by bringing new business into the area. ² In 1956, pursuant to that goal, it had acquired from various landholders an industrial site in Scott County along the Minnesota River. In 1962, the site, known as Valley Industrial Park, contained approximately 2,100 acres having a cost basis of $710,063.15. By 1962, the fair market value of the industrial site was estimated by experienced appraisers to be over $5,000,000. This valuation was, however, subject to a discount to $3,534,250 if the land were to be sold to a single developer--even then, a gain in value of nearly 500 percent before taxes.

The officers of MADC believed that the proposed research center served their objective of bringing new industry into the area. The president of MADC wrote a letter to MADC shareholders wherein he proposed that they donate the industrial site, their shares and debentures of MADC, and 75 percent of their tax savings ³ to the research institute. The proposal, subsequently reduced to an agreement, provided that all shareholders except the Chicago & North Western Railway Company donate all of their stock and debentures. The railway, the largest MADC shareholder, received no tax benefit from the donation due to its lack of taxable income, ⁴ but nonetheless it contributed 8,312 shares and sold its remaining 1,288 shares and its MADC debentures for approximately $300,000. This made the railroad North Star's largest contributor. The contributors also agreed to pledge at least $700,000 in cash to support the initiation of the research center. Additionally, certain financial institutions made low-interest loans to the institute. Finally, several companies which were not MADC shareholders contributed cash to the research center. MADC then dissolved.

It is important to distinguish between the contributors to and 'members' of North Star. Minn.St. 317.02, subd. 5, prohibits Members and shareholders from receiving pecuniary remuneration. The statute itself does not apply to contributors.

North Star Research and Development Institute, the object of the advantageous generosity described, was thus formed. Its articles of incorporation state that it exists 'for scientific purposes in the public interest and for the public benefit.' Named as incorporators were three men associated with the University, two involved with Upper Midwest, and one from the Hill Family Foundation. There were three other incorporators, all of whom were employed by private concerns: The Minneapolis Star and Tribune Company, Northwestern National Bank of Minneapolis, and First National Bank of St. Paul. The incorporators had no power over North Star of any kind.

The 'members' of the corporation were originally such persons as from time to time were regents of the University of Minnesota. ⁵ They were to hold membership in their individual capacity. Members in a nonprofit corporation organized under Minn.St. c. 317 are the 'owners' of the corporation. Although North Star has no capital stock, the members serve the same function that shareholders in a profit corporation serve. See, Minn.St. 317.22, 317.25. It is important, however, that the members of a nonprofit corporation derive no pecuniary gain from the corporation. § 317.02, subd. 5. North Star has amended its articles of incorporation to provide that the members be 12 individuals selected by the Board of Regents.

The board of directors of North Star consists of 48 to 99 individuals elected by the 'members.' ⁶ Subsequent to February 1969, no more than two-thirds of the directors may be associated with private business. Thus, it is apparent that the 'members' can presently insure that none of the directors be associated with business as these limitations were maximums and not a requirement. The members have elected doctors, lawyers, clergymen, educators and a prominent labor leader to the board in addition to industrial and business leaders. Neither the members nor the directors receive any compensation for their services.

If North Star is dissolved, the articles provide that all assets go to the University of Minnesota or to some other nonprofit organization described in § 501(c)(3) of the Internal Revenue Code of 1954, 26 U.S.C.A. § 501(c)(3)--that is, an organization 'organized and operated exclusively for religious, charitable, scientific' or other similar purposes, 'no part of the net earnings of which inures to the benefit of any private shareholder or individual.' Both the Federal and State taxing authorities have ruled that North Star is itself such an organization and that any contributions to it are deductible as 'charitable contributions' under the appropriate tax laws.

North Star has also been accorded income tax exemption by both the United States and the State of Minnesota. The Federal exemption arises under § 501 of the Internal Revenue Code, 26 U.S.C.A. § 501. The state exemption is under Minn.St. 290.05(9). ⁷

Voluntary dissolution of North Star must have the concurrence of three-fourths of both members and directors. It is obvious that the regents could, if they were of a mind to do so, name 12 members who could in turn elect directors all of whom might favor dissolution and the assignment of all assets to the University of Minnesota. Thus, all control over North Star has been severed from the contributors, who should be distinguished from the 'members.' ⁸

The basic idea behind the creation of North Star was in accord with the Ford Foundation's suggestion that the area needed a research facility. It was believed that many companies were too small to support a research center of their own. North Star was intended to enable such businesses to have access to a research center, thereby stimulating the economy. The development of new products and industrial...