Opinion
C.A. No. 98A-09-024-CG.
Date Submitted: December 8, 1999.
Date Decided: January 21, 2000.
On Appeal from the New Castle County Board of Assessment Review. REVERSED.
Scott Shannon, Tighe, Cottrell and Logan, P.A., Wilmington, Delaware, Attorney for Appellant.
Judith A. Hildrick, Assistant County Attorney, New Castle, Delaware, Attorney for Appellees.
OPINION and ORDER
This is an appeal by Greenbank Mill Associates, Inc., ("Greenbank") from a decision of the New Castle County Board of Assessment Review. The Board upheld New Castle County's denial of Greenbank's application for charitable exemption from county real estate tax for certain property owned by Greenbank.
Greenbank is a non-profit corporation formed under the laws of Delaware. Greenbank consistently has asserted that it is an organization existing for charitable purposes within the meaning of 9 Del. C. § 8105 and New Castle County Code § 14-206. Greenbank is, according to its mission statement:
Due to an apparent malfunction of the tape recorder at the Board proceedings, the record of those proceedings has been lost. As a result, the parties entered into a Stipulation setting forth the undisputed facts surrounding the appeal as a substitution in this Court for the record of proceedings below. The Court draws its summary of facts from the Stipulation.
. . . a non-profit volunteer organization dedicated to preserving Greenbank Mill property as a museum and expanding public knowledge of Red Clay Valley industrial history and the contributions of inventor Oliver Evans. Greenbank Mills Associates, Inc. accomplishes its mission through the ongoing acquisition, preservation, restoration, reconstruction, interpretation and exhibition of historic structures and landscapes, archeological remains and pertinent artifacts.
Since 1987, Greenbank has owned and operated Tax Parcel No. 08-039.10-224, a parcel of land containing the Greenbank Mill, an historic mill building constructed in the seventeenth century. This parcel is located within a certified historic district under the National Historic Preservation Act of 1966 and currently receives a general tax exemption from New Castle County.
Prior to 1965, the mill property and a second, separate property, Tax Parcel No. 08-039.10-222, were part of the same historic complex. The second property, the subject of this appeal, (hereinafter "the Property") contains two-thirds of Greenbank's cultural resources, including an eighteenth century farmhouse in which the millers lived, an 1850 bankbarn used to house sheep that provided raw wool for the textile mill, sheep pastures, and part of the mill race that supplied water to power the mill wheel. The miller's house, built in 1794, was occupied by various owners of the mill until 1965.
In 1997, the Property unexpectedly came on the real estate market. Greenbank decided to purchase the Property in order to preserve its historic integrity and to reunite the two parcels of land and restore them to their historic function as a unit. Lacking the necessary funds to purchase the Property outright, Greenbank secured a five-year mortgage in the amount of $295,000. The State of Delaware subsequently awarded Greenbank a $100,000 grant to make the initial down payment. Greenbank also embarked on a fund-raising drive in order to retire the mortgage.
As of August 1999, more than one-half of the Property was being used by Greenbank for educational purposes, including raising sheep, exhibiting raw materials, displaying farm machinery, and facilitating programs including 4-H programs and Eagle Scout projects. Archeological excavations have also taken place at the Property as part of a multi-year research project to study the architectural features of the miller's house, to restore the house to its original condition, and to create an accurate historical interpretation. Upon satisfaction of the mortgage on the Property and completion of the research outlined above, Greenbank intends to convert the miller's house into a museum and administrative offices and to use the garage for equipment storage and a workshop.
On August 5, 1997, Greenbank applied to New Castle County for a general charitable or educational property tax exemption on the Property. On February 17, 1998, the County issued a letter-opinion denying Greenbank's application. The County stated that, for purposes of the application, it "assumed, without deciding, that [Greenbank] is an organization existing for `charitable purposes.'" However, the County concluded that the Property is held by way of investment so that it is ineligible for charitable tax exemption.
On March 17, 1998, Greenbank appealed the County's decision to the Board. Greenbank denied that its property was "held by way of investment" because there was no intent to use the Property for the purpose of securing profit to its owner. After considering the evidence, a member of the Board moved that the appeal be denied for the reasons given by the County. The motion was seconded and approved unanimously. Greenbank subsequently appealed the Board's decision to this Court.
By statutory authority granted pursuant to 9 Del. C. § 8105 and New Castle County Code § 14-206, real estate owned by charitable organizations that is "not held by way of investment" is entitled to exemption from real estate tax. Generally, it is the taxpayer's burden to prove entitlement to a tax exemption as a charitable organization. Whether a property is "held by way of investment" is a mixed question of fact and law. Migration Dialogue, Inc. v. New Castle County Bd. of Assessment Review, Del. Super., C.A. No. 98A-09-009, Silverman, J. (May 28, 1999), Mem. Op. at 3, aff'd, Del. Supr., 741 A.2d 1027 (1999). The facts surrounding this appeal are not in dispute since the parties have stipulated to those facts. Therefore, the Court must determine "if the Board applied the facts as it found them to be, according to the law as the Court finds it to be." Id.
Greenbank presents two arguments in support of its appeal. Greenbank argues that the Board ignored the fact that 9 Del. C. § 8105 was amended and relied on pre-amendment case law. In other words, the Board misinterpreted the controlling statute. Alternatively, Greenbank argues that the Board erred in determining that the Property is "held by way of investment" by ignoring controlling Delaware case law.
Greenbank argues that the Board's decision is "plainly wrong" because the controlling statutory provision, 9 Del. C. § 8105, was amended effective July 14, 1988 and that the controlling case law, as cited by the Board, is based upon the prior statute. Greenbank is correct in stating that the controlling statute was amended. Prior to 1988, what is now § 8105 provided, in pertinent part:
Other amendments redesignated the code provision number assigned to what is now § 8105 but did not change any of its substantive provisions.
Property belonging to this State, or the United States, or any county of this State, or any church or religious society, and not held by way of investment, or any college or school and used for educational or school purposes, or any corporation created for charitable purposes and not held by way of investment, except as otherwise provided, shall not be liable to taxation and assessment for public purposes by any county or other political subdivision of this State. (Emphasis added.)
Sixty-six Del. Laws, c. 385, effective July 14, 1988, deleted the language, "or any corporation created for charitable purposes and not held by way of investment" from the provision and added a new last sentence:
Corporations created for charitable purposes and not held by way of investment that are in existence on July 14, 1988, together with existing and future charitable affiliates of such corporations that are also not held by way of investment, shall not be liable to taxation and assessment purposes by any county, municipality or other political subdivision of this State.
Greenbank states in its opening brief, "no reported case has been found interpreting the amended statute. And no case at all has been found in which the legislature's decision to grant this tax exemption to a narrowly delineated subclass of charitable organizations has been raised or discussed." Greenbank offers what it argues is the clear interpretation of the post-1988 provision. Greenbank argues that, according to the final sentence of the amended § 8105, any property owned by a corporation that was created for charitable purposes and that was in existence as of July 14, 1988 is exempt from taxation. The gist of Greenbank's argument is that the phrase, "not held by way of investment," modifies the word, "corporation," rather than the word, "property," so that the Board should have considered whether Greenbank itself was held by way of investment, rather than the Property.
Although Greenbank is correct that no reported decision addresses the appropriate interpretation of the post-1988 language of § 8105, the Court finds that there are unreported decisions directly addressing the issue. See Presbyterian Homes, Inc. v. Kent County Bd. of Assessment, Del. Super., C. A. No. 97A-07-004, Terry, J. (Jan. 30, 1998); Kent General Hospital v. Kent County Bd. of Assessment, Del. Ch., C. A. No. 1270-K, Allen, Ch. (July 19, 1995). Kent General Hospital addresses the identical issue at length and, although the unreported Chancery Court decision does not represent controlling authority upon this Court, the Court finds its reasoning to be sound and adopts its conclusions.
Kent General Hospital held that the 1988 amendment to § 8105 did not alter the statute in the way in which Greenbank suggests. Kent General Hospital explained that prior to the 1988 amendment of § 8105, "it was well understood that the tax status of real property owned by charitable corporations turned upon the purpose for which the property was used and was determined on a property by property basis." Id. at 1. The property owner contended, as does Greenbank, that as a result of the 1988 amendment, "the focus of the inquiry [under § 8105] is not whether specific real properties are being held for investment purposes, but whether the charitable corporation that owns the real property is "held for investment purposes". Id. at 4. (Emphasis in original.)
At the time Kent General Hospital was decided, § 8105 was § 8104. For purposes of clarity the Court will substitute the current statutory citation where that Court cites to § 8104.
Kent General Hospital analyzed the legislative history of § 8105 and concluded that the General Assembly did not intend by rearrangement of clauses to extend the reach of the exemption contained therein. Id. at 5. The Court of Chancery explained that, despite the fact that under the rearranged amendment, the phrase "by way of investment" modifies the word "corporations" rather than "property," "literalistic interpretation is problematic: a `corporation created for charitable purposes' cannot be "held by way of investment' since a non-stock corporation cannot very sensibly be said to be `held' at all and, being a charitable endeavor, certainly could not be `held for investment.'" Id. The court therefore determined that the property owner's literal interpretation, also relied upon by Greenbank, "cannot be accepted as correct." Id.
Kent General Hospital also looked to the synopsis of the bill to determine its legislative intent and concluded that the General Assembly was not attempting to expand the tax exemption rights of charitable corporations. Id. at 6. Therefore, for the reasons set forth in Kent General Hospital, the Court finds that the 1988 amendment to § 8105 did not alter the previous interpretation of § 8105 contained in the older case law, which will be discussed below. The focus remains upon whether the property itself is held for investment purposes.
Appellee's answering brief fails to address Greenbank's argument regarding statutory interpretation. As a result, Greenbank argues in its reply brief that Appellees should be deemed to have conceded that Greenbank's interpretation of § 8105 is correct. Although this Court has held that, where a party fails to respond to a factual argument raised by an opposing party, that party concedes that the facts asserted are correct, the Court finds that to do so under these circumstances would lead to an improper result. As stated above, the Court finds that Greenbank's interpretation of the applicable statutory provision is erroneous and the Court cannot adopt that interpretation solely due to Appellee's failure to address the issue.
Greenbank argues alternatively that the Board erred in its determination that Greenbank holds the Property "by way of investment." In its letter decision denying Greenbank's charitable exemption, the County, relying upon Kappa Alpha Educational Foundation, Inc. v. Holliday, Del. Supr., 226 A.2d 825 (1967), determined that Greenbank held the property by way of investment because "a substantial portion of the property is used for rental purposes and that rental income is sufficient to cover the mortgage application."
Appellees respond that the County's decision was without error because, in the application for charitable exemption filed by Greenbank, Greenbank stated that, "the house, garage and apartment will be rented to generate cash flow for the mortgage commitment for a period of 5 years" and that Greenbank submitted no other materials regarding the alleged historic value or charitable use of the Property.
Appellees also argue that, although Greenbank subsequently submitted additional information regarding its charitable activities and financial information regarding the Property, that information was not available when the application was reviewed by the County. Even if the information had been available to the County, Appellees argue:
. . . it would not have affected the determination that the property was held by way of investment. For purposes of eligibility for a tax exemption, the determinative factor is the actual use of the land. Midwest Bible Missionary Institute v. Sestric, 260 S.W.2d 25, 29 (1953); Experiment in International Living, Inc. v. Town of Brattleboro,, Vt. Supr., 238 A.2d 782, 786 (1968). This is the factor upon which the County relied in its determination that the property was held by way of investment.
The Court determines that Appellee's reliance upon the actual use of the land as the "determinative factor" in deciding that the Property was held by way of investment is in error. Although Appellees cite case law from Vermont and Missouri, controlling Delaware law cites a different factor as determinative, that is, whether the charitable corporation intends to use the property for the purpose of securing a profit. New Castle County v. Historical Soc'y of Delaware, Del. Supr., 580 A.2d 578, 581 (1990) ("The proper test of whether a property is `held by way of investment' . . . is whether there is `. . . an intent to use the property for the purpose of securing profit to its owner.'" Citations omitted.)
The Court therefore finds that the Board committed an error of law by failing to consider whether Greenbank intended to use the property for the purpose of securing profit to its owner. The Court finds this to be true despite Appellees' argument that evidence of Greenbank's intent regarding the use of the Property was not submitted with its application. First, Appellees' statement regarding the information provided to the County in Greenbank's initial application is inaccurate. Although the application stated that Greenbank rents the house, garage, and apartment in order to generate cash flow for the mortgage commitment, Greenbank, in response to the query, "Explain exempt activities in which engaged," also states, "use of barn and pasture for 4H clubs, barn for museum displays, house for museum display and administrative offices, garage for equipment storage and workshop."
Also, even though Greenbank did not submit further documentation at the time of its application to the County, the Board held a full hearing on the application during which Greenbank submitted further evidence and documents regarding Greenbank's financial status and its intended use of the Property. Clearly, the Board was entitled to consider the evidence submitted at the hearing when it decided to uphold the County's decision and the Court is entitled to consider such evidence as part of the record below. In fact, Appellees signed the written stipulation submitted to the Court, which includes evidence and documents regarding these issues. The final paragraph of the signed stipulation reads, "The Stipulation and exhibits appended hereto are intended by the parties . . . to set forth the facts of the appeal and the positions advanced by each party and the hearing by the Board of Assessment Review, and to substitute in the court for the record of proceedings below." (Emphasis added.)
In addition, the Court finds that the facts contained in the record, even under the correct standard, do not constitute substantial evidence to support the legal finding that the Property is held by way of investment. As stated above, the Delaware Supreme Court has addressed the meaning of the phrase, "not held by way of investment" on more than one occasion. In Kappa Alpha Educational Foundation, Inc. v. Holliday, Del. Supr., 226 A.2d 825 (1967), a fraternity created a foundation that rented housing to the fraternity's members. Although the County assumed without deciding, as it did in this case, that the foundation was a charity, the County concluded that the property was held by the charity by way of investment and not for charitable purposes. Kappa Alpha upheld the County's detennination, citing the following facts:
. . . that the property has been leased to the Fraternity since 1946, with the Foundation collecting rent. The rental income thus collected has been used by the Foundation largely to pay off the mortgage on the property and, secondly, to provide funds for the so-called scholarships awarded by the foundation.Id. at 827. The Court held it was obvious that, over the years, the rent charged for the property had increased the equity of the Foundation in the property and that eventually the Foundation would own the property free and clear. Therefore, the Supreme Court concluded, "that this property is held by the Foundation as an investment and not as a property devoted to charitable purposes." Id.
However, despite the County's determination that, under Kappa Alpha, "the holding of real property for rental purposes, even at subsidized rates, is not `charity' and the property must be deemed held `by way of investment,'" the inquiry does not end with a determination that a property is used for rental purposes. The Supreme Court revisited the issue in Electra Arms Apartment and Med. Ctr. Found., Inc. v. City of Wilmington, Del. Supr., 254 A.2d 244 (1969). In Electra Arms, the City of Wilmington denied a tax exemption for a charitable organization that owned the Electra Arms apartment building on the basis that "a certain number of apartments were leased to tenants under the age of sixty-two, most of whom were gainfully employed." Id. at 248. The City also found that, because the owner of the apartments was using the rental income to pay off a mortgage, the case fell under the holding of Kappa Alpha. Id.
The Supreme Court in Electra Arms, however, distinguished Kappa Alpha, finding that the foundation in Kappa Alpha "did nothing more with the property than rent it to the fraternity." Id. Electra Arms' owner, in contrast, used the apartment building for the charitable purpose of providing low-cost housing for the elderly. Therefore, the Supreme Court found that the property" `was not held by way of investment.' It was held to provide housing for the aged." Id.
Electra Arms also held, in rejecting the City's argument that the property was held by way of investment because the property owner used the rents to pay the mortgage, "we cannot adopt a rule which would bar charities from receiving the benefits of this statute simply because they must borrow money in order to exist." Id. at 249. The court explained, "We do not think . . . that this factor alone requires a holding that the property was held for investment when considered in light of all the other facts." Id.
Finally, the Supreme Court considered the same issue in New Castle County v. Historical Society of Delaware, 580 A.2d 578 (1990). As quoted above, Historical Society held that the determinative factor in determining whether a property is held by way of investment is the charity's intent to use the property to secure profit for its owner. Id. at 581. Such inquiry is, of necessity, "intensely factual," and requires the Court to consider "all relevant circumstances." Id.
The Historical Society of Delaware maintained historic structures in restored condition for historic and architectural purposes. The Historic Society rented out some of its structures to a commercial enterprise for profit and used the rental income to maintain the rental property and other buildings it owned. The Supreme Court summarized the issue:
Whether the rental to a private firm of a portion of historic property that is otherwise being used for tax exempt purposes, requires that the rented portion be deemed "held by way of investment," and therefore not exempt from taxation. . . .Id. at 580-581. Historical Society focused on the fact that the charity leased only a small portion of its property and used the income to meet its obligation to maintain the property. Also, the Historical Society was precluded from selling the property for a profit.
As aptly summarized in Migration Dialogue, C.A. 98A-09-009, at 11-12:
The tie that binds Electra Arms and Historical Society is that each charity's commercial use of its property was incidental to but directly in furtherance of the charity's eleemosynary purpose. Kappa Alpha, in contrast, involved a charity's using its real estate to meet non-charity-related ends.
In this case, Greenbank argued before the Board and on appeal that several facts support its having met the burden to establish that the Property was not held by way of investment. First, Greenbank is a non-profit corporation dedicated to preserving the mill complex and surrounding land as a museum and to expanding the public knowledge of the Red Clay Valley's industrial history. At the time of Greenbank's applicable for charitable exemption, more than half of the Property was actively used for educational purposes. Greenbank plans to convert the miller's house into a museum once research and planning is complete and the mortgage has been satisfied. According to Greenbank, the rental income on the farm house is used to avoid the facilities' lying vacant and to defray operating, maintenance, and restoration costs of the mill complex. The joining of the two property parcels enabled Greenbank to "create the only mill site in Delaware able to showcase residential, agricultural and industrial elements of society in antebellum America."
Finally, Greenbank points out that, under its Certificate of Incorporation, Greenbank, like the Historical Society of Delaware, is precluded from securing a profit from the properties. Likewise, Greenbank in fact does not secure a profit from rental of the farmhouse since the total revenue generated by the Property is exceeded by the mortgage interest and costs of maintaining both properties.
The Court finds that the facts presented in this case more closely resemble Electra Arms and Historical Society than Kappa Alpha. It is not disputed that Greenbank's purpose in holding the property is to directly promote its charitable cause despite its rental of a portion of the property. Greenbank uses the unrented portion of the property and the adjoining parcel in direct furtherance of its charitable goal, as outlined above. Greenbank clearly is doing more with the property than simply acting as a landlord; Greenbank demonstrated that the Property's commercial use is incidental but directly in furtherance of its charitable purpose.
As a result, the Court finds that the Board erred by failing to consider whether it was Greenbank's intent to incur a profit from the property and by determining that it held the property by way of investment solely on the basis that it rented out a portion of the property and because it used the rental income to pay off the mortgage on the Property. As outlined above, the facts underlying this appeal do not support a legal finding that the Property is held by way of investment. Therefore, the decision of the New Castle County Board of Assessment of March 17, 1998 is REVERSED.
IT IS SO ORDERED.