Case Information

*1 OFF,CE OF THE ATTORNEY GENERAL. STATE OF TEXAS

JOHN CORNYN

November 30,200O Opinion No. E-03 11

Karnes County Attorney Re: Whether a building owned by the Karnes

101 North Panna Maria, Suite 10 County Hospital District, but leased to physicians Karnes City, Texas 78118

for their private medical practice is tax-exempt (RQ-0259~JC)

Dear Mr. Busselman:

Under article XI, section 9 and article VIII, section 2 of the Texas Constitution, property must be held only for public purposes and devoted exclusively to the use and benefit of the public to be tax-exempt. Private commercial use ofpublicly ownedpropertydestroys its tax-exempt status. On behalf of the Kames County Hospital District (the “District”), you ask whether a building owned by the District, but leased to physicians for their private medical practice is exempt from ad valorem taxation. We conclude that it is not tax-exempt.

You inform us of the following circumstances giving rise to your request: The building, which is located near but not attached to the District’s hospital, contains doctors’ offices and is leased to three physicians. The physicians are not employed by the District’s hospital. The lease agreement, however, restricts the equipment that the physicians may own in order to encourage them to send all patients requiring X-rays and laboratory work to the District’s hospital. The X-ray and laboratory fees are a significant soume of revenue to the District. The land on which the building is located is presently tax-exempt, but the building is subject to ad valorem taxation. The District believes that the building is tax-exempt “not only because the [District] owns it, but also because the use being made of the property increases the income to the hospital, which is a benefit to the residents of Kames County.” The Karnes County Appraisal District disagrees, contending that the building is not entitled to the tax exemption because it is leased to private physicians who operate the clinic for private gain.’

All real property is taxable unless exempt as required or permitted by the Texas Constitution. art. VIII, 5 l(b). While the District’s position is not completely clear, it appears to assert that the leased building is tax-exempt under article XI, section 9 and article VIII, section 2 of the Texas Constitution.

‘Letter from Robert L. Busselman, Kames County Attorney, to John Corny& Texas Attorney General (July 3,200O) at 3-4 (on file with Opinion Committee) [hereinafter Request Letter]. *2 (JC-0311)

Article XI, section 9 itselfexempts from taxation qualifying property byprovidingthat “[tlhe property of counties, cities and towns, owned and held only for public purposes, and all other property devoted exclusively to the use and benefit of the public shall be exempt from forced sale and from taxation .” TEX. CONST. art. XI, 5 9; A&M Consol. Indep. Sch. Dist. v. City of Bryan, 184 S.W.2d 914, 915 (Tex. 1945) (stating that article XI, 5 9 is self-executing). Under this provision, property must be publicly owned and held only for public purposes and devoted to the use and benefit of the public. Satterlee v. Gulf Coast Waste Disposal Auth., 516 773,779 (Tex. 1978); Lower Cola. RiverAuth. V. ChemicalBank& Trust Co., 190 S.W.2d 48, 50 (Tex. 1945); Daugherty v. Thompson, 9 S.W. 99, 102 (Tex. 1888); see also Hays County Appraisal Dist. v. Southwest Tex. State Univ., 973 S.W.2d 419, 422 (Tex. App.-Austin 1998, no pet.) (stating that article XI, 5 9 requires public use ofproperty be exclusive). Governmental receipt and use ofproceeds arising from commercial usage ofthe property does not, under article XI, section 9, qualify the use of the property itself as public. Hays County Appraisal Dist., 973 S.W.2d at 423 (citing City ofBeaumont v. Fertittu, 415 S.W.2d 902, 908 (Tex. 1967)). Finally, while article XI, section 9 speaks specifically only of “property of counties, cities, and towns,” in Lower Colorado River Authority, 190 S.W.2d 48, the Texas Supreme Court held that it extends to property of a governmental agency. See at 50. Later Texas Supreme Court opinions have questioned this holding, but the court has not expressly overruled it. See Satterlee, 576 S.W.2d at 779; Leander Indep. Sch. Dist. V. CedarPark WaterSupply Corp.,479 S.W.2d908,911,913 (Tex. 1972); see&o Hays County Appraisal Dist., 973 S.W.2d at 422. But see State v. Houston Lighting & Power Co., 609 S.W.2d 263, 266 (Tex. Civ. App.-Corpus Christi 1980, writ refd n.r.e.) (stating framers of constitution contemplated that article XI, 5 9 applies only to property owned by counties, cities, and towns); Tex. Att’y Gen. Op. No. DM-188 (1992) at 2 (stating that more recent court decisions have clarified that article XI, 5 9 applies solely to enumerated entities).

Article VIII, section 2, on the other hand, authorizes the legislature to exempt qualifying It provides that the “the legislature may, by general laws, exempt from taxation public property used for public purposes.” TEX. CONST. art. VIII, 5 2(a). This provision authorizes the legislature to exempt only publicly owned property used for public purposes. Leander Indep. Sch. Dist., 479 S.W.2d at 912. Accordingly, section 11.11 ofthe Tax Code provides in part that “[elxcept as provided by Subsections (b) and (c)’ of this section, property owned by this state or a political subdivision of this state is exempt from taxation if the property is used for public purposes.” TEX. TAX CODE ANN. 5 11.11 (a) (Vernon 2000) (footnote added).

Unlike article XI, section 9, article VIII, section 2(a) and Tax Code section 11.11 by their terms do not require exclusive public use. See TEX. CONST. art. VIII, 5 2(a); TEX. TAX CODE ANN. 5 11 .l l(a); art XI, 5 9; see also Hays County Appraisal Dist., 973 S.W.2d at 423 (stating that article XI, 5 9 requires exclusive public use, but not article VIII, 5 2). However, the relevant case law has not made that distinction, articulating a single standard derived from the language of article XI, section 9 and Texas Supreme Court decisions construing that provision: to

*Subsections (b) and (c) provide for limited taxation of land owned by the Permanent University Fund and counties. See TEX. TAX CODE ANN. $ 11.1 l(b), (c) (Vernon 2000).

be tax-exempt, property must be held only for public purposes and be devoted exclusively to the use and benefit of the public. See Grand Prairie Hosp. Auth. v. Dallas County Appraisal Dist., 730 S.W.2d 849, 85 1 (Tex. App.-Dallas 1987, writ ref d n.r.e.); Grand Prairie Hosp. Auth. v. Tarrant Appraisal Dist., 707 S.W.2d 281,284 (Tex. App.-Fort Worth 1986, writ ref d n.r.e.). Opinions of this office have also articulated a single standard. See, e.g., Tex. Att’y Gen. Op. Nos. DM-436 (1997) at 4; DM-188 (1992) at 3; DM-78 (1992) at2; IM- 523 (1986) at 3; IM-464 (1986) at 3; IM- 405 (1985) at 2; MW- 430 (1982) at 4-5.

In a 1987 decision, the Dallas Court of Appeals determined that a hospital authority-owned medical office building leased in part to hospital staff physicians and utilized for their private practices was not tax exempt under section 11.11 (a) of the Tax Code. See Dallas County Appraisal Disk, 730 849,851. In Dallas County Appraisal District, the appellant hospital authority contended that the building was tax-exempt under section 11.11 of the Tax Code because “the physician’s use ofthe property was related to the [hospital authority’s] use of the property for public purposes” and, therefore, exempt under former article 4437e, section 16, Texas Revised Civil Statutes Annotated (1976): as a matter of law, because the hospital authority was the owner of the Id. at 850. The court disagreed, holding, first, that article 4437e, section 16 was repealed by the enactment of the Tax Code. Id. at 85 1. More importantly, the court stated that the test in these cases “is whether the property in question is held only for public purposes and is devoted to the use and benefit of the public[,]” citing Satterlee, notwithstanding that the Texas Supreme Court in Satterlee enunciated this standard under article XI, section 9. Id.; see also Satterlee, 576 S.W.2d at 779. The court concluded that the medical office building at issue “was not used exclusively for the use and benefit of the public since private doctors were leasing part of the property for their own commercial enterprises.” Dallas County Appraisal Dist., 730 S.W.2d at 851. Significantly, the fact that the physician’s use of the property might serve the hospital authority’s public purpose, as the hospital authority contended, appears to have been irrelevant under this analysis given that the court did not even address it. See id.

In an earlier 1986 decision, the Fort Worth Court of Appeals reached the same conclusion utilizing the exclusive public use standard. See Tarrant Appraisal Dist., 707 S.W.2d at 284. The hospital authority asserted that its medical office building leased to private doctors was tax-exempt as a matter of law under former article 4437e, section 16. Id. at 282. But the court held that it was taxable because the building “was not used exclusively for the use and benefit of the public since the private doctors were leasing part of the property for their own commercial enterprise[,]” citing Attorney General Opinion MW-430. Id. at 284.

‘Former article 4437q $ 16 stated that: “Recognizing the fact that the pmperty owned by [Municipal Hospital] Authority will be held for public purposes only and will be devoted exclusively to the use and benefit of the public, it from taxation of every character.” See Dallas County Appraisal Disf., 730 S.W.2d at 850. The shall be exempt substance of section 16 is now codified at section 262.004 of the Health and Safety Code. See TEX. HEALTI~ & SAFE~V CODEANN. § 262.004 (Vernon 1992); see&o historical note (prior law) [Act ofMay 17, 1957,55tb Leg., R.S., ch. 472, $ 16, 1957 Tex. Gen. Laws 13791.

The Honorable Robert L. Bussehnan

SUMMARY A building owned by the Kames County Hospital District, but leased to physicians for their private medical practice is not exempt from ad valorem taxation.

CORNYN Attorney General of Texas ANDY TAYLOR

First Assistant Attorney General

CLARK KENT ERVIN

Deputy Attorney General - General Counsel

SUSAN D. GUSKY

Chair, Opinion Committee

Sheela Rai

Assistant Attorney General - Opinion Committee