                                                        -.       .-..     ._

       Hon. William Schneider,       Jr.     opinion         No. V-1399
       county Attorney
       Gillespie   County                    Re:       Taxability  of
       Fredericksburg, I-Texas                         leasehold  es-
                     -,                                tate of tenant
                                                   ~. of an independ-
                                                   ‘-~-ent school dis-
       Dear Sir:                                       tri.ct .
                        You have requested the opinion of this
         office   as to the taxability       of the leasehold   es-
         tate -of a tenant of the Fredericksburg         Independent
-------+hool-District.,         ~The certified   copy of the lease
        “contract    which you enclosed with your’request        shows
         that the lease is for a primary term of fifty           years.
                   Article   7173, V.C.S.,      provides:
                       “Property held under a lease for a
                 term of ‘three years or more, or held un-
                 der a contract   for the purchase thereof,
                 belonging to this State, or that is ex-
                  empt by law from taxation in the hands
                  of the owner thereof,  shall be considered
                 -for all the purposes of taxation,  as the
   -, ,_- ------property    of the person so holding the
                  same except as otherwise specially    pro-
                 vide d by law.   . . .e
                   Your specific     question      is   stated     as follows:
                   “In construing Article    7173, is the                        '\
             estate of the tenantacquired      under the
             lease contract with Fredericksburg      Inde: ‘,
             pendent School District    subject to rendl-
             tion and taxation as a leasehold     estate?”
                  While the Legislature  could subject lease-
       hold Interests  in nonexempt property to taxation if It
       so chose, under the present scheme of taxation in force
       in this State the owner of the freehold   of nonexempt
       property is liable  for taxes on the entire value of the
     I




86       Hone William   Schneider,   Jr.,   page 2   (v-1399)


          property,   even though it is under lease.’
               T   D q 71 Tex. 192 9 S.W. 99 (1888)
          r”~x.h$~096      Taxation  iec:66
          leasehold   inEerest in the propeity in question to
          be taxable,   it must come within the provisions     of Ar-
          title   7173.   If this property is “exemp~t by law from
          taxation in the hands of the owner’ thereofe      and if
          the Legislature    has the power to tax a leasehold     in-
          terest   in the property   it would follow that the es-
          tate of the tenant wouI d be taxable.      It may be
          noted that the courts construe Article      7173 as author-
          izing the assessment of the property against the les-
          see not%t the value of the freehold       but only at the
         -value of the leasehold’ estate.    Dauphertv v. Thomuson,
          sunra.
                      The property involved is a block of land
          located   In the town of Fredericksburg.       Originally
          designated and dedicated by the German Immigration
          .Company as public property for educational       purposes,
         .this property has been under the control of the ~Fred-
          ericksburg Independent School District       since its in-
          corporation   in 1885.   The school di.strictls     title to
          the property was confirmed by a district        court judg-
         .ment rendered in 1920.
                     The lease contract   shows that the RederL&s-
         burg Independent School District      has leased the land
         to an individual    for a primary term of fifty      years,
         iktyles~see agreeing to erect a building      on the prop-
               . The lessee is to pay a stipulased      monthly
         rental for a period of fifty     years.     hereafter,    the
         rental is to be determined by a rental committee ap-
         pointed in a manner set out in ~the contract,        the ten-
         ant having the privilege    of surrendering    the lease
         if the rental is not satisfactory       to him. You state
         in your letter   that the lessee has erected an office
         building   on the premises.
                    It is evident that the school district  is
         now using the property In question to produce revenue.
         The facts which have been submitted to us .suggest
         that the school board has abandoned any plans which
         may have been formulated in the past to use the prop-
         erty as a school site; however, the present intention
         of the board in this regard presents a fact question
         w hi c h. this office  does not have the authority to
         decide.   1us0, we are not here passing on the liability
    Hon. William      Schneider,   Jr.,   page 3   (V-1399)
                                                                      8%‘~’


    of the lessee for taxes on the improvements which
    he has placed on the land, since that question
    likewise      depends upon the intention      and agreement
    of the parties respecting       title   to the improve-
    ments.       Edwards v. Thannisch, 254 S.W. 523 (Tex. ~.
    CIV.’ A p,. 1923); Ropers V. Fort Worth Poultrv % gg
    @. , 1i 5 S.W.2d 165 (Tex. Civ. App. 1945). If t?tle
    to the building has presently         vested’in   the school
    district,      the building would be taxable in the same
    way as the land.        On the other hand, if it remains
    the property of the lessee during the existence            of
    Fk,“,i;;se,,    he’would be liable ‘as owner for taxes
               .

                Independent school districts        are empowered
    b y s t atute    to receive   conveyances of property
    “for the benefit of the public schools,”          and their
    power of ownership Is not limited to property ac-
    tually used as school sites.        Art.   2756, V.C.S.;
    Adams v. Miles, 35 S.W.2d 123 (Tex. Comm. App. 1931);
    Hushes v. Gladewater County Line Indenendent School
    &g&., 124 Tex. 190, 76 S.W.2d 471 (1934). Cf. Art.
    2773a, V.C.S.     It is clear,    therefore,    that the own-
    ership and use of this property by the school dis-
    trict   for a purpose other than as a school e..t;$;
    authorized by the statutes of this State.
    opinion we shall assume that the revenue derived”
    from property belonging to a school district           becomes
    a part of the local funds of the district           and must
    be used for school purposes in accordance with the
    provisions    of Article   2827 V.C.S.       In any event,
    you have informed us that the rent from this property
    Is being deposited      to the local funds of the district
    and is being expended under the provisions           of Article
-   28.27.

               The Constitution of Texas contains two pro-
    visions relating  to the exemption of public property
    from taxation.   Section 9 of Article XI provides:   _
                   “The property of counties,     cities
             and towns, owned and held only for pub-
             lic purposes,, such as public     uildings
             and the sites therefor.    WQ        Fire en-
             gines and the furniture   thereof,     and all
             property used, or intended for extin-
             guishing fires,   public grounds and all
             other property devoted exclusively        to
‘88     Bon. William   Schneider,   Jr.,   page 4   (V-1399)       ,


              the use and benefit     of the public
              shall be exempt from forced sale and
              from taxation,    provided,   nothing
              herein shall prevent the enforcement
              of the vendors lien,     the mechanics
              or'builders   lien,   or other liens now
              stisting."
                     ,This provision   of the Constitution     is self-
          executing and accords an absolute exemption to prop-
          erty coming within its terms. A. & M. Consolidateq
                                       v. Citv of Brvan 143 Tex.
                                            In m
                                          & Trust co., 144 Tex. 326,
         190 S.W.2d 48 (1945), it was held that the Lower
         Colorado River Authority was a governmental agency
          serving a public purpose and that its property was
          exemut from taxation under Section 9 of Article         XI.
          On the authority    of that case and State v. City of
          San Antonio, 147 Tex. 1, 209 S.W.2d 756 (1948)          this
      .-office    held in Att*y Gen. Op. v-1308 (195l)th&llthe
          exemption accorded ~by this constitutional~provision
          extends to the property of any governmental agency
         which is devoted exclusively       to the public use" and
          that the property of an independent school district
       .~..nsed as a public school site was thereby exempt from
          all forms of taxation,     including   spe,cial assessments
          for improvements.
                     In pauffhertv v. Thompson, m,           the Supreme
         Court held that the Legislature       does not have the power
         to impose a tax upon a leasehold       estate in property
         which is exempt under this constitutional         provision,
         whether imposed on the owner or the lessee.           This deci-
      --“sion has been followed     in Davis v. Rurnett, 77 Tex. 3,
         13 S.W. 61 (X390), and                           & Cattl     C
         v. hoard, a0 Tex. 489,                               It n”,ceZI
          sarilp follows that if Article     XI, Section 9 exempts
         the property in question from taxation in the hands of
         the school district,     the leasehold    estate likewise     is
          exempt. paushertu v. Thomnsog involved county school
         lands alloted   to co ties under Article        VII, Section 6
         of the Constitution. 'lp Whilettze &&sin thepresentinquiry

          JJ Under a constitutional   amendment adopted in 1926,
        agricultural and grazing lands which counties own as
        school lands are now taxable,  except for State purposes
        to the same extent as lands privately   owned. Tex. Cons c .,
        Art. VII, Sec. 6a.
     Hon. William Schneider,     Jr.,   page 5   (V-1399).


      may appear at first     blush to be analogous to those
      in the pauehertv case, we have reached the conclu-
      sion that the character      of county school lands
      held under grant from the State .is different        from
      that of lands held by an independent school dis-
      trict   for the production of revenue.,      In that case
      the court observed that even in the absence of the
      provision   in Article   XI, Section 9, "looking to the
      policy which this state has steadily        pursued in
      granting lands to counties for educational         purposes,
      it could not veil be he1 that the legislature           in-
      tended by Article     4691 2R.S. 1879, now Art. 7173,
      R.C.S. 1929 to impose a tax on school lands owned
      by counties even when leased;       for taxes levied on
      such lands, while owned by counties,       whether imposed
      on the counties or their lessee would but diminish
     'the rental value of such lands, which it is not rea-
      sonable to suppose was intended when the sole purpose
      for which such liberal      donations were made was to
      furnish the counties with a school fund."
                 While independent school districts       are em-
     powered to o+.n land for the purpose of producing in-
     come, this method of raising       revenue is extraneous to
     the established    means of support of their schools.
     .Independent school districts      in the main derive their
     support from the State Available        School Fund ar.4 sth-
     er appropriations    of State moneys, from the County
     Available School Fund (income from the permanent fund
     created under Article    VII, Section 6 of the Conctitu--/
     tion),   and from local taxatioil.      It is only in iso-
     lated and sporadic instances       that school districts     de-
     rive even a small part of their revenue from income
     on property which they own. The considerations           of pol-
     icy in the exemption of county school lands do not
     support a similar exemption for income-producing           pro,--
     erty of independent school districts.          We conclude
     that Daunhertv v. Thomcson is not compelling authority
     for holding that the property in question is exempt
     from taxation.     Consequently,    we must make an independ-
     ent determination    of whether this property is lldevoted
     exclusively    to the use and benefit     of the public.1t
                The second constitutional  provision  relating
     to exemption of public property is Section 2 of Article             /
     VIII, Constitution   of Texas, which provides,  in part:
                 '1. * . the legislature may, by general
           law's, exempt from taxation public property




--
  Iion. IEl.liam Schneid~er, Jr.,         page ,6     0I-139)


          used for public pnrpose~s; actual plac.es
          or ,@       religious    worship, also any prop-
          erty owned by a church or'by a strictly
          religious      society   for ~th.sexclusive       'use
          as a dwelling'place         for th~e ministry       of
           such church or religious          soc~iety, Andy
          which yields no 'revenue whatever to such
          church or religious         society;    provided
          that such exemption shall not extend to
          more property than is reasonably neces-
           sary for a dwelling place and .in no event
          more thau one acre of laud; places of
          burial not held for private or corporate
          profit;     all buildings~used        exclusively
          and owned by persons or associations                of
          persons for school purposes and the neces-
           sary furniture       of all schools and property
          used exclusively        and reasonably necessary
          In conducting any association             engaged in
          promoting the religious,           educational      and
-_--~_~-physical        development of-~boys, girls,-young
          men or young women operating under a State
           or National organization          of like character;
           also the endowment funds of such institn-
         .tions    of learning and religion          not nsea
         .w~ith a view to profit;         and when the same
           are invested in bonds or mortgages, or ?.n
          land or other property which has be-en artd
           shall hereafter       be bought in by such in-
           stitutions      under foreclosure       sales made to
           satisfy    or protect     such bonds or mortgages,
           that such exemption of such land and prop-
           erty shall continue only for two years af-
  ~.,~,-__~-.t.er~thepurchase of the same at such sale
           by such institutions         and no longer,       and
           institutions      of purely public Charity;           and
           all laws exempting property from taxation
           other than the property above mentioned
           shall be null and void."
                Thissection   of the Constitution    does not
   Itself  exempt any property from taxation,       but author-
   zL;L; the Legislature    to exempt certain   types of prop-
           Acting under this authorization,       the Legisla-
   ture-enacted    Article  7150, V.C.S., which contains the
         .




             Bon. William   Schneider,   Jr.,   page 7   (V-1399)


             following   provision:2
                        "The following   property shall be
                   exempt from taxation,   .to-Wit: . . .
                         "4. All property,   whether real
                   or personal,  belonging exclusively    to
                -. this State, or any political    subdivi-           .
                   sion thereof,  or the United States,
                   . . . I,
                       Article   7150 provides for an exemption of
           'I&, property belonging exclusively           to this State,
       '-"or any political      subdivision    thereof."     An independ-
           ent school district      is a political     subdivision    of
           the State.     Kins~s Estate v. School Trustees of Wil-
           lacv Count :333 S.W.2a 783 (Tex. civ. App. 1930
           error ref.         If the exemption in subdivision         2, of
           Article  7150 could be given effect         according   to its
           terms, the property in question would be exempt from
       -'?e&ation     inthe    handsof~-the    owner.     However, the
           property exempt under Section 9 of Article            XI is prop-    :
           erty of counties,     cities    and towns owned and held
           snf-v for oublic ourooses and other property devoted
             x lusi   Iv to the u         na benefit   of the oubliq      and
       "-Ehz proikty       which tg ~tegislature       may exempt under
           Se;tiF   2 of Article      VIII.is  public property B ed fez
           pu 1 uuroos es. Although the attempted exemption in

                2J Article     7150 also contains a provision     relat-
              ing to,exemption    of property used for school purposes.
              Assuming that this provision      includes property of an
~:~--------~--independent school district,      the property in question
              clearly   does not satisfy    the conditions  for exemption
              set .out in then Constitution    and Article  7150.
                2/    While school districts    are in a sense State agen-
              cies in that they are created for the purpose of carry-
              ing out a function     of the State government, their status
              in relation    to the State government is expressed in the
             following    language from Hatcher v. State, 125 Tex. 84,
              81 S.W.2d 499, 500 (1935): llSchool districts,         whether
              independent districts     or common school districts,      are
             not primarily     agencies of the state, but they are local
              public cor;oorations    of the same general character as
              munlci al -~~oorations."
                      Ghis opinion is not to be understood as passing on
              the &ability      of property owned by the State ItasU
             which is not used for a public purpose.
.



         Hon. William   Schnsider,    Jr.,   page 8   (V-1399)
    92

         Article  7150 is broader than authorized, the provi-
         sion is operative  to the extent of the Legislature’s
         power, that is, to exempt such property when used
         for public pur oses.    City of Abilene   State    113
         S.W.2d 631, 63% (Tex. Civ. App. 1937, &?or di&u.).

                      The authority     to exempt property under ‘Sec-
         tion 2 of Article      VIII is to be exercised     by the Leg-
         islature,    and the Legislature     has the power, within
         constitutional     restrictions,    to prescribe   the condi-
         tions upon which an exemption is accorded.           Since the
         Legislature    could either grant or withhold the exemp-
         tion imthe first       place, it might also provide that
         the-.exemption would not extend to property which~ an
         exempt owner has leased to another person.           It follows
         that if property is exempt from taxation under Article
         7150, V.C.S., solely by virtue of the authorization            in
         Article    VIII, Section 2 of the Constitution,        the lease-
         hold is properly taxable under Article          7173.
                    These two constitutional   provisions,  as well
         as the decisions  construing them, make it clear that
         there are some types of publicly    owned property which
         are not and cannot be exempt from taxation.
                    We therefore have three possible   situations
         in respect to the property under consideration:       (1)
         if it is exempt by virtue of Article  XI, Section 9 of

            &/ Article    VIII, Section 1, Constitution     of Texas,
           rovides that “all property in this State, whether owned
         t y natural..    persons or corporations,    other than muni-
         ciphi,   shall be taxed in proportion     to its va1ue.l’ In
         Daugherty vD Thomusou, m,           the court stated that
         Section 1 of Article     VIII l’does not require property
         belonging to municipal corporations       to be taxed.”   How-
         ever, Section 2 of.Article      VIII, after setting out the
         types of property which may be exempt, provides that
         “all laws exempting property from taxation other than
         the property above mentioned shall be null and void.”
         It would appear that only such property as is exempt
         by the Constitution     itself  or as may be exempt by the
         Legislature    under .Section 2 of Article   VIII can be re-
         lieved from taxation.       This is the only construction
         under which we can explain the numerous cases Involving
         municipally    owned property where the court found it
         necessary to decide whether the property was being used
         for a public purpose.
.

                            .~,
    Hon. William   Schneider,     Jr.,   page 9   (V-1399)            93

    the Constitution,    the leasehold    estate is also ex"
    empt; (2) if the property is exempt in the hands of
    the school district    by virtue of Article       7150, V.C.S.,
    enacted purmant to the authorization          contained in'
    Section 2 of Article     VIII, the leasehold     is taxable
    under Article    71733 (3) if the property is not being
    "devoted exclusively     to the use and benefit      of the
    public"  or  is not  being   "used for   public  purposes,"
    it is not exempt in the hands of the school district
    and Article, 7173 has no application.
                We have not found where the courts of this
    State have ever,been called upon'to consider the pre-
    cise question here involved.       Indeed, not often has
    it been necessary for the courts to decide whether
    public property which has been held to be exempt came
    under Article   XI, Section 9 of the Constitution      or un-
                                        the Constitution   and
                                        example, A. & M. Con-
                                     Dist. v. Citv of BrYan
    suma.>     We may state some generalizations,      however:
    which are pertinent    to a solution    of this question.
    In the first   place, the exemption under either of
    these provisions    is not limited to property which is
    used for governmental purposes.       A. & M. Consolidateg
    Independent School Dist. v. CitY of ~BrYau, Suora.
    Secondly, the fact that the property produces revenue
    does not of.itself    prevent its being exempt, if the
    use to which the DroDertY is DUt meets the reauired
    test of being a public use.      8. & 14. Consolidated    m-
    dooendent School Dist. v. Citv of Brvaq, suura: Lower
    Colorado River Authoritv v. Chemical Bank & Trust Co.,
    SUDraj   Citv of Abilene v. State, suDra* State V. City
    of Houstoq, 140,S.W.2d 277 (Tex. Civ. App. 1940, er-
    ror ref.).

       y   In Lower Colorado River Authority v. Ch mi Cal
    B&.Trust.,suDra,           the court repeated,d&um       in
    Daunhertv v. Thomosog to the effect     that Article    VIII,
    Section 2 applied to "property held in private owner-
    ship but used for purposes which give to it a public
    character."    Under this view the Legislature     would be
    powerless to tax the leasehold    estate in any publicly
    owned property which is exempt in the hands of the
    owner.    The property involved in that case was actually         ._
    being used in the performance of the functions       for
    which the public agency was created and accordingly
    came within the exemption of property "devoted exclu-
    sively to the use and benefit    of the public"   under Sec-
    tion 9 of Article    XI.
94‘   Hon. William     Schneider,   Jr.,   page 10 (V-1399)


                   Upon reviewing all the cases which have
      been decided under the Constituti6n     and statutes of
      this State, we find that publicly    owned property
      which has been held to be exempt from taxation may
      be classified    as ~follows:
                1. Property used by the public or actual-
      ly being put to use exclusive,ly in carrying out a
      public function performed under the powers of a gov-
      ernmental agency, whether the function b,e govern-
      mental or proprietary.   In this category we find such
I




      cases as Lower Colorado River Authority v. Chemical




       Citv of Brvaq, B.
       such a use, although used in part for other purposes,
       w~ould also be exempt.    See City of Abilene v. State,.
      'Butma. Conceivably, this latter    exemption might in
       some situations   come under Section 9,of Article   XI
       and in others under Section 2 of Article     VIII, but it
       is not necessary here to consider the exact ~bounda-
       ries of the exemption under each of the constitutional
       provisions   in such instances.
                  2.    Property which is a part of or stands in
      the place of a public fund.           Cases illustr&tive    of
      this classification        include Dauahertv v. T mm
                                     Sh mard     144 Tex. %l     ?$& ='
                               ,"i other caies holding tdt        prop-
                            'delinquent     tax foreclosures   is ex-
      empt . Cf. State v. Cl y               ous
      man      v. William,        8:~ T~kH421~of$ ~b0~).
      %;s;xemption       likewise     results from Section 9 of Arti-
             .

                   3. Property which is intended for actual
      use in carrying out a public function where there has
      not been an abandonment of the intended use, although
      iz    act,ual use for that purpose is temporarily suspend-
             Cases of this nature include Citv of Abilene V.
      Stite,    suura; State v. City of Beaumont, 161 S.W.2d
      WTex.        Civ. App. 1942).  This exemption is by virtue
      of Article    VIII, Section 2 of the Constitution and AI?-
      title   7150 of the Revised Civil Statutes.
    -...




           Bon. William    Schneider,    Jr.,     page 11 (V-1399)
                                                                                   95

                         It is obvious that the property leased'by
            the Fredericksburg      Independent School District   for     '.
            commercial development does not come within,the         first
            class of exempt property.        Nor do we think it comes
            within the second class.       All the cases in this class
            which have held such property to be exempt involve
            funds raised by taxes or other public money or, as in
            the ~case of Daugherty v. Thomnson, property which is
            itself   made a part of a fund created by law.       The
            fact that the income from a school district's        proper-
            tyheld    under a permissive     ownership becomes a part
             of a fund used for the support of the public schools
            after~it   is ctillected   is not sufficient   to make the
           'property   itself   a part of the fund or to make it rep-
            resent any part of the fund.
                               As noted above, the courts of this State
                'have never been'called      upbn to decide the precise    ques-
                tion presented in your r,equest.        Opinions of.the Attor-
-~-'-----'--..ingney General's
                       results.     Office have reached apparently conflict-
                                  .-Opinion O-4459 (1942) .held that property
                 devised to a county, the income from which was to be
                 used for the supqort of a county hospital,         was exempt
               .while Opinion o-4285 (1942) held that property devise B
      _ --,,,to a city, .the income from which was to be used for the
                 support and improvement of the city's        public parks, was
                not exempt.       In Opinion V-447 (1947), rendered during
                the present administration , it was held that land orig-
                 inally acquired by a county- for use as a poor farm rnfas
                not exempt whare the intended use had been abandoned.,
                 although the income from~the property went into the
                 county's    charity fund.
                  --~~~---The
                            prevailing  view in other jurisdictions
           is that prdperty which is being held and used solely for
           the production     of income is not exempt from taxation un-
           der constitutional     and statutory provisions   similar to
           those in force in this State, even though the income is




                    See Notes, 3 A. L. R. 1439;           iq49; 101 A.L.B.
           787; 129 A.L.R. 480.
                        After considering        all the authorities    herein
           discussed,    we have reached        the conclusion  that   property
     , . . .*

/
      94%
,/
                 which an independent school dist2ictmms mily&r
                 the purpose of producing~income*i:s not ?be%frrgused
                 for a public purpose within the:maaning:ofthe COP
                 stitution and is notexempt from -taxationin-the
                 hands of the owner, Consequently,the Leasehold
                 interest under a lease :fora t:ermmf thre-e:yaarsror
                 more would not be taxable to zthelessee.. :fIowever,
                 if the property is ~h&ldfor the eventu&l :purpose-of
                 being used as a part,of the school-facilities,  {even
                 though it is being leased te@porar'ily, :it.Tsexempt
                 from taxation in the .handsof the school district
                 under the provisions ofArticle VIII, Section2 -of
                 the Consti,tution and Article 7130 of the.Revised
                 Civil Statutes, but it is not exemptunder Article
                XI, Section 9 of the Constitution. Ihthis -event,
                 the value of the .leaseholdinterest,zhder:a:lease
                 for a term of three years or.more:istaxable :to;the
                                                                 ,.y
                 lessee under Article 7173.                     -4,


                ..--.~-:.--~--
                         ---++operty which ah 'inde~peniient
                                                           school
                       district owns and holds only for the :pu.r-
                       pose of producing income is :not:exempt
                       from taxation in the hands .ofthe .owner.,
                       and the 'leaseholdinterestunder .alease
                ~~~-.~--for a term of three years :or.moreis :not .,
                        caxable to the Ylessee. Property~whichis
                       held for the eventual pur,poseof being
                       used as a part of the school:facilities~,
                       though leased temporarily is exempt from
                       taxation in the hands of 4he owner; and
                       the value of the leasehold estate .mder a
                       lease for a term of three years or more
                 _ ....-$L7ex.bteSto the lessee under .Article
                            9 * . .
                 APPROVEO:                           %ur.s xe~y *LiUIy,
                      W. V. Geppert
                      Taxation Division
                      E. Jacobson
                      ReviewingAssistaut
                      Charles D. i<athews
                      First Assistant                      Assistant
                      MIQI:wb
