Present:   All the Justices


THE MARINER'S MUSEUM, ET AL.
                        OPINION BY JUSTICE A. CHRISTIAN COMPTON
v. Record No. 970833                         January 9, 1998

CITY OF NEWPORT NEWS


       FROM THE CIRCUIT COURT OF THE CITY OF NEWPORT NEWS
              W. Park Lemmond, Jr., Judge Designate



      This is an appeal from a judgment in an action for relief

from alleged erroneous assessment of local taxes.   The central

issue is whether a charitable corporation, eligible for an

exemption from real estate taxes, forfeits that exemption when it

leases realty to another charitable corporation and the lease is

"a source of revenue or profit" to the lessor under Code § 58.1-

3603(A).
      In July 1994, appellants The Mariner's Museum and Riverside

Healthcare Association, Inc., filed against appellee City of

Newport News an application, pursuant to Code § 58.1-3984, for

relief from erroneous tax assessment.   The plaintiffs asserted

they are nonstock, nonprofit corporations exempt from taxation.

They also asserted the Museum owns real estate located in the

City that is leased to Riverside, which occupies and uses the

property exclusively as a hospital conducted not for profit.

      The plaintiffs alleged that the City erroneously has

assessed the Museum for real estate taxes and that Riverside (the

Hospital) has paid the taxes on behalf of itself and the Museum

under protest.   They asked the court to enter an order declaring

the tax assessment erroneous, invalid, and illegal, and
exonerating the plaintiffs from any liability for payment of the

taxes.    They also sought a refund in the amount of approximately

$2.8 million with interest.

         Responding, the City denied the plaintiffs are entitled to

the relief sought.    It asserted "that the aforesaid real estate

is leased or was otherwise a source of substantial revenue or

profit" to the Museum and, accordingly, it is liable to taxation

pursuant to Code § 58.1-3603.
         The parties entered into a stipulation of facts and

submitted the case to the trial court on issues of law.

Following argument of counsel, the court, in a letter opinion,

denied the plaintiffs' application for relief.    The plaintiffs

appeal from the February 1997 final order adjudicating that the

taxes in issue had not been erroneously assessed.

         According to the stipulation, the Museum was organized in

1930 to operate, in what is now the City of Newport News, "a

museum and library pertaining to nautical subjects" and

"otherwise to advance learning, the arts and sciences relating to

or bearing on water craft, the marine and marine navigation."

The Museum is owner of a substantial amount of realty located on

the east and west sides of Warwick Boulevard in the City, and has

leased a part of the property on the east side to the Hospital

and its predecessor corporation.    The plaintiffs are exempt from

taxation of their income pursuant to the federal Internal Revenue

Code.




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      Since February 1963, a medical center known as Riverside

Hospital has been operated on the land leased from the Museum.

The Hospital always has been conducted not for profit and

exclusively as a charity.   All buildings, parking lots, and

related structures are used by the Hospital for charitable,

literary, scientific, or educational purposes.

      Over the years, the Hospital has expanded existing

structures, constructed additional buildings, and leased more

property from the Museum as its hospital operations have grown.

In September 1989, the Museum and Hospital entered into a lease

superseding all prior leases.   In 1990 and 1993, construction of

additional hospital facilities was completed on the leased

property.
      The September 1989 lease covers about 36 acres and is for a

term ending on December 31, 2061.   It provides that the Hospital

is leasing the property "for the purpose of conducting its

medical facilities and such other allied purposes."

      The total rent for the 72-year term is $5 million, with $2

million to be paid upon execution of the lease, $2 million in

January 1990, and $1 million in January 1991.    These sums were

paid in a timely fashion.

      In an April 1994 letter, the City's Chief Assessor notified

the Museum that "it has been determined that the land that was

the subject of the 1989 lease is no longer exempt from taxation

pursuant to the provisions of" Code § 58.1-3603.   Prior to April




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1994, no effort had been made by the City to assess real estate

taxes against any land covered by the several leases between the

parties.   The letter enclosed "the assessment for the current tax

year and the three (3) most recent tax years."     This action

ensued.

      Settled principles applicable here should be reviewed.      The

general policy in the Commonwealth is to tax all property.       See

Va. Const. art. X, § 1.   But the Constitution creates certain

exemptions, see id. § 6(a), and authorizes the General Assembly
to establish others.    See id. § 6(b).   And, the legislature is

permitted to restrict or condition, in whole or in part, but not

extend, any or all of the exemptions created in the Constitution.

 Id. § 6(c).

      Furthermore, the Constitution provides that all exemptions

shall be strictly construed against the taxpayer.     Id. § 6(f).

"Under this rule, exemption from taxation is the exception, and

any doubt is resolved against the one claiming the exemption."
DKM Richmond Assocs. v. City of Richmond, 249 Va. 401, 407, 457

S.E.2d 76, 80 (1995).   The burden is upon the taxpayer to

establish that it comes within the terms of the exemption.       Id.

      The Constitution authorizes the General Assembly to exempt

from taxation property used by its owner for charitable,

historical, benevolent, or cultural purposes "subject to such

restrictions and conditions as may be prescribed."    Art. X, §

6(a)(6).




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         The General Assembly implemented the foregoing

constitutional provisions in Title 58.1, Chapter 36, of the Code.

"Property of any nonprofit corporation organized to establish

and maintain a museum" is exempt by classification from taxation.

Code § 58.1-3606(A)(8).

         However, § 58.1-3603, the main focus of this appeal,

restricts exemptions under certain circumstances.    The statute

provided at the time of this dispute that:    "Whenever any

building or land, or part thereof, exempt from taxation pursuant

to this chapter . . . is leased or is otherwise a source of

revenue or profit, all of such buildings and land shall be liable

to taxation as other land and buildings in the same county, city

or town."    § 58.1-3603(A) (1991 Repl. Vol.).   The statute further

provided:    "In assessing any building and the land it occupies

pursuant to subsection A, the assessing officer shall only assess

for taxation that portion of the property subject to any such

lease or otherwise a source of profit or revenue . . . ."

§ 58.1-3603(B) (1991 Repl. Vol.) (statute amended in part by Acts

1996, ch. 534).
         On appeal, the plaintiffs claim that the trial court

"reached its decision that the subject property was not exempt

from taxation based solely on the provisions of Section 58.1-

3603."    The plaintiffs note the court concluded that the payment

of $5 million as consideration for the 1989 lease constituted

"revenue or profit" within the meaning of the statute and that




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the property therefore was not exempt.

      Continuing, the plaintiffs argue that the decision below

was reached "without regard for" certain provisions of the

Constitution of Virginia "as it existed both before and after its

amendment in 1971, other provisions of the Code of Virginia which

deal with the subject of tax exempt property, and a decision by

this Court which is on all fours with the case at bar."

Concluding, the plaintiffs contend the judgment of the trial

court "was contrary to the law and the evidence and should be

reversed."   We disagree.
      The existence of the 1989 lease between the Museum and the

Hospital has been stipulated.    However, the mere existence of a

lease will not work a forfeiture of the exempt status that the

leased property may otherwise enjoy.     Board of Supervisors of

Wythe County v. Medical Group Found., Inc., 204 Va. 807, 812, 134

S.E.2d 258, 262 (1964).     Rather, the lease must generate a

"substantial" net revenue or profit before the exemption is

forfeited. See City of Newport News v. Warwick County, 159 Va.
571, 593-94, 166 S.E. 570, 578 (1932).

      In the present case, as the trial court found, the 1989

lease generated a substantial net revenue or profit.    The lease

yielded $5 million in revenue for the Museum during the first 16

months of its term.

      Under the lease, the Museum incurs no expenses for the

leased property.   For example, Section Eight of the lease




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provides:   "It is the intent of the parties that the Lessee is to

pay all charges and expenses of every nature that may be imposed

upon the Premises and its appurtenances in any manner during the

term of this Lease and that may arise during the term of this

Lease from the use and/or misuse of the Premises in any manner."

      Therefore, we hold that the Museum's receipt of a

substantial net revenue or profit from the lease to the Hospital

renders the otherwise exempt property taxable under § 58.1-3603.
      The plaintiffs rely heavily upon the Wythe County case,

which, they say, "is on all fours with the case at bar."    That

case is not controlling.   Actually, it supports the trial court's

ruling in this case.

      In Wythe County, decided under § 183 of the 1902

Constitution, before adoption of the current 1971 Constitution,

the Court considered a real estate tax exemption involving a

lease between two charitable corporations.   The first issue was

whether the realty owned by one charitable corporation and leased

by it to another charitable corporation to be operated as a

hospital, exclusively as a charity, was property "belonging to"

the lessee within the meaning of a constitutional and statutory

provision, so as to affect the tax exempt status of the property.

 204 Va. at 808, 134 S.E.2d at 259.    The "belonging to" phrase

now appears in Code § 58.1-3606(A)(5).

      The term of the lease was 15 years, with a right of

renewal, at a monthly rental of $2,400.   The rent was an amount



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that the lessor anticipated would be required to curtail a

$100,000 loan, obtained to fund construction of the hospital

building, and to meet expenses of equipping the hospital.         Id. at

809, 134 S.E.2d at 259.    The lessee encountered financial

difficulties and the lessor wrote off some of the amounts due it

under the lease, refinanced the loan, and negotiated a new 15-

year lease at a monthly rental of $2,500, the amount needed to

amortize the refinanced mortgage.       Id., 134 S.E.2d at 260.
      This Court held that the subject property "belonged to" the

lessee, "so long as it has the exclusive right to its possession

under the lease," id. at 812, 134 S.E.2d at 261-62, and hence was

qualified for exemption.

      The first issue in Wythe County, of course, is not

presented in this case; the City always has conceded that, but

for the 1989 lease and the application of the provisions of Code

§ 58.1-3603, all the Museum's property would qualify for

exemption.

      The second issue addressed in Wythe County, however, is
presented here.   The Board of Supervisors contended that, even if

the hospital property were exempt, the exemption was lost by

virtue of the leases.   The Board relied on a paragraph in § 183

of the 1902 Constitution providing that exempted real estate

shall be liable to taxation whenever it "shall be leased or shall

otherwise be a source of revenue or profit."      204 Va. at 812, 134

S.E.2d at 262.    Similar language now appears in Code § 58.1-3603




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("a source of revenue or profit, whether by lease or otherwise").

      Focusing on the renegotiated lease, we held it did not

affect the tax exempt status of the hospital property.   The Court

reasoned that the rent the lessee agreed to pay tended

"immediately and directly to promote the objects and purposes for

which the [lessor] was chartered.   Indeed, the amount to be

received by the [lessor] under the lease was to pay on the loan

secured by the property in order to prevent a foreclosure and

assure the continued existence of hospital facilities.   Thus the

lease . . . was not a source of revenue or profit."    Id. at 813,

134 S.E.2d at 262.

      The Wythe County facts are not present here.    Unlike the

lessor in Wythe County, the Museum, as we have said, does realize

substantial net revenue or profit from the lease.    Indeed,

implicit in Wythe County is the conclusion that, but for the fact

the revenue received by the lessor was "incidental," not

substantial, the property would have been taxable.    Id. at 814,

134 S.E.2d at 263.

      Additionally, there is no evidence that the $5 million rent

tended "immediately and directly to promote the objects and

purposes" for which the Museum was chartered.   Certainly, one may

assume that any funds received by a museum will promote its

charitable purposes, a fact not in evidence here.    But that makes

no difference because the Museum no longer uses its leased

property for museum purposes; it leases the land as a means of



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generating substantial net revenue or profit.      It is the use to

which property is put, not the use to which profits that are

realized from such property are put, that determines whether the

property shall be exempt.    Commonwealth v. Trustees of Hampton

Normal and Agric. Inst., 106 Va. 614, 621-22, 56 S.E. 594, 597

(1907).   See County of Hanover v. Trustees of Randolph-Macon

College, 203 Va. 613, 617, 125 S.E.2d 812, 815 (1962).      This

principle applies even though, as here, the lessee of an exempt

owner also enjoys a tax exempt status.       See Commonwealth, 106 Va.

at 621, 56 S.E. at 598.

      The remaining issues raised by the plaintiffs merit only

brief comment.   They point to a "grandfather clause" in the 1971

Constitution, which provides "that all property exempt from

taxation on the effective date of this section shall continue to

be exempt until otherwise provided by the General Assembly as

herein set forth."   Va. Const. art. X, § 6(f).      See Code § 58.1-

3606(B) (certain property exempt on July 1, 1971 shall continue

to be exempt under rules of statutory construction applicable to

exempt property prior to such date).

      The plaintiffs argue the "subject property was clearly

exempt on July 1, 1971," the effective date of the present

Constitution, and the property "has continued to be exempt until

the present time pursuant to the current Constitutional and

statutory provisions."    We do not agree.

      This contention assumes the property was exempt in 1971, a



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conclusion that is questionable given the evidence in this case.

And, the property was not rendered exempt merely because the

City did not tax the property prior to the assessments in issue

here.

        Even assuming the property was exempt in 1971, however, the

Museum is not eligible for protection under the grandfather

clause.   The execution of the 1989 lease was a defining and

controlling event that operated as a forfeiture under Code

§ 58.1-3603.    Property exempt under a 1971 grandfather clause

does not remain perpetually exempt regardless of post-1971

actions by the property owner.
        Finally, we reject the plaintiffs' contention that the

subject property is exempt under portions of Code § 58.1-3203,

which deals with taxation of leasehold interests.    This case does

not involve leasehold taxes.   Therefore, the statute is

inapplicable.

        Consequently, we hold that the plaintiffs failed to carry

their burden to show they qualify for the tax exemption, that the

City properly imposed the taxes upon the Museum, and that the

trial court did not err in denying the plaintiffs' application

for relief.    Thus, the judgment below will be



                                                  Affirmed.




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