Opinion issued October 5, 2006
In The
Court of Appeals
For The
First District of Texas
NO. 01-05-00496-CV
TRQ CAPTAIN’S LANDING L.P., A TEXAS LIMITED PARTNERSHIP and AMERICAN HOUSING FOUNDATION, A TEXAS NON-PROFIT CORPORATION, Appellants
V.
GALVESTON CENTRAL APPRAISAL DISTRICT, Appellee
On Appeal from the 10th District Court
Galveston County, Texas
Trial Court Cause No. 04CV0796
DISSENTING OPINION
TRQ could not claim a property tax exemption because it is the owner and legal title holder of the property at issue, but it is not a charitable community housing development organization. Instead, it is a Texas limited partnership that did not seek or obtain non-profit or CHDO status during 2003. The applicable provision governing tax exemptions plainly restricts them to qualified CHDOs who own the property subject to taxation. Although AHF is a CHDO, it does not own the property, and thus it is not legally obligated to pay any tax levied on the property. The majority concludes that an investor in a duly organized limited liability entity holds “equitable title” to property owned by the entity in which it invests, and then further concludes that such title is sufficient to allow the limited liability entity to assert the investor’s CHDO status. Because the statute does not confer imputed exemptions, I respectfully dissent.
The statute requires ownership.Section 11.182 of the Texas Tax Code allows a CHDO to claim a property tax exemption for real property it owns. See Tex. Tax Code Ann. § 11.182 (Vernon Supp. 2005). In particular, subsection (b) provides:
(b) An organization is entitled to an exemption from taxation of improved or unimproved real property it owns if the organization:
(1) is organized as a community housing development organization;
(2)meets the requirements of a charitable organization provided by Sections 11.18(e) and (f);
(3)owns the property for the purposes of building or repairing housing on the property to sell without profit to a low-income or moderate-income individual or family satisfying the organization’s eligibility requirements or to rent without profit to such an individual or family; and
(4)engages exclusively in the building, repair, and sale or rental of housing as described by Subdivision (3) and related activities.
Id. § 11.182(b) (emphasis added). Thus, not once, but twice, the statute requires that the CHDO own the property. It does not define “owns.” As the majority observes, TRQ and AHF contend “that the exemption should be imputed through the partnership chain and back to AHF.” Thus, our decision turns on whether we impute ownership beyond the legal title holder for property tax exemption purposes. Nothing in the plain language of the statute permits such an interpretation, and cases interpreting the Tax Code have not done so. To the contrary, the Texas Supreme Court has held that an exemption from taxation should not be found unless the plain language of the statute confers it:
Statutory exemptions from taxation are subject to strict construction since they are the antithesis of equality and uniformity and because they place a greater burden on other taxpaying businesses and individuals. An exemption cannot be raised by implication, but must affirmatively appear, and all doubts are resolved in favor of [the] taxing authority and against the claimant.
Bullock v. Nat’l Bancshares Corp., 584 S.W.2d 268, 271–72 (Tex. 1979).
The property tax obligation—and thus the corresponding exemption—rests with the legal title holder, as the owner.
“The person having legal title to property is generally considered to be the owner thereof for purposes of taxation.” Childress County v. State, 127 Tex. 343, 349, 92 S.W.2d 1011, 1015 (1936); Travis Cent. Appraisal Dist. v. Signature Flight Support Corp., 140 S.W.3d 833, 840 (Tex. App.—Austin 2004, no pet.) (holding that lessees could not be taxed on property for which City of Austin held legal title). In rare instances, when the legal title holder to property is unclear or legally encumbered, courts will examine whether a party holds equitable title to real property. See Signature Flight, 140 S.W.3d at 840 (“In the absence of a clear legal title-holder, the holder of the equitable title is considered the taxable owner, while someone with only a contingent interest is not.”). An equitable title holder is not an owner for taxation purposes unless the legal title holder is legally encumbered, or a dispute as to the legal title holder’s identity exists; rather, with rare exceptions, legal and equitable title are merged in a single owner. See Tex. Tpk. Co. v. Dallas County, 153 Tex. 474, 477–78, 271 S.W.2d 400, 401–02 (1954) (rejecting tax exemption for private turnpike entity based on contractual provision that State was equitable title holder of property). “Equitable title” for property tax purposes thus does not exist absent uncertainty as to actual, legal title or legal encumbrance (as, for example, between trustees and beneficiaries or estate administrators and heirs). Even in those instances, the property tax obligation lies with the legal title owner if one is determinable. See Bailey v. Cherokee County Appraisal Dist., 862 S.W.2d 581, 584 (Tex. 1993) (“While it is true that the heirs hold equitable title to estate property, this interest does not give rise to tax liability. The responsibility for taxes lies with the administrator as holder of legal title.”).
Moreover, a contingent interest is not an ownership interest in property. Tex. Tpk., 271 S.W.2d at 402. A lienholder, for example, is not an “owner” for property taxation purposes, though it may have some future right to the property in the event of default. See Childress County, 127 Tex. at 351, 92 S.W.2d at 1016; Comerica Acceptance Corp. v. Dallas Cent. Appraisal Dist., 52 S.W.3d 495, 497 (Tex. App.—Dallas 2001, pet. denied) (holding that lienholder in possession of collateral pending foreclosure is not owner for property tax purposes).
Investors are neither owners nor “equitable title holders.”
In this case, TRQ and AHF seek to expand the principle of equitable title “owners” to include classes of investors: i.e., partners, limited partners, and limited liability company members (and, by implication, corporate shareholders). AHF, however, does not hold “equitable title” to the apartments. Rather, it owns partnership and limited liability company equity interests of various sorts—primarily, in CD Captain’s Landing, L.L.C., by virtue of its 100% membership interest in the company. Secondarily, AHF has an interest in TRQ, through its interest in CD, because CD is the sole limited partner of TRQ. The general partner for TRQ is TRQ Galveston, L.L.C., another limited liability company, in which AHF also holds a 100% membership interest. Graphically, it looks like this:
Although the majority may be correct that, under principles of federal income taxation, AHF ultimately pays the taxes incurred by the partnerships and limited liability companies in which it invests, AHF does not bear liability for—and does not pay—any state property tax associated with the real property assets of the limited partnerships and limited liability companies in which it invests. Rather, liability rests with TRQ Captain’s Landing, L.P., as title holder, and in the case of default, the property itself via a tax lien. See Bailey, 862 S.W.2d at 584. Tax liability never lies with AHF.
This is because neither a general nor a limited partner has “the present right to compel legal title” to property owned by a partnership. It is axiomatic that partnership property is not the property of the partners, even of a general partner. See Tex. Bus. Org. Code Ann. § 152.101 (Vernon Supp. 2005) (“Nature of Partnership Property: Partnership property is not property of the partners.”). The same is true for members of limited liability companies. See id. § 101.106(b) (“A member of a limited liability company or an assignee of a membership interest in a limited liability company does not have an interest in any specific property of the company.”). Thus, as the majority acknowledges, in order to gain title to the property in this case, AHF must dissolve or wind-up the affairs of the various partnerships and limited liability companies in which it has invested. Undeniably, it possesses the power to do so, but that is not tantamount to a present, vested right to compel title—it is, at best (assuming no default on creditors’ secured interests or other material liens or claims on the assets of the partnership or limited liability company), a contingent right that could be asserted via a future course of action. See Comerica, 52 S.W.3d at 497 (noting that lienholders are not owners in part because they have no right to use or possession of property apart from future right of possession upon loan default).
Investors, without more, are simply not “equitable title holders” for real property purposes. Rather, investors are the equitable owners of the business organizations in which they invest. Thus, I disagree with the Amarillo Court of Appeals’s interpretation of “equitable title” and its holding in Southeast Texas Housing Finance, which the majority concludes is applicable to the Tax Code provision in this case. See Harris County Appraisal Dist. v. Se. Tex. Hous. Fin. Corp., 991 S.W.2d 18, 22 (Tex. App.—Amarillo 1998, no pet.). In deciding to classify investors as “equitable owners,” our court and the court of appeals in Southeast Texas Housing Finance incorrectly apply Texas Turnpike.
In Texas Turnpike, the Texas Supreme Court denied a property tax exemption to a legal title holder, who sought to claim it on the basis that a public entity—the State—equitably owned the property, based upon the express characterization of it as an equitable title holder in legislation governing the Texas Turnpike Authority. Tex. Tpk., 153 Tex. at 477, 271 S.W.2d at 401. Decided in 1954, the case did not deal with modern equity investment vehicles, but the court’s overarching determination that any right to property must be vested to claim an exemption applies in today’s context—contingent rights are not equitable ownership rights. See id. at 478, 271 S.W.2d at 402 (noting that “[the State’s] interest in the property is not a vested interest; it is purely contingent”).
Classifying investors as equitable owners ignores the very legal formalities that exist to differentiate investors from the business entities in which they invest and creates multiple “owners” for property tax purposes. In this case, for example, it creates at least four: AHF; CD Captain’s Landing, L.L.C.; TRQ Galveston, L.L.C.; and TRQ Captain’s Landing, L.P. The last of these has legal title, too, but one cannot ignore that it also has equitable title, for no legal encumbrance exists as to its ownership, and the legal title is undisputed.
Moreover, nothing requires three of these entities (all but AHF) to comply with the other provisions of Tax Code section 11.182(b). See Tex. Tax Code Ann. § 11.182(b). For example, TRQ Captain’s Landing need not pay salaries that are within “a reasonable allowance for services rendered,” and need not “use its assets to perform charitable functions,” as required by section 11.182(b)(2). Id. § 11.182(b)(2). The Legislature conditioned the right to a tax exemption upon fulfilling certain statutory obligations, but nothing compels the non-CHDO entity with an investor classified as an “equitable owner” to comply with these obligations.
Finally, subsection 11.182(e), added to section 11.182 in 2001, does not suggest a different result. See Act of May 25, 2001, 77th Leg., R.S., ch. 1191, § 1, 2001 Tex. Gen. Laws 2694, 2695, 2696 (current version at Tex. Tax Code Ann. § 11.182(e) (Vernon Supp. 2005)). By its express terms, the amendment imposes a limitation “[i]n addition to” compliance with subsections 11.182(b) and (c). Tex. Tax Code Ann. § 11.182(e). Whatever the Legislature’s intent in adding subsection (e), which requires that the CHDO be the sole general partner in limited partnership projects for an exemption to apply, it does not change the result in this case, because the amendment does not apply to projects constructed before 2002 (as this one was), and is “[i]n addition to” existing ownership requirements. Id. Furthermore, AHF is not the general partner of TRQ; rather, TRQ Galveston holds that interest.
* * *
Section 11.182(b) does not confer a tax exemption based on the charitable status of an investor in a company or limited partnership that owns the property. Using the required principle of strict construction, we should not impute one where it does not “affirmatively appear.” See Bullock, 584 S.W.2d at 271–72.
Southeast Texas Housing Finance is inconsistent with caselaw from the Texas Supreme Court and the Waco Court of Appeals.
Because equity investors are not owners of the real property assets of the companies in which they invest, we should decline to follow the Amarillo Court of Appeals’s decision in Southeast Texas Housing Finance. 991 S.W.2d 18 (Tex. App.—Amarillo 1998, no pet.). Instead, we should follow American Housing Foundation v. Brazos County Appraisal District, and hold that an investor seeking a section 11.182(b) exemption on behalf of an entity in which it invests does not qualify the entity as an “owner” under the statute when the entity, as legal title holder, does not qualify in its own right. 166 S.W.3d 885 (Tex. App.—Waco 2005, pet. denied). This approach is consistent with the Texas Supreme Court’s opinions in Bailey and Childress County, regarding legal title, and its opinion in Bullock, requiring strict construction of statutes that confer tax exemptions. See Bailey, 862 S.W.2d at 584 (“The responsibility for taxes lies with the administrator as holder of legal title.”); Bullock, 584 S.W.2d at 272 (“An exemption cannot be raised by implication, but must affirmatively appear . . . .”); Childress County, 127 Tex. at 349, 92 S.W.2d at 1015 (“The person having legal title to property is generally considered to be the owner thereof for purposes of taxation.”).
The majority relies on a number of cases that define equitable title as “the present right to compel legal title.” Save Southeast Texas Housing Finance, however, those cases do not define who holds equitable title; rather, they define who does not. Contractual obligees, while the contract is executory, do not. Tex. Tpk., 153 Tex. at 478, 271 S.W.2d at 402. Lessees do not. Signature Flight, 140 S.W.3d at 840. Secured creditors do not. Comerica, 52 S.W.3d at 498. Investors do not, either, and we should so hold. Brazos County, 166 S.W.3d at 889.
CONCLUSION
AHF does not own the property that the appraisal district seeks to tax, and the exemption in Tax Code section 11.182(b) does not provide that charitable investors may assert an exemption on behalf of the non-charitable entities in which they invest, if those entities do not qualify for the exemption in their own right under the statute. Classifying business investors as equitable owners of property held by the businesses in which they invest departs from the general rule that the legal title holder is the owner for property tax purposes and creates uncertainty as to the real property rights and obligations of Texas business entities. The trial court correctly ruled that the property tax must be paid. I therefore respectfully dissent.
Jane Bland
Justice
Panel consists of Justices Keyes, Alcala, and Bland.
Justice Bland, dissenting.