Untitled Texas Attorney General Opinion

OFF,CE OF THE ATTORNEY GENERAL. STATE OF TEXAS

JOHN CORNYN

November 30,200O

The Honorable Robert L. Busselman Opinion No. E-03 11
Karnes County Attorney
101 North Panna Maria, Suite 10 Re: Whether a building owned by the Karnes
Karnes City, Texas 78118 County Hospital District, but leased to physicians
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.
TEX. CONST. 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].
The Honorable Robert L. Busselman - Page 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
exclusively to the use and benefit of the public. Satterlee v. Gulf Coast Waste Disposal Auth., 516
S.W.2d 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 id. 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
property. 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); TEX. CONST. 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 CODEANN. $ 11.1 l(b), (c) (Vernon 2000).
The Honorable Robert L. Busselman - Page 3 (X-0311)

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 S.W.2d 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
property. 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
exclusively 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
shall be exempt from taxation of every character.” See Dallas County Appraisal Disf., 730 S.W.2d at 850. The
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 id. 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 - Page 5 (X-0311)

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