IN THE SUPREME COURT OF IOWA
No. 09–0654
Filed July 29, 2011
KRUPP PLACE 1 CO-OP, INC. and
KRUPP PLACE 2 CO-OP, INC.,
Appellees,
vs.
BOARD OF REVIEW OF
JASPER COUNTY, IOWA,
Appellant.
On review from the Iowa Court of Appeals.
Appeal from the Iowa District Court for Jasper County, Dale B.
Hagen, Judge.
The Board of Review of Jasper County, Iowa, seeks further review
of the court of appeals decision affirming the judgment of the district
court that two residential cooperatives be classified as residential
property for property tax purposes. DECISION OF COURT OF APPEALS
AND JUDGMENT OF DISTRICT COURT AFFIRMED.
Michael K. Jacobsen, County Attorney, and James W. Cleverley,
Jr., Assistant County Attorney, for appellant.
James E. Nervig of Brick, Gentry, Bowers, Swartz & Levis, P.C.,
West Des Moines, and Craig R. Hastings of Hastings, Gartin & Boettger,
LLP, Ames, for appellee.
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Eleanor M. Dilkes, City Attorney, and Eric R. Goers, Assistant City
Attorney, for amicus curiae City of Iowa City, and Terrence L. Timmins,
General Counsel, for amicus curiae Iowa League of Cities.
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ZAGER, Justice.
In this case, we are presented with an appeal of the district court’s
decision to classify two multiunit apartment buildings as “residential
cooperatives” entitling the properties to be taxed at residential, rather
than commercial, property tax rates. The Board of Review of Jasper
County appeals, contending the two properties are cooperatives in form
only and should be classified as commercial property for purposes of
property taxation. The court of appeals affirmed the district court, and
we granted further review. We now affirm the decision of the district
court and the court of appeals.
I. Background Facts and Proceedings.
This case involves the proper classification of two parcels of real
estate for property tax purposes. Krupp Place 1 Co-op, Inc. and Krupp
Place 2 Co-op, Inc. are both corporations organized as multiple housing
cooperatives under Iowa Code chapter 499A (2007), and each corporation
has filed its articles of incorporation with the Iowa Secretary of State.
Each cooperative subsequently obtained title to real estate designated as
Krupp Place 1 and Krupp Place 2. Both Krupp Place 1 and Krupp
Place 2 are improved with a building containing twenty-four apartment
units.
Larry and Connie Krupp are the only members of the cooperatives.
Pursuant to Iowa Code section 499A.11, certificates of membership have
been issued to Larry and Connie Krupp in each of the cooperatives
certifying their membership interests. These certificates entitle Larry and
Connie Krupp to two property rights: (1) an undivided fifty percent
interest in each of the cooperative housing corporations which carries
with it the right to participate in the management of the corporation, and
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(2) a proprietary leasehold interest in one-half of the apartments in
Krupp Place 1 and Krupp Place 2.
As members of the cooperatives, Larry and Connie Krupp have
entered into proprietary leases with the cooperatives requiring them to
pay rent. Neither of the Krupps have ever resided in the cooperative
properties. Instead, they have subleased the apartments to subtenants
who use the properties for residential purposes. The Krupps use the net
rental income from subtenants to pay the rent they owe to the
cooperatives under the proprietary leases. The cooperatives in turn use
the rent paid by the Krupps to meet cooperative expenses. Any net
income left after payment of expenses is retained by the cooperatives as
they are prohibited by Iowa Code section 499A.4 from distributing net
income to its members. Additionally, both Larry and Connie Krupp pay
their proportionate fifty percent shares of all taxes on the subject real
estate consistent with their respective fifty percent membership interests.
Neither of the cooperatives operate under a tax exempt status
pursuant to section 501(c)(3) of the Internal Revenue Code. Nor is either
cooperative a for-profit corporation under Iowa Code chapter 504. Each
is a specialized corporation created under Iowa Code chapter 499A. The
accountant for the cooperative corporations has made a subchapter S
election for each corporation under the Internal Revenue Code. As a
result of this election, Larry and Connie Krupp must report any net
income from these cooperatives on their individual income tax returns
even though it is not, and cannot by statute, be distributed to them.
On March 18, 2008, the Jasper County Assessor mailed Larry and
Connie Krupp a notice of the 2008 Real Estate Assessment Roll for
Jasper County wherein the cooperative real estate was classified as
commercial real estate for property tax purposes. The cooperatives
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appealed the classification of their real estate as commercial and the
corresponding assessments to the Board of Review of Jasper County.
The board adjusted the assessed value of the properties but did not alter
its classification of the properties as commercial. The cooperatives
appealed the board’s decision to the district court.
During the course of the appeal, the parties entered into a
stipulation of facts, after which time the cooperatives filed for summary
judgment on the issue of classification of the real estate. Originally, the
district court issued its decision affirming the classification of the real
estate as commercial. The district court recognized that under Iowa
Code section 441.21(11), “all land and buildings of multiple housing
cooperatives organized under chapter 499A” are to be classified as
residential property for tax purposes. The district court, however,
concluded the Krupps had not complied with “the spirit of the law.”
Although the district court found that the real estate fell within the
definition of a multiple housing cooperative under chapter 499A, it stated
that like any corporation, the corporate entity may be disregarded and
the corporate veil pierced if the entity is a sham or if corporate formalities
are not followed. The court noted that there was no evidence in the
record that corporate meetings had been held or the existence of any
bylaws.
While the district court recognized that members of a housing
cooperative have the power to sublease their units under Iowa Code
section 499A.5, the district court concluded that the manner in which
Connie and Larry Krupp have “subleased” the premises “reeks of
impropriety.” The district court was concerned the Krupps each received
one membership unit representing a one-half ownership in each
building, and then in effect subdivided their units and subleased them.
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The district court was also concerned the record did not establish how
much the Krupps paid to the cooperatives under the proprietary leases.
As a result, the district court did not know the difference between the
amounts paid by the Krupps to the cooperatives and the amount the
Krupps received from their subtenants. The district court was therefore
concerned the Krupps may have been making a profit as a result of the
arrangement, something cooperatives are not authorized to do under
Iowa Code section 499.1. The district court concluded that the facts
revealed “two people, seeking to minimize their tax liability, forming a
shell multiple housing cooperative under chapter 499A while actually
operating a standard rental property.” The district court affirmed the
board’s determination the real estate held by the cooperatives should be
taxed as commercial property.
The cooperatives filed a combined motion under Iowa Rules of Civil
Procedure 1.904 and 1.1004 for amendment and enlargement of findings
and for a new trial. At the time of the filing of the combined motions, the
cooperatives provided substantial additional documentation to the
district court, including the 2008 income tax returns for the cooperatives
and various corporate documents.
In light of the joint motion and additional filings, the cooperatives
argued the district court had made additional findings of fact that were
beyond the parties’ stipulation that “[a]ll of the material facts in this case
are undisputed.” The cooperatives pointed out that there was no
evidence regarding compliance with corporate formalities because the
issue was not in dispute. As a result, the cooperatives argued the court’s
previous piercing of the corporate veil was erroneous. The cooperatives
further reiterated that because all of the statutory prerequisites of Iowa
Code chapter 441 were met, the court had no choice but to follow the
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legislative directive that residential cooperative property be classified as
residential for property tax purposes. While the cooperatives recognized
the court was concerned with compliance with the spirit of the law, they
noted that the district court’s ruling ran contrary to the fundamental
principle that a taxpayer has a legal right to arrange his affairs in such a
manner as to minimize taxation.
After its receipt of numerous evidentiary documents, and after
further hearing, the district court granted the rule 1.904 motion for
reconsideration, correction, amendment and enlargement of findings and
conclusions filed on behalf of the cooperatives. In light of the new
evidence, the district court concluded the cooperatives had followed all
proper corporate formalities, and the multiple housing cooperatives were
set up exactly as prescribed by Iowa law. Accordingly, the district court
reversed its prior ruling and concluded the cooperative real estate should
properly be classified as residential pursuant to Iowa Code section
441.21(11).
The board appealed. Our court of appeals affirmed the district
court. We granted further review. We now affirm the court of appeals
and district court in all respects.
II. Standard of Review.
Appeals from tax assessments are triable in equity. Iowa Code
§ 441.39. Therefore, the court’s review is de novo. Iowa R. App. P.
6.907. In this case the parties have stipulated to the underlying facts. A
stipulation of facts is binding on the parties. Iowa Supreme Ct. Att’y
Disciplinary Bd. v. Gailey, 790 N.W.2d 801, 803 (Iowa 2010).
We construe factual stipulations by attempting to determine
and give effect to the parties’ intentions. In doing so, we
interpret the stipulation “with reference to its subject matter
and in light of the surrounding circumstances and the whole
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record, including the state of the pleadings and issues
involved.”
Id. at 803–04 (quoting Graen’s Mens Wear, Inc. v. Stille-Pierce Agency,
329 N.W.2d 295, 300 (Iowa 1983)). 1 We review the interpretation of a
statute for correction of errors at law. Braunschweig v. Fahrenkrog, 773
N.W.2d 888, 890 (Iowa 2009).
III. Discussion.
A. Background to Residential Cooperatives. Residential
cooperatives were created by statute in the Multiple Housing Act, Iowa
Code chapter 499A. This chapter generally allows two or more adult
persons to organize themselves into residential cooperatives. The
determination of whether an entity is a residential cooperative is
important because of the favorable tax treatment available for property
held by residential cooperatives. Ordinarily, multiunit apartment
buildings are classified as commercial ventures, with owners subject to
property tax at commercial rates.
We considered whether to classify a residential cooperative as
residential or commercial for property tax purposes in City of Newton v.
Board of Review for Jasper County, 532 N.W.2d 771 (Iowa 1995). In City
of Newton, Wesley Retirement Services (WRS) owned a multistory
building with sixty-three living units. Id. at 772. WRS in turn leased the
building to Park Centre Apartments, a cooperative organized under
chapter 499A. Id. The residents paid WRS a sum for an “estate in the
nature of an estate for life.” Id. Each resident further paid a monthly fee
1The court in City of Newton v. Board of Review for Jasper County, relying on the
stipulation of facts, determined its scope of review was limited to correction of errors at
law. 532 N.W.2d 771, 772 (Iowa 1995). However, we are not bound to these
stipulations of fact and rely on these stipulations only to assist us in determining the
facts in issue. The scope of review in City of Newton is incorrect as to our review of
stipulation of facts and is therefore overruled.
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to WRS depending upon the size of the unit and the number of
occupants. Id. at 773.
We relied upon a prior version of Iowa Code section 499A.14 to
conclude the residential cooperative should be classified as commercial.
At the time, section 499A.14 provided:
The real estate shall be taxed in the name of the co-
operation, and each person owning an apartment or room
shall pay that person’s proportionate share of such tax, and
each person owning an apartment as a residence under the
qualifications of the laws of the state of Iowa as such shall
receive that person’s homestead tax credit . . . .
Iowa Code § 499A.14 (1991) (emphasis added). We reasoned “the fact
that the ‘members’ of the cooperative have no rights to ownership or
management of the enterprise clearly defeats the purposes underlying
section 499A.14’s residential tax property tax benefit.” City of Newton,
532 N.W.2d at 774.
A few weeks prior to the City of Newton decision, the legislature
amended Iowa Code section 441.21 to clarify how to classify residential
cooperatives under chapter 499A. 1995 Iowa Acts ch. 157, § 1 (currently
codified at Iowa Code § 441.21(11)). The new subsection provided:
“Beginning with valuations established on or after January 1, 1995, as
used in this section, “residential property” includes all land and buildings
of multiple housing cooperatives organized under chapter 499A . . . .” Id.
The Iowa Department of Revenue promulgated an administrative rule
conforming to the 1995 amendment. The administrative rule stated that
“regardless of the number of separate living quarters, multiple housing
cooperatives organized under Iowa Code chapter 499A . . . shall be
considered residential real estate.” Iowa Admin. Code r. 701—71.1(4).
B. Analysis. On appeal, the board concedes the cooperatives are
properly organized under chapter 499A. The board, however, urges the
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court to look beyond the mere act of filing papers of incorporation and
look to the actual operation of the property in classifying the property for
tax purposes. According to the board, the court should utilize the
“actual use” test to inquire if the property’s operation is solely to
circumvent current tax classifications and to avail themselves of reduced
tax assessments. The board argues the purpose of chapter 499A is to
band together occupants to own, manage, and operate the structure for
residential purposes, not for the commercial purpose of leasing out
property to subtenants.
The board, in advancing its “actual use” argument, relies on Carroll
Area Child Care Center, Inc. v. Carroll County Board of Review, 613
N.W.2d 252 (Iowa 2000). In Carroll, the question was whether a child
care facility was entitled to favorable tax treatment under a tax provision
which exempted grounds and buildings used for “charitable” institutions
“ ‘solely for their appropriate objects.’ ” Id. at 254 (quoting Iowa Code
section 427.1(8) (1997)). We held entitlement to the tax exemption
depends on meeting a three-part test: (1) the entity was a charitable
institution, (2) the entity did not operate the facility to make pecuniary
profit, and (3) the actual use was solely for the appropriate objects of the
charitable institution. Id. at 254–55. The board argues we should
similarly apply an “actual use” test to classify property under section
441.21(11).
The cooperatives respond that under section 441.21(11), the term
“residential property” includes “all land and building of multiple housing
cooperatives organized under chapter 499A.” The cooperatives in
essence argue the test for favorable tax treatment is not an “actual use”
test, but is instead an organizational test. They assert they are entitled
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to be treated as residential property as a matter of law because there is
no dispute the cooperatives were organized under chapter 499A.
In determining whether an “actual use” test such as that utilized in
Carroll is appropriate, we begin our analysis by examining the underlying
statutes. In Carroll, the statutory provision provided an exemption from
property tax for: “Property of religious, literary and charitable societies.
All grounds and buildings used . . . by . . . charitable . . . institutions and
societies solely for their appropriate objects . . . and not leased or
otherwise used . . . with a view to pecuniary profit.” Id. at 254 (quoting
Iowa Code § 427.1(8) (1997)).
Plainly, under this statutory provision, an entity seeking the
exemption would have the burden of proving two questions of fact:
(1) the entity was “charitable”, and (2) the property in question was used
“solely for their appropriate objects” and “not leased or otherwise used
. . . with a view to pecuniary profit.” In short, section 427.1(8) requires
an entity seeking the exemption to meet an “actual use” test.
Iowa Code section 441.21(11) (2007), however, provides in relevant
part: “Beginning with the valuations established on or after January 1,
1995, as used in this section, “residential property” includes all land and
buildings of multiple housing cooperatives organized under chapter 499A
. . . .”
The only fact finding required under section 441.21(11) is whether
the property is owned by an entity organized under chapter 499A. While
section 427.1(8) imposes an “actual use” test, the plain language of
section 441.21(11) and chapter 499A imposes only an “organizational
test,” with no reference to the property’s actual use. See Rock v.
Warhank, 757 N.W.2d 670, 673 (Iowa 2008) (“When the language of a
statute is plain and its meaning clear, the rules of statutory construction
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do not permit us to search for meaning beyond the statute’s express
terms.”). As a result, we agree with the cooperatives that the legislature
did not create an “actual use” test in section 441.21(11). 2
Nothing in City of Newton is inconsistent with our holding here.
Two circumstances distinguish City of Newton from the present case.
First, the members here (the Krupps), have an ownership interest, but
not current residency. Under the previous version of Iowa Code section
499A.14, it was plausible residency was required for an owner to classify
the property as residential. See Iowa Code § 499A.14 (1991). Since City
of Newton, however, section 499A.14 has been amended. See 1991 Iowa
Acts ch. 30, § 6. Nothing in the current provision expressly or impliedly
requires member residency for the cooperative to be entitled to
residential tax treatment; the statute now simply states, “The real estate
shall be taxed in the name of the cooperative” and each member shall
pay the member’s proportionate share of the tax in accordance with the
bylaws. Id. § 499A.14. The statute still requires actual residency for a
taxpayer to qualify for a homestead exemption. But the homestead
exemption has nothing to do with the general rule that residential
cooperative property is classified and taxed as residential property.
Second, while City of Newton was pending, the legislature amended
section 441.21(11) to plainly state residential cooperative property is
entitled to be taxed at residential property tax rates. By enacting the
amendment with an organizational test, the legislature avoided a fact
intensive “actual use” test that might have been implied in City of
2Some commentators have recently called for the codification of the economic
substance doctrine, a judicially created test to identify abusive tax transactions. See,
e.g., Zachary Nahass, Note, Codifying the Economic Substance Doctrine: A Proposal on
the Doorsteps of Usefulness, 58 Admin. L. Rev. 247, 266 (2006). We decline to apply an
economic substance test in light of the legislative history.
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Newton. We think the timing of the amendment reinforces our linguistic
view that section 441.21(11), as amended, does not contemplate an
“actual use” test.
We therefore conclude section 441.21(11) requires property owned
by residential cooperatives, properly organized under chapter 499A, to be
classified as residential and taxed at residential property rates.
C. Piercing the Corporate Veil. The board also suggests the
court may pierce the corporate veil if the corporation is operated as a
mere sham. According to the board, the corporate form may be ignored
where “ ‘the corporate cloak is utilized as a subterfuge to defeat public
convenience, to justify wrong, or to perpetuate fraud.’ ” Fazio v. Brotman,
371 N.W.2d 842, 847 (Iowa Ct. App. 1985) (quoting 18 C.J.S.
Corporations § 6 (1939)). The board asserts the Krupps treated the
cooperatives as rental property. They argue the scheme in fact amounts
to a pecuniary venture and, as a result, the corporate veil established by
the filing of papers under chapter 499A should be pierced.
The cooperatives assert the doctrine of piercing the corporate veil is
a limited one that is employed only on behalf of creditors to reach the
personal assets of shareholders of corporations. In any event, the
cooperatives point out that the burden of piercing the corporate veil rests
with the moving party, and there is no evidence in the record that the
cooperatives are making any profit in this case.
We agree with the cooperatives. Even assuming the doctrine has
application here, which is questionable, the board has failed to show the
cooperatives were operating for profit. Even if the rent generated by the
Krupps’ subleases exceed the amount the Krupps must pay to the
cooperatives under their lease, this alone would not provide a basis for
penetrating a corporate veil. Under chapter 499A, it is the cooperatives
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that must operate on a nonprofit basis. Nothing in the chapter prohibits
a member from leasing out a unit or units with desirable economic
terms.
IV. Conclusion.
The judgment of the district court and the decision of the court of
appeals holding that the real estate owned by the cooperatives should be
classified as residential property for property tax purposes is affirmed.
DECISION OF COURT OF APPEALS AND JUDGMENT OF
DISTRICT COURT AFFIRMED.
All justices concur except Mansfield, J., who takes no part.