(specially concurring in part and dissenting in part).
Taxpayers appeal the order of the director (hereinafter referred to as the director) of the Department of Property Tax (the department), denying a protest of assessment and levy of ad valorem taxes on their leasehold interests in the Albuquerque International Airport (the airport). I would affirm in part and reverse in part.
The taxpayers present several points for reversal which can be considered as three issues on appeal: (1) constitutional and statutory tax exemptions should have been applied to the taxpayers; (2) certain interests of the taxpayers are not taxable; (3) the department used an incorrect alternative method of valuation. Unless otherwise noted, all statutory references are to the Property Tax Code, § 72-28-1 through § 72-31-93, N.M.S.A. 1953 (Supp.1975). Statutory references to the 1975 Interim Supplement will be designated by “Int. Supp.”
Constitutional and Statutory Issues Pertaining to Tax-Exempt Status
The taxpayers contend that their leases at the airport are not subject to valuation for property taxation purposes. It is therefore asserted that the action of the director of the department was contrary to law. The taxpayers challenge two conclusions of law made by the director: (1) taxpayers’ fractional interests in the improvements located at the airport are not exempt by reason of § 72-29-2.4, (Int.Supp.) or Article 8, § 3 of the New Mexico Constitution; and (2) taxpayers’ fractional interests in the improvements located at the airport are within the definition of “property” found in § 72-28-2 G, and taxpayers are “owners” of those fractional interests as defined in § 72-28-2 E.
Generally, the taxpayers argue that their interests are exempt from taxation because of Article 8, § 3 of the New Mexico Constitution, which states:
“The property of . towns, cities, and other municipal corporations . . . shall be exempt from taxation.”
Specifically, taxpayers argue for tax-exemption under § 72-29-2.4 (Int.Supp.) which reads in part:
“Fractional interests of nonexempt entities in real property of exempt entities are exempt from property taxation under the Property Tax Code . . .
I shall answer this argument first.
Under § 72-29-2 B(5), the department is authorized and is responsible for valuing all airline property subject to valuation for property taxation. Section 72-29-3 states that all property having a taxable situs in New Mexico is subject to valuation for taxation except property exempted by the federal or New Mexico Constitutions, the Property Tax Code, or other laws.
Section 72-29-4 states in part:
“Taxable situs — Allocation of value of property. — A. Property has a taxable situs in the state if:
“(1) it is real property and is located in the state;
“(2) it is an interest in real property and the real property is located in the state; or
“(3) it is personal property and is physically present in the state on the date when it is required to be valued for property taxation purposes . [Emphasis added]
“Property” for purposes of the Property Tax Code is defined as “ . tangible property, real or personal . . ” § 72-28-2 G. A “fractional interest” is defined as a “tangible interest in real property . that is less than the total of the interests existing in the property . . . Section 72-29-2.2 A (Int.Supp.). Thus, the taxpayers’ leasehold interests in the airport could be classified as “fractional interests” because: (1) I accept the view that a lease is an interest in real property and is tangible personal property. Ellison v. Ellison, 48 N.M. 80, 146 P.2d 173 (1944); State ex rel. Truitt v. District Court of Ninth Judicial Dist., Curry County, 44 N.M. 16, 96 P.2d 710 (1939); American Mortgage Co. v. White, 34 N.M. 602, 287 P. 702 (1930); and (2) the taxpayers’ leasehold interests fit the definition of a “fractional interest,” i. e., one that is less than the total (fee) interest existing in the property.
I do not agree that the taxpayers’ “fractional interests” or leasehold interests are exempted from taxation because of the last sentence of § 72-29-2.4 (Int.Supp.). Let us set out § 72-29-2.4 (Int.Supp.) in full:
“Fractional interests — Improvements— Property tax status. — Fractional interests of nonexempt entities in real property of exempt entities are exempt from property taxation under the Property Tax Code [articles 28 through 31 of Chapter 72].
Nothing contained in this section shall affect the liability for tax of improvements located upon the real property of exempt entities.” [Emphasis added]
We believe that it was the intent of the legislature that “fractional interests” in improvements should be taxed. In enacting § 72-29-2.4 (Int.Supp.) the legislature specifically found that:
“It [the legislature] has legislative authority and should exercise it to impose the state’s property tax on improvements owned or used by a non-exempt entity when the improvements are on the land of an exempt entity . . . [Emphasis added]
The taxpayers’ “fractional interests” are in the improvements located at the airport. These leases are interests in real property as well as tangible personalty. Yrisarri v. Wallis, 76 N.M. 776, 418 P.2d 852 (1966), State ex rel. Truitt v. Judicial Court of Ninth Judicial Dist., Curry County, supra; American Mortgage Company v. White, supra.
The legislature has authority to exempt properties from taxation. See § 72-29-2.3 A(3) (Int.Supp.). Taxpayers argue that the first sentence of § 72-29-2.4 (Int.Supp.) gives effect to this legislative authority. I agree. But the taxpayers overlook the second sentence which states that nothing contained in the section exempting “fractional interests” shall affect the liability for tax on improvements located upon the real property of exempt entities.
Section 72-29-2.4 (Int.Supp.) must also be read in conjunction with § 72-29-2.3 B(1) (Int.Supp.). It was the expressed legislative purpose that:
“fractional interests of a nonexempt entity in real property of an exempt entity be exempted from property taxation subject to the limitation contained in that section . .” [Emphasis added]
The second sentence of § 72-29-2.4 (Int. Supp.) is the limitation referred to in § 72-29-2.3 B(1) (Int.Supp.). This language qualifies the exemption given to “fractional interests” by stating that the exemption: “ . . . shall [not] affect the liability for tax of improvements located upon the real property of exempt entities.”
I do not think that §§ 72-29-2.2, 2.3 and 2.4 (Int.Supp.) are ambiguous or of doubtful meaning. The legislative intent is determined primarily from the language of an act. Judicial construction is not necessary unless there is ambiguity or doubt as to the meaning of the tax statute. Till v. Jones, 83 N.M. 743, 497 P.2d 745 (Ct.App.1972).
The Supreme Court, in deciding a case concerning an exemption for charitable institutions, stated: “The rule in New Mexico is that of reasonable construction, without favor or prejudice to either the taxpayer or the State, to the end that the probable intent of the [tax] provision is effectuated and the public interests to be subserved thereby are furthered.” Benevolent and Protective Order of Elks v. New Mexico Property Appraisal Dept., 83 N.M. 445, 493 P.2d 411 (1972). The legislative intent was to impose the State’s property tax on the “fractional interest” of improvements, owned or used by a nonexempt entity, on the land of an exempt entity. Otherwise, nonexempt entities could readily circumvent the State’s property taxes by leasing from an exempt entity. The taxpayers in this case are nonexempt and their leasehold interests are “fractional interests” in the improvements on the land of a tax-exempt entity. Therefore, property taxes are payable. See Town of Atrisco v. Monohan, 56 N.M. 70, 240 P.2d 216 (1952).
As to the argument that the taxpayers’ interests are exempt under the New Mexico Constitution, this argument is answered by Village of Deming v. Hosdreg Company, 62 N.M. 18, 303 P.2d 920 (1956). The Supreme Court said:
“In reaching the conclusion he did the trial judge drew upon the language of Const. Art. VIII, § 3, exempting the property of the state and municipal subdivisions thereof, as well as bonds issued by them. There is nothing in the act exempting the defendant from ad valorem taxes on its leasehold interest, raw materials, stock and equipment. Nor are private corporations absolved from payment of income, privilege or other excise taxes.”
See generally, Kirtland Heights, Inc. v. Bd. of County Comm’rs of Bernalillo County, 64 N.M. 179, 326 P.2d 672 (1958); Muir, Ad Valorem Tax Status of a Private Lessee’s Interest in Public Owned Property: Taxability of Possessory Interests in Industrial Projects Under the New Mexico Industrial Revenue Bond Act, 3 N.M.L.Rev. 136 (1973).
It is my conclusion that the leasehold interests of the taxpayers are not exempt.
In the next paragraph I shall discuss which “fractional interests” are taxable.
The Interests of the Taxpayers Under the Lease Agreements
I have examined the voluminous lease agreements between the taxpayers and the city. It is my conclusion that the interests of all the taxpayers fall into two categories: leasehold interests and licenses. The lease agreements of all the taxpayers provide for: (1) the lease of specified areas of the improvements for which specified rents are paid; and (2) licenses to use the runways for which activity fees are paid. I do not intend to recite the terms of all the leases, but it will suffice to state the following facts:
The agreements of four taxpayers include the leasing of premises, facilities and rights. The demise clauses are almost identical in stating: “ . . Lessor does hereby demise unto Lessee, and Lessee does hereby hire and take from Lessor, certain premises, facilities and rights . . .” The demised premises are described to include “common use” areas, “ . . landing areas, aprons, taxi ways, flood lights, landing lights, beacons, signals, radio aids, and other conveniences for flying, landing, and take-offs of aircraft of Lessee.” The lease agreement for Continental Airlines separates the premises category into subcategories, the first two of which is termed: “Use of Airport and Facilities” under which the terms used are “rights” and “uses,” and the second of which is termed: “SPACE IN AND ADJACENT TO AIRPORT TERMINAL BUILDING”. The leases of the four major airlines do not differ markedly from this arrangement and terminology.
In the case of two of the taxpayers, Southwest and Cutter, the two operators are given the right to sell fuel and aviation material.
All the taxpayers are charged specified rents for specified premises in the improvements of the airport. For the use of the airways, runways, etc., the airlines are charged activity fees and landing fees for landing purposes. As to Southwest and Cutter, they do not pay landing fees but merely perform a conduit function by collecting and remitting landing fees to the city in the form of a tax on aviation fuel. The city has characterized the money received for the sale of aviation fuel as fees instead of rent.
I believe that the taxpayers have leased premises for which they pay a fixed rent. As to these premises they have exclusive possession, control and dominion, having a “fractional interest” in the improvements of the airport.
As to the landing and activity fees, these are not rents but are payments for the use of the runways. The runways provide a place where the taxpayers have permission to operate their airplanes. In the case of Southwest and Cutter, they collect landing fees from their customers when they use the runways to sell fuel.
The department argues that under § 72-28-2 G property means tangible property, real or personal. The department argues that the interest of the taxpayers are properties under § 72-28-2 G. The department asserts that § 72-29-2.2 A (Int.Supp.), which defines a “fractional interest” in real property, would include all the interests of the taxpayer. This means that the department is arguing that the “fractional interests” includes licenses.
I believe that “fractional interests” include the leasehold interest, other property interests, but not licenses.
In the State of New Mexico it has always been the law that a leasehold interest, during its life, is equivalent to absolute ownership. Yrisarri v. Wallis, supra. The estate of the lessor, during the life of the lease, is limited to a reversionary interest which at the end of the lease ripens into perfect title. Tri-Bullion Corp. v. American Smelting & Refining Co., 58 N.M. 787, 277 P.2d 293 (1954). A license, on the other hand, is a personal privilege to go upon land belonging to the licensor. It is permission to do acts upon another’s land which would otherwise be trespass. It is not an interest in real property or improvements.
I have arrived at my conclusion not by looking merely at the form of the instrument. I look through the form of the agreements to determine their substance. Cf. Helvering v. Lazarus & Co., 308 U.S. 252, 60 S.Ct. 209, 84 L.Ed. 226 (1939); Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935). I have also followed the rule recently stated in Kresge that the substance of the instrument is not to be determined by its form but from the intentions of the parties as shown by the contents of the instrument. S. S. Kresge v. Bureau of Revenue, 87 N.M. 259, 531 P.2d 1232 (Ct.App.1976). In Kresge, the Court of Appeals defined license in its ordinary meaning as a permission to act. In this case, when the taxpayers are given the right to use the runways for landing purposes and to sell aviation fuel, this is nothing more than permission to land and permission to sell fuel.
It is undisputed that the taxpayers have no absolute ownership, absolute control or absolute dominion in the airstrips or facilities. However, in the specifically demised premises they do have exclusive control. 1 Tiffany Real Property § 79 distinguishes license and lease agreements:
“A tenancy involves an interest in the land passed to the tenant and a possession exclusive even of the landlord except as the lease permits his entry . A mere permission to use land, dominion over it remaining in the owner and no interest in or exclusive possession of it being given, is but a license.”
1 American Law Property § 3.3, says:
“At common law leaseholds were classified as corporeal or possessory interests, licenses, easements, and profits as incorporeal or non-possessory interests. . possession is the main feature which distinguishes a lessee’s interest from a license, easement or profit. The courts have continued to use the classification and the distinction. Possession, of course, is a variable term which might mean different things for different purposes, but it does imply physical control and intention to exclude others.” [Emphasis added]
The case of Henson v. Airways Service, Inc., 220 Ga. 44, 136 S.E.2d 747 (1964) presents similar facts. The Supreme Court of Georgia held that Airways Service, Inc., under a “Lease and Concession Agreement,” obtained from a city no estate in the premises but only a license to use the premises for certain purposes under the control of the city. Henson cited Black’s Law Dictionary, 3d ed. to define a license as “. authority to do a particular act or series of acts on land of another without possessing any estate or interest therein. . ” Applying this definition, together with the principle announced in Kresge, we conclude that taxpayers obtained licenses. The licenses include the use of the airport runways, and the other facilities for the particular purposes stated in the contracts. I believe that taxpayers obtained only the right to use the land for the purposes as stated in the agreements, during the period specified in the agreements. Henson v. Airways Service, Inc., supra.
An alternative holding which reaches the same results is that a license is precisely the type of “fractional interest” which is made exempt by § 72-29-2.4 (Int.Supp.).
It would have been much easier for the legislature to use such well-established words as “leasehold interest in improvements” or “license,” rather than let us speculate on the meaning of “fractional interest,” defined as something less than the fee.
On remand the department should determine those improvements upon which the taxpayers have a leasehold interest, separate from those areas upon which taxpayers have licenses. The leases of improvements are taxable but not the licenses.
Alternative Method of Valuation
Section 72-29-5 B provides that the value of property, for taxation purposes, shall be determined by market value or comparable sales. If there is a lack of comparable sales or market data, the section provides for the use of an alternative approach, either cost or income methods of valuation.
“The department states, and the taxpayers accept, that no comparable sales data regarding taxpayers’ interests are available.” The taxpayers assert, however, five objections to the department’s use of an alternative method of valuation. I shall consider these objections in order.
(1) The method of valuation is not in accord with the department’s regulations.
The department’s alternative method of valuation followed the method outlined in the Property Tax Department Regulations, P.T.D. Reg. 29-5:4. The method was modified to exclude the value attributable to land, in order to reflect only the value of improvements. Although the department is obligated to follow its regulations, Martinez v. Health and Social Services Department, (Ct.App.) 90 N.M. 345, 563 P.2d 608, decided 3/8/77, the aforementioned regulation was set aside by order of the New Mexico Court of Appeals. Mapco, Inc. v. Property Tax Department of the State of New Mexico, (Ct.App.) No. 2387, decided April 21, 1976.
For the first time, on appeal, the department asserts that the alternative valuation method is a cost method. The department’s regulations define cost methods as:
“. . . methods for valuing improvements ... by determining the costs of reproduction or replacement of property with property which is as good as, but no better than, the improvements being valued.” [Emphasis original] P.T.D. Reg. 29-5:2
There is no evidence that the department used the replacement or reproduction cost as the alternative method. To the contrary, in the documents specifying the method which was used the department stated: “The method shown is believed by the Department to reflect an income method of valuation . . . .”
The taxpayer is entitled to know the method used for valuation. In re First National Bank v. Bernalillo County Valuation Protest Bd., 90 N.M. 110, 560 P.2d 174 (Ct.App.1977). The department cannot change horses in mid-stream and assert for the first time on appeal that a cost method of valuation was used pursuant to a valid regulation. It is abundantly clear, and the department conceded below, that the method of valuation which was used is an income method determined pursuant to an invalid regulation. I go to the next point to determine whether the income method was appropriate and in accord with generally accepted appraisal techniques.
(2) The taxpayer overcame the presumption that the valuation was correct.
Whichever method of valuation is used, the valuation authority must apply generally accepted appraisal techniques. The burden is on the taxpayer, however, to show the department failed to determine value by any statutory or regulatory method. Otherwise, this Court has no way of knowing whether generally accepted techniques were used. In re First National Bank v. Bernalillo County Valuation Protest Bd., supra.
The taxpayers must present evidence of value, based on expert testimony, to establish the generally accepted appraisal techniques which dispute the correctness of the department’s valuation. In the instant case, the taxpayer did present such evidence. There is substantial evidence in the record to indicate a real dispute as to the accuracy of the department’s valuation method.
The taxpayer overcame the presumption that the assessor made a correct valuation. Section 72-31-6. The burden is on the department to prove the method of valuation is a generally accepted appraisal technique. In re First National Bank v. Bernalillo County Valuation Protest Bd., supra.
(3) The remaining conclusions are not substantiated by the evidence.
The remaining points challenge several assumptions used in the alternative valuation method: a) the assumption that certain leases were for five years; b) the capitalization rate or interest rate did not consider risk factors; and c) the allocation of value between land and improvements was arbitrary.
I have already determined that the burden of explanation shifted to the department when the taxpayers presented expert testimony to refute the accuracy of the department’s appraisal. I do not think that there is substantial evidence, either in the documents setting out its alternative method of valuation or in the testimony of the department’s expert witness, to establish the accuracy of the appraisal. The department has not met the burden of establishing the use of generally accepted appraisal techniques. From the record and the director’s order it is unclear how the department arrived at the three conclusions which the taxpayers challenge. The basis for these conclusions are obviously unclear to the taxpayers.
This court has recently held that the taxpayers are entitled to know the method of valuation which is used by the department. In re First National Bank v. Bernalillo County Valuation Protest Bd., supra. For this reason, and the reasons expressed herein, the taxpayers should be granted a new hearing. The director will be required to choose an appropriate method of valuation, and to establish that the method is applied in accordance with statutory and regulatory methods of valuation and generally accepted appraisal techniques.
I add that these matters should be resolved in a written “decision” and order by the director, stating the reasoning of the director and the basis for his action. This would facilitate an appeal if either party should deem it necessary. See In re First National Bank v. Bernalillo County Protest Valuation Bd., supra.
The order and decision of the department should be affirmed in part and reversed in part, and the cause be remanded for proceedings consistent with my opinion.