HL Farm Corp. v. Self

HIGHTOWER, Justice,

delivered the opinion of the Court,

in which PHILLIPS, Chief Justice, and GONZALEZ, HECHT, CORNYN, GAMMAGE and SPECTOR, Justices, join.

We grant Petitioner’s motion for rehearing, overrule Respondents’ motion for rehearing, withdraw our prior opinion and judgment, and substitute the following in its place.

This case presents the issue whether section 23.56(3) of the Texas Tax Code violates section 3 of article I of the Texas Constitution because it impermissibly discriminates against a Virginia corporation whose majority interest is owned by a nonresident alien. H.L. Farm Corporation (H.L. Farm) filed this action contesting the Kaufman County Appraisal District’s (Appraisal District) denial of its application for an open space land designation. The trial court granted summary judgment for the Appraisal District. The court of appeals affirmed. 820 S.W.2d 372. We reverse the judgment of the court of appeals and remand the cause to the trial court for further proceedings.

I.

H.L. Farm1 is a Virginia corporation authorized to do business in Texas. H.L. Farm is owned by Liebherr-America, Inc., which is also a Virginia corporation and a subsidiary of Liebherr International, AG, a Switzerland corporation.2 H.L. Farm owns land in Kaufman County. H.L. Farm applied for an open-space land designation pursuant to section 23.54 of the Texas Tax Code. See Tex. Tax Code § 23.54. This designation provides for reduced tax valuation for open-space land. See TexTax Code §§ 23.52-3. However, there are limits on the eligibility of certain owners of open-space land to qualify for the reduced tax valuation. Section 23.-56(3) sets out the eligibility limitation which affects H.L. Farm:

§ 23.56. Land Ineligible for Appraisal as Open-Space Land
Land is not eligible for appraisal as provided by this subchapter if:
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(3) the land is owned by a corporation, partnership, trust, or other legal entity if the entity is required by federal law or by rule adopted pursuant to federal law3 to register its ownership or acquisition of that land and a nonresident alien or a foreign government or any combination of nonresident aliens and foreign governments own a majority interest in the entity.

*290TexTax Code § 23.56(8) (footnote added). Based on section 23.56(3), the Appraisal District denied H.L. Farm’s application for open-space land designation.

H.L. Farm filed suit against the Appraisal District alleging that section 23.56(3) violated various provisions of the Texas and United States Constitutions. The trial court upheld the constitutionality of section 23.56(3) and granted summary judgment for the Appraisal District. The court of appeals affirmed, holding that the statute did not violate either the Texas or United States Constitutions.

II.

H.L. Farm argues that section 23.-56(3) violates section 3 of article I of the Texas Constitution because it impermissibly discriminates against a Virginia corporation whose majority interest is owned by a nonresident alien. We agree.

H.L. Farm asserts that section 23.-56(3) violates various provisions of the Texas and United States Constitutions; however, we will examine our own Texas Constitution first to determine this question. See Davenport v. Garcia, 834 S.W.2d 4, 11-13 (Tex.1992). Equal protection is afforded by two distinct provisions of the Texas Constitution. See Tex. Const, art. I, §§ 3, 3a. Section 3 provides that “[a]ll free men, when they form a social compact, have equal rights, and no man, or set of men, is entitled to exclusive separate public emoluments, or privileges, but in consideration of public services.”4 Tex. Const, art. 1, § 3.

When a court reviews the constitutionality of a statute, it presumes that the statute is valid. Spring Branch Indep. School Dist. v. Stamos, 695 S.W.2d 556, 558 (Tex.1985); Whitworth v. Bynum, 699 S.W.2d 194, 197 (Tex.1985). If interests other than fundamental rights or a suspect classification are affected, the classification must be rationally related to a legitimate state interest. Whitworth v. Bynum, 699 S.W.2d at 197 (“Even when the purpose of a statute is legitimate, equal protection analysis ... requires a determination that the classifications drawn by the statute are rationally related to the statute’s purpose.”); Sullivan v. University Interscholastic League, 616 S.W.2d 170, 172 (Tex.1981). H.L. Farm does not assert that fundamental rights or a suspect classification are affected; consequently, we will apply the rational basis test. In doing so, we must determine whether the classification created in section 23.56(3) for eligibility for appraisal for open space land— ownership by a corporation that is required by federal law or rule to register its ownership or acquisition of land and whose majority interest is owned by a nonresident alien and/or a foreign government — is rationally related to the purpose of section 23.51 et seq. First, however, we must determine the purpose of section 23.51 et seq.

III.

In 1966, section 1-d of article VIII of the Texas Constitution was adopted. Section 1-d states in pertinent part:

(a) All land owned by natural persons which is designated for agricultural use in accordance with the provisions of this Section shall be assessed for all tax purposes on the consideration of only those factors relative to such agricultural use. “Agricultural use” means the raising of livestock or growing of crops, fruit, flowers, and other products of the soil under natural conditions as a business venture for profit, which business is the primary occupation and source of income of the owner.

Tex. Const, art. VIII, § l-d(a). Sections 23.41-46 of the Texas Tax Code were enacted pursuant to section 1-d.

In Gragg v. Cayuga Indep. School Dist., 539 S.W.2d 861 (Tex.1976), we inquired into the purpose of section 1-d, concentrating on the phrase “primary occupation and source of income of the owner.” We stated that section 1-d was enacted for the purpose of relieving the tax burden of bona fide farmers and ranchers who depend upon the soil for *291their livelihoods. Id. at 867-68. We further stated:

It is obvious that the Texas “primary occupation and source of income” requirement was intended to prevent the lower agricultural assessment from being abused by allowing land investors and speculators to reduce their assessments and taxes simply by planting a crop or running livestock on the land. The provision also has the salutary purpose of encouraging not only that agricultural and ranch land be continued in production but that farmers and ranchers remain in the business of such production.

Id. at 865.

In 1978, section 1-d-l of article VIII of the Texas Constitution was adopted. Section 1-d-1 states:

(a) To promote the preservation of open-space land, the legislature shall provide by general law for taxation of open-space land devoted to farm or ranch purposes on the basis of its productive capacity and may provide by general law for taxation of open-space land devoted to timber production on the basis of its productive capacity. The legislature by general law may provide eligibility limitations under this section and may impose sanctions in furtherance of the taxation policy of this section.
(b) If a property owner qualifies his land for designation for agricultural use under Section 1-d of this article, the land is subject to the provision of Section 1-d for the year in which the designation is effective and is not subject to a law enacted under this Section 1-d-l in that year.

Tex. Const, art. VIII, § 1-d-l. Sections 28.51 et seq. were enacted pursuant to section 1-d-l. Section 1-d-l did not supersede section 1-d.5

In Alexander Ranch, Inc. v. Central Appraisal Dist., 733 S.W.2d 303 (Tex.App.—Eastland 1987, writ ref'd n.r.e.), the court of appeals considered whether section 23.56(3) violated the equal protection clause of the fourteenth amendment to the United States Constitution by excluding from appraisal as open-space land real property owned by two Texas corporations controlled by a nonresident alien. Citing Gragg v. Cayuga Indep. School Dist., 539 S.W.2d 861 (Tex.1976) and San Marcos Consolidated Indep. School Dist. v. Nance, 495 S.W.2d 335 (Tex.Civ.App.-Austin), writ ref'd n.r.e. per curiam, *292502 S.W.2d 694 (Tex.1973), the court stated that “[i]t is apparent that the purpose of the open-space exemption in Section 23.51 et seq. is to preserve and benefit the family farm.” Id. at 307. However, Gragg and San Marcos Consolidated Indep. School Dist. involved section 1-d of the Texas Constitution concerning agricultural valuation and not section 1-d-l and sections 23.51 et seq. concerning the open-space land valuation. Consequently, the court of appeals erroneously determined the purpose of section 1-d-l and sections 23.51 et seq. concerning the open-space land valuation. In Riess v. Williamson Cty. Appraisal Dist., 735 S.W.2d 633 (Tex.App.-Austin 1987, writ denied), the court of appeals reviewed the denial of an open-space land valuation based upon the degree of agricultural use generally accepted in the area. Concerning the purpose of section 1-d-l, the court stated:

It appears to this Court that § 1-d-l expresses two policies to be achieved by the legislature in appraising farm and ranch land: (1) preserve “open-space land”; and (2) provide for taxation on the basis of the land’s “productive capacity.”

Id. at 637. In Tarrant Appraisal Dist. v. Moore, 845 S.W.2d 820 (Tex.1993), we recognized that “[t]he Texas Constitution promotes the preservation of open-space land by authorizing the legislature to tax open-space land devoted to farm or ranch purposes on the basis of its productive capacity.” Id. at 821. We conclude that the purpose of section 1-d-l and sections 23.51 et seq. is to promote the preservation of open-space land devoted to farm or ranch purposes.

IV.

Next we consider whether the classification created in section 23.56(3) is rationally related to the purpose of section 23.51 et seq. The classification created in section 23.56(3) is based upon ownership by a corporation that is required by federal law or rule to register its ownership or acquisition of land and whose majority interest is owned by a nonresident alien and/or a foreign government. The purpose of section 23.51 et seq. is to promote the preservation of open-space land devoted to farm or ranch purposes. Preservation of open-space land is based upon use, not ownership.

Any individual or legal entity, foreign or domestic, may own property and contribute to the preservation of open-space land by utilizing the land for agricultural use to the degree of intensity generally accepted in the area. A “foreign corporation” owned by a nonresident alien may contribute to the preservation of open-space land as well as any Texas individual or legal entity. However, under section 23.56(3), if H.L. Farm sold its property in Kaufman County to another Virginia corporation which was not owned by a nonresident alien, the new owner would qualify for the open-space land designation while H.L. Farm would not. In fact, under section 23.56(3), if the majority interest of a Texas corporation was owned by a nonresident alien, it would not qualify for an open-space land designation. No rational basis exists for denying an open-space land designation to H.L. Farm, a “foreign corporation” owned by a nonresident alien. We conclude that the classification drawn by section 23.56(3) is not rationally related to the promotion and preservation of open-space land. Consequently, we hold that section 23.56(3) of the Texas Tax Code violates section 3 of article I of the Texas Constitution.6 To the extent that it conflicts with this opinion, we disapprove Alexander Ranch v. Central Appraisal Dist., 733 S.W.2d 303 (Tex.App.-Eastland 1987, writ ref'd n.r.e.).

We reverse the judgment of the court of appeals and remand the cause to the trial court for further proceedings.

Feb. 9, 1994

. H.L. Farm is required by the Agricultural Foreign Investment Disclosure Act to register its ownership and acquisition of land with the United States Secretary of Agriculture. 7 U.S.C. § 3501.

.Liebherr International, AG, is a nonresident alien.

.The Agricultural Foreign Investment Disclosure Act requires all foreign persons to register their ownership of land in the United States. 7 U.S.C. § 3508(3)(C). H.L. Farm is a foreign person as defined in this statute.

. Despite its gender specific language, i.e. "men," this provision applies to business entities, such as corporations, as well as to natural persons. See Prudential Health Care Plan, Inc. v. Comm. of Ins., 626 S.W.2d 822, 832 n. 10 (Tex.App.-Austin 1981, writ ref'd n.r.e.); Beaumont Traction Co. v. State, 57 Tex.Civ.App. 605, 122 S.W. 615, 617 (1909, no writ).

. Essentially two distinct valuation schemes were created — "agricultural use” and "open-space land.” "Agricultural use” valuation is governed by section 1-d of the Texas Constitution and sections 23.41-46 of the Texas Tax Code. "Land designated for agricultural use is appraised at its value based on the land's capacity to produce agricultural products." Tex.Tax Code § 23.-41(a). An owner of land is eligible for "agricultural use" valuation if (1) “the land has been devoted exclusively to or developed continuously for agriculture for the three years preceding the current year”, (2) "he is using and intends to use the land for agriculture as an occupation or a business venture for profit during the current year” and (3) “agriculture is his primary occupation and primary source of income.” Tex.Tax Code § 23.42. “If land that has been designated for agricultural use in any year is sold or diverted to a nonagricultural use, the total amount of additional taxes for the three years preceding the year in which the land is sold or diverted plus interest at the rate provided for delinquent taxes becomes due." Tex.Tax Code § 23.46(c).

"Open-space land" valuation is governed by section 1-d-l of the Texas Constitution and sections 23.51-57 of the Texas Tax Code. "Open-space land” includes “land that is currently devoted principally to agricultural use to the degree of intensity generally accepted in the area and that has been devoted principally to agricultural use or to production of timber or forest products for five of the preceding seven years or land that is used principally as an ecological laboratory by. a public or private college or university.” Tex. Tax Code § 23.51(1). For the purposes of "open-space land," “agricultural use" includes "cultivating the soil, producing crops for human food, animal feed, or planting seed or for the production of fibers; floriculture, viticulture, and horticulture; raising or keeping livestock; raising or keeping exotic animals for the production of human food or of fiber, leather, pelts, or other tangible products having a commercial value; and planting cover crops or leaving land idle for the purpose of participating in any governmental program or normal crop or livestock rotation procedure.” Tex.Tax Code § 23.51(2). "If the use of the land ... changes, an additional tax is imposed on the land equal to the difference between the taxes imposed on the land for each of the five years preceding the year in which of use occurs that the land was appraised as provided by this subchapter and the tax that would have been imposed had the land been taxed on the basis of market value in each of those years, plus interest_” Tex.Tax Code § 23.55(a). See generally Gifford-Hill & Co., Inc. v. Wise County Appraisal Dist., 827 S.W.2d 811 (Tex.1991).

. Because we have determined that section 23.-56(3) violates section 3 of Article I of the Texas Constitution, it is not necessary to consider whether section 23.56(3) violates the United States Constitution or other provisions of the Texas Constitution.