March 10, 1980

Mr. Thomas A. Lloyd 
Deputy State's Attorney 
Perkins County 
Lemmon, South Dakota 57638

Official Opinion No. 80-16

Tax Status of Leased Property

Dear Mr. Lloyd:

You have requested an official opinion from this office in regard to the following factual situation:

FACTS: 

A local business corporation has filed an application for tax exempt status of some of its property in the City of Lemmon, South Dakota.  Part of the premises are leased to Perkins County for Judge's chambers and part to a non- profit mental health center.  The lease extends for a period of more than three years.  The mental health center is incorporated for a stated purpose to assist the court's law enforcement agencies, parole and probation systems and any other person or organization dealing with problems involving alcohol, drugs and mental health.  The articles provide that services of this corporation 'shall be available to all persons regardless of ability to pay, race, color, creed, sex or geographical location.'  A similar purpose and ability to pay provision is included in the by-laws.

Based on the above facts you have asked the following question:

QUESTION: 

Does property belonging to a corporation organized for profit which is leased to an organization performing public services and which may be classed as charitable or benevolent qualify for tax exempt status?

Although you have raised the point with respect to the lessee that it may or  may not be charitable or beneficial, I choose not to go into that matter in this opinion since that answer would have no bearing on this opinion.

The applicable statute in question is SDCL 10-4-9, which exempts from ad valorem taxation all property belonging to any charitable, benevolent or religious society and used exclusively for charitable, benevolent or religious purposes.  A second statute, 10-4-23, relates to property held under a lease for a term of three or more years or contract for purchase thereof belonging to the state or to any religious, scientific or benevolent society.  It provides that property shall be considered for purposes of taxation as the property of the person holding the same.  That section, however, only applies if the property belongs to the exempt society and is rented to a non-exempt entity. In that instance the non-exempt entity is taxed as it is considered to be the owner of the property for tax purposes.  In the instant case the owners of the property are not religious, scientific or benevolent societies or institutions although the lessee is.  That statute covers the reverse of the situation you have presented and does not assist in resolving this question.

SDCL 10-4-9 simply does not permit an exemption for property belonging to a taxable entity leased to an exempt society or even, for that matter, to the State of South Dakota.  It is noted within the City of Pierre numerous buildings are owned by private individuals and are leased to the State of South Dakota and are not tax exempt.

A principal case on this matter is the 1937 Supreme Court decision in the case of South Dakota Sigma Chapter House Association v. Clay County, 276 N.W. 258.  There a corporation was formed to hold title to the property of a college fraternity.  The property was rented to the fraternity and its members and the House Corporation sought to have itself clothed with the purposes and credited with the activities of the Chapter, thereby rendering it exempt from taxation.  The court points out at 260, 'that under prior law there was permitted separation of use and ownership' but following 1929 it was required that use and ownership concur.  The court said that 'the House Corporation could claim no credit for the purposes and activities of the Chapter and that its claim to status as a charitable or benevolent corporation must be determined solely upon the basis of its corporate purposes and activities.' There is no question in the facts you have presented that the owner of the building does not assert that it is a charitable or benevolent corporation.

While tax exemptions of this character are granted as a concession by government in return for unselfish ministrations to human welfare the court added:  'the money equivalent exacted as rent from the charity intercepts the flow of the concession offered by the state and operates to withhold it from that charity and benevolence.'

Your question is resolved in the decision of the court where it is stated: 

Therefore, the landlord may not claim exemption of property leased to an  institution of one of the enumerated classes for a rent equivalent.  As to such an ownership, the property is used exclusively for rental purposes, and not charitable or benevolent or educational, etc., purposes.  (Citing cases.)

Respectfully submitted,

Mark V. Meierhenry
Attorney General