Request By:
Mr. Allen K. Montgomery, Jr.
Vice President - Corporate Counsel
Baptist Hospitals, Inc.
4007 Kresge Way
Louisville, Kentucky 40207
Opinion
Opinion By: FREDERIC J. COWAN, ATTORNEY GENERAL; NATHAN GOLDMAN, ASSISTANT ATTORNEY GENERAL
In your letter you question the enforceability of KRS 132.195. This statute, enacted in 1988, purports to assess an ad valorem tax on tax-exempt real property against the lessee of that property.
KRS 132.195 states:
"(1) When any real estate which for any reason is exempt from taxation is leased to a natural person, association, partnership or corporation in connection with a business conducted for profit, the leased property shall be subject to taxation in the same amount and to the same extent as though the lessee were the owner of the real estate.
"(2) Subsection (1) of this section shall not apply to interests in: "(2) Subsection (1) of this section shall not apply to interest in:
"(a) Industrial buildings, as defined under KRS 103.100, used and financed by a tax-exempt governmental unit, or tax-exempt statutory authority under the provisions of KRS Chapter 103, the taxation of which is provided for under the provisions of KRS 132.020 and 132.200:
"(b) Federal property for which payments are made in lieu of taxes in amounts equivalent to taxes which might otherwise be lawfully assessed;
"(c) Property of any state-supported educational institution; or
(d) Vending stand locations and facilities operated by blind persons under the auspices of the department for the blind, regardless of whether the property is owned by the federal, state or a local government.
"(3) Taxes shall be assessed to lessees of exempt real estate and collected in the same manner as taxes assessed to owners of other real estate, except that taxes due under this section shall not become a lien against the property. When due, such taxes shall constitute a debt due from the lessee or use to the state, county, school district, special district or urban-county government for which the taxes were assessed and if unpaid shall be recoverable by the state as provided in KRS 134.500."
For the purposes of this opinion, we are assuming that the subject property is properly qualified as tax-exempt pursuant to Section 170 of the Kentucky Constitution and the statements herein should not be construed as expressing an opinion on the tax-exempt status of any particular piece of property.
As we interpret subsection (1) of KRS 132.195, it does, indeed, attempt to levy an ad valorem tax on the fair cash value of the property itself against the lessee of the property. It is the opinion of this office that KRS 132.195 is unconstitutional and unenforceable.
It has been the consistent rule as decided by the courts since at least 1977 that a privately-owned leasehold interest in real estate owned by a tax-exempt entity is subject to ad valorem taxation if the leasehold itself has a fair market value. Ky. Dept. of Rev. v. Hobart Manufacturing Co., Ky., 549 S.W.2d 297 (1977). The court reiterated its holding in Standard Oil Co. v. Boone County Board of Supervisors, Ky., 562 S.W.2d 83 (1978).
The law remains unchanged to the present time. As the court reasoned in the Standard Oil case, the leasehold interest is a separate estate from the fee and if owned by a taxable entity is taxable at its fair cash value.
Section 172 of the Kentucky Constitution states, in part: "All property, not exempted from taxation by this Constitution, shall be assessed for taxation at its fair cash value . . . ." What KRS 132.195(1) does is to set up an irrebutable presumption that the fair cash value of any leasehold interest will always equal the fair cash value of the fee. This is patently unconstitutional. The court has recognized in Commonwealth, Dept. of Highways v. Sherrod, Ky., 367 S.W.2d 844, 850 (1963) that there is a difference in the value of a piece of property with and without a lease and, consequently, a difference in the value of a leasehold interest and the fee. The value of the leasehold interest, to be constitutional, must be assessed at its fair cash value, using generally accepted assessing methods such as the Sherrod formula. It cannot constitutionally be mandated to be the value of the fee.
Since KRS 132.195 attempts to do precisely what we believe it cannot do, it is our opinion that the statute is unconstitutional.