Opinion letter to the State Tax Commission of Missouri

Opinion No . 9 (1965) Opinion No . 241 (1964) ·' Answered by l etter - Nessenfeld rJiarch 5., 1965 State Tax Commission of Missouri Jefferson Building Jefferson City, Missouri Gentlemen: I Fl LED You have made the following request for an epinion of this office: "This Commission requests an official opinion from your department as to whether or not the De Kalb Water Corporation, when , organized and operated in accord with the plans and agreements submitted herewith, will qualify for tax exemption under the provisions of Article 10, Section 6, Con- · stitution. of Missouri." Submitted with your request tor an opinion are an agreement pur- suant to which the De Kalb Water Corporation was organized, a oopy of the Indenture of Mortgage pur suant to which the De Kalb Water Gorporatio~ is to issue its revenue bonds, a copy of the Certificate and Articles of Incorporation, a copy of a ruling of the Bureau of Internal Revenue relating to the tax exempt status of interest on its revenue bonds, and a letter from the attorneys for the De Kalb Water Corporation contending that its property is exempt from taxation on the theory that its purposes are charitable. The De Kalb Water Corporation was organized under Chapter 355, RSMo., and received a charter thereunder as a not-for-profit corporation. The purposes of the corporation as set forth in its Articles of Incorporation are as follows: "(A) To own and operate a water system having as the ultimate civic object and purpose of this corporation the eventual vesting by gift from this corporat ion of ' ' State Tax Commission of Missouri -2- the complete ownership of, possession of and title in and to all assets of this corporation, existing at the time of said vesting in the VUlage of De Kalb, Buchanan County, Missouri, a Missouri municipal cor- poration, which gift will not only embrace the eventual ownership of, possession ot and title in and to the water system but also the operation thereof by said Village; " (B) To acquire by construction, purchase or otherwise, own and operate a complete water system in all or part of Buchanan County, Missouri, and to supply, distribute and/or sell water for municipal, domestic and industrial uses therein and to make and collect reasonable charges upon and for dis- tribution and sale of its water and the use ot any of its facilities; II (c) From time to time hereafter to improve, enlarge and/or extend said water system and facilities and/or acquire, construct or make additions to said facilities and water system; "(D) To acquire and/or develop additional sources of water supply for said water system and the acquisition of real or personal prop- erty therefor; " (E) To possess, exercise and/or enJoy all the powers, rights, privileges, capacities, tmmunities and exemptions provided it under and by virtue of the Constitution, as amended at any time, and laws, now or hereatter in force, of the United States of America and State of Missouri. " It appears from the foregoing that the corporation was or- ganized primarily for the purpose of acquiring and operating a water system in Buchanan County and engaging in the business of distributing and selling water tor compensation. The corporation was organized pursuant to an agreement by the three residents of the Village ot De Kalb who became its incorporators and the Village of De Kalb. This agreement is too long to be set forth in this opinion or even to be adequately summarized herein. Briefly, the incorporators agreed to organize State T.ax Commission of f.fissour i -3- the corporation and have it obtain all necessary rights, fran- chises, and permits so as to enable it to construct a~d operate a water system in Buchanan County. The agreement proyides that the corporation, when organized, would issue its revenue bonds in the pr incipal amount of $505,000• would construct and operate the water system therein described, would grant to the Village ot De Kalb an option to purchase all of its assets after Febru- ary 1, 1979 (i~ it may legally do so), at an amount sufficient to retire the bonds of the corporation which may then be out- standing and that at such time as all bonds have been ret!.red all of the assets of the corporation would become the property of the Village. The Indenture ot Mortgage is also too long to summarize. For purposes of this opinion it is necessary only to note that it requires the corporation to set its charges at an amount which will not only pay costs of maintenance and operation and intereot on the bonds, but additional amounts to take care of principal payments and other items. In connection with your request, we have had the benefit of the ruling ot the Public Service Commis- sion or Missouri upon an application of De Kalb Water Corporation tor a Certificate of Public Convenience and Necessity, and many of the essential facts are stated in that decision. At the inception, the corporation Will have the sum ot $6000, which represents deposits to secure future charges tor water made by proposed consumers in anticipation or water service. This sum, together with the $505,000 to be borrowed under the In- denture of Mortgage, will be used as capital tor plant construction. The only source of revenue ot the corporation will be from the sale of water. In order to pay interest and principal on the amount borrowed, the water must be sold at a price over and above its cost to the corporation together with the cost ot system opera- tion and maintenance. Thus, it appears that at the inception of the corporation, it w1ll have no equity in the corporate assets. It and when principal payments are made on the bonds (and it is anticipated and provision made therefor, that some of the bonds will be called in advance of their maturity out of moneys received from sale of water), the equity ot the corporation in its assets will constantly increase. Article 10, Section 6 of the Constitution of Missouri exempts from taxation all property of the state, county, and other politi- cal subdivisions. Obviously, this corporation is not a political subdivision. It is stmply a private corporation. The mere tact that there is an agreement which contemplates that ultimately the Village of De Kalb will acquire the assets of the corporation has no bearing upon the situation. The question is whether the property State Tax Commission of Missouri -4- is rresently exempt, prior to the time title thereto may vest in he V!ilage. We note in this connection that paragraph Second of the Articles ot Incorporation refers to the "eventual vesting by gift from this corporation" or the assets existing at the time of said vesting in the Village of De Kalb. In the interim, and until such 11eventual" vesting of the property, if ever, in the Village of De Kalb the property is owned and op- erated by a private corporation and is not therefore automati- cally exempt from taxation. Section 6, Article 10 of the Constitution rurther author- izes the Legislature to enact general laws exempting from tax- ation ''all property, real and personal. not held tor private or corporate profit and used exclusively • • • tor purposes purely charitable •••• " Section 137.100, RSMo. implements the quoted portion of the Constitution. The basic questions therefore are whether, under the facts submitted, the water system of the De Kalb Water Corporation is (1) "not held for private or corporate profit" and (2) if so, whether the property is used tor purposes exclusively charitable. In view of the conclusion we have reached on the first question, it is not necessary to determine whether property of a private (as distinguished from a public) corporation used in the opera- tion or a water system is by virtue thereof used exclusively tor purposes purely charitable within the meaning or Section 6, Article 10 ot the Constitution and Section 137.100, RSMo. It is our opinion, under the facts submitted, that the property of De Kalb Water Corporation is and will be held for private or cor- porate profit within the meaning of Section 6, Article 10. and Section 136.100 RSMo., and for that reason such property is not exempted trom taxation, without regard to whether or not it may be used for purposes purely charitable. Under the facts submitted, the corporation is to be so op- erated that its charges will not only take care of all operating and maintenance costs but will be in an amount sufficient to re- duce the corporate indebtedness and thereby enable the corpora- tion to acquire valuable assets debt-free. In City or Ne~rt News v. Warwick County, 159 Va. 571, 166 S.E. 570,=t.c. 5~579, the court said: "It also appears manifest that reduction or the indebtedness by payment of the principal ot the bonds outstanding out of earnings can only be regarded as protit. 11 In Williams v. Town of Morristown, 132 Tenn. App. 274, 222 S. W. 2d 607 l.c. 612, it was said: State Tax Commission ot Missouri -5- "So, the operation of a water works system by a municipality tor 'profit' means the system is being conducted on a commercial basis for revenue and not as a governmental enterprise out of public funds tor the common good." There are many definitions of the term "profit'' , too num- erous to set forth in this opinion1 some ot which may be round in Volume 34, Words and Phrases, Permanent Edit!on. However, under any applicable definition, there can be no question but that an operation such as is here proposed, wherein the revenue to be received will be far in excess of the costs of operation and maintenance, necessarily results 1n profit. That the profit is being used to acquire and pay for a water system (or any other property) is or no consequence and does not alter either the es- sential profit-making nature ot the operation or the fact that the operation is conducted on a commercial basis tor revenue. Of vital tmportance in determining whether its property is exempt under the constitutional provision and Section 137.100 is that the De Kalb Water Corporation, organized under Chapter 355, is not, under any possible theory, a ~bl1c corporation. Public corporations hold their property in rust solely for pub- lic purposes, and any incidental profit inures presently to the benefit of the public. The documents you have submitted make it clear that the very reason De Kalb Water Corporation was organized was to make a profit from its business operations sufficient in time to pay for a water system. That the incorporators and members of De Kalb Water Corporation are prohibited by its Articles or In- corporation from receiving any part ot the income or property or the co.rporation by way of dividend or otherwise (except as compen ... sat ion tor servic·es rendered) does not mean that the propeny is not held tor ooPlrate profit. The Constitution and statute do not require tlia ~e profit be received by the members of the cor- poration. It is sufficient only that the corporation hold the property tor profit in order to e~ude such property from the benefit of the tax exempt ion. In our opinion, the corporation • s · purpose is to derive a profit fttom the property. It follows that if the corporation is operated as set forth in the documents sub• mitted by you, its property will be held for corporate profit. We have not overlooked the fact that De Kalb Water Corpora- tion was organized as a not-for~profit eorporat1on under Chapter 355. In dete~in1ng whether the property of the corporation is exempt from taxation, neither the Articles of Incorporation, the charter issued to such corporation, nor the statute under which it obtained its charter governs the ultimate decision. See Celina and Mercer County Telephone Co. v. Union- center Mutual Telephone State Tax Commission of Missouri -6- Association, 102 Ohio 487, 133 N. E. 540. The true test is not its charter, but the character of its business, its method of conducting such business and the actual purpose f or which the property is held and used. For purposes of this opinion, it is necessary to rule only that the property of the De Kalb Water Corporation is held for corporate profit and therefore is subJect to taxation. The fur- ther question ot whether the corporation was properly organized under Chapter 355, that is, whether a water corporation for gain may properly be organized as a not- for- profit corporation pur- suant to Chapter 355, is not considered herein and we express no opinion upon that question. It ie the view of this Jffice under the facts submitted, that the property of the De ..t~alb Water Corporation is not exempt from taxation. JN:mac Very truly yours, NoRMAN B. ANDERSON Attorney General