US SUPREME COURT DECISIONS

Although all the parties to this action are citizens of the same state, the circuit court of the United States had jurisdiction because the case arises under the Constitution of the United States, as complainant insists that the tax sought to be restrained is imposed under a state statute that impairs the obligation of a legislative contract for exemption from taxation.

A charter exemption from taxation of land and buildings to be erected thereon so long as they belong to the educational institution exempted does not exempt from taxation the separate interests of parties to whom the institution leases portions of the property, and who erect buildings thereon, and a subsequent act of the legislature taxing such separate leasehold interest does not amount to taxing the property owned by the institution, and is not unconstitutional under the contract clause of the Constitution of the United States as impairing the obligation of the exemption provision in the charter. So held as to the act of Tennessee of 1903

This Court, while not bound by the construction placed on a state statute by the state court as to whether a contract was created thereby, and if so how it should be construed, gives to such construction respectful consideration, and unless plainly erroneous generally follows it; a decision of the state court, however, that a leasehold interest in exempted property cannot, during the exemption, be taxed against the owner of the fee, is not authority to be followed by this Court on the proposition that the leasehold interest cannot be taxed without impairing the obligation of the contract of exemption against the lessee in his own name and against his particular interest in the land.

A charter exemption from taxation cannot be extended simply because it would, as so construed, add value to the exemption, and an exemption from taxation of property belonging to an institution, so long as it belongs thereto, will not be extended to also exempt the leasehold interest of parties to whom the owner leases the same.

This Court will not construe a state statute assessing leaseholds and making the tax a lien upon the fee as creating a lien on property exempted from taxation, and thereby violating the contract clause of the Constitution, chanrobles.com-red

Page 208 U. S. 490

when the state court has not so construed the statute and the taxing officers of the state disclaim any intention of so construing it or levying any tax on exempted property. An exemption of real property from taxation will not be construed as extending to the interest of the lessee therein because a forced sale of the lessee's interest might put the property in the hands of parties to whom the exempted owner objects. Under the terms of the lease, the owner can prevent such contingency by reentering for nonpayment of taxes. The fact that the lessee does not own the building erected by him on leased property doe not affect the right to tax his leasehold interest; it is material only on the question of value of his interest.

155 F.1d 2 reversed.

This is a suit in equity brought in the United States Circuit Court for the Middle District of Tennessee by the University of the South, a corporation, and by the several individual complainants named in the bill, who are residents of the County of Franklin in that state and lessees of certain lands from the university, to obtain an injunction against the individual defendants, who are a state revenue agent and a trustee of Franklin County, and also against the County of Franklin, in the above-named state, to restrain them from taking any proceedings to collect taxes from the lessees of the university within the limits of the thousand acres mentioned in the complainants' bill.

The bill having been filed, a preliminary injunction was issued restraining the collection of the taxes as prayed for.

Thereafter a demurrer to the bill was filed by the defendants on several grounds -- among others, on the ground that, as to the individual complainants, the bill could not be maintained and the court had no jurisdiction to hear and determine the cause on their behalf.

The defendants also answered.

The demurrer was sustained as to the individual complainants and the bill dismissed, but was overruled as to the university itself.

After a trial between the university and the defendants, a final decree was entered in favor of the university, restraining the defendants from assessing, or attempting to assess, taxes chanrobles.com-red

Page 208 U. S. 491

on the property and leasehold interests described in the bill, and situated within the thousand acres already referred to.

From this final decree, the defendants have taken an appeal directly to this Court under the fifth section of the act of 1891, 26 Stat. 826, c. 517, as involving the application of the Constitution of the United States.

The material facts are as follows:

The University of the South is a Tennessee corporation, under a charter granted by the legislature of that state, January 6, 1858, and amended January 19, 1858. The corporation was created for the purpose of establishing a seminary of learning, to be located at Sewanee, on the Cumberland Mountain, in Tennessee.

The tenth section of the act, under which the question arises, is set forth in the margin. [Footnote 1] That question is whether the assessments made against the lessees upon their interests in that portion of the one thousand acres of the lands leased to them respectively are valid, or whether they are not a violation of the exemption from taxation granted by that section.

The Civil War coming on soon after the charter was granted, very little work was done under it, but after peace was restored, the university authorities, aided by subscriptions from those interested in the work, went on with it, and in process of time the one thousand acres were duly surveyed and marked out and many buildings were erected for the university. Leases were also granted by it of lots within the one thousand-acre limit to persons who, under such leases, built upon the lots severally leased to them. By this method, a population of about 1,000 or 1,200 people had been gathered within the village called chanrobles.com-red

Page 208 U. S. 492

Sewanee, situated within the limit stated, and which was a barren wilderness when the charter was granted. In fact, the very existence of the village is the result of the efforts of the university.

In the summer of 1906, proceedings were taken to assess taxes upon the interests of the lessees occupying various lots under the leases mentioned, and a hearing was had before the trustee of Franklin County, within which the lots were situated, and he held that, under the act of the legislature of Tennessee passed January 10, 1903, c. 258, being the general assessment act, the lessee of a leasehold interest of a lot in Sewanee was taxable on the value of such interest, and he thereafter assessed the tax in the case of an individual named, and announced his intention of doing the same with reference to all lessees similarly situated. This bill was then filed before any further assessments were made.

The several leases under which the various lessees of the university held their lots, among other things, provided that the lessees would pay the rent specified in the lease "and all taxes and assessments upon said premises." It was also provided in the leases that the premises should not be sublet or transferred without the consent of the commissioner of land and buildings of the university, and that, for any violation of the restrictions and provisions made in the lease, the lessor might end and determine the lease and reenter upon the premises. Each lease also contained the following, the blanks being filled up in accordance with the terms which might be agreed upon between the parties:

"And at the expiration of the present term, the University of the South shall have the option of taking the premises by paying for all such improvements made thereon, or may renew the lease for another term of __ years, on such terms as may be agreed upon by the parties respectively, and may also give a second renewal for __ years, and in case the parties cannot agree upon the value of the improvements or the rental to be paid for the new term, the same shall be determined

Page 208 U. S. 493

by arbitration, one of the arbitrators to be selected by the commissioner of buildings and lands and the other by the lessee; and, in case they cannot agree, they shall call in an umpire . . . provided, however, that in fixing the rental for the new term, the value of the improvements shall not be taken into account as against the said party of the second part . . . , heirs or assigns. And it is further agreed that the improvements to the value of ___ hundred dollars be made and kept on said premises by the party of the second part."

At the time of the passage of the act of 1858 (the charter of the university) there was no statute providing for the separate taxation of the interest of a lessee in real estate, but the whole value of the entire real estate was assessed against the owner of the fee. The act of 1903, already mentioned, provided in subdivision 5 of § 5 that the interest of a lessee should be assessed to the owner of such interest separately from other interests in the real estate.

Section 32 of the same act provided that all taxes should be a lien upon the fee in the property, and not merely upon the interest of the person to whom the property was, or ought to be, assessed, and it was provided that the whole proceeding for the collection of taxes, from the delinquency to the sale, should be a proceeding in rem.

It is also asserted by complainant as a further ground of invalidity that § 2, subd. 2, of the act of 1903, providing a general exemption from taxation of religious, educational, and other named classes of institutions, as therein stated, does not provide as broad an exemption as the special exemption granted the university by its charter, and if it be held that the above general exemption does not reach the complainant, while at the same time it is claimed to repeal the special exemption provided by the charter, it impairs the contract between the state and the university, and is therefore void. chanrobles.com-red

Page 208 U. S. 498