Dolphin Residential Cooperative, Inc. v. Iowa City Board of Review , 2015 Iowa Sup. LEXIS 58 ( 2015 )

IN THE SUPREME COURT OF IOWA
No. 13–1031
Filed May 15, 2015
DOLPHIN RESIDENTIAL COOPERATIVE, INC.,
Appellee,
vs.
IOWA CITY BOARD OF REVIEW,
Appellant.
Appeal from the Iowa District Court for Johnson County,
Stephen B. Jackson, Jr., Judge.
The Iowa City Board of Review appeals from the decision of the
district court, which ordered the Iowa City Board of Review to reclassify a
multiunit apartment cooperative as residential for property tax purposes.
DISTRICT COURT DECISION REVERSED AND CASE REMANDED
WITH INSTRUCTIONS.
Eric R. Goers, Assistant City Attorney, Iowa City, for appellant.
Dennis J. McMenimen and Dana L. Oxley of Shuttleworth &
Ingersoll, P.L.C., Cedar Rapids, for appellee.
2
APPEL, Justice.
In this case, the Iowa City Board of Review (Board) appeals from a
district court ruling that ordered the Board to reclassify twenty-two
multiunit apartment buildings as residential property for tax assessment
purposes. Classification of the property as residential would require the
Board to tax the property at residential rather than commercial property
tax rates. The Board appeals, contending Dolphin Residential
Cooperative, Inc. (Dolphin) was not properly organized under Iowa Code
chapter 499A. As a result, the Board argues that Dolphin fails the
organizational test for residential cooperatives adopted by this court in
Krupp Place 1 Co-op, Inc. v. Board of Review, 801 N.W.2d 9 (Iowa 2011).
The Board argues that because Dolphin fails the organizational test, the
subject property should remain classified as commercial for property tax
purposes. For the reasons set forth below, we reverse the summary
judgment entered in favor of Dolphin and remand for the district court to
enter summary judgment in favor of the Board.
I. Background Facts and Proceedings.
Dolphin was created on December 22, 2011, when Dolphin caused
to be filed articles of incorporation with the Iowa secretary of state
seeking to organize as a multiple housing cooperative under Iowa Code
chapter 499A. The articles of incorporation listed attorneys Laurie L.
Dawley and Dennis J. McMenimen as organizers. 1 Both Dawley and
McMenimen signed the articles of incorporation. Both Dawley and
McMenimen are citizens of the state of Iowa and over the age of eighteen.
The articles of incorporation named Vijay J. Bhatt, an out-of-state
1Although the articles of incorporation list Dowley and McMenimen as
incorporators, we assume the term “organizers” is meant. See Iowa Code § 499A.1(1)
(2011).
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resident, as the sole initial member of the board of directors. A
document entitled “Consent Resolutions of Directors,” listed Bhatt as
president, vice president, treasurer, and secretary of the cooperative.
The consent resolutions authorized and directed Dolphin to acquire
property located at 2401 Highway 6 East in Iowa City, Iowa, which
contained four hundred apartment units owned by Dolphin
International, LLC (Dolphin International), and RBJ Management, Inc.
(RBJ). Finally, the consent resolutions authorized Dolphin’s issuance of
three hundred ninety-nine membership certificates to Dolphin
International and one membership certificate to RBJ in exchange for
their respective interests in the real estate.
On December 23, the Iowa secretary of state issued a document
entitled “Acknowledgment of Document Filed,” acknowledging receipt of
the articles of incorporation for Dolphin and confirming such articles
were effective as of December 22, 2011. The secretary of state also
directed the recording of the articles of incorporation with the Johnson
County recorder. By two deeds recorded December 27, Dolphin acquired
title to the subject real estate described above and commonly known as
Dolphin Lake Point Enclave (the Enclave). These deeds were from
Dolphin International, an Illinois limited liability company, and RBJ, an
Illinois corporation. The Enclave is an apartment complex in Iowa City
that consists of twenty-two buildings comprising four hundred
residential apartment units. Thereafter, pursuant to Iowa Code section
499A.11 (2011) and as authorized by the board of directors, Dolphin
issued four hundred certificates of membership, one for each apartment
unit at the Enclave. Dolphin issued three hundred ninety-nine
membership certificates to Dolphin International and one membership
certificate to RBJ. Dolphin and Dolphin International then entered into a
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proprietary lease for Dolphin International’s three hundred ninety-nine
apartment units, and RBJ did the same for its one apartment unit.
In January 2012, the Iowa City assessor classified the Enclave as
commercial property. Based on the commercial classification for the
Enclave, Dolphin’s real estate taxes for the 2012–2013 fiscal year for the
property were $307,366. Dolphin challenged this classification with the
Iowa City assessor asserting that because it was a multiple housing
cooperative, organized under chapter 499A of the Iowa Code, the Enclave
should have been classified as residential property under Iowa Code
section 441.21(11). This Code section expressly classified as
“ ‘residential property’ . . . all land and buildings of multiple housing
cooperatives organized under chapter 499A.” Iowa Code § 441.21(11)
(emphasis omitted).
In a letter dated April 2, the Iowa City assessor refused to change
the classification of the Enclave to residential. The reason given for the
refusal was that Dolphin failed to satisfy the statutory requirements of
Iowa Code chapter 499A, as interpreted by the Iowa Supreme Court in
the Krupp case, in that it did not pass the organizational test. Dolphin
was advised of its right to appeal the assessment classification to the
Board, which it did.
By notice dated May 25, the Board notified Dolphin that its request
to reclassify the Enclave had been denied. The Board found there was
“[i]nsufficient evidence to prove that the petitioned property is not
assessable, is exempt from taxes, or is misclassified.” Dolphin appealed
the Board’s decision to the district court.
During the course of the appeal, the parties filed cross-motions for
summary judgment on the classification issue, with each party resisting
the opposing motion. Dolphin argued that it satisfied the organizational
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test adopted by this court in Krupp because Dawley and McMenimen, as
organizers, satisfied the requirements outlined in section 499A.1(1). See
Iowa Code § 499A.1(1). Additionally, Dolphin took the position that the
Board’s rejection of its classification was an attempt to resurrect the
“actual use” test this court rejected in Krupp. Finally, Dolphin argued
that the majority-citizenship requirement contained in section 499A.1(1),
as interpreted by the Board, would violate the dormant Commerce
Clause of the United States Constitution.
The Board emphasized that Dolphin failed to meet the
requirements set forth in Krupp because Dolphin was not properly
organized under chapter 499A. The Board argued for a “meaningful
organizational test.” Specifically, the Board contended that Dolphin
failed to meet the statutory requirement of members “organizing
themselves,” or the statutory requirement that two adult natural persons
be organizers of the cooperative. The Board argued that the two
purported organizers of Dolphin, Dawley and McMenimen, were not
members “organizing themselves,” as required by section 499A.1(1), as
the two were not members of the Dolphin cooperative. Id. (emphasis
added). According to the Board, Dawley and McMenimen cannot be
considered proper organizers for purposes of satisfying the requirements
of section 499A.1(1). Rather, the Board insisted the proper organizers
under section 499A.1(1) must be the two entities which ultimately
obtained “Certificates of Membership” in Dolphin, Dolphin International
and RBJ. These entities failed the statutory requirements of section
499A.1(1) as they are neither persons of full age, nor citizens of the state
of Iowa. Additionally, the Board argued that before property owned by a
cooperative is entitled to residential tax treatment, chapter 499A requires
the cooperative have as many different members as it has residential
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units. Dolphin has only two members having proprietary interests in all
of the cooperative units. Finally, the Board contended the dormant
Commerce Clause is inapplicable to the facts of this case, as apartment
buildings are incapable of crossing state borders in commerce.
On May 29, 2013, after a hearing on the competing motions for
summary judgment, the district court entered its ruling. Relying on the
plain language of Iowa Code section 499A.1(1), the district court
concluded section 499A.1(1) imposed no requirement that the organizers
of a chapter 499A cooperative must also be members of the cooperative.
It held Dawley and McMenimen satisfied the clear statutory requirements
of section 499A.1(1) as they were natural persons of full age and were
citizens of Iowa. The district court also rejected the Board’s argument
that there must be a one-to-one, member-to-unit ratio for ownership of
the units in the cooperative. The district court concluded Dolphin met
the organizational test set forth in Krupp. Consequently, the district
court did not reach the dormant Commerce Clause issue.
The district court granted the summary judgment motion filed by
Dolphin and denied the summary judgment motion filed by the Board. It
ordered the Board to reclassify the subject property as residential
property for tax assessment purposes as of the assessment date
January 1, 2012. The Board appealed the ruling of the district court,
and we retained the appeal.
II. Standard of Review.
Although ordinarily appeals from decisions of the local board of
review are triable in equity, Iowa Code § 441.39, and our review is de
novo, Iowa R. App. P. 6.907, because the district court adjudicated the
issue on appeal by summary judgment, our review is for corrections of
errors at law, Am. Legion, Hanford Post 5 v. Cedar Rapids Bd. of Review,
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646 N.W.2d 433, 437 (Iowa 2002). Summary judgment is appropriate
when “there is no genuine issue as to any material fact and . . . the
moving party is entitled to a judgment as a matter of law.” Iowa R. Civ.
P. 1.981(3). In considering a motion for summary judgment that
requires an interpretation of a statute, our review is for correction of legal
error. 2 Jones v. Univ. of Iowa, 836 N.W.2d 127, 139 (Iowa 2013).
III. Discussion of Requirement of Organizers for Residential
Cooperatives.
A. Introduction. This case involves the proper interpretation of
Iowa’s statute regarding the creation of residential cooperatives.
Residential cooperatives have been part of the legal scene for decades.
See Richard Siegler & Herbert J. Cooper-Levy, Brief History of
Cooperative Housing, in General Materials and Information on
Cooperative Housing 1, 1–2 (Nat’l Ass’n of Hous. Coops. 1986) (noting
that although the concept of housing cooperatives has been around for
centuries, “[t]he period of greatest cooperative development . . . occurred
in the aftermath of World War II”). Traditionally, residential cooperatives
are a vehicle designed to allow residents “to own, manage, and operate
residential apartments without anyone profiting therefrom.” 15B Am.
Jur. 2d Condominiums and Cooperative Apartments § 59, at 637 (2011);
see City of Newton v. Bd. of Review, 532 N.W.2d 771, 774 (Iowa 1995),
overruled on other grounds by Krupp, 801 N.W.2d at 13 n.1, 15. In many
jurisdictions, including Iowa, residential cooperatives may receive
favorable tax treatment. See generally Iowa Code § 441.21(9) (directing
the director of revenue to certify annually to each county auditor the
2In this case, the standard of review elaborates upon, but is consistent with
Krupp. See 801 N.W.2d at 13. In Krupp, we interpreted the statute and applied the
standard of review for correction of errors at law. Id. at 13, 14–16. As stated here, this
standard generally applies in reviewing rulings on motions for summary judgment.
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percentages of the actual value at which agricultural, residential,
commercial, industrial, railroad, and utility properties are to be assessed
for property taxes). The notion is that while the traditional apartment
building with a landlord owner and renting tenants should be considered
a commercial enterprise, and taxed accordingly, a residential cooperative
should be treated as residential property and subject to the lower tax
rates ordinarily afforded to homeowners.
Since 1947, Iowa has had a statutory framework providing for the
formation of residential cooperatives that are eligible to receive favorable
tax treatment. See 1947 Iowa Acts ch. 250, § 1 (codified at Iowa Code
§ 499A.1 (1950)). This case raises a series of questions of statutory
issues under the Iowa statute.
B. Statutory Framework for Organization of Cooperatives.
Cooperative associations are not a stranger to the Iowa Code. Iowa Code
chapters 497 through 499A relate to various types of cooperatives. Each
chapter has provisions related to formation of the cooperative.
Iowa Code chapter 497 relates to cooperatives for “agricultural,
dairy, ethanol production, mercantile, mining, manufacturing, or
mechanical business” purposes. Iowa Code § 497.1 (2011). Under this
chapter, “Any number of persons, not less than five, may associate
themselves as a cooperative association.” Id. (emphasis added). The next
provision states, “They shall sign and acknowledge written articles”
which are filed with the secretary of state. Id. § 497.2 (emphasis added).
Iowa Code chapter 498 relates to nonprofit cooperative
associations. Iowa Code section 498.2 provides that “[a]ny number of
persons, not less than five, may associate themselves as a cooperative
association . . . for the purpose of conducting any agricultural, livestock,
horticultural[, etc.] business.” Id. §§ 498.2–.3 (emphasis added). As with
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Iowa Code chapter 497, the Code provisions that follow provide that
“[t]hey shall sign and acknowledge written articles,” id. § 494.4 (emphasis
added), and that such articles “shall be filed with the secretary of state,”
id. § 498.5.
Iowa Code chapter 499 has similar provisions. Under Iowa Code
section 499.5(1), “Five or more individuals, or two or more associations,
may organize an association.” (Emphasis added.) The next statutory
provision provides, however, that “[a]ll individual incorporators of
agricultural associations must be engaged in producing agricultural
products . . . .” Id. § 499.5(2).
That brings us to the statutory provisions implicated in this
lawsuit. Under Iowa Code section 499A.1(1), “Any two or more persons
of full age, a majority of whom are citizens of the state, may organize
themselves for the following or similar purposes: Ownership of
residential, business property on a cooperative basis.” (Emphasis
added.) 3
Under Iowa Code section 499A.1(1), the organizers are required to
“adopt, and sign and acknowledge the articles of incorporation” of the
3A number of other residential cooperative statutes require more than one
person to organize the entity. For example, in Colorado, “Cooperative housing
corporations may be formed by any three or more adult residents of [the] state
associating themselves to form a cooperative or nonprofit corporation . . . .” Colo. Rev.
Stat. Ann. § 38-33.5-101 (West, Westlaw current through 70th G.A., 1st Reg. Sess.,
assorted chapters (2015)); see also Mo. Ann. Stat. § 357.015(2) (West, Westlaw current
through 2015 1st Reg. Sess., 98th G.A.) (“Any number of persons, not less than five,
may associate themselves together as a housing cooperative . . . .”); N.J. Stat. Ann.
§ 46:7-9(1)(1) (West, Westlaw current through L. 2015, ch. 32) (“That it shall and may
be lawful for any number of persons not less than five, to associate themselves into a
company for the purpose of buying, selling, settling, owning and improving real estate
. . . upon making a certificate in writing under their hands and seals . . . .”); N.C. Gen.
Stat. Ann. § 54-111 (West, Westlaw current through 2015 Reg. Sess., ch. 1, 3–5) (“Any
number of persons, not less than five, may associate themselves as a mutual
association, society, company, or exchange, for the purpose of conducting any . . .
housing . . . business . . . .”).
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residential cooperative. The articles of incorporation adopted by the
organizers must state, among other things, the names of the directors for
the first year and the number of directors. Id.
Once the articles of incorporation have been filed with the
secretary of state with the required filing and recording fees, “a certificate
of incorporation as a cooperative not for pecuniary profit” is issued. Id.
The Code further provides that “[u]pon filing such articles the persons
signing and acknowledging the same [the organizers] and their associates
and successors shall become a body corporate” with various enumerated
powers. Id. § 499A.2(1)–(10).
C. Iowa Caselaw Regarding Residential Cooperatives. We have
had few occasions to consider the statutory provisions related to the
formation of residential cooperatives under Iowa Code chapter 499A.
There are two cases, however, in which we considered important issues
related to the chapter that set the stage for our consideration of the
issues in this case.
The first case is City of Newton. The central issue in City of
Newton was whether a multistory building containing sixty-three living
units was properly assessed as commercial property. 532 N.W.2d at
772–73. We recognized the rental of multiunit dwellings is ordinarily
recognized as a profit-oriented enterprise and thus subject to commercial
classification for tax purposes. Id. at 773. The question in City of
Newton was whether the cooperative status of Park Centre Apartments,
the leasee of the building, entitled the residents, and thus Park Centre,
to the tax benefits of then Iowa Code section 499A.14. Id. at 773–74. We
noted the residents in Park Centre did not actually own their apartment
units. Id. at 774. Although the residents were entitled to occupy their
unit, they had “no more ownership interest in the cooperative than an
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ordinary tenant.” Id. Further, the residents of Park Centre lacked any
control over the affairs of the cooperative. Id. We concluded that under
the then existing statute, “the fact that the ‘members’ of the cooperative
[had] no rights to ownership or management of the enterprise clearly
defeats the purpose underlying section 499A.14.” Id.
However, as the City of Newton case was pending, the legislative
wheels were turning. Prior to handing down the City of Newton decision,
the legislature amended Iowa Code section 441.21 to provide that
“[b]eginning with valuations established on or after January 1, 1995, . . .
‘residential property’ includes all land and building of multiple housing
cooperatives organized under chapter 499A.” 1995 Iowa Acts ch. 157,
§ 1 (currently codified at Iowa Code § 441.21(11)).
We next considered an appeal of a district court decision that two
multiunit apartment buildings were entitled to favorable tax treatment as
residential cooperatives in Krupp. In Krupp, the residential cooperatives
had only two members, Larry and Connie Krupp. 801 N.W.2d at 11.
Although as the only two members of the cooperatives they had
ownership interests in the cooperatives, they did not reside in the
buildings. Id. at 11. Instead, they subleased the units they owned to
subtenants. Id. The district court found that the cooperatives were
entitled to favorable residential tax treatment, as “the cooperatives had
followed all proper corporate formalities.” Id. at 13. The board of review
appealed and the court of appeals affirmed the district court. Id. We
granted further review. Id.
On appeal, the board conceded the cooperatives were properly
organized under Iowa Code chapter 499A. Id. at 14. The board,
however, asked us to look beyond the filing papers and consider the
actual operation of the property. Id. Based on our review of the relevant
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statutes, we rejected an actual use test. Id. at 15. In particular, we
noted the legislative history and language in Iowa Code section
441.21(11) imposes only an “organizational test” with no reference to a
property’s actual use. Id. By adopting an organizational test, we noted
the legislature avoided a fact-intensive actual use test. Id. at 16. We
observed, among other things, that nothing in the current statutes
required member residency to be entitled to favorable tax treatment. Id.
at 15–16.
We further declined the board’s invitation in Krupp to “pierce the
corporate veil.” Id. at 16. We noted that “the doctrine of piercing the
corporate veil is a limited one that is employed only on behalf of creditors
to reach the personal assets of shareholders of corporations.” Id. In any
event, we held there was no evidence in the record that the cooperatives
were operating for a profit and even if there had been such evidence,
there was nothing in chapter 499A that prevented “a member from
leasing out a unit or units with desirable economic terms.” Id.
D. Validity of Organization of Dolphin by Attorneys Dawley
and McMenimen. The first issue raised by the Board in this case is that
attorneys Dawley and McMenimen were not lawful organizers of the
residential cooperative. The Board recognizes that in Krupp we applied
an organizational test rather than an actual use test with respect to
determining proper tax treatment of a residential cooperative organized
under Iowa Code chapter 499A. See id. at 15–16. The Board maintains,
however, that although we adopted an organizational test in Krupp, any
residential cooperative seeking favorable tax treatment must be properly
organized under Iowa Code chapter 499A. According to the Board,
because Dawley and McMenimen were not organizing themselves for
purposes of “[o]wnership of residential, business property on a
13
cooperative basis” as required by Iowa Code section 499A.1(1), Dolphin
was not a properly organized residential cooperative and is not entitled to
favorable tax treatment.
Dolphin responds that once the papers were filed and approved by
the secretary of state, Dolphin came into existence as a residential
cooperative and that is the end of the matter under the Krupp
organizational test. See 801 N.W.2d at 15–16. It asserts that organizers
may be “[a]ny two or more persons of full age, a majority of whom are
citizens of the state” under Iowa Code section 499A.1(1) and that
attorneys Dawley and McMenimen plainly qualify. Dolphin notes there is
no requirement anywhere in Iowa Code section 499A.1 that organizers be
“members” and that, indeed, at the time of the filing of articles of
incorporation, there are no members.
A threshold question is whether Krupp precludes us from
considering whether Dawley and McMenimen were qualified organizers of
the residential cooperative. We conclude that it does not. In Krupp, the
parties stipulated that the residential cooperative was properly organized
under Iowa Code chapter 499A. Id. at 14. While Dolphin cites authority
for the proposition that we are not bound by the parties’ stipulation of
law, see Sanford’s Estate v. Comm’r, 308 U.S. 39, 51, 60 S. Ct. 51, 59, 84
L. Ed. 20, 26 (1939), or fact, see Krupp, 801 N.W.2d at 13 n.1, it is
apparent from Krupp, that in that case, we did not consider the issue of
proper organization at all, but focused only on the question of whether
the subsequent operation of the residential cooperative had any impact
on the availability of favorable tax treatment under Iowa Code section
441.21, see Krupp, 801 N.W.2d at 15–16. Thus, we think the Board may
challenge whether Dolphin was properly organized at its inception.
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We now turn to the merits of the Board’s argument. We begin our
analysis with the language of the statute. There is no dispute that
Dawley and McMenimen are persons of full age and that they are citizens
of the state of Iowa. See Iowa Code § 499A.1(1). However, Iowa Code
section 499A.1(1) requires more. They must “organize themselves” for
“the following or similar purposes: [o]wnership of residential, business
property on a cooperative basis.” Id. This language must be given
meaning. See Neal v. Annett Holdings, Inc., 814 N.W.2d 512, 520 (Iowa
2012) (noting “each term [in a statute] is to be given effect, and we will
not read a statute so that any provision will be rendered superfluous”
(citation omitted) (internal quotation marks omitted)). The plain
language suggests the organizers cannot organize others, but must
organize themselves for purposes of ownership of residential property or
a similar purpose. See State v. Royer, 632 N.W.2d 905, 908 (Iowa 2001)
(noting statutory language is given its plain and ordinary meaning).
The notion that organizers are not just any person of full age who
are citizens is supported not only by the direct language of Iowa Code
section 499A.1(1), but also by the language in Iowa Code section 499A.2.
This provision states, in relevant part: “Upon filing such articles the
persons signing and acknowledging the same [the organizers] and their
associates and successors shall become a body corporate with the name
therein stated and shall have [enumerated powers].” Iowa Code
§ 499A.2.
Thus, from Iowa Code section 499A.2, it is clear that organizers,
along with associates and successors, become the body corporate. This
provision is consistent with an interpretation of Iowa Code section
499A.1(1) that the organizers must “organize themselves” for purposes of
residential ownership. See Mall Real Estate, L.L.C. v. City of Hamburg,
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818 N.W.2d 190, 198 (Iowa 2012) (noting statutes must be read in
conjunction with other parts of chapter).
In addition, considered in context, it is clear that “organizers” are
not merely professional facilitators. As noted above, the organizers cause
the articles of incorporation to be filed with the secretary of state. Iowa
Code § 499A.1(1). The organizers further name the directors for the first
year. Id. The organizers thus have substantial power to direct the affairs
of the residential cooperative during the first year through their drafting
and appointment power. The initial directors have authority to
promulgate bylaws, which in turn must provide for the “election of a
president, vice president, treasurer, and secretary by the board of
directors.” Id. § 499A.2A(2)(b). Indeed, in this case, the lawyer
organizers appointed one person, Vijay Bhatt, as the sole member of the
initial board of directors, and that one-person board then promulgated
bylaws, pursuant to which the sole director named himself as president,
vice president, treasurer, and secretary. It is thus entirely reasonable to
require that organizers with such important powers should have a direct
interest in the residential cooperative itself rather than be a bystander
with no direct interest in the enterprise. 4
While Dolphin insists that its lawyers may be organizers even
though they have no putative interest in the cooperative, the requirement
of two organizers is inconsistent with that theory. If lawyers can be
organizers under Iowa Code section 499A.1(1), why are two needed?
4Dolphin attacks the Board’s position that organizers must be members of the
residential cooperative because members are not admitted until after the residential
cooperative has been formed by the filing of the articles of incorporation with the
secretary of state. Dolphin’s point may be well taken in the sense that organizers
cannot be formal members until after the filing of the articles, but they can be putative
members with an interest in organizing themselves into a cooperative at the time of
filing.
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Indeed, under Iowa Code section 498.2, “not less than five [persons] may
associate themselves as a cooperative association.” Under Dolphin’s
theory, five lawyers could band together to form the cooperative under
Iowa Code section 498.2. Of course, having multiple persons form
cooperatives who are interested in directly participating in the
subsequent organization makes sense, because by definition cooperatives
involve multiple ownership. It makes little sense, however, to require
multiple lawyers to associate together to merely accomplish incorporation
formalities.
The facts of this case also illuminate the nature of the legal
requirements for residential cooperatives. The record reveals that two
entities, Dolphin International, an Illinois limited liability company, and
RBJ, an Illinois corporation, are the owners of the Enclave, the
apartment buildings in question. They understandably seek to convert
their holdings into a residential cooperative in order to receive favorable
tax treatment.
At the time of the attempted conversion, however, there were
potential legal problems with Dolphin International and RBJ acting as
organizers. First, the statute requires that the organizers be “persons of
full age.” Id. § 499A.1(1). Although corporations are said to be a person
within the meaning of the chapter, id. § 499A.1(1), one might wonder
whether this general principle would be applied to organizers in light of
the “full age requirement.” Ordinarily, corporations do not mature to
“full age,” only living, breathing persons do. Second, even if corporate
entities could be organizers, it was doubtful at all times relevant here
that Dolphin International, a limited liability company, would qualify as
an organizer. Arguably, the statute, which expressly authorized
corporations to be persons but did not mention limited liability
17
companies, impliedly rejected them as persons. See Kucera v. Baldazo,
745 N.W.2d 481, 487 (Iowa 2008) (discussing the rule of expressio unius
est exclusio alterious); see also 2014 Iowa Acts ch. 1095, § 1, eff. July 1,
2014 (codified at Iowa Code § 499A.1(1) (2015)) (amending section
499A.1(1) to include a limited liability company as a person under the
statute). A third potential legal problem was the statutory requirement
that a majority of organizers under the statute be citizens of Iowa. While
the citizenship requirement might be challenged under the dormant
Commerce Clause, it is doubtful that Dolphin International or RBJ,
organized in Illinois, could meet this statutory qualification. To avoid
these legal pitfalls, Dolphin appears to have attempted to work around
the statutory limitations in Iowa Code section 499A.1(1) (2011) by using
attorneys Dawley and McMenimen as organizers. However, these lawyers
were not organizing themselves for purposes of “[o]wnership of
residential, business property on a cooperative basis.” Iowa Code
§ 499A.1(1).
As a result, Dolphin was not properly established under Iowa Code
section 499A.1(1). The district court therefore erred when it granted
summary judgment to Dolphin and denied summary judgment to the
Board. Because we conclude that Dolphin was not properly organized on
this ground, we do not address the alternative arguments raised by the
Board on this appeal.
IV. Challenge Under the Dormant Commerce Clause.
Dolphin asserts that the Board understands Iowa Code chapter
499A to impose a residency requirement, namely, that a majority of the
initial members must be Iowa residents and that this provision violates
the dormant Commerce Clause. Dolphin cites cases that stand for the
general proposition that if a statute discriminates against interstate
18
commerce, it may be constitutionally infirm. See Brown-Foreman
Distillers Corp. v. N.Y. State Liquor Auth., 476 U.S. 573, 578–79, 106 S.
Ct. 2080, 2084, 90 L. Ed. 2d 552, 559 (1986); Smithfield Foods, Inc. v.
Miller, 367 F.3d 1061, 1064–65 (8th Cir. 2004); S.D. Farm Bureau, Inc. v.
Hazeltine, 340 F.3d 583, 592–93 (8th Cir. 2003). Dolphin urges us to
avoid an interpretation that gives rise to potential constitutional
infirmities. See Simmons v. State Pub. Defender, 791 N.W.2d 69, 88
(Iowa 2010).
We do not base our decision, however, on the citizenship
provisions of Iowa Code section 499A.1(1) or any “residency
requirement.” Cf. Jones v. Gale, 470 F.3d 1261, 1269 (8th Cir. 2006)
(finding prohibition of corporations from farming in Nebraska invalid
when there was evidence of discriminatory intent against out-of-state
corporations). Instead, we base our decision on our interpretation of the
“organize themselves” provision of the statute. Iowa Code § 499A.1(1).
While Dolphin in its briefing challenges any residency requirement as
violating the commerce clause, our “organize themselves” interpretation
does not require residency. In Krupp, we expressly stated there is no
requirement that members occupy their units. 801 N.W.2d at 15–16.
We have held, however, that organizers must have some skin in the game
when they organize residential cooperatives. No party claims that such
an interpretation runs afoul of the dormant Commerce Clause, and in
any event, such a challenge does not discriminate against interstate
commerce and would thus lack merit under dormant Commerce Clause
analysis.
19
V. Conclusion.
For the foregoing reasons, we reverse the summary judgment
entered in favor of plaintiff Dolphin and remand for the district court to
enter summary judgment in favor of defendant the Board.
DISTRICT COURT DECISION REVERSED AND CASE
REMANDED WITH INSTRUCTIONS.
All justices concur except Mansfield, J., who concurs specially, and
Zager and Waterman, JJ., who dissent.
20
#13–1031, Dolphin v. Bd. of Review
MANSFIELD, Justice (concurring specially).
I join in the majority opinion and write separately only because I
would go farther. In my view, Krupp was wrongly decided and should be
overruled. See Krupp Place 1 Co-op, Inc. v. Bd. of Review, 801 N.W.2d 9
(Iowa 2011).
Let’s begin with the underlying reality of what is going on: An
Illinois-based commercial landlord is leasing out 400 apartment units in
several buildings for profit. Seeking a fifty percent reduction in its
property tax bill, that landlord has taken on some of the trappings of an
Iowa cooperative. But none of the members of the cooperative actually
resides in any of the apartment buildings. Rather, the so-called
cooperative, Dolphin Residential Cooperative, Inc. (the Dolphin
cooperative), has two “members”—Dolphin International, LLC, which has
been assigned 399 of the apartments, and RBJ Management, Inc., which
has been assigned the one remaining apartment. All three entities are
under the direction of the same person—Vijay Bhatt. Bhatt is the sole
director, president, vice president, treasurer, and secretary of the
Dolphin cooperative, the manager of Dolphin International, and the
president of RBJ.
As the majority opinion explains, two attorneys from the same
Cedar Rapids law firm organized the Dolphin cooperative. That law firm
apparently represents all three entities—the Dolphin cooperative,
Dolphin International, and RBJ. Once the Dolphin cooperative was
formed, Dolphin International and RBJ deeded the real estate to it, which
then turned around and leased the real estate back to Dolphin
International and RBJ.
21
This commercial enterprise under the direction of a single person
is totally different from what we would normally call a “cooperative.” The
classic cooperative involves independent persons such as farmers
forming a jointly owned entity in order to accomplish something as a
group that no one person could do as effectively on his or her own (e.g.,
buy supplies, market grain, obtain electricity). See, e.g., Merriam-
Webster’s Collegiate Dictionary 275 (11th ed. 2003) (defining a
cooperative as “an enterprise or organization owned by and operated for
the benefit of those using its services”). Instead, we have here the
opposite: a single economic enterprise purporting to be divided into
independent units in order to get favorable tax treatment. The
independent units exist on paper only, and none of the users of services
have an ownership interest in the entity.
Does this underlying reality matter? I believe it does. There is a
well-established doctrine in federal tax law that transactions undertaken
only for tax purposes and otherwise lacking economic significance should
be disregarded. As the United States Supreme Court has summed up,
This Court, almost 50 years ago, observed that
taxation is not so much concerned with the refinements of
title as it is with actual command over the property taxed-the
actual benefit for which the tax is paid. In a number of
cases, the Court has refused to permit the transfer of formal
legal title to shift the incidence of taxation attributable to
ownership of property where the transferor continues to
retain significant control over the property transferred. In
applying this doctrine of substance over form, the Court has
looked to the objective economic realities of a transaction
rather than to the particular form the parties employed. The
Court has never regarded the simple expedient of drawing up
papers as controlling for tax purposes when the objective
economic realities are to the contrary. In the field of
taxation, administrators of the laws and the courts are
concerned with substance and realities, and formal written
documents are not rigidly binding.
22
Frank Lyon Co. v. United States, 435 U.S. 561, 572–73, 98 S. Ct.
1291, 1298, 55 L. Ed. 2d 550, 560 (1978) (citations omitted)
(internal quotation marks omitted).
[W]here . . . there is a genuine multiple-party transaction
with economic substance which is compelled or encouraged
by business or regulatory realities, is imbued with tax-
independent considerations, and is not shaped solely by tax-
avoidance features that have meaningless labels attached,
the Government should honor the allocation of rights and
duties effectuated by the parties.
Id. at 583–84, 98 S. Ct. at 1303–04, 55 L. Ed. 2d at 567.
Frank Lyon involved a transaction that did have sufficient
economic substance, according to the Supreme Court (although two
justices dissented). Id. There, a state bank (Worthen) wanted to erect a
multistory bank and office building but could not borrow the funds
because of state and federal banking regulations. Id. at 563–64, 98
S. Ct. at 1293–94, 55 L. Ed. 2d at 554–55. Worthen entered into a sale-
and-leaseback arrangement with a separate company (Lyon), which in
turn took out a mortgage. Id. at 564–68, 98 S. Ct. at 1293–96, 55 L. Ed.
2d at 555–57. The Court found that this transaction had enough
economic substance because “the lessor [Lyon] retain[ed] significant and
genuine attributes of the traditional lessor status.” Id. at 584, 98 S. Ct.
at 1304, 55 L. Ed. 2d at 567.
It is true that Lyon’s majority shareholder also happened to serve
on Worthen’s board of directors. Id. at 563, 98 S. Ct. at 1293, 55 L. Ed.
2d at 554. Yet there was no dispute as to “Lyon’s substantiality and its
independence from Worthen.” Id. at 582, 98 S. Ct. at 1303, 55 L. Ed. 2d
at 566 (footnote omitted). Nor was it disputed that Lyon had assumed
significant risk and that both entities had valid nontax reasons for
23
engaging in the transaction. Id. at 582–83, 98 S. Ct. at 1303, 55 L. Ed.
2d at 566–67.
Here, by contrast, there are no genuine third parties. The putative
cooperative, directed by Bhatt, consists of a 99.7 percent interest held by
one Bhatt-directed entity and a .03 percent interest controlled by another
Bhatt-directed entity. The three entities have been separated purely for
tax reasons, and the ersatz cooperative has no reason for being other
than tax reduction. 5
The economic substance doctrine has been recognized by state
courts. See TD Banknorth, N.A. v. Dep’t of Taxes, 967 A.2d 1148, 1157
(Vt. 2008). In TD Banknorth, the taxpayer established three holding
companies for the sole purpose of reducing Vermont tax liability. Id. at
1150–51. In holding that the companies should not be treated as
separate for tax purposes, the court emphasized both the taxpayer’s
motivation and the holding companies’ lack of any independent business
activity apart from holding certain assets for tax reasons. Id. at 1157–
58; see also Shuwa Invs. Corp. v. County of Los Angeles, 2 Cal. Rptr. 2d
783, 784–86, 796 (Ct. App. 1991) (finding that a stepped transaction
intended to avoid property tax reassessment lacked economic substance
and would be treated as a single sale); Comptroller of the Treasury v. SYL,
Inc., 825 A.2d 399, 415–16 (Md. 2003) (finding that subsidiary
corporations were formed solely for tax purposes, lacked economic
substance, and would be disregarded); Sherwin–Williams Co. v. Comm’r,
778 N.E.2d 504, 512 (Mass. 2002) (“Massachusetts recognizes the ‘sham
transaction doctrine’ that gives the commissioner the authority to
disregard, for taxing purposes, transactions that have no economic
5As noted, the tax benefits do not even accrue to Iowa residents.
24
substance or business purpose other than tax avoidance. The doctrine
generally works to prevent taxpayers from claiming the tax benefits of
transactions that, although within the language of the tax code, are not
the type of transactions the law intended to favor with the benefit.”
(Footnote omitted.) (Citation omitted.) (Internal quotation marks
omitted.)).
Our court has also followed substance-over-form in the field of
taxation. For example, in Parshall Christian Order v. Board of Review, we
upheld a county’s determination that a religious organization comprised
of a single family was not entitled to a property tax exemption. See 315
N.W.2d 798, 805 (Iowa 1982). The facts of that case were as follows:
In December 1975, the Parshalls founded the Parshall
Christian Order (PCO), a religious order dedicated to the
advancement of biblical teachings. PCO consists of Robert
Parshall, denominated as its chief steward, Joyce Parshall,
assistant steward, and the two sons, who are referred to as
members. No other person has been a member of PCO or
applied for membership. Robert Parshall testified that new
members would be welcome to join PCO if they were willing
to abide by its rules and take the required oaths. Nothing in
the record, however, suggests that PCO has made any effort
to recruit additional members. The members of PCO are
thus identical to the members of the Parshall family.
Id. at 799.
We explained our reasoning in this way:
Nothing in these definitions suggests that a religious
society can consist solely of the members of a nuclear family.
Inherent within those definitions is the notion that the
various individuals composing a religious society have
become associated only through their mutual desire for
worship and religious education. Were it not for that desire
the association of those particular individuals would not
have occurred. Such is obviously not the case with PCO.
The members of the Parshall family are not associated only
because of their desire for mutual worship; they are
associated as a family. They will continue as a group
regardless of any religious beliefs they may possess.
Because the predominant reason for the Parshalls’
25
association is not religious pursuit, we conclude that PCO is
not a religious institution or society as contemplated by
section 427.1(9) [now section 427.1(8)].
Id. at 802. In summary, we said, “Granting tax exempt status to PCO
would exalt form over substance . . . .” Id. at 805. 6
No detailed study of chapter 499A is needed to conclude that a
purported cooperative arrangement which lacks economic substance
does not fall within the purview of the chapter and should not qualify for
the Iowa Code section 441.21(11) tax benefit. Section 499A.1(1)
authorizes “[o]wnership of residential, business property on a cooperative
basis.” Iowa Code § 499A.1(1) (2011) (emphasis added). If ownership is
not, in reality, on a cooperative basis, the tax benefit does not accrue.
Just as Iowa Code section 427.1(8) does not define “religious institution
or society,” so too Iowa Code chapter 499A and section 441.21(11) do not
define the term “cooperative.” But in the same way that taxing entities
are entitled to look behind the labels to determine whether an entity is
actually a religious institution, likewise they can examine whether the
entity is, in practical terms, a cooperative. A de facto single-member
cooperative has no more validity for tax purposes than a religious order
limited to one nuclear family. See Parshall Christian Order, 315 N.W.2d
at 805.
Indeed, a hallmark feature of cooperatives is that they bring
together multiple “persons.” See Iowa Code § 499A.1(1) (stating that
“[a]ny two or more persons” may organize themselves to form a
6In Parshall Christian Order, we determined that the taxpayer was not a
“religious institution or society” without reaching the question whether the taxpayer’s
property was used solely for the purposes of a religious institution or society. See 315
N.W.2d at 801. Thus, we applied an economic substance test to the issue of whether
the taxpayer was a particular type of entity, not needing to consider the uses served by
that entity. Cf. Krupp, 801 N.W.2d at 15 (indicating that Iowa Code section 427.1(8)—
unlike section 441.21(11)—expressly incorporates an actual use test).
26
cooperative). But when, as here, the so-called cooperative lacks
members who are economically distinct from each other, it is missing
this essential feature.
Iowa Code section 499A.11 gives additional force to this point. It
provides that
each member has an exclusive possessory interest in an
apartment unit and a possessory interest in common with all
other members in that portion of the cooperative’s real and
personal property not constituting apartment units, and
which creates a legal relationship of landlord and tenant
between the cooperative and member.
Id. § 499A.11. In addition, section 499A.18A makes each member
“responsible for maintenance and repair of the person’s apartment unit.”
Id. § 499A.18A. While I agree that it may be over-reading chapter 499A
to hold that each member can only have an exclusive interest in one unit,
and I do not believe chapter 499A prohibits members from subleasing
their units, the section clearly contemplates that a cooperative would be
comprised of multiple members who are economically independent of
each other.
I acknowledge that Krupp presented a similar situation: The only
members of the purported cooperative were the Krupps—presumably a
husband and wife—who together owned the entire twenty-four-unit
apartment complex. 801 N.W.2d at 11. Hence, as in the present case,
there was a unitary economic entity that engaged in legal mitosis purely
for tax reasons. As here, the transactions in Krupp lacked economic
substance. Krupp, however, rejected the economic substance test in a
footnote. Id. at 15 n.2. For these reasons, I believe Krupp should be
overruled.
Krupp gave considerable weight to language in Iowa Code section
441.21(11) which provides that “ ‘residential property’ includes all land
27
and buildings of multiple housing cooperatives organized under chapter
499A . . . .” Id. at 15 (second emphasis added) (quoting Iowa Code
§ 441.21(11) (2007)). In the court’s view, this language unambiguously
established an “organizational test” as the only standard a cooperative
must meet to receive preferred tax treatment. Id. It thus foreclosed any
reliance on whether the so-called cooperative actually operated as a
cooperative. Id.
While this is not an unreasonable interpretation of section
441.21(11), it does not persuade me. I think the phrase—“organized
under chapter 499A”—was simply intended by the legislature to nail
down the type of cooperative being referred to. I am not convinced that
by using this rather plain vanilla phrase “organized under,” which
appears in hundreds of Iowa statutes, the legislature specifically meant
to establish a limited “organizational test” as the entire test for whether a
cooperative qualified for residential tax treatment. To put it another way,
I view the phrase “organized under” as being a floor, i.e., the cooperative
had to have been organized under chapter 499A, rather than a ceiling,
i.e., the cooperative would always get the tax benefit as long as it was
organized under chapter 499A.
To bolster its conclusion, the Krupp court suggested that when the
legislature enacted section 441.21(11) in 1995, see 1995 Iowa Acts ch.
157, § 1, it may have been weighing in on a controversy raised by the
then-pending case of City of Newton v. Board of Review, 532 N.W.2d 771
(Iowa 1995), overruled on other grounds by Krupp, 801 N.W.2d at 13 n.1.
See Krupp, 801 N.W.2d at 16. City of Newton involved a retirement home
that was owned by one entity (WRS) and leased by it to another entity
(Park Centre, the purported cooperative). 532 N.W.2d at 772. The
residents of the retirement home had entered into agreements with WRS
28
that provided them with life estates. Id. at 772–73. However, in rejecting
Park Centre’s request for residential tax treatment as a cooperative, we
indicated that one should look at “the purpose underlying” the tax
benefit. Id. at 774. The members of this cooperative had “no rights to
ownership or management of the enterprise.” Id.
While City of Newton was pending but before it was decided, the
legislature enacted what is now Iowa Code section 441.21(11). See 1995
Iowa Acts ch. 157, § 1. If the legislature was weighing in, it is important
to note the legislature effectively ruled against Park Centre; that entity
would have lost the case under section 441.21(11) just as surely as it lost
under the reasoning of City of Newton. That is because the legislation
required the cooperative to own the land and buildings—i.e., “all land
and buildings of multiple housing cooperatives”—which Park Centre
didn’t do. Thus, the legislation would have enabled the questionable
Park Centre-type of cooperative to be nipped in the bud.
To read this legislation as undermining the ensuing City of Newton
decision seems misguided to me. In all likelihood, if we believed our City
of Newton decision was a dead end due to the recent enactment of
section 441.21(11), we would have said so in City of Newton. We did not.
Hence, I read the phrase “organized under chapter 499A” in
section 441.21(11) not as drawing a technical distinction between how a
cooperative was initially organized and how it operates, but simply as
importing chapter 499A’s overall requirements into section 441.21(11).
Another important point is that the legislature said “organized under
chapter 499A,” not “organized under section 499A.1.” This certainly
implies that sections other than 499A.1, the only section dealing with
initial organization, are relevant to the inquiry.
29
Additionally, as the debate between the majority and the dissent in
this case illustrates, it is difficult to draw a line between organization and
operations. They blend into each other. Is a cooperative validly
organized under section 499A.1(1) if there never was an intent to operate
“on a cooperative basis” as provided in section 499A.1(1)? Organization
and operations to me are two sides of the same coin.
In the dissent’s view, favorable tax treatment is simply a matter of
getting some paperwork in order. Once the cooperative has been
established with the usual boilerplate filings executed by two
strawperson nominees, the organizational test has been met and
everything else is irrelevant. That can’t be right. If the dissent were
correct, the cooperative would never have to advance beyond its initial
formation and would never have to have any members. It could totally
flaunt the other requirements of chapter 499A so long as the
requirements of section 499A.1 were satisfied. After all, the dissent
would say, the cooperative was “organized” properly and that is the only
thing that matters. Everything else concerns operations.
Note that the dissent is consistent and would give the owner of the
real estate favorable residential tax treatment even if the “cooperative’s
plans fall through . . . , it never builds residential units, and it never
admits members to the cooperative.” With respect, I think the members
of the general assembly would drop their jaws when considering this
outcome. This would mean an ordinary commercial developer could get
a fifty percent tax break merely by filing technically compliant section
499A.1 paperwork—without ever following through on anything. The
developer would not even have to pretend to establish a cooperative-type
arrangement, as here. That is not what the general assembly intended.
30
Yet the dissent has a valid point. Normally we allow new entities to
be formed with the aid of organizers or incorporators who serve a largely
ministerial role, before being quickly replaced. Doing it any other way is
often impractical, because until the entity is up and running it may be
unclear who is going to be involved with it. The irony is that under the
majority’s view of the organizational test, it will be harder for bona fide
cooperatives to qualify than for Potemkin cooperatives such as Dolphin.
It is easier for a faux cooperative to organize itself, as the majority
demands, than for a real one to do so.
In sum, I agree with the majority that the cooperative here fails
even a limited organizational test. However, going beyond the majority, I
would also hold that any such cooperative should be disregarded for tax
purposes because it fails the economic substance test. Without doubt,
this cooperative was set up only for tax reasons, and it lacks an essential
attribute of a chapter 499A cooperative, namely, that its members be
economically independent. For these reasons, I would reverse the
summary judgment entered by the district court. 7
7I recognize that stare decisis is a reason not to overrule Krupp. However, Krupp
was decided only four years ago, and this is the first time we have been called upon to
apply it. See 801 N.W.2d at 9. For reasons discussed above, I believe Krupp’s rejection
of an actual use test for cooperatives is not merely an incorrect reading of the statute,
but also leads to an unworkable distinction between a cooperative’s organization and its
operations.
31
#13–1031, Dolphin v. Bd. of Review
ZAGER, Justice (dissenting).
I respectfully dissent. In my opinion, Dawley and McMenimen
were qualified to act as the organizers of Dolphin Residential
Cooperative, Inc. (Dolphin) and satisfied the requirements of Iowa Code
section 499A.1(1) (2011). Thus, Dolphin was properly organized under
chapter 499A and is entitled to favorable tax treatment by virtue of its
status as a residential cooperative. I would affirm the decision of the
district court.
The statutory language the majority concentrates on is “organize
themselves for the following or similar purposes: Ownership of
residential, business property on a cooperative basis.” Iowa Code
§ 499A.1(1). According to the majority, this language suggests the
organizers cannot organize others, but instead must organize themselves.
Thus, it concludes Dawley and McMenimen cannot serve as the
organizers of Dolphin because they did not intend to have a future
interest in the cooperative. In other words, the majority injects an intent
requirement into our meaningful organizational test that has no basis in
the statute or our caselaw. In effect, the majority’s analysis imposes a
new requirement that the organizers of a residential cooperative also
form its initial membership base. In my opinion, these requirements are
not supported by the plain and ordinary language of the statute and are
further undermined by a broader examination of chapter 499A as a
whole. Moreover, these requirements are wholly illogical and contrary to
our decision in Krupp Place 1 Co-op, Inc. v. Board of Review, 801 N.W.2d
9 (Iowa 2011).
The plain language of the statute provides: “Any two or more
persons of full age, a majority of whom are citizens of the state, may
32
organize themselves . . . .” Iowa Code § 499A.1(1) (emphasis added).
Webster’s Third New International Dictionary defines “any” as “one
indifferently out of more than two : one or some indiscriminately of
whatever kind.” Webster’s Third New International Dictionary 97 (unabr.
ed. 2002). As we have previously noted, “ ‘A more comprehensive word
than “any” could hardly be employed. It means indiscriminate, or
without limitation or restriction.’ ” Iowa-Ill. Gas & Elec. Co. v. City of
Bettendorf, 241 Iowa 358, 364, 41 N.W.2d 1, 4–5 (1950) (quoting
Commonwealth v. One 1939 Cadillac Sedan, 45 A.2d 406, 409 (Pa. Super.
Ct. 1946)). Given the legislature’s use of the broad term “any,” I cannot
conclude the statute requires inquiry into the intent of a cooperative’s
organizers.
Moreover, read in its entirety, chapter 499A clearly does not
require the organizers of a residential cooperative to have any direct
interest in the cooperative either at the time of its organization or at
some point in the future. See Miller v. Marshall County, 641 N.W.2d 742,
749 (Iowa 2002) (“We must read each provision of a statute together,
without according undue importance to any single provision.”). Nor does
the statute in any way contemplate the de facto member-organizer
requirement now imposed by the majority. Chapter 499A clearly
distinguishes between organizers, directors, and members, establishing
different roles for each. The legislature’s use of distinct terms to refer to
different classes of persons who take part in the process of forming,
operating, and participating in a chapter 499A cooperative manifests its
intent that these participants serve different functions. See Miller, 641
N.W.2d at 749 (“We assume the legislature intends different meanings
when it uses different terms in different portions of a statute.”). The
legislature also clearly demonstrated its ability to differentiate between
33
these participants and established different rights and duties for each
distinct class. See, e.g., Iowa Code §§ 499A.1(1) (establishing organizers’
duty to “adopt, and sign and acknowledge the articles of incorporation”),
.2A (establishing directors’ duty to adopt initial bylaws), .3C (establishing
members’ right to vote), .19 (establishing members’ right to elect
directors). Had the legislature intended to require that the organizers of
a residential cooperative possess an interest in a chapter 499A
cooperative or that they ultimately become members of the cooperative, it
could have stated as much as it has in other contexts. See, e.g., id.
§ 496C.6 (“One or more individuals having capacity to contract, each of
whom is licensed to practice in this state a profession which the
professional corporation is to be authorized to practice, may act as
incorporators of a professional corporation.” (Emphasis added.)); id.
§ 499.5(2) (“All individual incorporators of agricultural associations must
be engaged in producing agricultural products . . . .” (Emphasis added.)).
But nothing in chapter 499A requires the organizers of a residential
cooperative to have any interest in the cooperative or to become members
of the cooperative. We should not, under the pretext of construction,
read these requirements into the statute. Bank of Am., N.A. v. Schulte,
843 N.W.2d 876, 880 (Iowa 2014) (“Under the pretext of construction, we
may not extend a statute, expand a statute, or change its meaning.”).
Significantly, nothing in chapter 499A requires the organizers of a
residential cooperative to continue with the organization in any capacity
after they file the articles of incorporation with the secretary of state and
the cooperative becomes a corporate body. Under the statute, organizers
serve a largely administrative function. Iowa Code section 499A.1(1)
defines the function of organizers:
34
The organizers shall adopt, and sign and acknowledge the
articles of incorporation, stating the name by which the
cooperative shall be known, the location of its principle place
of business, its business or objects, the number of directors
to conduct the cooperative’s business or objects, the names
of the directors for the first year, the time of the cooperative’s
annual meeting, the time of the annual meeting of its
directors, and the manner in which the articles may be
amended.
Further, outside of section 499A.1(1), chapter 499A makes no further
reference to the organizers whatsoever. See Iowa Code §§ 499A.2–.25.
The majority conflates the duties of a cooperative’s organizers with
those of its directors and, by extension, its members. The majority
states, “It is thus entirely reasonable to require that organizers with such
important powers should have a direct interest in the residential
cooperative itself rather than be a bystander with no direct interest in the
enterprise.” (Emphasis added.) But are the administrative powers listed
above all that important? More significantly, where has the legislature
made this judgment in the statute? The answer, of course, is that it
hasn’t.
More fundamentally, under the statute once the cooperative comes
into existence, its initial members need not, and perhaps cannot, be
ascertained. Thus, it is illogical to read the statute as requiring that the
organizers of a cooperative possess an interest in the cooperative, that
members be organizers, or that all organizers become members. In fact,
after the articles of incorporation are filed with the secretary of state, and
before membership certificates are ever issued, Iowa Code section 499A.2
provides that the organization “shall become a body corporate” and “have
power . . . [t]o purchase, take, receive, lease . . . , take by gift, devise or
bequest, or otherwise acquire, and to own, hold, use and otherwise deal
in and with any real or personal property or any interest therein.” Id.
§ 499A.2(4). Section 499A.2A further provides that the initial bylaws of
35
the cooperative shall be adopted by the cooperative’s board of directors.
Id. § 499A.2A. It also provides that “[p]rior to the admission of members
to the cooperative, the power to alter, amend, or repeal the bylaws or
adopt new bylaws is vested in the board of directors.” Id. § 499A.2A.
These sections plainly contemplate a period in which a chapter 499A
cooperative may have no members yet nevertheless legally operate.
Problematically, the majority’s logic applies to any two or more
individuals who decide to organize themselves as a cooperative, not just
these attorney organizers. The purpose of the cooperative may be to
purchase undeveloped real estate, build an apartment complex on the
real estate, and sell each of the residential units. Perhaps the
cooperative’s plans fall through after acquiring the real estate, it never
builds residential units, and it never admits members to the cooperative.
Are we to conclude that the cooperative was not properly organized? Is
the cooperative not entitled to favorable tax treatment with respect to
property acquired and held during that period simply because its plans
were unsuccessful? Maybe the organizers never intended to build the
apartments, but instead intended to hold the real estate for investment
purposes. The point is, in determining whether the cooperative was
properly organized, we wouldn’t look back and make a judgment about
the original motive and intent of the organizers. Neither should we make
an inquiry about the original motive and intent of the organizers as part
of our meaningful organizational test here.
Finally, the majority’s interpretation of the statute in essence
requires that we revive the “actual use” test we explicitly rejected in
Krupp only four years ago. See 801 N.W.2d at 16 (“By enacting the
amendment with an organizational test, the legislature avoided a fact
intensive ‘actual use’ test . . . .”). Take the previous example of the
36
cooperative that has its building plans fall through after acquiring some
undeveloped real estate. How would the majority decide whether that
cooperative was properly organized under chapter 499A? It never got to
the membership phase; thus, we can’t compare its members to its
organizers. The only way to determine whether the property it holds is
entitled to favorable tax treatment is to look to its actual operation
during the interim period and ask: Was it actively making plans to go
forward with what looks like a cooperative? This is plainly inconsistent
with Krupp, in which we held that “[t]he only fact finding required under
[Iowa Code] section 441.21(11) is whether the property is owned by an
entity organized under chapter 499A” and declined to look at the actual
use of the property in classifying it for tax purposes. Id. at 15–16. In the
future, courts will have to take a fact-intensive look behind the curtain
and consider who the cooperative’s organizers were, who its initial
members were, who the members are now, what the organizers and
initial members’ intentions were, and how the cooperative is operating.
This patently contradicts both the holding and spirit of Krupp.
The statute and our decision in Krupp plainly do not contemplate
the requirement that an organizer have a direct interest in the
cooperative or the de facto member-organizer requirement now imposed
by the majority. Thus, in my opinion, Dawley and McMenimen were
qualified to act as the organizers of the Dolphin cooperative. Further,
Dawley and McMenimen satisfied the organizational requirements of
section 499A.1(1). Section 499A.1(1) requires: 1) that there be “two or
more persons of full age”; 2) a majority of those persons must be “citizens
of the State”; 3) those persons must “adopt, and sign and acknowledge
the articles of incorporation,” which must contain specific information;
and 4) those persons must follow delineated procedures in filing the
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articles of incorporation with the secretary of state. See Iowa Code
§ 499A.1(1). Here, it is undisputed that Dawley and McMenimen are
persons, there are two of them, and they are both over the age of
eighteen. It is undisputed that they are both citizens of Iowa. It is
undisputed that they adopted, signed, and acknowledged the articles of
incorporation and that the articles contained the necessary information.
It is undisputed that they filed the articles with the secretary of state on
December 22, 2011, and that on December 23 the Iowa secretary of state
issued a document entitled “Acknowledgment of Document Filed,”
confirming Dolphin’s articles of incorporation were effective as of
December 22. Consequently, Dawley and McMenimen clearly satisfy our
meaningful organizational test. See Krupp, 801 N.W.2d at 15 (“[C]hapter
499A imposes only an ‘organizational test,’ with no reference to the
property’s actual use.”). Dolphin was properly organized and is entitled
to favorable tax treatment by virtue of its status as a residential
cooperative.
There is no statutory or logical basis for inquiring into the motive
or intent of the organizers of a cooperative, or for considering whether the
organizers have some direct interest in the cooperative either at the time
of its organization or at some point in the future. Neither is there any
statutory or logical basis for the de facto member-organizer requirement
now imposed by the majority. The majority’s new requirements are not
supported by the statute and are plainly inconsistent with our holding in
Krupp. These considerations should have nothing to do with our
analysis.
The elephant in the room is that the majority, and the local taxing
authorities, don’t like the loss of tax revenue resulting from the
conversion of property from a commercial to a residential tax status. But
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the impression that these property owners are somehow taking
advantage of the law should not really be our concern. The legislature
made the policy decision to tax residential cooperatives more favorably.
If people are upset about this, they should make their concerns known to
the legislature, which has the power to correct this perceived injustice. I
don’t believe it is for this court to arbitrarily adopt additional
requirements not provided for in the statute to achieve this result.
Dolphin was properly organized. I would affirm the decision of the
district court.
Waterman, J., joins this dissent.