Evergreen Aviation & Space Museum v. Dept. of Rev. ( 2014 )

No. 1 December 19, 2014 1
IN THE OREGON TAX COURT
REGULAR DIVISION
EVERGREEN AVIATION & SPACE MUSEUM,
and the Captain Michael King Smith
Education Institute,
Plaintiffs,
v.
DEPARTMENT OF REVENUE,
Defendant.
(TC 5129-31)
Plaintiffs (taxpayer) appealed from a Magistrate Division decision as to prop-
erty tax exemption for certain spaces used by taxpayer at its site in Yamhill
County. Taxpayer owns and leases property in Yamhill County (the county) that
is operated generally as a museum relating to air and space equipment, activ-
ity and exploration and related scientific educational activity. The county and
Defendant Department of Revenue (the department) acknowledged that much
of the property was exempt from taxation as being related to scientific activity,
but the department asserted that some of the property for which taxpayer claims
exemption did not qualify for exemption, and also questioned exemption for por-
tions of the land parcels on which the museum and theatre are located. Following
trial, the court found that the department could not in connection with an appeal
by taxpayer assert a counterclaim that, in effect, sought to do what the assessor
never purported to do—disqualify from exemption certain land. The court made
decisions as to other areas involving mixed uses and further ruled that the mat-
ter be continued for consideration of final resolution of outstanding issues.
Trial was held September 11, 2013, in the courtroom of
the Oregon Tax Court, Salem.
Kevin L. Mannix, Attorney at Law, Salem, argued the
cause for Plaintiffs (taxpayer).
Douglas M. Adair, Senior Assistant Attorney General,
Department of Justice, Salem, argued the cause for Defen-
dant Department of Revenue (the department).
Decision rendered December 19, 2014.
HENRY C. BREITHAUPT, Judge.
I. INTRODUCTION
This property tax exemption case is before the court
after trial and post-trial briefing.
2 Evergreen Aviation & Space Museum v. Dept. of Rev.
II. FACTS
Many of the background facts were agreed upon
in a partial stipulation. Plaintiffs (taxpayer) own and lease
property in Yamhill County (the county) that is operated
generally as a museum relating to air and space equipment,
activity and exploration, and related scientific educational
activity.1 The county and Defendant Department of Revenue
(the department) acknowledge that much of the property is
exempt from taxation as being related to scientific activity.
However, the department asserts that some of the
property for which taxpayer claims exemption does not
qualify for exemption. More particular facts are set forth in
the following discussion of each category or item of property
that the department asserts is taxable.
A. Theatre
This space is used primarily to play movies of two
types. The first type of movie can be described as related
to the subjects that form the basis for the conclusion that
most of the museum space is exempt—aeronautics, history
of flight, etc. The other type of movie can more correctly be
described as having an entertainment function unrelated to
flight or science. This borderline can be difficult to establish
completely. For example, the department questions whether
science includes history and suggests that a film about
Lewis and Clark should not be considered related to science.
The court considers the department’s views in this regard to
be too grudging. The boundaries of “science” and “history”
are simply not that well defined. Consider that President
Thomas Jefferson was a man of the Enlightenment and a
movie about the expedition he commissioned might well
touch on matters suggested by this report of the National
Park Service (http://www.nps.gov/nr/travel/lewisandclark/
encounters.htm, last visited Dec 16, 2014):
“Between 1804 and 1806, Lewis and Clark made the first
systematic reports, based on scientific measurement and
observations, of the Missouri River—not only its course,
but its flora and fauna, depth and current, tributaries
1
Taxpayer leases real property in different tax accounts and owns personal
property thereon.
Cite as 22 OTR 1 (2014) 3
and inhabitants. They continued onward to document
their observations in the Rocky Mountains and the Pacific
Northwest. Lewis and Clark described for science at least
120 mammals, birds, reptiles and fish, as well as at least
182 plant species. They made the first attempt at a system-
atic record of the meteorology of the West, and less success-
fully attempted to determine the latitude and longitude of
significant geographical points. These facts set them apart
from other contemporary expeditions, most notably those
of Zebulon Pike, which made no new scientific discoveries.”
That said, there is no question that films having no
connection, even indirect, with the purposes of the museum
are shown in the theatre.
In addition, the theatre was rented out to others.
These included for-profit business operations using the
space for meetings unrelated to the purpose of the museum.
The department has demonstrated in its post-trial submis-
sion, and taxpayer has not rebutted, that the revenue from
rental of the theatre, at least for the 2010 calendar year,
exceeded the amount of revenue generated from showing of
films related to the purpose of the museum.
The department argues that a relative revenue test
be used to determine whether the nonexempt use of the the-
atre space is such as to disqualify the space for exemption
purposes. The court is of the view that an analysis of the
time used for exemption-related movies as compared with
time used for nonexemption-related movies and rentals to
third parties would be the better analysis for purposes of
determining whether any portion of the space is exempt.
After all, revenue may well be indirectly related to the
actual use of space. The use of property, not revenue from
property, is the focus of the statute and case law.
Neither party had the benefit of the court’s view on
the proper approach to the allocation of space in the theatre
as between exempt and nonexempt uses. Accordingly, the
court will continue the case for the purpose of allowing the
parties to consider whether they can agree on a conclusion
as to partial exemption. If they cannot, the matter will be
addressed in a further evidentiary hearing.
4 Evergreen Aviation & Space Museum v. Dept. of Rev.
B. Cafés, Kitchen, and Concession Stand
The café space is used by patrons of the museum,
volunteers who provide services at the museum, and other
visitors. One need not be a museum visitor to enter or use
the café space.
The kitchen area is used for preparation of food for
the café space and also for preparation of food that is catered
to special events that occur on the museum grounds.
The concession stand area is used to sell typical
movie concessions of food and drink items. The area is used
in part for ticket sales to the movie theatre.
The department asserts, and taxpayer does not
deny, that there is no discount element in the pricing of the
items sold in any of these areas. The revenues for the 2011
year for all such activities were approximately $1,025,000.
Of this amount, the catering activity amounted to approx-
imately $195,000. Meals provided to staff or volunteers
amounted to approximately $117,000 in 2011.
The department asserts, and the taxpayer does not
deny, that there is nothing scientific about the activities
carried on in these spaces. Rather, taxpayer contends that
food service is necessary to retain patrons at the museum.
Taxpayer points out that the nearest alternative source of
food is over one mile away and access to that food would
entail leaving the museum grounds. As to both food service
and concessions, taxpayer argues that these items have
become things expected by persons who attend museums or
theatres.2
The department asserts that the argument regard-
ing retaining museum customers on site is not well taken
given the fairly healthy admission prices that would tend to
cause those attending the museum to return from nearby
food service facilities if the museum visit had not been
completed.
2
Taxpayer expressly does not rely on the argument that such spaces are
exempt because the income from these areas and activities goes to support the
concededly exempt portions of the property. Oregon does not allow such consider-
ations in considering exemption. Corp. of Presiding Bishop v. Dept. of Rev., 276 Or
775, 777-78, 556 P2d 685 (1976) (citations omitted).
Cite as 22 OTR 1 (2014) 5
Taxpayer put on witnesses from the management
of the museum regarding their views on why food service
was needed. Taxpayer also put on a witness who has studied
museums and their patrons. This witness talked about what
museum patrons have come to expect in the overall museum
experience. However, even if these witnesses have accu-
rately described the expectations of the public, the expecta-
tions of patrons or potential patrons is not an element that
the Oregon tax statutes consider to be directly relevant on
the question of exemption.3 Such expectations may well out-
distance the decisions of legislators as to what properties
should contribute to the revenues of government and what
properties are exempt.
Case law in this area offers important guidance.
Taxpayer invokes the decision of the Oregon Supreme Court
in YMCA v. Dept. of Rev., 268 Or 633, 522 P2d 464 (1974). In
that case the YMCA maintained at its urban facility a cafe-
teria which served food, at “reasonabl[e]” prices, to persons
staying at the facility, persons using the facility, staff, and
business persons active in the support of the facility. Id. at
635. The cafeteria was also used for job training. Id. at 636.
The court found the cafeteria space to be exempt, observing
that the food service activity implemented the exempt objec-
tives of the YMCA in a substantial way. Id. The court noted
the connection of the meals to the residential activity of the
YMCA, the fact that the food service facilitated the use of
the property for the exempt recreational purposes and the
convenience of the service for supporters of the organization
when they attended meetings on site. Id. The facility was in
the downtown urban area of Portland and other places to
obtain food were obviously present. Id. at 634.
Application of this governing precedent requires
first an identification of the exempt purposes of the tax-
payer. On this score, the department takes a narrow view,
distinguishing the YMCA case in saying “By contrast, a sci-
entific institution is necessarily engaged in ‘scientific work,’
which does not include providing meals.”
3
There was no evidence supplied from anyone who actually has attended the
museum.
6 Evergreen Aviation & Space Museum v. Dept. of Rev.
The department has conceded the exempt status
of most of the property owned or used by taxpayer. That
property does not include laboratories or other places where
“scientific work,” in any strict sense, takes place. The court
therefore finds no basis for the department’s unsupported
conclusion that a scientific institution, or stated differently,
an institution entitled to an exemption under the scien-
tific prong of ORS 307.130, must carry on “scientific work.”4
Rather, exemption is also available for property used to
educate or expose the public to scientific concepts, events,
principles and the application of science to the problems
and opportunities of human life.5 Under the YMCA case,
the question then becomes whether the food service activ-
ity that exists at the museum implements the objectives of
taxpayer in a substantial way. The fact that the activity is
not strictly necessary to the accomplishment of the exempt
objectives is not fatal. Nor is the fact that the food is avail-
able to the general public or that the activity may compete
in some way with taxable properties. These are all teach-
ings of the YMCA case.
Applying these principles, the court concludes that
the food-service-related property is exempt. While it is true
that other food is available nearby, the revenue numbers
indicate that a substantial number of visitors to the museum
make use of the facilities.6 Provision of meals to staff paral-
lels a similar fact in the YMCA case. Here, taxpayer makes
substantial use of volunteer services to accomplish its goals.
Those volunteers are provided meals in the facilities.
It is true that the kitchen facilities are used to
provide catering to outside events. Persons attending
such events are often, if not always, permitted to visit the
museum areas. While the revenues from such activities are
4
The court’s references to the Oregon Revised Statutes (ORS) are to 2011.
5
Indeed, the department in its briefs acknowledges that a combined
educational/scientific use is exempt.
6
The record includes numbers on total revenue, revenue from catering, and
the value of meals provided to volunteers. The record does not appear to identify
how many, if any, patrons of the cafés are member of the public who are not
museum patrons. However, the location of the museum, at some distance from
other food service facilities, supports a conclusion that the number of persons
coming to the cafés solely for food is small.
Cite as 22 OTR 1 (2014) 7
not insignificant they are a relatively small portion of the
overall revenue of the kitchen and café operations. The court
is of the opinion that this use of the kitchens is not such as
to disqualify the kitchen-related property from exemption.7
As to the concession stand for the theatre, no part of
the stand space used for sale of concessions is exempt. This
property is analogous to the barbershop space in the YMCA
case.
C. Gift Shops
The legislature has addressed gift shop property
and allowed exemption in a number of situations. See ORS
307.130(2)(d), (e), and (h). None of those apply here. The leg-
islature has also specifically disallowed exemption in the
case of gift shops in art museums. ORS 307.130(2)(f). For
religious organizations, those portions of property used as a
store or shop are taxable. ORS 307.140(1).
It is clear that the operation of a shop cannot make
the shop property exempt merely because the proceeds of
the shop go to support the activities of a taxpayer. This
court has, however, indicated that a shop might be exempt
if it substantially contributes to the accomplishment of the
exempt purposes of a taxpayer. Mercy Medical Center, Inc. v.
Dept. of Rev., 12 OTR 305, 308-09 (1992). The department
argues that the holding in Mercy Medical should be limited
in its application to hospitals. The court disagrees. The
approach of the court in Mercy Medical was basically the
same as the substantial factor test of the YMCA case, a case
that the department concedes is authority for the decision in
this case.
Some of the inventory in the gift shop seems clearly
related to the goals of taxpayer to introduce and interest
visitors in the science and history of aviation. Models of
planes are the most obvious example. Other items such as
7
Taxpayer’s income statement from 2011 shows $196,496 in catering sales.
Total café food sales for that year were $1,023,090.23. Special events include
weddings, birthday parties, dances, receptions, business meetings, and wine fes-
tivals. Special event customers “may rent all or portions of the museums, the
theatre, and the grounds, and the Museum offers catering for most functions.”
Some events were public, whereas others were private.
8 Evergreen Aviation & Space Museum v. Dept. of Rev.
items with the logo of a related business, general merchan-
dise, items of clothing clearly directed at visitors to Oregon
and garden and housewares are unrelated to the exempt
purposes of the museum. The evidence relied upon by the
department demonstrates that the sale of items related to
the purpose of the museum are a small fraction of the total
sales of the shop. The gift shop space does not meet the sub-
stantial factor test.
D. Classrooms 213 and 214 and Mezzanine
The department objects to exemption for these
spaces on the grounds that they are primarily rented out to
third-party users. The department acknowledges that such
rental does not occur in only one location of the buildings. It
also requests that all personal property used for such out-
side group rentals be found to be nonexempt. The depart-
ment’s basis for objection is an analysis of revenues from
outside rentals and a record of usage that the author testi-
fied was not accurate.
Taxpayer presented testimony of credible witnesses
that the primary use of these spaces was for educational
programs and usage related to the purpose of the museum.
The court concludes that taxpayer has borne its
burden of proof as to the building space usage. However, the
department position as to personal property used in connec-
tion with rental of space to third parties is sustained.
E. Land-Exemption Issues
The department questions exemption for portions
of the land parcels on which the museum and theatre are
located. Some of the area is subject to concessions by the
department in this case that are to be given effect. In addi-
tion, however, taxpayer argues that a stipulation entered
into in the Magistrate Division proceedings should be bind-
ing on the department in this division.
The stipulation in question did not purport to
bind the parties at all levels of litigation in this court.
Accordingly, the de novo characteristic of a trial in this divi-
sion requires that the stipulation entered into at the level
of the Magistrate Division be given no effect unless both
Cite as 22 OTR 1 (2014) 9
parties agree that it should be given effect. Dept. of Rev. v.
Guardian Management Corp., 16 OTR 17, 20 (2002).
Nor are taxpayer’s arguments relating to preclusive
effect of a different decision of the magistrate persuasive.
That case involved different property and different issues
from those present here.
However, as to tax lot 601, the initial action of the
assessor was to notify taxpayer that all of the land was
exempt (not the conclusion or action of the assessor as to
tax lot 600). It is the assessor, and not the department, who
is charged with making this decision. Therefore, the court
concludes that no appeal as to that land has been taken as
there was no adverse action to appeal.
The opinion of the court is that the department may
not in connection with an appeal by taxpayer assert a coun-
terclaim that, in effect, seeks to do what the assessor never
purported to do—that is, disqualify from exemption certain
land.8 While it is true that taxpayer did not raise this issue
in connection with opposition to the motion seeking leave to
amend and add a counterclaim, the court views this mat-
ter as in the nature of a question of subject matter jurisdic-
tion that can and must be raised by the court. This tax lot
appears to include the driveway or access road about which
other arguments, now moot, have been made.
As to tax lot 600, the position of the department is
that the land adjacent to the museum, with the exception of
an “arrow” shaped parcel on this tax lot, is not used for the
purposes of the museum and must therefore be considered
nonexempt. Taxpayer responds that this land helps to cre-
ate a campus atmosphere that is related to the purposes of
the museum. Taxpayer also argues that a berm area should
be exempt as it is required by land use regulations and that
the road leading to the museum is necessary to the opera-
tion of the museum.
The court is of the view that while a campus atmo-
sphere may be desirable, that alone is not sufficient to
8
This situation differs from certain matters that by statute may be raised
by an assessor or the department even when the initial decision of the assessor
was not objectionable to the taxpayer. Cf. ORS 305.287.
10 Evergreen Aviation & Space Museum v. Dept. of Rev.
support exemption. With respect to the berm area, the posi-
tion of taxpayer in its Urban Growth Boundary Amendment
application was inconsistent with the position now argued.
The court is of the opinion that the berm area is not quali-
fied for exemption. Other land not covered by stipulations in
this division of the court and extending beyond the footprint
of the generally exempt improvements is taxable, except for
such a border portion as may be agreed upon by the parties
and, absent such agreement, by further trial proceedings
as to what a typical border for such a building is. As to land
beneath structures on tax lot 600, a portion is exempt equal
to the relative square footage of exempt use and square foot-
age of nonexempt use as determined in this opinion.
F. Parking
There are a significant number of parking spaces
adjacent to the museum and theatre building. Taxpayer
claims the benefit of ORS 307.130(2)(b), an apparently broad
grant of exemption for parking on property owned or being
purchased by exempt organizations. The department cor-
rectly observes that because the property in question is
being leased by the museum, ORS 307.130(2) does not apply.
Taxpayer points out that ORS 307.112 also can
serve as a basis for exemption and the court accepts this
position. The remaining question is whether some allocation
of exempt and nonexempt space is needed as the record indi-
cates that some use of parking spaces is made by employees
of a for-profit organization that makes use of the theatre
building.
The court is of the opinion that an allocation is
required and should be done on the basis of the ratio of space
occupied by the for-profit entity and otherwise found to be
nonexempt (such as the space in the theatre allocated to
nonexempt use by reason of display of nonexempt movies) as
compared with the total space in the museum and theatre
properties.
G. Basement Area
Taxpayer claims that it has been surprised by the
post-trial assertion that a basement area in the theatre
building is not exempt. It appears to the court that, given
Cite as 22 OTR 1 (2014) 11
the assessor’s actions in expressing exemption conclusions
as a percentage of the total improvements, specification was
needed in connection with the trial. That occurred as to
most of the spaces. It appears not to have occurred as to the
basement area.
The court is of the opinion that unless the parties
are able to come to agreement as to this space, the matter
should be the subject of further brief proceedings, to be cou-
pled with any other matters that the court has indicated in
this opinion should go to hearing if the parties are not able
to reach an agreed upon solution.
III. CONCLUSION
This matter is continued for consideration by the
parties of final resolution of outstanding issues, further
hearing if necessary on outstanding issues. The court under-
stands that the parties reached a framework of agreement
as to personal property and expects a report as to the out-
come of applying that framework and the necessity of any
further proceedings in that regard. Now, therefore,
IT IS THE DECISION OF THIS COURT that this
matter is continued for consideration by the parties of final
resolution of outstanding issues, further hearing if neces-
sary on outstanding issues.