Public Power District Was Not Liable for Property Taxes on Land It Leased for Commercial and Residential Uses Because It Paid in Lieu of Taxes
Central Nebraska Public Power and Irrigation District (“Central”) is a political subdivision of the State of Nebraska that generates electricity by hydroplants and delivers irrigation water to its customers. Central owns and manages Lake McConaughy and more than 38,000 acres of land surrounding it. Rather than paying real property taxes for the land, Central makes an annual payment in lieu of taxes in accordance with article VIII, section 11 of the Nebraska Constitution. Article VIII, section 11 provides, in part, that a public corporation or political subdivision that provides electricity or irrigation may make annual payments in lieu of taxes.
For the 2011 tax year, the county assessor for Keith County, Nebraska (the “Assessor”), assessed property taxes on 13 parcels of real property Central owns around Lake McConaughy. The Assessor determined that Central owed property taxes on the parcels because Central leased four of the Parcels for commercial use and the other nine for residential use. The Assessor argued that residential and commercial leasing did not serve a public purpose, and therefore, the parcels were subject to taxation and were not eligible for payments in lieu of taxes.
Central filed protests with the Keith County Board of Equalization (the “Board”) objecting to the Assessor’s Notice of Taxable Status. Central argued that Nebraska Revised Statute section 77-202(1)(a) exempted the parcels from taxation. Section 77-202(1)(a) provides that property owned by a state or governmental subdivision is exempt from taxation when the entity uses the property for a public purpose. Central argued that the commercial and residential leases served the public purpose of managing Lake McConaughy and establishing the required “buffer” around the lake. The Board recommended approving Central’s protests and leaving the parcels exempt.
The Tax Commissioner and Property Tax Administrator of the Nebraska Department of Revenue (collectively, the “Department”) appealed the Board’s decision to the Tax Equalization and Review Commission (“TERC”). TERC rejected the Department’s argument that Central’s property tax liability depended on its use of the parcels. Instead, TERC concluded that Central’s payment in lieu of taxes exempted the parcels from additional taxation. TERC further ordered that there should be “no assessed value” and “no separate property tax obligation” for the parcels because “any and all tax obligations [had] been included in Central’s payment in lieu of taxes.” The Department appealed.
The Nebraska Supreme Court affirmed in part and vacated in part. The Supreme Court affirmed that Central’s payment in lieu of taxes superseded any property tax obligation that would otherwise apply to Central, regardless of the use of the parcels. Nevertheless, for lack of jurisdiction, the Supreme Court vacated the portion of TERC’s order that stated there should be no separate property tax obligations and no assessed value for the parcels and that Central paid all property tax obligations via its payment in lieu of taxes. The Supreme Court made no determination whether the County could assess property taxes on the lessees of the parcels because the issue of the lessees’ liability was not before TERC.
The Supreme Court’s decision in Conroy v. Keith County Board of Equalization provides some guidance to public power corporations and other political subdivisions. The holding clarifies that property of entities that the law authorizes to pay payments in lieu of taxes is exempt from additional taxation regardless of use. The decision, however, leaves open the possibility of, or lacks clarity regarding, taxing the lessees of such property. By doing so, the decision failed to address the question of whether the payments in lieu of taxes directly and fully cover the tax obligations of each parcel belonging to the political subdivision.
A full copy of the Supreme Court’s opinion is available here.