Metropolitan Water Reclamation Dist. of Greater Chicago v. Dept. ofRevenue, No. 1-98-4459

1st District, May 17, 2000

THIRD DIVISION

JUSTICE BURKE delivered the opinion of the court:

Defendant Department of Revenue of the State of Illinois (the Department) appeals from an order of the circuit courtreversing, on administrative review, the Department's denial of a request sought by plaintiff Metropolitan WaterReclamation District (the District) for a tax exemption on certain property owned by the District. The Department contendson appeal that its decision to deny the District a tax exemption for its property was not clearly erroneous because thatproperty was more than incidentally used for taxable purposes. For the reasons set forth below, we reverse the circuit courtand affirm the Department's determination that the District's property did not qualify for an exemption from taxation.

The District, a municipal corporation whose corporate purposes are treatment and disposal of sewage for 98% of CookCounty, sought an exemption from real property taxes for the 1994 tax year for property it owned that it was leasing to aprivate corporation. The District alleged in its complaint filed with the Cook County Board of (Tax) Appeals (the Board)that the subject property was exempt from real estate taxation under section 15--75 of the Illinois Property Tax Code (Code)(35 ILCS 200/15--75 (West 1994)). The Board recommended to the Department that it approve the requested exemption,but with the proviso that the lessee's leasehold interest in the property was subject to taxation. The Department, however,disapproved the Board's recommendation by issuing a certificate finding that the property was not in exempt use.

Subsequent to the Department's finding, the District filed a request for a formal administrative hearing, during which thefollowing evidence was presented. The property, having no legal address, is located on the east bank of the channel. Itconsists of a four-acre rectangular-shaped tract, 260 feet in width and 670 feet in length, and is bordered on its western sideby the channel's bank and on its northern side by the Chicago Transit Authority's Skokie Swift right of way. The Districthad purchased the property by indenture in 1909 as part of a right of way for the North Shore Channel (channel), and theDistrict had acquired the property in the event the District would be required to either construct release sewers runningparallel to the channel and/or to widen or deepen the channel.

In 1950, the District granted a 99-year lease to the property to K & K Excavators (K&K) subject to a prior agreementbetween the District and Hibbard, Spencer, Bartlett & Company (Hibbard) under which Hibbard was allowed to operate andmaintain a 48-inch storm-water drain which it owned and which ran through the property on a line parallel to the property'ssouth line. In 1957, K&K assigned its leasehold interest to the Cosmopolitan National Bank of Chicago which, in turn,assigned its leasehold interest to Crossover, Inc. (Crossover), a wholly owned subsidiary of Shure Brothers, Inc. (Shure).

Thereafter, in 1976, the District and Crossover executed an amendment to the original lease, restricting Crossover's use ofthe property until October 2000 to only the parking of vehicles such as automobiles, bicycles, and motorcycles. Theamendment also confirmed and ratified provisions in the original lease requiring the lessee to pay, in addition to rent, alltaxes, assessments, and water rates against the demised premises or any part thereof and prohibiting the lessee from doinganything on the property that would, in the opinion of the District's chief engineer, cause erosion, shifting, or caving on thechannel's banks. While the amendment expressly eliminated the District's right to maintain an easement for a cinderpathway on the demised property, it left the following provisions of the original lease undisturbed: one reserving in theDistrict the right to construct, reconstruct, maintain and operate intercepting sewers, drain outlets, and pipelines forelectrical transmission as needed for the District's corporate purposes; one reserving in the District the right to use, at anytime, a 30-foot wide strip of the demised premises as a free means of access for the District's property lying north of theleased premises; one reserving in the District the right to terminate the lease with respect to the same 30-foot strip of land;and one reserving in the District the right of access to the demised premises at all times.

Further evidence presented during the administrative hearing revealed that the property was used by Shure as a pavedparking lot for its employees during the 1994 tax year. Dr. Amreek Paintal, a professional engineer and head of theDistrict's civil engineering and sewer design section, testified that the District had no facilities on the property, although theDistrict's maintenance vehicles would traverse the property "at least once a month" during 1994 to gain access to Districtfacilities located adjacent to the property. According to Dr. Paintal, in the event that repairs to those facilities were needed,heavy equipment "might" also need to traverse the property and such equipment "might" have to remain on the site for threeto four days.

Following the administrative hearing, the administrative law judge (ALJ) issued a recommended decision, denying theDistrict a tax exemption on its property for the 1994 tax year. The ALJ found that the District had failed to bear its burdenof demonstrating that the property was "used exclusively for public purposes" during the tax year 1994 as required bysection 15--75 of the Code (35 ILCS 200/15--75 (West 1994)), and it further found that the evidence which the District hadpresented demonstrated that the District's use of the property for public purposes during the tax year 1994 was at best"periodic." The ALJ concluded that the property was not entitled to a tax exemption for the 1994 tax year because theDistrict had leased the property to Crossover, a private entity, and the property was primarily used by Crossover for privatecommercial purposes. Any tax exempt use of the property, according to the ALJ, was merely incidental. The ALJ rejectedthe District's claim that the District's fee interest in the property should remain tax exempt while Crossover's leaseholdinterest should be taxed. The ALJ determined that section 9--195 of the Code (35 ILCS 200/9--195 (West 1994)), whichprovides for taxation of leaseholds, only applies where the owner's underlying fee interest in the property is tax exempt andthe leasing of the property does not render that property taxable. The Department subsequently accepted the ALJ'srecommended decision as dispositive of the issues.

Thereafter, pursuant to the Administrative Review Law (735 ILCS 5/3--101 et seq. (West 1994)), the District soughtadministrative review in the circuit court of the Department's decision. The District asserted that it had used the property atissue primarily as a right of way and for drainage purposes. The District further asserted that while it had leased theproperty to a private corporation, it had retained easements over the property that had substantially limited the lessee's useof that property. The District argued that the Department's decision to deny the property tax exempt status was arbitrary,capricious, contrary to law and against the manifest weight of the evidence, and also violated the District's right to equalprotection of the law. The District asked the court to reverse the Department's decision, order the Department to certify thatthe property was exempt from taxation for the tax year 1994 and all subsequent tax years, and further order that the propertybe "subjected to a leasehold tax bill for the improvement portion of the current assessment." Following arguments by bothparties, the court reversed the Department's decision, holding that it was against the manifest weight of the evidence andcontrary to applicable law. This appeal followed pursuant to section 3--112 of the Administrative Review Law (735 ILCS5/3--112 (West 1994)).

The Department contends that its decision to deny the District tax exempt status for the District's property was not clearlyerroneous because that property, which the District leased to a private entity, was not primarily used for public purposesafter such leasing. The Department argues that the District failed to demonstrate that its property was primarily used for atax exempt public purpose and that any taxable use of its property was merely incidental. In response, the District arguesthat the trial court correctly held that the property should be exempt from real estate taxes because that property was ownedby a municipal corporation and used to perform the municipal corporation's public functions. The District asserts that suchproperty should not be stripped of its tax exempt status merely because the municipal corporation enters into a restrictivelease with a private corporation, providing for limited and incidental private use of the property as an employee parking lot,but reserves in itself superior and preemptive rights to the property.

In reviewing an administrative agency's decision made pursuant to the Administrative Review Law, this court reviews thedecision and not the circuit court's determination. See Richard's Tire Co. v. Zehnder, 295 Ill. App. 3d 48, 56, 692 N.E.2d360 (1998). This case concerns whether the Department properly applied the municipal property tax exemption. This is amixed question of law and fact; thus, this court may only overturn the Department's decision if it is clearly erroneous. SeeCity of Belvidere v. Illinois State Labor Relations Board, 181 Ill. 2d 191, 205, 692 N.E.2d 295 (1998); XL Disposal Corp.,Inc. v. Zehnder, 304 Ill. App. 3d 202, 207, 709 N.E.2d 293 (1999). The clearly erroneous standard requires a level ofdeference between that accorded the manifest weight standard and that accorded the de novo standard of review. SeeBelvidere, 181 Ill. 2d at 205. Review of pure questions of law are de novo, but an agency's construction is still entitled tosubstantial weight and deference. See Abrahamson v. Illinois Department of Professional Regulation, 153 Ill. 2d 76, 98,606 N.E.2d 1111 (1992). This deference stems from the fact that agencies make informed judgments on the issues basedupon their experience and expertise and are also an informed source for ascertaining the legislature's intent. SeeAbrahamson, 153 Ill. 2d at 98; see also Boaden v. Department of Law Enforcement, 171 Ill. 2d 230, 241, 664 N.E.2d 61(1996) (Freeman, J., specially concurring).

It is well established in Illinois that a statute exempting property from taxation must be strictly construed againstexemption, with all facts construed and debatable questions resolved in favor of taxation. See Chicago Patrolmen's Ass'n v.Department of Revenue, 171 Ill. 2d 263, 271, 664 N.E.2d 52 (1996); City of Chicago v. Illinois Department of Revenue, 147Ill. 2d 484, 491-92, 590 N.E.2d 478 (1992); XL Disposal, 304 Ill. App. 3d at 208. The taxpayer seeking an exemption bearsthe burden of proving clearly and conclusively that it is entitled to such an exemption. See XL Disposal, 304 Ill. App. 3d at208.

Under the Illinois Constitution, the General Assembly may exempt from taxation only