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Metropolitan Water Reclamation District of Greater Chicago v. Department of Revenue

May 17, 2000


The opinion of the court was delivered by: Justice Burke

Appeal from the Circuit Court of Cook County. Honorable Alexander P. White, Judge Presiding.

Defendant Department of Revenue of the State of Illinois (the Department) appeals from an order of the circuit court reversing, on administrative review, the Department's denial of a request sought by plaintiff Metropolitan Water Reclamation District (the District) for a tax exemption on certain property owned by the District. The Department contends on appeal that its decision to deny the District a tax exemption for its property was not clearly erroneous because that property was more than incidentally used for taxable purposes. For the reasons set forth below, we reverse the circuit court and 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 Cook County, sought an exemption from real property taxes for the 1994 tax year for property it owned that it was leasing to a private 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 the following evidence was presented. The property, having no legal address, is located on the east bank of the channel. It consists of a four-acre rectangular-shaped tract, 260 feet in width and 670 feet in length, and is bordered on its western side by the channel's bank and on its northern side by the Chicago Transit Authority's Skokie Swift right of way. The District had purchased the property by indenture in 1909 as part of a right of way for the North Shore Channel (channel), and the District had acquired the property in the event the District would be required to either construct release sewers running parallel 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 agreement between the District and Hibbard, Spencer, Bartlett & Company (Hibbard) under which Hibbard was allowed to operate and maintain a 48-inch storm-water drain which it owned and which ran through the property on a line parallel to the property's south 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 of the property until October 2000 to only the parking of vehicles such as automobiles, bicycles, and motorcycles. The amendment also confirmed and ratified provisions in the original lease requiring the lessee to pay, in addition to rent, all taxes, assessments, and water rates against the demised premises or any part thereof and prohibiting the lessee from doing anything on the property that would, in the opinion of the District's chief engineer, cause erosion, shifting, or caving on the channel's banks. While the amendment expressly eliminated the District's right to maintain an easement for a cinder pathway on the demised property, it left the following provisions of the original lease undisturbed: one reserving in the District the right to construct, reconstruct, maintain and operate intercepting sewers, drain outlets, and pipelines for electrical transmission as needed for the District's corporate purposes; one reserving in the District the right to use, at any time, a 30-foot wide strip of the demised premises as a free means of access for the District's property lying north of the leased 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 paved parking lot for its employees during the 1994 tax year. Dr. Amreek Paintal, a professional engineer and head of the District's civil engineering and sewer design section, testified that the District had no facilities on the property, although the District's maintenance vehicles would traverse the property "at least once a month" during 1994 to gain access to District facilities 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 three to four days.

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

Thereafter, pursuant to the Administrative Review Law (735 ILCS 5/3--101 et seq. (West 1994)), the District sought administrative review in the circuit court of the Department's decision. The District asserted that it had used the property at issue primarily as a right of way and for drainage purposes. The District further asserted that while it had leased the property to a private corporation, it had retained easements over the property that had substantially limited the lessee's use of 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 equal protection of the law. The District asked the court to reverse the Department's decision, order the Department to certify that the property was exempt from taxation for the tax year 1994 and all subsequent tax years, and further order that the property be "subjected to a leasehold tax bill for the improvement portion of the current assessment." Following arguments by both parties, the court reversed the Department's decision, holding that it was against the manifest weight of the evidence and contrary to applicable law. This appeal followed pursuant to section 3- -112 of the Administrative Review Law (735 ILCS 5/3--112 (West 1994)).

The Department contends that its decision to deny the District tax exempt status for the District's property was not clearly erroneous because that property, which the District leased to a private entity, was not primarily used for public purposes after such leasing. The Department argues that the District failed to demonstrate that its property was primarily used for a tax exempt public purpose and that any taxable use of its property was merely incidental. In response, the District argues that the trial court correctly held that the property should be exempt from real estate taxes because that property was owned by a municipal corporation and used to perform the municipal corporation's public functions. The District asserts that such property should not be stripped of its tax exempt status merely because the municipal corporation enters into a restrictive lease 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 the decision and not the circuit court's determination. See Richard's Tire Co. v. Zehnder, 295 Ill. App. 3d 48, 56, 692 N.E.2d 360 (1998). This case concerns whether the Department properly applied the municipal property tax exemption. This is a mixed question of law and fact; thus, this court may only overturn the Department's decision if it is clearly erroneous. See City 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 of deference between that accorded the manifest weight standard and that accorded the de novo standard of review. See Belvidere, 181 Ill. 2d at 205. Review of pure questions of law are de novo, but an agency's construction is still entitled to substantial 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 based upon their experience and expertise and are also an informed source for ascertaining the legislature's intent. See Abrahamson, 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 against exemption, 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, 147 Ill. 2d 484, 491-92, 590 N.E.2d 478 (1992); XL Disposal, 304 Ill. App. 3d at 208. The taxpayer seeking an exemption bears the burden of proving clearly and conclusively that it is entitled to such an exemption. See XL Disposal, 304 Ill. App. 3d at 208.

Under the Illinois Constitution, the General Assembly may exempt from taxation only "the property of the State, units of local government and school districts and property used exclusively for agricultural and horticultural societies, and for school, religious, cemetery and charitable purposes." Ill. Const. 1970, art. IX, §6. The above constitutional provision is not self-executing; rather, it merely authorizes the legislature to enact laws exempting property from taxation within the imposed constitutional limitations. See Chicago Patrolmen's Ass'n, 171 Ill. 2d at 269. In accordance with this constitutional authority, the Illinois legislature enacted section 15-- 75 of the Code, which provides: "All market houses, public squares and other public grounds owned by a municipal corporation and used exclusively for public purposes are exempt." 35 ILCS 200/15--75 (West 1994).

A municipal corporation is not entitled to obtain a tax exemption on property merely by virtue of its ownership of that property. See Sanitary District of Chicago v. Martin, 173 Ill. 243, 248, 50 N.E. 201 (1898). Rather, such a municipal corporation must demonstrate that its property is used exclusively for tax exempt public purposes. See Metropolitan Sanitary District of Greater Chicago v. Rosewell, 133 Ill. App. 3d 153, 155, 478 N.E.2d 1100 (1985). Property will be deemed to be exclusively used for public purposes when the primary use of the property is for public purposes and any private use of the property is merely incidental. See Rosewell, 133 Ill. App. 3d at 156. A municipal corporation seeking a tax exemption on its property cannot meet its burden of demonstrating that its property is in exempt use merely by presenting evidence that it intends to use that property for tax exempt public purposes in the future; rather, it must demonstrate that it actually used the property primarily for public purposes during the tax year in question. See Skil Corp. v. Korzen County Treasurer, 32 Ill. 2d 249, 252, 204 ...

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