Supervisor of Assessments of Baltimore City v. Friends School

ROSALYN B. BELL, Judge. The Supervisor of Assessments appeals an order of the Circuit Court of Baltimore City reversing the Maryland Tax Court’s decision that a caretaker’s residence located on the property of Friends School was not exempt from real property taxes under Md.Code Ann. Art. 81, § 9(e)(2) (1957, 1980 Repl.Vol.). Article 81, § 9(e)(2), supra, as presently codified exempts “[property owned by ... any ... educational ... institutions or organizations ... when ... actually used exclusively for and necessary for ... educational purposes (including athletic programs and activities of an educational institution) in the promotion of the general public welfare of the people of the State.” The Supervisor presents two issues on appeal contending that the tax court’s decision was supported by substantial evidence and, consequently, must be affirmed; and even if regarded as a legal determination, the tax court’s decision must be affirmed because it is correct as a matter of law. Friends School is a private day school located in Baltimore City.

The Supervisor of Assessments assessed the caretaker’s residence at $47,750 for the 1983-84 tax year. The residence was built by the school in the 1940’s specifically to house a caretaker on campus. The caretaker was required to live in the residence as a condition of his employment. Until the assessment in question, the house had always been exempt from property taxes.

Friends School appealed the assessment to the Maryland Tax Court. Applying the decision in Supervisor of Assess ⁵¹² ments of Baltimore County v. Trustees of Bosley Methodist Church Graveyard, 293 Md. 208 , 443 A.2d 91 (1982), the tax court determined that since the caretaker’s residence had no “academic function,” Friends School was not entitled to a tax exemption for the property. The court did not find whether the property was “actually used exclusively for and necessary for ... educational purposes ... in the promotion of the general public welfare of the people of the State” as required under Art. 81, § 9(e)(2), supra. The circuit court, applying Maryland State Fair and Agricultural Society, Inc. v. Supervisor of Assessments of Baltimore County, 225 Md. 574 , 172 A.2d 132 (1961), reversed the tax court’s decision.

The circuit court reviewed the evidence presented to the tax court and found that the caretaker’s residence “[was] both essential and necessary for the operation of Friends School.” The Supervisor appeals to this Court. The Association of Independent Maryland Schools filed an amicus curiae brief in support of Friends School. When reviewing a tax court decision, Md.Code Ann. Art. 81, § 229(o) (1957, 1980 Repl.Vol., 1985 Cum.Supp.) requires that a reviewing court “shall affirm the Tax Court order if it is not erroneous as a matter of law and if it is supported by substantial evidence appearing in the record.” Consequently, under § 229(o), supra, “the judicial review of decisions of the Maryland Tax Court is severely limited.” Comptroller of the Treasury, Income Tax Division v. Diebold, Inc., 279 Md. 401, 407 , 369 A.2d 77 (1977). We hold that both the tax court and circuit court erred as a matter of law in applying inapplicable precedent and thus we may substitute our judgment under Art. 81, § 229(o), supra.

We will explain. I. TAX COURT’S DECISION The tax court relied on Trustees of Bosley Methodist Church Graveyard, supra, to support its decision that the caretaker’s residence was taxable. In that case, Bosley ⁵¹³ Methodist Church and St. John’s United Church of Christ were denied tax exemptions for caretakers’ residences owned by the churches under Md.Code Ann. Art. 81, § 9(c) (1957, 1980 Repl.Vol.). Subsection (c), supra, exempts property owned by a religious group or organization actually used for public religious worship or educational purposes.

The Court of Appeals in Bosley, supra, only interpreted the “actually used” and “public religious worship” language. The interpretation of the “educational purposes” clause was not addressed. Although we adopt the Court’s definition of the phrase “actually used,” the tax court’s reliance on Bosley, supra, was erroneous. That case involved an exemption for property used for “public religious worship.” In the case sub judice, the applicable exemption is codified under subsection (e)(2), supra, the exemption for property used and necessary for “educational purposes.” The exemption for property used for “public religious worship” interpreted in Bosley, supra, is clearly distinguishable from the exemption for property used and necessary for “educational purposes” implicated in the case before us.

Moreover, the omission of the “necessary for” language from subsection (c), supra, indicates that subsection (c) and subsection (e) are not analogous. In addition, in the case sub judice the tax court determined that the caretaker’s residence had no “academic function,” whereas Art. 81, § 9(e)(2), supra, requires a determination of whether the property is actually used and necessary for “educational purposes.” Since there can be a distinction between “academic function” and “educational purposes,” the tax court erred as a matter of law in applying the wrong standard. Accordingly, the circuit court was permitted to substitute its judgment for that of the tax court.

II

CIRCUIT COURT DECISION The circuit court relied in part on the test enunciated in Maryland State Fair, supra, to overturn the tax court ⁵¹⁴ decision. In Maryland State Fair, supra, the Court of Appeals interpreted the language of the statute then in force which permitted, inter alia, a tax exemption for property owned and used by an educational institution which was “necessary for the respective uses” of that institution. Md.Code Ann. Art. 81, § 9(8) (1957). The Court of Appeals explained that in Maryland State Fair, supra, it was construing the “necessary for the respective uses” clause of the statute.

Maryland State Fair, supra 255 Md. at 579, n. 1, 172 A.2d 132 . As we discuss infra, the substance of this language was changed in 1972 with the enactment of the current exemption for educational institutions codified at Art. 81, § 9(e)(2), supra. The interpretation by the Court in Maryland State Fair, supra, therefore, is no longer applicable. Consequently, the circuit court erred as a matter of law in relying on this decision to reverse the tax court’s determination.

Accordingly, in reviewing this matter this Court may substitute its own judgment. III., SOURCES OF STATUTORY INTERPRETATION The statute under consideration, § 9(e)(2), supra, exempts, inter alia, that property owned by and actually used exclusively for 1 and necessary for the educational purposes of a school. The question of what constitutes an “educational purpose” under § 9(e)(2), supra, has not been addressed by either the Legislature or the appellate courts of this State. For guidance in interpreting this phrase, we examine several sources including the legislative history of § 9(e)(2), supra, previous decisions applying this statute, and out-of-state applications of similar statutory provisions. ⁵¹⁵ In establishing a standard, we note that unlike the construction rules applicable to tax statutes in general, “statutory tax exemptions are strictly construed in favor of the taxing authority and if any real doubt exists as to the propriety of an exemption that doubt must be resolved in favor of the State.” Perdue, Inc. v. State Department of Assessments and Taxation, 264 Md. 228, 232-33 , 286 A.2d 165 (1972).

(Emphasis in original) In fact, the Code itself mandates that property tax exemptions must be strictly construed. Md.Code Ann. Art. 81, § 9(a), supra. They must, however, be construed fairly so as to give expression to the legislative intent and purpose. State Tax Commission v. Baltimore Block & Tile Co., 180 Md. 620 , 26 A.2d 371 (1942).

Accordingly, we examine the legislative history behind Art. 81, § 9(e)(2), supra. Legislative History In 1972, several exemptions previously scattered throughout the Code were combined into Art. 81, § 9(e), supra. This included the exemption at issue for educational institutions and organizations. Within the exemption for educational institutions, the word “actually” was inserted before the word “used” and the “necessary for the respective uses thereof” language was changed to read “necessary for ... educational purposes.” Appellant argues that these changes served to narrow the exemption and that the previously exempted caretaker’s residence was, thus, taxable.

The 1970 Report of the Maryland Legislative Council on Taxation and Fiscal Matters provides the sole legislative history. In the general discussion, the Report notes the rapid growth in the number of exemptions and the resultant erosion of the property tax base. Id. at 93. This discussion indicates an intent on the part of the Legislature to narrow the existing exemptions.

Therefore, all property which was exempt under the previous statute would not necessarily be exempt under the revised statute. Moreover, in interpreting the phrase “actually used,” the Bosley Court ⁵¹⁶ stated: “It is generally agreed that the insertion of the term ‘actually used’ in a statute which grants an exemption from taxation based on the use of the property significantly limits the range of exempt property.” (Citations omitted) Bosley, supra 293 Md. at 215 , 443 A.2d 91 . Although we conclude that the Legislature intended to narrow the exemption for property owned by educational institutions and organizations, we do note that both the statute and legislative history are devoid of any definition or explanation of the term “educational purposes.” Previous decisions applying § 9(e)(2), supra, are equally barren. Previous Decisions by Maryland Tax Court and Circuit Court Under § 9(e)(2) Appellee cites two opinions since the 1972 statutory changes which upheld exemptions for residences on school property and argues that they are controlling.

We point out that while these decisions are not binding on this Court, we do find them instructive. In Supervisor of Assessments of Montgomery County v. London School Corporation, No. 49247 (February 27, 1979), the circuit court affirmed exemptions for five residences housing four faculty members and the headmaster at a private day school. The faculty residences were used for tutoring, student guidance meetings and faculty socials. The headmaster’s house was also used for student and faculty meetings.

The recreation room in his house was open for use to the senior class at all times. The circuit court, therefore, concluded that the tax court could reasonably have found that the residences were primarily used for the broader educational purposes of the school. In Supervisor of Assessments of Baltimore City v.