Commonwealth of kentucky department of revenue office of property valuation



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PROPERTY EXEMPTION

GUIDELINES

COMMONWEALTH OF KENTUCKY

DEPARTMENT OF REVENUE

OFFICE OF PROPERTY VALUATION


DECEMBER 2010


PROPERTY EXEMPTION GUIDELINES


FOREWORD

The Office of Property Valuation has prepared this manual to provide a source of information for all Property Valuation Administrators concerning property tax exemptions including ad valorem tax laws and court decisions, office procedures, and departmental policies. This is part of our continuing effort to give assistance to the Property Valuation Administrators.


The administration of property tax laws is a complex task, and no manual could contain all the necessary information. This manual has been structured to provide the basic information which should be quickly accessible to those charged with administration of exemptions relating to ad valorem tax.
Our intent is to constantly review this manual, with revisions being made whenever needed to maintain the information in an up-to-date form. We welcome any comments or suggestions concerning possible improvement.

CONTENTS PAGE
I. PROPERTY EXEMPTION BASIS
A. Kentucky Constitution-Section 170 1

B. Kentucky Constitution-Section 171 2


II. PUBLIC PROPERTY USED FOR PUBLIC PURPOSES

A. Scope of Exemption 4

B. Court Cases and Attorney General Opinions 6
III. INSTITUTIONS OF RELIGION

A. Scope of Exemption 8


IV. INSTITUTIONS OF PURELY PUBLIC CHARITY

A. Scope of Exemption 10

B. Court Cases and Attorney General Opinions 13

V. EDUCATIONAL INSTITUTIONS

A. Scope of Exemption 17

B. Court Cases and Attorney General Opinions 18

VI. PUBLIC LIBRARIES

A. Scope of Exemption 20


VII. HOUSEHOLD GOODS OF A PERSON USED IN HIS HOME

A. Scope of Exemption 21


VIII. PLACES OF BURIAL

A. Scope of Exemption 22


IX. CROPS GROWN IN YEAR ASSESSMENT MADE AND IN HANDS OF PRODUCER 23
X. HOMESTEAD EXEMPTION 24

XI. BONDS OF STATE, COUNTY, MUNICIPALITY, OTHER TAXING SCHOOL DISTRICT (OF KENTUCKY) 25


XII. ADMINISTRATIVE PROCEDURES 26
XII. SITUATIONS 29
XIV FORMS 33

SECTION I

PROPERTY TAX EXEMPTION BASIS
The Kentucky Constitution prohibits exemption of any property of persons except as provided by the Constitution itself.1 Section 170 and a portion of Section 171 of the Constitution set forth the only exemptions permitted for property tax purposes. In administering property tax exemptions, the Property Valuation Administrator should keep in mind one basic principle: taxation is the rule and exemption is the exception and all doubts must be resolved against the exemption and in favor of the tax.2

A taxpayer claiming an exemption should always provide the specific constitutional and statutory authority for the exemption and be able to reference any document that supports the claim of exemption. Neither the Property Valuation Administrator nor the Office of Property Valuation should be required by the applicant to guess or search the application and materials provided to find the necessary information and legal authority to support the claim of exemption. You should always remember that the taxpayer has the burden of proving the exemption applies and all of its requirements have been met. If there is any doubt that an exemption should apply then the doubt should be resolved in favor of not applying the exemption.

Section 170 of the Constitution provides:
"There shall be exempt from taxation public property used for public purposes; places of burial not held for private or corporate profit; real property owned and occupied by, and personal property both tangible and intangible owned by, institutions of religion; institutions of purely public charity, and institutions of education not used or employed for gain by any person or corporation, and the income of which is devoted solely to the cause of education, public libraries, their endowments, and the income of such property as is used exclusively for their maintenance; household goods of a person used in his home; crops grown in the year in which the assessment is made, and in the hands of the producer; and real property maintained as the permanent residence of the owner, who is sixty-five years of age or older, or is classified as totally disabled under a program authorized or administered by an agency of the United States government or by any retirement system either within or without the Commonwealth of Kentucky, provided the property owner received disability payments pursuant to such disability classification, has maintained such disability

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1 Kentucky Constitution, Section 3

2 Mordecai F. Ham Evangelistic Assoc. v. Matthews, 300 Ky. 402, 189 S.W. 2d 524, 168 ALR 1216 (1945)

classification for the entirety of the particular taxation period, and has filed with the appropriate local assessor by December 31 of the taxation period, on forms provided therefor, a signed statement indicating continuing disability as provided herein made under penalty of perjury, up to the assessed valuation of sixty-five hundred dollars on said residence and contiguous real property, except for assessment for special benefits. The real property may be held by legal or equitable title, by the entireties, jointly, in common, as a condominium, or indirectly by the stock ownership or membership representing the owner’s or member’s proprietary interest in a corporation owning a fee or leasehold initially in excess of ninety-eight years. The exemptions shall apply only to the value of the real property assessable to the owner or, in case of ownership through stock or membership in a corporation, the value of the proportion which his interest

in the corporation bears to the assessed value of the property. The General Assembly may authorize any incorporated city or town to exempt manufacturing establishments from municipal taxation, for a period not exceeding five years, as an inducement to their location. Notwithstanding the provisions of Sections 3, 172, and 174 of this Constitution to the contrary, the General Assembly may provide by law an exemption for all or any portion of the property tax for any class of personal property.”

Section 171 in pertinent part states:
". . . Bonds of the state and of counties, municipalities, taxing and school districts shall not be subject to taxation ...”
Thus, Section 170 of the Constitution exempts the following:


        1. Public Property used for Public Purposes

        2. Tangible and intangible property owned by Institutions of Religion and real property owned and occupied by Institutions of Religion

        3. Institutions of Purely Public Charities

        4. Institutions of Education not used or employed for gain by any person or corporation, and the income of which is devoted solely to the cause of education

        5. Public Libraries

        6. Household Goods of a Person Used in His Home

        7. Places of Burial

        8. Crops Grown in Year Made and in Hands of Producer

        9. Homestead Exemption

        10. Bonds of State, County, Municipality, other Taxing School District

Discussions of the foregoing exemptions are provided in Sections Two through Eleven of this manual.


Real property exempt from taxation by Section 170 of the Constitution must be listed in the same manner and at the same time as taxable real property, and the property valuation administrator must maintain an inventory of exempt real property, but such property is not to be placed on the tax rolls. Each property valuation administrator must, under the direction of the Office of Property Valuation, review annually all property listed with him and claimed to be exempt from taxation. All property not exempt shall be placed on the tax rolls.3

Organizations exempt from federal income tax under Section 501(c) are not automatically exempt from Kentucky property tax and they must complete Form 62A023, Application for Exemption from Property Taxation, to determine if they meet all the qualifications to be exempt from Kentucky property tax. For example, if a church that is exempt as a 501(c) does not own the building where they hold services, they would not qualify for an exemption from property tax because they must own and occupy the building.

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3 KRS 132.220(6) & (7)
SECTION Il

PUBLIC PROPERTY USED FOR PUBLIC PURPOSES

To qualify for exemption from property tax under this provision, the property must be:


1. Publicly owned, and

2. Used for a public purpose.


Ownership: The ownership requirement is met when the property is owned by the federal, state, municipal or county government or by an instrumentality or agent thereof.1 However, property owned by a group of private citizens of a community, as trustees, which they have dedicated to the use of a community,2 or property owned by a civic organization and used for the general public is taxable,3 because it is not publicly owned.
Use: The property can be put to an endless variety of uses so long as it is a public use. The Court of Appeals adopted the following definition.
"A public purpose. . .has for its objectives the preservation of the public health, safety, morals, general welfare, security, prosperity, and contentment of all the inhabitants or residents within a given political division."4
Public use includes, for example, providing low-rent public housing,5 water works,6 fire department7 and many others.
Frequently, the statutes state that a particular project is for a public purpose and provides that such project and bonds issued therefore are exempt. The law specifically provides that the following are exempt:
a. Airport revenue bonds8

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1 Com. v. Newport & Covington Bridge Co., 32 KLR 196, 105 S.W. 378 (1907)

2 Opinion, Attorney General, February 3, 1954


3 Opinion, Attorney General, April 3, 1953

4 Spahn v. Stewart, 268 Ky. 97, 103 S.W.2d 651, 1937

5 Webster v. City of Frankfort Housing Commission, 293 Ky.114, 168 S.W.2d 344 (1943)

6 Ryan, et al. v. City of Louisville, et al., 133 Ky. 714, 118 S.W. 992 (1909)

7 City of Owensboro v. Com. ex rel. Stone, 105 Ky. 344, 49 S.W. 320 (1899)

8 KRS 183.650


  1. Bonds issued by Housing Commissions for housing projects9

  2. Road improvement bonds issued by public road districts in counties containing cities of the first class10

  3. Parks, and bonds issued therefore11

  4. War Memorial buildings12

  5. School buildings and revenue bonds issued therefore13

  6. Bonds and property of a metropolitan sewer district14

  7. State Fair Board Bonds15

  8. State warrants16

  9. Teachers Retirement System funds17

  10. Turnpike property and bonds18

  11. Bridges built by an adjoining state or by the U.S. provided the adjoining state does not tax similar bridges built by the Commonwealth19

  12. All properties, both real and personal, acquired by a city or county and rented or leased to an industrial concern is considered as other public property used for public purposes20

The Supreme Court of Kentucky has ruled that a lessee may have a taxable leasehold interest in real property leased from a government body or exempt institution.21 On the other hand, the Kentucky Supreme Court has ruled that publicly owned property, although used by private companies, where the income is used for public purposes, is exempt from taxation.22

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9 KRS 80.560

10 KRS 184.260

11 KRS 97.160

12 KRS 97.670

13 KRS 162.190 & 162.300

14 KRS 76.210

15 KRS 247.180

16 KRS 41.200

17 KRS 161.700

18 KRS 177.510

19 KRS 132.205

20 KRS 103.285

21 Kentucky Tax Commission, et al. v. Jefferson Motel, Inc., 387 S.W.2d 293 (1965). Also, see Kentucky Department of Revenue v. Hobart Manufacturing Co., Ky. 549 S.W.2d 297 (1977)

22 Layne v. Kentucky Board of Tax Appeals (3/5/76)

The following is a summary of previous court cases and attorney general opinions regarding public property used for public purposes:

Property must be publicly owned to be exempt from taxation as public property used for a public purpose. The Inter-County Rural Electric Cooperative Corporation owned certain property which it sought to have exempted from taxation. The cooperative corporation was the owner and operator of an electric distribution system. Any person could become a member of this corporation provided he paid a membership fee, agreed to purchase electric energy from the corporation, and provided that he met with the approval of the Board of Directors or a majority of the membership. The court held the property subject to taxation pointing out that such property must be owned by a collective body of a state or community.23

Leasehold in exempt property taxable: Jefferson Motel constructed a motel on property leased from the Jefferson County Air Board. Assessment was sought on the improvements constructed by Jefferson but was overruled by the Court. However, the Court said when the lessor is exempt from ad valorem taxes, the nonexempt lessee's contract right is taxable if it has a fair cash value.24
Several properties of the Commonwealth of Kentucky, Jefferson County and/or the Louisville and Jefferson County Air Board were leased to private enterprises. The property valuation administrator took the position that, while the property was publicly owned it was not being used for a public purpose as required by the Constitution. The Court held the property to be exempt because all income received by the government from such private use was used for a public purpose.25
Parking meters owned by a city are exempt from ad valorem tax but if they are owned by the manufacturer or distributor and leased or rented to the city, they are taxable to the manufacturer or distributor.26
A municipally-owned water works is exempt. A water works, owned and operated by a city for the benefit of its inhabitants is used for public or governmental purposes, and is therefore exempt from taxation.27 This is true even though the water works owned and operated by a city supplying its own inhabitants also supplies neighboring towns, cities and individuals when the income received is applied to a public purpose. The fact that a city furnishes water to neighboring towns does not affect its public character.28

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23 Inter-County Rural Electric Cooperative Corporation v. Reeves, 294 Ky. 458, 171 S.W.2d 978 (1943)

24 Kentucky Tax Commission v. Jefferson Motel, 387 S.W.2d 293 (1965)


25 Lawrence P. Layne v. Kentucky Board of Tax Appeals Memorandum Decision of the Supreme Court, March 5, 1976

26 OAG, September 10, 1947

27 Ryan et al. v. City of Louisville et al., 133 Ky. 714, 118 S.W. 992 (1909)

28 District of Highlands v. City of Covington, Kentucky, 164 Ky. 815, 176 S.W. 192 (1915)

Realty acquired and bonds issued by the City of Frankfort Housing Commission are exempt from taxation. The Court refused the argument of the city that a housing project is not property used for a public purpose. The Court said that ridding a community of unsafe, unsanitary and crime festering habitations and supplying low-rent quarters, is to the benefit of the general public and therefore, such property is being used for a public purpose.29
Municipally-owned property held by a city solely for resale is taxable. Property acquired by a city at a commissioner's sale to satisfy tax and improvement liens and held by the city solely for resale was not exempt from taxes under the constitutional provision exempting from taxation property held for a public purpose.30
A market place and stalls owned and maintained by a city where gardeners and meat vendors sell their goods and pay to the city a small rental charge are exempt. The Court said that regulation and maintenance by the city of the area was for the protection of the public health and that the income received was used to help defray costs of maintaining the area and was not a revenue producing measure.31
A municipal airport owned by the City of Ashland is exempt from ad valorem taxes even though the property is located in an adjoining county.32

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29 Webster v. City of Frankfort Housing Commission, 293 Ky. 114, 168 S.W.2d 344 (1943)


30 City of Paducah v. Commonwealth ex rel. Oates, 297 Ky. 107, 118 S.W.2d 982 (1944)

31 City of Paducah v. Commonwealth, 136 Ky. 232, 124 S.W. 286 (1910)

32 OAG, November 30, 1950

SECTION III

INSTITUTIONS OF RELIGION
Under Section 170 of the Constitution,
". . . real property owned and occupied by, and personal property both tangible and intangible owned by, institutions of religion; . . .”
is exempt.
Vacant land owned by a church held for future expansion is not considered occupied by the church and therefore is not exempt. Real property must be both owned and occupied for the exemption to apply. To be considered occupied by the church, the property must be used by the church, even if the use is not regular or continuous.
Real property owned by the church but rented out to individuals or commercial enterprises is taxable, despite the fact that the rental income is used to pay down the mortgage on the property. The church owns but does not occupy the real property when residential rental income is paid into the church’s building fund. 1
The most recent court decision involving church property was Freeman v. St. Andrews Orthodox Church, Inc., the Supreme Court decision said:

“In keeping with this endeavor, we recognize that churches are unique. For the most part, they are never “occupied” in the conventional sense. A vast majority of properties owned by “institutions of religion” such as churches, mosques, tabernacles, temples and the like, are used for places of worship at specified times and may remain vacant for substantial periods during the week. We further recognize that adjacent facilities, such as activity buildings, gymnasiums, even shelters, may be owned by religious institutions but perhaps utilized irregularly on an as needed basis. School buildings owned by religious institutions may, in fact, sit idle for a great deal of time. This would not preclude these buildings from being “occupied” under Section 170 of Kentucky’s Constitution.”2

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1 Freeman v. St. Andrews Orthodox Church, Inc., Ky. 294 S.W.3rd 425 (2009)

2 Freeman v. St. Andrews Orthodox Church, Inc., KY. 294 S.W.3rd 425 (2009)

Personal Property: Tangible and intangible personal property owned by the church is exempt.3
Tangible property leased by a church (copiers, computers, etc.) is taxable to the owner (lessor). However, if the lessee (church) is obligated to purchase the property at the expiration of the lease (i.e. capital lease), the property would be exempt because it would be deemed to be owned by the church.

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3 Sec. 170 KY. Const.

SECTION IV

INSTITUTIONS OF PURELY PUBLIC CHARITY
In order to qualify the institution must:


  1. Be a public charity instead of private charity, and

  2. Be nonprofit.


Purely Public Charity: has been defined as:
"Whatever is done or given gratuitously in relief of public burdens or for the advancement of the public good, is a public charity. Where the public is the beneficiary, the charity is public, and where no private or pecuniary return is reserved to the giver or to any particular person, but all the benefit resulting from the gift or act goes to the public, it is a purely public charity; the word 'purely' being equivalent to wholly."1
Thus, an institution will not be considered one of purely public charity when its operations will result in private profit or gain.

The following factors should be considered when determining whether an organization is charitable:

The stated purpose of the organization

The actual work performed

The extent to which the work performed benefits the community and the public in general

Whether a substantial and indefinite class of persons are benefited

Whether the charity is dispensed to all who need and apply for it

Whether a substantial portion of its services are donated or rendered gratuitously or whether recipients of its services are required to pay

The amount of support provided by donations

Whether some burden of government is relieved

Whether the income received produces a profit

To whom assets would go upon dissolution

Whether the charity provided is based on need

Ownership by the institution claiming exemption is one requirement to be fulfilled in establishing the right for exclusion from the levy of the ad valorem tax.

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1 Kentucky Female Orphan School v. City of Louisville, 100 Ky. 470, 36 S.W. 921 (1896)

Use: A variety of uses have been considered for this exemption some of which are summarized below:
Hospitals: A non-profit hospital is exempt even though it charges patients, if the object for which it was founded is the general public good.2
Fraternal or benevolent organizations such as The Odd Fellows, Elks, Masons, American Legion, and VFW are not purely public charities and are not exempt from taxation.3 Their primary purpose is social and their charitable work, outside of that bestowed on themselves and their families, is incidental only.
However, where a lodge maintains a home for widows and orphans of deceased members of the lodge, and funds have been irrevocably dedicated to the use of such homes and cannot be used for the local lodge itself, such funds and real property irrevocably dedicated to the home is exempt, even though it is limited to widows and orphans of its members. 4
Boy and Girl Scout organizations are tax exempt as a charity.5 Country clubs whose purpose is social and not charitable are not tax exempt.6
Civic organizations, such as, Rotary, Lions, etc., even though their work is certainly worthwhile, are nevertheless, not entitled to exemptions since they are not open to the public and require membership.7
Income producing property: income producing property of a purely public charitable institution is exempt when there is no private gain and when it is used solely for charitable purposes in this state.8

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2 City of Dayton v. Trustees of Speers Hospital, 165 Ky. 56, 176 S.W. 361 (1915)


3 City of Newport v. Masonic Temple Association, 108 Ky. 333, 56 S.W. 405 (1900); Merrick Lodge No. 31, IOOF v. City of Lexington, 175 Ky. 275, 194 S.W. 92 (1917); Benevolent Association of Elks v. Wintersmith, 204 Ky. 263 S.W. 670 (1924)

4 Widows' and Orphans’ Home of Odd Fellows v. Com., 126 Ky. 386, 103 S.W. 354 (1907); Trustees of Widows' and Orphans' Fund of Beattyville, Lodge No. 304 IOOF v. Blount, 222 Ky. 717, 2 S.W.2d 394 (1928)

5 Opinion, Attorney General, October 7, 1969 (OAG 69-526)

6 Opinion, Attorney General, March 22, 1951

7 Opinion, Attorney General, April 3, 1953

8 Mason Co. v. Hayswood Hospital of Maysville, 167 Ky. 17, 179 S.W. 1050 (1915)

A foundation whose activities were all of a charitable nature was an institution of purely public charity though it had not augmented all its stated charitable purposes and though its activities, which included a park, nature center and nature museum, did not fulfill basic human needs such as alleviation of hunger and providing clothing, shelter and medical care to the poor.9


A nonprofit medical laboratory corporation performing services for nonprofit tax exempt hospitals is a purely public charity.10
A nonprofit corporation providing housing to low and moderate income families of elderly or handicapped persons is an institution of purely public charity.11

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9 Commonwealth ex rel. Luckett v. I. W. Bernheim Foundation, Ky. 505 S.W.2d 762 (1974)

10 Department of Revenue, Commonwealth of Kentucky v. Central Medical Laboratory, Inc., Ky. App., 555 S.W.2d 632 (1977)


11 Steve Banahan, Property Valuation Administrator of Fayette County v. Presbyterian Housing Corporation and Emerson Center, Inc., Ky. 553 S.W.2d 48 (1977)
The following is a summary of court cases and attorney general opinions regarding Institutions of Purely Public Charities:
Purely public charity has been defined as:
Whatever is done or given gratuitously in relief of public burdens or for the advancement of the public good, is a public charity. Where the public is the beneficiary, the charity is public, and where no private or pecuniary return is reserved to the giver or to any particular person, but all the benefit resulting from the gift or act goes to the public, it is a purely public charity; the word “purely" being equivalent to wholly.12
Benevolent associations, such as Odd Fellows. Elks, Masons, are not institutions of purely public charity. They are private charities since their primary purpose is social instead of charitable, their charitable work being only incidental.13
In Commonwealth of Kentucky. ex rel. James Luckett v. Grand Lodge of Kentucky Ancient Order of Free and Accepted Masons, the Kentucky Court of Appeals ruled that the administrative headquarters building containing offices and space for soliciting funds for charitable homes was exempt from ad valorem taxes.14
This does not change the status of local lodges, which are still considered as taxable.

Property of a fund irrevocably dedicated by local lodge to a home for widows and orphans of members is exempt. The Independent Order of Odd Fellows maintains a home for the widows and orphans of deceased members of the order. The local lodge accumulated a fund for the benefit of the institution, and this fund is dedicated solely to the support and maintenance of the home. It was not used in any way for the local lodge. but it was irrevocably dedicated to the home. Part of the fund was used to purchase a lot upon which a garage was built. A small income was received, and it was applied solely to the charity. No private gain was derived from use of the property. The city sought to tax the lot, and the trustee of the fund claimed exemption. Held: exempt. The Court pointed out that it was not the origin of ownership of property, but the use to which it is put that determines immunity from taxation. Therefore, the property of the fund irrevocably dedicated to a home for widows and orphans is exempt even though the recipients of the charity are limited to widows and orphans of deceased members of the lodge.15

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12 Kentucky Female Orphan School v. City of Louisville, 100 Ky. 470, 36 S.W. 921 (1896)

13 City of Newport v. Masonic Temple Association, 108 Ky. 333, 56 S.W. 405 (1900); Merrick Lodge No. 31, IOOF v. City of Lexington, 175 Ky. 275, 194 S.W. 92, (1917); Benevolent Association of Elks v. Wintersmith, 204 Ky. 20, 263 S.W. 670 (1924)

14 Commonwealth v. Grand Lodge of Kentucky, 459 S.W.2d 601 (1970)

15 Trustees of Widows and Orphans' Funds of Beattyville Lodge No. 304, Independent Order of Odd Fellows v. Blount, 222 Ky. 717, 2 S.W.2d 394 (1928)

A corporation whose sole object is to provide a suitable home for widows and orphans of deceased members of a fraternal organization is exempt. The Widows and Orphans Home of Odd Fellows of Kentucky was incorporated for the sole purpose of providing a suitable home for the destitute widows and orphans of members of Odd Fellows. It owned certain real estate in Fayette County and a note for $4,000 which it sought to have declared exempt on the ground that it was an institution of purely public charity. Held: exempt.16
Society for the Prevention of Cruelty to Animals held exempt from ad valorem tax where the property is used solely for the purpose of promoting the interest of the society.17
Income-producing property of a hospital is exempt. Invested funds of a hospital, incorporated as a charitable corporation, the income of which is used solely for hospital expenses, are exempt from taxation when no private gain is derived by an individual or corporation and when the hospital provides free care for indigent patients.18

A wildlife sanctuary is an institution of charity. Property of Isaac W. Bernheim Foundation, financing the development and maintenance of Bernheim Forest Park as a place of recreation, free to all, and providing a wildlife sanctuary is not subject to ad valorem tax, it being an institution of charity. The Court said, "Charity is broader than relief to the needy and includes activities which reasonably better the conditions of mankind."19

A nonprofit corporation providing housing to low and moderate income families of elderly or handicapped people is an institution of purely public charity Property owned by the Presbyterian Housing Corporation and Emerson Center, Inc., and whose income was used solely to continue the operation of the projects and low cost housing programs of the nonprofit corporation was held to be exempt from ad valorem taxes.20
Central Medical Laboratory, a nonprofit medical laboratory corporation, organized as a testing facility for three nonprofit tax exempt hospitals performed services previously provided by the hospitals. The Court of Appeals held the corporation to be a purely public charity.21

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16 Widows’ and Orphans' Home of Odd Fellows v. Commonwealth, 126 Ky. 386, 103 S.W. 354 (1907)

17 OAG, August 9, 1951

18 Mason County v. Hayswood Hospital of Maysville, 167 Ky. 17, 179 S.W. 1050 (1915)

19 Commonwealth of Kentucky, Department of Revenue v. Isaac W. Bernheim Foundation, Inc., Ky. 505 S.W.2d 762 (1974)

20 Steve Banahan, Property Valuation Administrator of Fayette County, v. Presbyterian Housing Corporation and Emerson Center, Inc., Ky. 553 S.W.2d 48 (1974)

21 Department of Revenue, Commonwealth of Kentucky v. Central Medical Laboratory, Ky. App. 555 S.W.2d 632 (1977)

Assessment of improvements to the lessee under fifty year lease. In 1922, the Louisville Garage Corporation leased from the Protestant Episcopal Orphans Asylum, for a term of fifty years, a lot on Fifth Street, between Chestnut and Broadway in Louisville. The Orphans Asylum was a charitable organization. The contract of lease provided for the payment of rent in monthly installments. The lessee agreed to raze the existing improvements located on the lot, and to commence, within a year, to complete new improvements on the property at a cost of not less than $75,000. The lessee obligated itself to take out fire and tornado insurance in the full value of the improvements. In the event of destruction or damage by fire or tornado, the proceeds of the insurance must be used to reconstruct the improvements on the property. The lease provided that the improvements on said property were to belong to the lessor at the expiration of this lease without cost. The lessee erected a two story brick sales and service garage at a cost of more than $75,000. Sometime after the completion of the building, the Louisville Garage Corporation leased the land and improvements to Louisville Motors, Inc. The City of Louisville assessed the improvements at $45,000 and the land at $18,600 and issued tax bills on the improvements in the name of the Louisville Garage Corporation. The Louisville Garage Corporation claimed immunity from taxation on the theory that the ownership of the improvements was not in it, but was in a charitable institution, and the property, therefore, was exempt from taxation under Section 170 of the Constitution. The lower Court held that the land leased by the charitable institution was exempt, but that the improvements during the term of the lease belonged to the lessee and were, therefore, taxable. The Court of Appeals said that the general rule is that in the absence of an agreement to the contrary, the owner of real estate is the owner of improvements erected thereon by another. The Court, however, recognized severance of ownership of land from the improvements thereon, and held that the Louisville Garage Corporation, for the purpose of taxation, was the owner of the improvements and, therefore, liable for the tax.22


Lessee's interest in improvements valued according to deprivation clause contained in twenty year lease. The City of Louisville sought to collect taxes assessed against a building on land leased for a term of twenty years to Steiden Stores by the Children's Free Hospital, an exempt institution. Steiden Stores leased a valuable lot with forty foot frontage on Fourth Street in Louisville and a high type store building located thereon, the building having, prior to April 1, 1936, and prior to any conveyance of the property to the Children's Free Hospital, been erected on this lot by Steiden Stores at a cost of about $20,000. The lot, which was owned by the charity, had an assessed valuation of $137,600, while the building had an assessed valuation of $20,000. The lease provided that, in the event of a loss of the property through condemnation proceedings, Steiden Stores was to be paid out of the resulting condemnation award stated amounts which decreased yearly, e.g., $20,000 if possession was lost by Steiden during 1936, $19,167 if possession was lost by Steiden during 1937, $1,500 if possession was lost by Steiden during 1950. The lease further provided that

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22 Louisville Garage Corporation v. City of Louisville, et al., 303 Ky. 553, 198 S.W.2d 40 (1949)

Steiden would have no part of any condemnation award if it lost possession through condemnation proceedings after the year 1950; that the building must be insured to the extent of $20,000, but the insurance premiums must be paid by Steiden; that any payable insurance must be paid to the hospital and, that the hospital must make such collective funds available to Steidens for immediate restoration of the building following its damage or destruction. It further provided that the hospital may, at its own election, after January 1, 1940, cancel the lease, provided the hospital had a valid opportunity to sell the property; and further provided that in the event of a loss of the property through such cancellation by sale, Steiden Stores should be compensated for the years 1940 through 1950 on the same basis as the ones set out in the deprivation schedule mentioned before, but that Steiden would have no deprivation compensation it if lost, through cancellation by sale, possession after the year 1950. Steiden was to pay all expenses of maintenance and repairs, and had the full right to assign or to sublet the property during the term of the lease without the hospital's consent. The lease specified that the improvements would become the property of the hospital upon termination of the lease by lapse of time or by other means; that the hospital would have a lien on Steiden's interest under the lease as security for fulfillment of the lessee's obligation; that Steiden and the hospital would share jointly and equally the expense of any construction, such as sidewalks and sewers required by a governmental authority; and that Steiden could further improve or alter the leased store building only upon the written consent of the hospital.

The Court recognized the differences between this case and earlier cases in which the Court had decided that the improvements, for tax purposes, were owned and thus taxable to the lessee. They pointed out that the Steiden lease was a mere 20 year contract, that the building was erected before the lease was executed, rather than subsequent thereto, and that the condemnation provision under consideration provided that any compensation after 1936 would be paid to the lessee in partial and varying amounts which amounts diminished with the diminishing tenure of the lease. The Court held that Steiden, as lessee, was liable for the tax to the extent of value fixed in the deprivation clause, but pointed out that deprivation schedules of some leases might not necessarily furnish accurate indexes of the true ownership of the improvements on such leases and that each lease must necessarily be construed individually. The Court further said, "However, there is one fundamental rule of construction which must, we believe, be followed in all cases of this kind. That fundamental rule is that any lease involving the possibility of a tax exemption must be construed so strictly as to defeat such a possibility if this can be done and still leave the Court in the position of an interpreter instead of a maker of the contract.”23

23 Steiden Stores v. City of Louisville, 303 Ky. 637, 198 S.W.2d 983 (1947)



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