Commonwealth v. Trustees Hamilton College

Opinion op the Court by John D. Carroll, Commissioner Affirming. This is an effort hy the commonwealth, through its auditor’s agents, to tax the property of Hamilton College for the years 1898 to 1902, inclusive, it being conceded that the property thus sought to bn taxed was not assessed or taxed for the years named. The appellee claims that it is exempt from taxation under section 170 of the Constitution, providing in part that “there shall be exempt from taxation * * * 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.” The following agreed state of facts is filed with the record: “It is agreed between the parties hereto that the following .facts are to be taken as true in the — 332 — consideration of this ease: That during the years-1898, 1899, 1900, 1901, 1902, and on the 15th day of each of said years, the property under consideration, which is sought to be assessed for taxation, was run by Prof. B. C. Hagerman at a yearly rental of $-, and that during said years, and on the 15th day of each of said years, and during the months of January and June, inclusive, of the year 1903, the said Hagerman conducted said school as a private enterprise, and that he secured therefrom a personal pecuniary profit over and above the rental paid to said corporation, which profit was used by him for his own personal benefit.” It was further agreed that during the years mentioned, and for many years prior thereto, “Hamilton College has never declared any dividend on its capital stock, and that no one of its officers or stockholders as such has ever received any personal profit from the rental or other funds or revenues derived from said school or property, and that all said rents or revenues have -used in paying interest on the mortgage debt, and maintaining the school known as Hamilton College, and for the repairs and betterment of said college property;” and that during said years a majority of the stock in the college was owned by the Kentucky University, which is purely an educational institution, not used or employed for gain by any person or corporation, its income being devoted solely to the cause of education.” Appellant bases its right to tax this institution for the years mentioned upon the theory that during those years it was leased to a private individual, who conducted it as a private school, and made for his own benefit a pecuniary profit therefrom over and above the amount of rental paid to the trustees of the college. It is therefore argued that during those years — 333 — Hamilton College was not “an institution of education not used or employed for gain by any person or corporation;” but, on the contrary, was used and enjoyed by an individual who made profit therefrom for his private and personal gain. And it is said that if educational property used in this manner can be exempted from taxation, that all the private schools and educational institutions in the State now being operated for private gain, and hence subject to taxation, will become incorporated institutions and lease their property to same favored person, the stockholders not deriving from the lease any benefit, but securing by the arrangement, exemption of the property from taxation. For appellee it is said, and the agreed statement of facts show, that no dividend was ever declared on the capital stock of the college, and. that none of its officers or stockholders ever received any personal profit from the rental or other revenue derived from the property, and that all the rents or revenues received were used in paying interest on its debts, and for the maintaining and repairing the property, thereby devoting them to the cause of. education. The words “private gain,” as used in the Constitution, have reference to gain by the person, corporation, or its stockholders who own the property, and not a lessee. The constitutional test of exemption from taxation depends, not upon the question whether some lessee of the property makes a profit as a result of his efforts, but whether or not any person or corporation who owns or has a pecuniary or financial interes 1 in the educational institution, derives from it any private gain. An institution of education not used or employed for gain by any person or corporation owning, holding, or controlling the property, and the income — 334 — of which, when received by them is devoted to the cause of education, will be exempt from taxation, although the person or corporation who does own it may lease the property to an individual who derives some private gain or profit from the arrangement. If the owner of a private school now subject to taxation should organize a corporation under an arrangement by which the corporation or its stockholders should not receive any profit from the property or the conduct of the institution, but should rent the property to the person who owned it before the corporation was formed, permitting him to make and receive the income, we would have no hesitation in holding that a scheme or device of this character would not be permitted to exempt the property from taxation. .But, in the ease before us, the arrangement or contract under which the property is leased or managed is free from any suspicion that it was made either to escape taxation or to result in private gain to the real owners of the property. If the trustees of Hamilton College during the years mentioned had not leased the property to Hagerman, but managed and controlled it themselves, it is conceded that it would be exempt from taxation; and the mere fact that it was in good faith, and not with any purpose of obtaining exemption., leased to him during this period, will not affect its status under the revenue laws of the State, or result in causing the property to be assessed for taxation. The Constitution does not mean that no person connected with an educational institution shall not receive private gain. This interpretation would result in nullifying completely the constitutional provision allowing exemptions to educational institutions; because there are persons connected with every edu — 335 — cational institution in the State in some capacity or other who receive from it private gain, such as principals, teachers, and employes. But, so long as the institution is not used or employed for gain by any person or corporation or the stockholders of any corporation who own it, and the income derived from it is devoted solely to the cause of education, it will be exempted, although other persons may derive gain and profit from its conduct and operation. This construction of the Constitution is in entire harmony with the rulings of this court upon this question. Trustees of Female Orphans’ School v. City of Louisville, 100 Ky. 470, 36 S. W. 921, 19 Ky. Law Rep. 1091, 40 L. R. A. 119; City of Louisville v. Southern Baptist Theol. Sem., 100 Ky. 506, 19 Ky. Law Rep. 110, 36 S. W. 995; Comth. v. Gray, 25 Ky. Law Rep. 52, 74 S. W. 702, 115 Ky. 665; Comth. v. Pollit, 76 S. W. 412, 25 Ky. Law Rep. 790; Commonwealth v. Y. M. C. A., 76 S. W. 522, 25 Ky. Law Rep. 940, 116 Ky. 711, 105 Am. St. Rep. 234; German Gym. Ass’n v. City of Louisville, 80 S. W. 201, 25 Ky. Law Rep. 2105, 117 Ky. 958, 65 L. R. A. 120, 111 Am. St. Rep. 287; City of Louisville v. Werne, 80 S. W. 224, 25 Ky. Law Rep. 2196; Louisville College of Pharmacy v. City of Louisville, 82 S. W. 610, 26 Ky. Law Rep. 825. From these various decisions it may be gathered that it is the purpose of the State under its tax laws to deal liberally with and foster and encourage all charitable and educational institutions when their conduct and operation does not result in private gain to the persons or corporations or the stockholders therein that own them; and when all the income derived from educational institutions is devoted solely to the cause of education. But the spirit in which this exemption from the bur — 336 — dens of taxation is allowed cannot be trifled wtb or evaded by any scheme or device that might defeat the purpose of the exemption, and enable persons owning or having an interest in the institution to reap some private gain or profit from its conduct. The judgment of the lower court' is affirmed.