By PETER HUSSMANN
The Iowa Supreme Court today upheld the district court's and state appeals court's rulings that allows the owners of two multi-unit apartment complexes in southwest Newton to have the properties classified as residential for property tax purposes, a move representatives of statewide city governments warned could cost cities across Iowa tens of millions of dollars in property taxes each year.
The case arose in 2008 when Larry and Connie Krupp of Nevada appealed to the Jasper County Board of Review the assessments and property classifications on two 24-unit apartment buildings the couple own in Newton. While the Board of Review agreed to lower the assessments at that time, it denied the Krupps' request to have the properties classified as multiple unit housing cooperatives, a move that would allow for a residential rather than commercial classification for property tax payment purposes.
The Krupps appealed the Jasper County Board of Review's decision to the district court. In February 2009, the district court sided with the Board of Review stating there was a lack of proof the apartment buildings were actually operating as multiple housing cooperatives instead of standard rental properties. However, two months later the court changed its ruling after documentation was produced that showed to the judge's satisfaction the Krupps were operating within the parameters of the state's cooperatives law.
The Jasper County Attorney's Office appealed the district court's ruling to the Iowa Court of Appeals. In December 2009, a divided court ruled in favor of the Krupps. Jasper County then asked the Iowa Supreme Court for further review, a request granted by state's high court in April 2010.
In its ruling today, the Supreme Court noted a 1995 case out of Newton where Wesley Retirement Services asked the court to classify its Park Centre property in Newton as residential rather than commercial. At that time, the court reasoned that since the tenants living in Park Centre "have no rights to ownership or management of the enterprise," they should not receive the residential property tax benefit.
However, a few weeks before the decision the Iowa Legislature amended the Iowa Code section pertaining to residential cooperatives to define that "all land and buildings of multiple housing cooperatives organized under Chapter 499A" should be treated as residential propreties, a move that allowed for Park Centre to be categorized as residential rather than commercial property.
On appeal, Jasper County concedes the Krupp properties are properly organized under Chapter 499A. However, the county urged the court to look at the "actual use" of the properties.
"According to the (Jasper County Board of Review), the court should utilize the 'actual use' test to inquire if the property's operation is solely to circumvent current tax classifications and to avail themselves of reduced tax assessments," the ruling states. "The board argues the purpose of Chapter 499A is to band together occupants to own, manage, and operate the structure for residential purposes, not for the commercial purpose of leasing out property to subtenants."
Attorneys for Krupps argued that the test for favorable tax treatment is not the "actual use" of the property, but instead is an organizational test. They argue the Krupp properties are entitled to be treated as residential property "as a matter of law because there is no dispute the cooperatives were organized under Chapter 499A.
The Supreme Court found that the legislature's change in the law precludes an "actual use" test and imposes only an "organizational test" with "no reference to the property's actual use."
The court also dismissed Jasper County's contention that Krupp's corporation "is operated as a mere sham."
"According to the board, the corporate form may be ignored where the corporate cloak is utilized as a subterfuge to defeat public convenience, to justify wrong, or to perpetuate fraud," the ruling states. "The board asserts the Krupps treated the cooperatives as rental property. They argue the scheme in fact amounts to a pecuniary venture and, as a result, the corporate veil established by the filing of papers under Chapter 499A should be pierced."
The court sided with the Krupps in denying that line of reasoning from the county.
"Even assuming the doctrine has application here, which is questionable, the board has failed to show the cooperatives were operating for profit," the ruling states. "Even if the rent generated by the Krupps' subleases exceed the amount the Krupps must pay to the cooperatives under their lease, this alone would not provide a basis for penetrating a corporate veil. Nothing in this chapter prohibits a member from leasing out a unit or units with desirable economic terms."
Officials with the Iowa League of Cities and lawyers for the City of Iowa City, who filed a friend of the court brief in support of Jasper County, contended allowing the residential classification will have detrimental financial impacts to cities statewide.
"The potential conversion of all commercial apartments to residential classification through the formation of 'cooperatives' would impose severe limitations on the ability of cities to provide their citizens with services," the brief stated. "Based on the most recent levies and rollback figures, conversion of all commercial apartments to residential classification, based on 2007 values, would result in the statewide loss to cities of tens of millions of dollars annually."
In the 2009 tax year, Jasper County Assessor records indicate, the Krupp Place 1 Co-op had an assessed value of $735,540 with a taxable value of $345,037 resulting in a property tax payment of $14,360. Krupp Place 2 Co-op had an assessed value of $608,690 and a taxable value of $285,532 resulting in a property tax payment of $11,884. Commercial properties are taxed at 100 percent of assessed value.
The ruling can be read here.
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