Upper Republican Natural Res. Dist. v. Dundy Cnty. Bd. of Equal.
300 Neb. 256, 912 N.W.2d 796 (2018)
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Rule of Law:
Property owned by a governmental subdivision and leased to a private party may maintain its tax-exempt status if its primary or dominant use remains for a public purpose, and any private use by the lessee is merely incidental to that public purpose. An appellate administrative body's scope of review is limited to issues raised and decided at the initial administrative level.
Facts:
- In 2011, the Upper Republican Natural Resources District (NRD) purchased approximately 4,080 acres of agricultural land from FEM, Inc., for about $10 million as part of an integrated management plan to comply with the Republican River Compact and manage groundwater.
- The NRD subsequently decertified the irrigated acres on the FEM property, converting them to native grassland, and completed construction of pipelines underneath for water management.
- FEM, Inc. retained a right to lease back the property, limiting its use to grazing and certain fixtures, and then subleased the land to M&L Cattle Company for cattle operations.
- Under the lease agreement with FEM, the NRD agreed to pay all real estate taxes and personal property taxes attributable to fixtures located on the property.
- In 2013, the NRD purchased an additional 3,200 certified irrigated acres from Maurice Wilder for $8.05 million, contiguous to the FEM parcels, to balance water use and further the management plan objectives.
- By the tax levy date of October 15, 2013, the Wilder parcels were no longer leased, and the NRD had planted sorghum as a ground cover for soil conservation and weed suppression, intending to plant native grasses later.
- Some FEM parcels contained improvements (e.g., grain bins, mobile homes, farmsites, garages), which were primarily used by FEM, Inc. and M&L Cattle Company for their agricultural or commercial purposes.
- The NRD utilized grazing on the FEM parcels as a cost-effective method for weed control and range management, essential for maintaining the newly established native grasslands, and the total annual rental income of approximately $57,000 for FEM parcels was minor compared to the NRD's multi-million dollar investment and ongoing operational costs for the augmentation project.
Procedural Posture:
- In 2013, the Dundy County assessor sent notices to the Upper Republican Natural Resources District (NRD), determining 12 FEM parcels and 6 Wilder parcels were taxable for 2013, 2014, and 2015 because they were not being used for a public purpose.
- The NRD protested these assessments to the Dundy County Board of Equalization (Board), arguing the property was exempt from taxation due to its use for a public purpose.
- Following a hearing, the Board determined that all 18 parcels were nonexempt and taxable property for 2013-2015, stating the basis for its decision was that the surface and buildings were not being used for a public purpose.
- The NRD timely appealed the Board's decision to the Tax Equalization and Review Commission (TERC), again asserting the property's public purpose use.
- TERC issued an order to show cause on jurisdiction, and subsequently ordered M&L Cattle Company to be joined as a necessary party, vacating an informal hearing on the merits and scheduling a new one.
- TERC then determined the issues based on exhibits and transcripts, issuing a decision that determined nine FEM parcels without improvements and all six Wilder parcels were exempt, but that one FEM parcel and portions of two other FEM parcels with improvements were nonexempt, and further ruled that tax liability could not be assessed to the NRD and that FEM's tax liabilities were void due to lack of due process.
- The Dundy County Board of Equalization filed a timely petition for review by the Nebraska Court of Appeals, and the Nebraska Supreme Court moved the case to its own docket.
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Issue:
Does property owned by a natural resources district for public purposes, such as water management and soil conservation, retain its tax-exempt status when portions of the land are leased to private parties for grazing or other agricultural uses that are incidental to the overarching public purpose, and what is the proper scope of an intermediate appellate administrative body's review?
Opinions:
Majority - O'Gorman, District Judge
No, property owned by a natural resources district and leased for private agricultural activities can retain its tax-exempt status if the private use is merely incidental to the district's predominant public purposes of water management, soil conservation, and range management, and an intermediate appellate administrative body's review is limited to issues presented to the lower administrative body. The Supreme Court first determined the scope of the Tax Equalization and Review Commission's (TERC) appellate authority. TERC, as an intermediate appellate body, is statutorily limited to questions that were both (1) raised in the proceeding before the TERC and (2) a basis for the order, decision, determination, or action appealed from by the county Board of Equalization. Issues concerning the fair market value of the lease, the NRD's liability for taxes on nonexempt property, and the lessees' due process rights regarding notice were not raised before the Board nor were they the basis of the Board's decision. Therefore, TERC lacked jurisdiction to decide these matters, and its rulings on them are vacated. The court affirmed TERC's finding that one FEM parcel and portions of two other FEM parcels with significant private improvements were nonexempt because their predominant use was not for a public purpose, as this finding was not assigned as error and did not constitute plain error. For the remaining parcels, the court conducted a de novo review to determine if they qualified for tax exemption based on a public purpose. The court emphasized that Nebraska law exempts property of governmental subdivisions "to the extent used or being developed for use... for a public purpose," and that "public purpose does not include leasing of property to a private party unless the lease of the property is at fair market value for a public purpose." The "primary or dominant use" of the property is controlling, with incidental uses not affecting tax status. The court considered all public purposes served by the NRD, not solely the initial reason for acquisition. These included the continuous use of the underground aquifer, wells, and pipelines for water management and compliance with the Republican River Compact, as well as the large-scale reseeding and maintenance of the Sand Sage Prairie for soil conservation, range management, and wildlife habitat. The court found that the lessees' grazing activities, while serving private interests, were incidental to these predominant public purposes. Grazing was a cost-effective method for weed control and range maintenance, an exempt function the NRD would otherwise perform. The relatively minor rental income compared to the NRD's multimillion-dollar investment and ongoing operational costs further demonstrated that the private use was incidental. Citing prior "City of York" cases, the court affirmed that agricultural leases could be incidental to predominant public purposes. The court affirmed TERC's determination that the Wilder parcels, 10 FEM parcels, and portions of two other FEM parcels were predominantly used for a public purpose and were therefore exempt from taxation. The court reversed and remanded with directions for TERC to affirm the Board's tax assessment to the NRD for the property TERC found nonexempt.
Concurring - Cassel, J.
Yes, the majority opinion faithfully follows existing law regarding tax exemptions for publicly owned land with incidental private use. Justice Cassel concurred with the majority's decision, acknowledging that it correctly applies current legal precedent. However, he expressed significant concern regarding the "social impact" on Dundy County, noting that the exemption of at least 6,640 acres (over 1% of the county's land area) from the property tax rolls would result in a loss of funding for schools and other local needs. This, he argued, would effectively compel remaining property taxpayers to bear a greater financial burden. Justice Cassel suggested that while the court's decision is legally sound, only the Legislature has the authority to review whether current law is adequate or if it should be modified to better balance the competing public interests at stake.
Analysis:
This case provides significant clarity on Nebraska's "public purpose" tax exemption for property owned by governmental subdivisions and incidentally leased to private parties. It broadens the interpretation of "public purpose" by considering all statutory duties of the public entity, including both overt surface uses and underlying resource management (e.g., aquifer use), and allows for multiple public purposes to be considered collectively. Crucially, the ruling reinforces that incidental private leasing, particularly if it aids in the cost-effective maintenance of the public purpose and generates minimal revenue compared to the public investment, will not disqualify the property from tax-exempt status. Furthermore, the decision serves as an important jurisdictional reminder to administrative appellate bodies like TERC, strictly limiting their review to issues initially raised and decided at the lowest administrative level, thereby emphasizing the importance of comprehensive litigation at each stage of the administrative process.
