The Law

Teachers vs Taxman by Ron Davis Retired public school teachers in Arkansas can forget about their group receiving a tax break by owning shopping center property in their state. That’s because a court ruling this month in essence requires the Arkansas Teacher Retirement System (ATRS) to pay taxes on shopping center property just as do for-profit ventures. Such taxes are not what the teachers group has had in mind. In 2000, their leaders purchased Southcenter Shopping Center in Hot Springs strictly for investment purposes. That property houses a number of tenants, including a Kroger supermarket and a Hobby Lobby store. To pay benefits to retired teachers, ATRS places the tenants’ rental income into the trust fund it administers. Following the purchase of Southcenter, the county in which Hot Springs is located listed the property as taxable. And ATRS paid its share of ad valorem taxes through 2007 without protest. In 2009, however, ATRS asked the local circuit court to declare that organization exempt from ad valorem taxation. Such a declaration was sure to be considered. That’s because the board’s ex-officio membership includes the Arkansas Bank Commissioner, the Auditor of State, the Director of the Department of Education, and the Treasurer of State. The Treasurer of State even serves as the custodian of ATRS’s assets. In its appeal to the circuit court, ATRS asked for a refund of the taxes “erroneously assessed and paid” for the tax years of 2005, 2006, and 2007. ATRS also sought a ruling that the 2008 assessment of the shopping center was illegal and demanded that the local tax assessor list the property on the rolls as tax-exempt property. But to be exempt from taxation, a property first must be public property. Second, it must be used exclusively for public purposes. Finally, a taxpayer must establish an entitlement to an exemption “beyond a reasonable doubt.” The Arkansas circuit court concluded that the shopping center is not exempt because the property is not used exclusively for public purposes. ATRS appealed that conclusion, arguing that Southcenter is exempt from taxation because it is indeed public property that is used exclusively for public purposes. The Arkansas Supreme Court concurred with the lower-court ruling, explaining, “This court has consistently drawn a distinction between property that is used exclusively for a public purpose and property that simply produces income that is used for the public benefit…. Here, it is undisputed that the property in question is a retail shopping center that is leased to private businesses. As such, ATRS has failed to demonstrate that the structure is used exclusively for public purposes, and we hold that the circuit court’s decision that the property is subject to taxation is not clearly erroneous.” (Arkansas Teacher Retirement System v. Short, 2011 Ark. 263, 2011 WL 2410516 [Ark.]) Decision: June 2011 Published: July 2011