A public housing authority may establish a for-profit subsidiary that is exempt from local property taxes, according to a ruling by the state’s second highest court.
In 2002, the Durham housing authority sought to redevelop its Fayetteville Street public housing project as an affordable housing community. To do so, it established Fayette Place LLC, a for-profit corporation held by two other corporations that were owned by the housing authority.
In November 2005, the Durham County Board of Equalization and Review rejected Fayette Place’s application for a property tax exception. In August 2007, the N.C. Property Tax Commission overturned the board’s decision, and held that Fayette Place was eligible for the exemption. Durham County brought the matter before the N.C Court of Appeals.
Before the appeals court, Durham County argued that the Property Tax Commission erred in finding that Fayette Place belonged to the housing authority. The Court of Appeals, however, was not swayed by this line of reasoning.
“County first argues the Commission erred in concluding that the property belonged to the Housing Authority and was exempt from ad valorem taxation,” Judge Doug McCullough wrote for a unanimous three-judge panel of the appeals court in the ruling issued Nov. 18. “We disagree.”
The court noted that in general, property is subject to taxation unless specifically exempt by either the N.C. Constitution or statute. The N.C. Constitution states that “[p]roperty belonging to the State, counties and municipal corporations shall be exempt from taxation.” N.C. General Statue § 105-278.1(b) contains similar language. State courts have previously held that public housing authorities qualify as units of state government for property tax purposes, which is to say they are exempt from such taxes.
“Although legal title to the property is held by Fayette Place, we have previously held that the possession of legal title is not determinative as to the question of ownership,” McCullough wrote.
“Instead, this Court will focus its inquiry on the state’s interest in the property.”
The appeals court adopted this standard in a 2004 case called In re Appeal of Appalachian Student Housing Corp., in which it held that a dormitory owned by a nonprofit corporation operated for the benefit of Appalachian State University was exempt from property taxes.
McCullough noted that Fayette Place was controlled by subsidiary corporations of the housing authority.
“Under this labyrinthine ownership structure, complete ownership of Fayette Place can be imputed to the Housing Authority. As the Housing Authority possesses complete ownership of Fayette Place, the possessor of legal title to the property, we hold that the property belongs to the Housing Authority for the purposes of N.C. Gen. Stat. § 105-278.1(b). Therefore, the property is exempted from ad valorem taxation…”
N.C. Court of Appeals decisions are controlling interpretations of state law unless over-ruled by the N.C. Supreme Court. Because the decision by the appeals court panel was unanimous, the high court is not required to hear the case should Durham County ask it to.
The case is In re Fayette Place LLC, (07-1483).
Michael Lowrey is associate editor of Carolina Journal.