[208 U.S. 489, 490] This is a suit in equity brought in the United States circuit court for the middle district of Tennessee, by the University of the South, a corporation, and by the several individual complainants named in the bill, who are residents of the county of Franklin, in that state, and lessees of certain lands from the university, to obtain an injunction against the individual defendants, who are a state revenue agent and a trustee of Franklin county, and also against the county of Franklin, in the above- named state, to restrain them from taking any proceedings to collect taxes from the lessees of the university within the limits of the 1,000 acres mentioned in the complainants' bill.
The bill having been filed, a preliminary injunction was issued, restraining the collection of the taxes, as prayed for.
Thereafter a demurrer to the bill was filed by the defendants on several grounds; among others, on the ground that, as to the individual complainants, the bill could not be maintained, and the court had no jurisdiction to hear and determine the cause on their behalf.
The defendants also answered.
The demurrer was sustained as to the individual complainants and the bill dismissed, but was overruled as to the university itself.
After a trial between the university and the defendants a final decree was entered in favor of the university, restraining the defendants from assessing, or attempting to assess, taxes [208 U.S. 489, 491] on the property and leasehold interests described in the bill, and situated within the 1,000 acres already referred to.
From this final decree the defendants have taken an appeal directly to this court, under the 5th section of the act of 1891 (26 Stat. at L. 826, chap. 517, U. S. Comp. Stat. 1901, p. 488), as involving the application of the Constitution of the United States.
The material facts are as follows:
The University of the South is a Tennessee corporation, under a charter granted by the legislature of that state, January 6, 1858, and amended January 19, 1858. The corporation was created for the purpose of establishing a seminary of learning, to be located at Sewanee, on the Cumberland mountain, in Tennessee.
The 10th section of the act, under which the question arises, is set forth in the margin. 1 That question is whether the assessments made against the lessees upon their interests in that portion of the 1,000 acres of the lands leased to them respectively are valid, or whether they are not a violation of the exemption from taxation granted by that section.
The Civil War coming on soon after the charter was granted, very little work was done under it; but after peace was restored the university authorities, aided by subscriptions from those interested in the work, went on with it, and in process of time the 1,000 acres were duly surveyed and marked out and many buildings were erected for the university. Leases were also granted by it of lots within the 1,000-acre limit to persons who, under such leases, built upon the lots severally leased to them. By this method a population of about 1,000 or 1,200 people had been gathered within the village called [208 U.S. 489, 492] Sewanee, situated within the limit stated, and which was a barren wilderness when the charter was granted. In fact, the very existence of the village is the result of the efforts of the university.
In the summer of 1906 proceedings were taken to assess taxes upon the interests of the lessees occupying various lots under the leases mentioned, and a hearing was had before the trustee of Franklin county, within which the lots were situated, and he held that under the act of the legislature of Tennessee, passed January 10, 1903, chap. 258, being the general assessment act, the lessee of a leasehold interest of a lot in Sewanee was taxable on the value of such interest, and he thereafter assessed the tax in the case of an individual named, and announced his intention of doing the same with reference to all lessees similarly situated. This bill was then filed before any further assessments were made.
The several leases under which the various lessees of the university held their lots, among other things, provided that the lessees would pay the rent specified in the lease 'and all taxes and assessments upon said premises.' It was also provided in the leases that the premises should not be sublet or transferred without the consent of the commissioner of land and buildings of the university, and that, for any violation of the restrictions and provisions made in the lease, the lessor might end and determine the lease and re-enter upon the premises. Each lease also contained the following, the blanks being filled up in accordance with the terms which might be agreed upon between the parties:
At the time of the passage of the act of 1858 (the charter of the university) there was no statute providing for the separate taxation of the interest of a lessee in real estate, but the whole value of the entire real estate was assessed against the owner of the fee. The act of 1903, already mentioned, provided in subdivision 5 of 5 that the interest of a lessee should be assessed to the owner of such interest separately from other interests in the real estate.
Section 32 of the same act provided that all taxes should be a lien upon the fee in the property, and not merely upon the interest of the person to whom the property was, or ought to be, assessed, and it was provided that the whole proceeding for the collection of taxes, from the delinquency to the sale, should be a proceeding in rem.
It is also asserted by complainant as a further ground of invalidity that 2, subdivision 2, of the act of 1903, providing a general exemption from taxation of religious, educational, and other named classes of institutions, as therein stated, does not provide as broad an exemption as the special exemption granted the university by its charter, and if it be held that the above general exemption does not reach the complainant, while at the same time it is claimed to repeal the special exemption provided by the charter, it impairs the contract between the state and the university, and is therefore void.
Messrs. Charles T. Cates, Jr., Felix D. Lynch, Frank L.
[208 U.S. 489, 494] Lynch, I. G. Phillips, and Thomas B. Lytle for appellants.
[208 U.S. 489, 496] Messrs. James J. Lynch, Arthur Crownover, William D. Spears, Isaac W. Crabtree, John J. Vertrees, Albert T. McNeal, and William L. Myers for appellee.
Mr. Justice Peckham, after making the foregoing statement, delivered the opinion of the court:
The appellants insist that the circuit court had no jurisdiction of this suit, because all the parties are citizens of Tennessee. We think, however, that jurisdiction existed, because the case is one arising under the Constitution of the United States, the complainant insisting that under such Constitution the law of the state of Tennessee, passed in 1903, is invalid, because it impairs the obligations of a contract protected by that instrument. Illinois C. R. Co. v. Adams, 180 U.S. 28, 35 , 45 S. L. ed. 410, 412, 21 Sup. Ct. Rep. 251. We therefore pass to the merits of the controversy.
As the complainant maintains that the exemption clause in the 10th section of its charter is broader than that contained in the 2d section of the act of 1903, we may at once refer [208 U.S. 489, 499] to the charter exemption, and if the contention of complainant is not justified by that exemption, it is unnecessary to consider that which is given by the act of 1903. It is by the charter exemption that we are to judge that matter.
Upon the question of the proper construction of the exemption clause in the charter, the case of the University of the South v. Skidmore, 87 Tenn. 155, 9 S. W. 892, is cited, and it is urged that within that case no tax can be assessed against the lessees of this property within the 1,000 acres. While in such a case as this we form our own judgment as to the existence and construction of the alleged contract, and are not concluded by the construction which the state court has placed on the statute that forms such contract, yet we give to that construction the most respectful consideration, and it will, in general, be followed, unless it seems to be plainly erroneous.
Looking at the Skidmore Case, we find that it does not uphold the contention maintained by the complainant. In that case the university filed a bill against Skidmore, trustee of Franklin county, to enjoin him from assessing for taxation against the university the property belonging to it within the 1,000 acres. In answer to the bill the state contended that the 1,000 acres would be exempt from taxation so long only as they were substantially owned by the university, but that, when it gave a lease of the kind described in the case before us, it ceased, during the term of the lease, to be the real and substantial owner of the land so leased, which, by the lease, was taken out of the exemption granted by the statute, and was, from that time, taxable against the university. The supreme court, however, held that the assessment made was void because the property, the land owned by the university, was exempt from taxation so long as it belonged to that corporation, and the making of the leases did not permit the property to be taxed against the university.
This is a different proposition from the one asserted by the complainant, and is not authority for its contention that the assessment cannot be made against the lessee in his own name [208 U.S. 489, 500] for his particular interest in the land while the university continues to own the fee.
It is plain that the state court has not construed the statute of 1858 as a contract that the interest of the lessee in the land granted to him for a term of years by the university cannot be assessed or taxed against him because of the exemption in question.
Counsel for appellee, placing the Skidmore Case aside for the moment, assert that, when this exemption was granted, leasehold interests were only assessable against the owner of the fee as part of the whole estate; and it was therefore a part of the estate exempted from taxation by the charter. We think this is not a correct construction of the contract of exemption.
As long as different interests may exist in the same land, we think it plain that an exemption granted to the owner of the land in fee does not extend to an exemption from taxation of an interest in the same land, granted by the owner of the fee to another person as a lessee for a term of years. The two interests are totally distinct, and the exemption of one from taxation plainly does not thereby exempt the other. The fact that, at the time when the exemption was granted to the owner of the fee, the state had not provided for taxation against the lessee in his own name, is not important. The different interests of an owner of the fee and an owner of an estate for years, as lessee, existed, and such existence was recognized. An exemption of one did not necessarily include the exemption of the other. The contract of exemption did not imply in the most remote degree that the state would not thereafter, through its legislature, so change its mode of assessment as to reach the interest of a lessee directly, and not through the owner of the fee. In so doing the state does not tax the owner of the land in fee nor the fee itself. It taxes what it had a right to tax,-a separate and distinct interest in the land, although the fee thereof be in the university, which cannot be taxed therefor. The doctrine that laws which are in force when a contract is made will generally enter into its obligations (Oshkosh [208 U.S. 489, 501] Waterworks Co. v. Oshkosh, 187 U.S. 437 , 47 L. ed. 249, 23 Sup. Ct. Rep. 234) is not denied, but it has no application. The laws existing when the contract was made have not been altered so as to impair the obligations of that contract by the passage of the act of 1903. Those obligations remain precisely as they were prior to its passage. The change wrought by the act affected third persons only (the lessees of real estate), and, instead of leaving them to be taxed in the name of their lessor for their interest in the land as such lessees, the act provided for their separate taxation. Such act impaired no obligation of contract between the state and the university.
Nor is such an assessment the same in substance as one against the owner in fee of the land. We cannot see that Pollock v. Farmers' Loan & T. Co. 157 U.S. 429 , 39 L. ed. 759, 15 Sup. Ct. Rep. 673, touches the case. This is not a tax on the rents or income of real estate. The university receives the rents or income free from any tax. The Tax is, in both form and substance, upon a separate interest in real estate granted by the lessor, and is assessed against the owner of such separate interest. If the university could lease its lands and could also effectually provide that the interest of the lessee in the land so leased should be exempt from taxation, it may readily be seen that the amount of rent which it would receive would be larger than if no such exemption could be obtained, but that is a matter which is wholly immaterial upon the question of the impairment of the contract of exemption that was really made. That contract cannot be extended simply because it would, as so construed, add value to the exemption. The language used does not include the exemption claimed.
The lessee also agreed in the lease to pay the taxes in any event, and the claim that the agreement was intended only to refer to municipal taxation which might be provided for by the university cannot prevail against the plain words of the agreement.
That part of 32 of the act of 1903 which makes the tax a lien upon the fee, even if void in that particular, does not make [208 U.S. 489, 502] the section void which provides for the separate assessment of the interest of the lessee. It is proper to mention that the appellants did not and do not claim that the 32d section gives a lien upon the fee for the tax against the lessee in cases where the fee is itself exempt from taxation, but they assert that the correct construction of that section is to apply the lien to the fee only in cases where the fee itself may be taxed; and in their answer they expressly aver that under that section neither the state nor county can have a lien upon any property which is exempt from taxation, and that no claim has ever been made, or was made in the proceedings instituted by the state revenue agent, that the interest of the university in the leased premises could be assessed for taxation or could in any way be affected by the proceedings so instituted, and the defendants disclaimed any intention of assessing or levying any tax whatsoever against the property of the complainant university, and they denied that the assessment of the interests of the several lessees of the complainant university in the buildings and improvements erected by them upon said property would in any manner affect the interest of the university. What is the proper construction of that section on this point is not a matter of importance as to future assessments, because the state, having these objections before it, and, as we may presume, in order to avoid nay such objection, even though possibly not well founded, passed another assessment act in 1907, repealing the one of 1903, and recognizing asvalid valid all charter exemptions, and also providing that the lien of the tax should not apply to or affect any fee in property where the same was exempt from taxation. The question, however, remains so far as the assessment here involved is concerned, and we are of opinion that the construction contended for by the defendants is the correct one. We cannot assume that the state would endeavor to create a lien upon property which it recognized as exempt from taxation, for the purpose of thereby attempting to obtain such a security for the payment of a tax due from another upon different property which is not exempt. [208 U.S. 489, 503] This never could have been the intention of the framers of the act of 1903
Again, it is urged that if the interest of the lessee can be taxed, it might be sold for the nonpayment of the tax, and thus someone might get into possession who would not be a proper person to be in such place, and the chief purpose of the charter in this respect would fail. If the interest of the lessee in the land could be sold for nonpayment of the tax assessed thereon, such result would arise from the act of the university in creating it. But the lessor might, under the terms of the lease, at once reenter for nonpayment of taxes.
What is the exact interest of the lessee in the land leased to him it is not necessary to here determine. It is plain that he has some interest in it, and that interest is distinct from the fee, and may be taxed when the fee is exempt from taxation. See cases to that effect in the margin. 1 In Elder v. Wood [ 208 U.S. 226 , ante, 263, 28 Sup. Ct. Rep. 263], decided by this court January 27, 1908, it was held that a mere possessory right in a mining claim in land to which the United States had title was a right separate from the fee, and might be taxed under a state statute, although the fee could not, because it was in the government. New Jersey v. Wilson, 7 Cranch, 164, 3 L. ed. 303, is not in point. The exemption was assumed to be absolute, unconditional, and unlimited in time. It seems that there was an act (that of 1796) which authorized the lands to be leased, but that act was not brought to the attention of the court. See Given v. Wright ( New Jersey, Given, Prosecutor, v. Wright) 117 U.S. 648, 655 , 29 S. L. ed. 1021, 1024, 6 Sup. Ct. Rep. 907, where a more full history of the case is given. The act repealing the exemption, passed after the sale of the lands by the Indians, was held void because it impaired the obligations of a contract. In the case before us the exemption lasts only so long as the university owns the lands, and, when it conveys a certain interest in them [208 U.S. 489, 504] to a third person, it no longer ownes that interest, which at once becomes subject to the right of the state to tax it. When the state exercises that right, as it did under the act of 1903, and taxes the interest in the name of its owner, the state thereby violates no contract, and the tax is valid.
It is said that although the lessee is bound to make improvements, yet he does not own them, even though their value is not to be taken into consideration against him until the same are paid for at some time is not material upon the question of the separate interests of the lessee and the owner of the fee, the ownership of the improvements being only material upon the question of the value of the interest of the lessee. Even if the university was entitled to become and was the owner of such improvements at the end of the second renewal, without paying for them, the question still remains as to the value of the separate interest of the lessee, which, even upon that assumption, might be greatly more than the rent to be paid. The value of whatever interest he has is to be assessed as real estate under the statute, and that value must be determined by the assessing officer. All we can say is that it is a separate and distinct interest from that of the owner of the fee, and the assessment of that interest for taxation is not an assessment upon the interest of the university, and is not a violation of the exemption granted to it by the statute of 1858.
The decree of the Circuit Court must be reversed and the case remanded to that court with directions to dismiss the bill.
[ Footnote 1 ] Sec. 10. Be it further enacted, That said university may hold and possess as much land as may be necessary for the buildings, and to such extent as may be sufficient to protect said institution and the students thereof from the intrusion of evil-minded persons who may settle near said institution, said land, however, not to exceed 10,000 acres, 1,000 of which, including buildings and other effects and property of said corporation, shall be exempt from taxation as long as said lands belong to said university.
[ Footnote 1 ] People ex rel. Muller v. Board of Assessors, 93 N. Y. 308; PEOPLE EX REL. VAN Nest v. Tax & A. Comrs. 80 N. Y. 573; Parker v. Redfield, 10 Conn. 490; Russell v. New Haven, 51 Conn. 259; Brainard v. Colchester, 31 Conn. 407; Lord v. Litchfield, 36 Conn. 116, 4 Am. Rep. 41; Philadelphia, W. & B. R. Co. v. Appeal Tax Court, 50 Md. 397; Zumstein v. Consolidated Coal & Min. Co. 54 Ohio St. 264, 43 N. E. 329; Bentley, 41 Ohio St. 410.