Tuesday, March 12, 2019

Arizona AG Sues Arizona Board of Regents Claiming Misuse of Tax Exempt Status

In a novel, if not bizarre legal move, Arizona Attorney General Mark Brnovich is suing his own client, the Arizona Board of Regents, claiming that the BOR is lending its tax exempt status to developers for the developers' private benefit.  The gist of the complaint is that the Arizona Board of Regents and Arizona State University hold title to various unimproved properties in the state.  The university leases those properties to private developers who then build a conference center, for example, on the property for use by the University.  The University maintains title to the property after the improvements are made.   The University leases the improved property back to the private developer which then operates the conference center.  The AG's objection, according to the complaint, is that private developers are essentially allowed to operate businesses on improved property that generates no tax revenue for the state:

1.  This case is about ending the Arizona Board of Regents ("ABOR") and Arizona State University ("ASU")'s practice of using ABOR's tax-exempt status to facilitate special property deals for favored businesses.  These deals are designed to shield selected companies from property taxes while generating revenue for ABOR and ASU, at the expense of the taxpaying community.

2.  Because of these unauthorized actions, some of the largest existing and planned construction projects in Tempe will be build by private developers, leased back to private tenants, and yet produce no property tax revenue.  This is because ABOR has offered to step in and hold bare legal title.  These construction projects are therefore not included in the property tax base available to local schools and governments, even as ASU receives substantial income for its straw-man role.

3.  ASU is a public university, not a commercial enterprise or an urban development authority.  It is inappropriate for this educational institution to pick winners and losers in teh highly competitive property development industry by negotiating for the use of ABOR's tax shielding status.  The Arizona Constitution, relevant statutes, and longstanding historical practice establish that ABOR is not authorized to act in this capacity.  With anohter mega-deal in the works, this Court must now hold ABOR and ASU accountable and require both to adhere to their enumerated powers as provided by the Constitution and Legislature.  

The Board of Regents is incredulous in it's response, calling the lawsuit a "senseless perpetuation of false narratives" and a waste of time and resources, noting that the AG is suing his own client:  

“For decades, the Arizona courts have made clear the Attorney General does not have statutory authority and free purview to file suit against whomever he wants,” said ABOR Chair Ron Shoopman. “Yet, once again, we are called to respond to a senseless lawsuit perpetuating false narratives. This lawsuit wastes time and resources at the board and universities, and detracts us from the crucial work we do to serve the students and families of Arizona.”  The ABOR motions state that the Attorney General has no statutory authority to bring this suit. Further, the motions state, “even if the AG has the statutory authority to sue his own client…he cannot force the taxing authorities to assess and collect property taxes against tax exempt property.” The Arizona Constitution provides that land owned by Arizona public universities is exempt from taxation by law.

In its 3rd Motion to Dismiss, the Board states the matter thusly:

Even if the AG had the statutory authority to sue the Board (which he does not, as shown in Motion to Dismiss Number 1 (AG’s Lack of Authority)), he cannot force the taxing authorities to assess and collect property taxes against tax-exempt state property.  The AG alleges that a proposed transaction in which the Board would lease land that it owns now—and has owned for over 35 years—to Omni Tempe, LLC (“Omni”) for building and operating a hotel and conference center near ASU’s main campus would violate article IX, section 2(12) of the Arizona Constitution and A.R.S. § 15-1625(B)(4).  [Compl. ¶¶ 60–66, 81–82, 98–101, 110–12]. But even if the transaction is ultimately closed, the lease is executed, and the hotel and conference center is built, the Board will continue owning the property as it has for decades. Because the Board is a state entity and because article IX, section 2(1) of the Arizona Constitution and A.R.S. § 42-11102(A) exempt state property from taxation, the taxing authorities cannot impose property taxes against the Board. As a result, the Court should dismiss count I of the AG’s complaint.

The most ironic thing about the case is that the ABOR has requested that the prevailing party be awarded fees.  Even if fees are not awarded, Arizona will ultimately pay the attorneys on both sides, since both sides are separate arms of the same government body.  See here and here for press coverage.

 

Darryll K. Jones

 

https://lawprofessors.typepad.com/nonprofit/2019/03/arizona-ag-sues-arizona-board-of-regents-claiming-misuse-of-tax-exempt-status.html

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