When a Mississippi nonprofit historical society leases a city building for a museum, is that leasehold interest exempt from property tax?

Plain-English summary

Gulfport's city attorney brought a structural question that comes up whenever a city wants to partner with a nonprofit. The City of Gulfport plans to lease a building to the Historical Society of Gulfport (a Mississippi nonprofit and IRS-recognized 501(c)(3)) for a city-history museum. The Society does not currently plan to charge admission, but might in the future. Two questions: (1) is the Society's leasehold interest exempt from ad valorem (property) tax, and (2) does charging admission change the answer?

The AG answered no on both, with question two becoming moot once question one was answered.

The doctrine starts with the gap between owning and leasing exempt property. Most municipal real estate is exempt under § 27-31-1(b). When a city leases that exempt property to a private party, the lease creates a separate "leasehold interest." That interest is itself a piece of property for tax purposes, and absent a specific statutory exemption, it is taxable to the lessee even though the underlying real estate is exempt to the owner. The Mississippi Supreme Court set this out in Board of Supervisors v. Hattiesburg Coca-Cola Bottling Co., 448 So. 2d 917 (Miss. 1984), and applied it again in In re Assessment of Ad Valorem Taxes on Leasehold Interest Held by Reed Mfg., Inc., 854 So. 2d 1066 (Miss. 2003).

§ 27-31-1(d) does provide an exemption for property "belonging" to a historical or patriotic association or society used exclusively for the society and not for profit. The word "belonging" is doing the work: it covers ownership, not leasehold interests. Other exemptions in § 27-31-1 explicitly include leasehold interests when the legislature meant to. Subsection (d) does not. So a historical society that owns its museum building is exempt; one that leases the building from the city is not.

The closest statutory hook is § 27-31-33, which authorizes a tax exemption for leasehold interests in municipal property. That statute is limited to interests created before July 1, 1984. A new lease in 2023 cannot use it.

Mississippi tax doctrine then puts a thumb on the scale: tax exemptions are strictly construed in favor of taxation and against the exemption (City of Jackson v. Sly, 343 So. 2d 473, 475 (Miss. 1977)), and the burden is on the party claiming the exemption to establish it. The historical society's leasehold cannot meet that burden because no statutory exemption covers it.

So the leasehold interest the historical society would hold is subject to ad valorem tax. The admission-charge question becomes moot because the underlying exemption is unavailable regardless of how the society uses the property.

What this means for you

If you are a Mississippi city attorney structuring a lease to a nonprofit

Under this opinion, when a city leases its otherwise-exempt property to a private party, the lessee's leasehold interest is a separate taxable interest unless a specific statutory exemption applies. The AG draws that directly from Hattiesburg Coca-Cola (Miss. 1984) and Reed Mfg. (Miss. 2003). The historical-society exemption in § 27-31-1(d) reaches property "belonging" to the society (ownership), not a leasehold, and § 27-31-33's leasehold exemption is limited to interests created before July 1, 1984. So a new lease to a nonprofit leaves the leasehold taxable.

The opinion does not bless or describe any particular way to avoid that result. It resolves only the exemption question on the facts presented.

If you are running a Mississippi nonprofit considering a lease of municipal property

Under this opinion, you should expect the leasehold interest to be subject to ad valorem tax even though the city's underlying property is exempt. The historical-society exemption in § 27-31-1(d) applies to property the society owns, not to a leasehold it holds in city property, and no other statute the AG found exempts such a leasehold. The opinion does not address how the leasehold would be valued or who bears the cost; those are matters for the lease and the assessor.

If you are a county tax assessor

The opinion confirms the framework your office applies: when a municipality leases exempt property to a private party, the leasehold interest is taxable to the lessee unless a specific statutory exemption applies (Hattiesburg Coca-Cola; Reed Mfg.). For a new lease, § 27-31-33's pre-July-1-1984 leasehold exemption does not apply, and § 27-31-1(d) reaches owned property, not a historical society's leasehold.

If you are a museum board member or historical society trustee

Under § 27-31-1(d), property "belonging to" a historical or patriotic society and "used exclusively for such society or association and not for profit" is exempt. The AG reads "belonging" as ownership, so if your organization leases its space from a city rather than owning it, expect the leasehold to be taxable. The opinion did not reach whether charging admission affects the analysis, because it found the leasehold exemption unavailable regardless, making that question moot.

Common questions

Q: Does this rule apply to leases to other nonprofits, not just historical societies?
A: The opinion addresses a historical society, but its reasoning rests on the general rule that a leasehold interest in municipal property is taxable to the lessee unless a specific statutory exemption applies. The AG notes that § 27-31-1(d) does not address leasehold interests at all and that the legislature included leasehold interests in other exemptions when it meant to.

Q: The city's property is tax exempt. Why would the lease be taxed?
A: Because the opinion treats the leasehold interest as a separate piece of property from the underlying real estate. As the AG put it, quoting the White (2010) opinion, "Although [municipal property] is tax exempt, the privately-held leasehold interest is not exempt unless expressly authorized or provided by law."

Q: What about IRS 501(c)(3) status? Does federal exemption help?
A: The opinion notes the society is a 501(c)(3) but grounds the exemption analysis entirely in Mississippi statute (§ 27-31-1). Federal income-tax exemption is not what determines the state ad valorem exemption here.

Q: Does charging admission change the answer?
A: The AG did not decide that. It held the leasehold exemption unavailable in any event, so it treated the admission question as moot.

Q: Why does the AG resolve doubt against the exemption?
A: Because Mississippi tax exemptions are strictly construed in favor of taxation and against the exemption, and the party claiming the exemption bears the burden of establishing it (City of Jackson v. Sly (Miss. 1977)).

Background and statutory framework

Mississippi ad valorem (property) tax is governed by Title 27 of the Code. § 27-31-1 enumerates exemptions. The key subsections for this question:

• § 27-31-1(b): exempts most municipal property from taxation
• § 27-31-1(d): exempts property "belonging" to a historical or patriotic association or society used exclusively for the society and not for profit; also covers garden and pilgrimage clubs

§ 27-31-33 authorizes a tax exemption for leasehold interests in municipal property. Critical limitation: the eligible interests must have been created prior to July 1, 1984. New leases do not qualify.

The doctrinal foundation comes from the Mississippi Supreme Court:

• Board of Supervisors v. Hattiesburg Coca-Cola Bottling Co., 448 So. 2d 917 (Miss. 1984): leasehold interest in municipal property is taxable absent a specific statutory exemption
• In re Assessment of Ad Valorem Taxes on Leasehold Interest Held by Reed Mfg., Inc., 854 So. 2d 1066 (Miss. 2003): same principle, applied to manufacturer's lease of county-owned property
• City of Jackson v. Sly, 343 So. 2d 473 (Miss. 1977): tax exemptions strictly construed in favor of taxation; burden on party claiming exemption

The AG had previously addressed similar questions in MS AG Op., Vincent (Aug. 15, 2003) and MS AG Op., White (May 21, 2010), confirming that nonprofit leases of city property are taxable to the lessee unless a specific exemption applies. The Bruni opinion is consistent with that long-standing position.

Citations

• Miss. Code Ann. § 27-31-1 (ad valorem tax exemptions)
• Miss. Code Ann. § 27-31-1(b) (municipal property exemption)
• Miss. Code Ann. § 27-31-1(d) (historical or patriotic association property exemption)
• Miss. Code Ann. § 27-31-33 (pre-July 1, 1984 leasehold exemption)
• Board of Supervisors v. Hattiesburg Coca-Cola Bottling Co., 448 So. 2d 917 (Miss. 1984) (leasehold of municipal property is taxable)
• In re Assessment of Ad Valorem Taxes on Leasehold Interest Held by Reed Mfg., Inc., 854 So. 2d 1066 (Miss. 2003) (manufacturer's lease of county-owned property taxable)
• City of Jackson v. Sly, 343 So. 2d 473 (Miss. 1977) (tax exemptions strictly construed; burden on claimant)
• MS AG Op., Vincent (Aug. 15, 2003) (leasehold of nonprofit on city property taxable)
• MS AG Op., White (May 21, 2010) (leasehold not exempt though municipal property is)

Source

• Landing page: https://attorneygenerallynnfitch.com/divisions/opinions-and-policy/recent-opinions/
• Original PDF: https://attorneygenerallynnfitch.com/wp-content/uploads/2023/01/J.Bruni-January-20-2023-Tax-Exempt-Status-of-Historical-Societys-Leasehold-Interest-Held-in-Municipal-Property.pdf

Original opinion text

January 20, 2023
Jeffrey S. Bruni, Esq.
Attorney, City of Gulfport
2309 15th Street
Gulfport, Mississippi 39501
Re:

Tax Exempt Status of Historical Society's Leasehold Interest Held in
Municipal Property

Dear Mr. Bruni:
The Office of the Attorney General has received your request for an official opinion.
Background
The City of Gulfport owns certain real property that it is contemplating leasing to the Historical
Society of Gulfport for the establishment and operation, by the Society, of a museum dedicated to
the history of the City of Gulfport. The Historical Society of Gulfport is a nonprofit corporation
established pursuant to Mississippi law and has been granted tax exempt status by the Internal
Revenue Service (i.e., the Society is a 501(c)(3) corporation). While the Society does not presently
intend to charge admission to the museum, it has not ruled out doing so if conditions should
change.
Questions Presented

1. Is a leasehold interest held by a historical association or society in property owned by a
   municipality exempt from taxation pursuant to Mississippi Code Annotated Section 27-31-1(d)?
2. Would the answer to question one change if a historical society charges admission to the
   museum contemplated by the parties (but still fully and lawfully functions as a nonprofit)?

Brief Response

1. Pursuant to Section 27-31-1(d), all property, real or personal, belonging to a historical
   society that is used exclusively for the association or society and not for profit shall be
   exempt from taxation. However, because the historical society does not own the property
   in question and because there is no other statutory authority extending a tax exemption to
   a historical society's leasehold interest in property, it is the opinion of this office that the
   contemplated leasehold interest to be held by the historical society would not be tax
   exempt.

2. Because the historical society is not entitled to an exemption, this question is moot.
   Applicable Law and Discussion
   While in most instances real property belonging to a municipality shall be tax exempt under
   Section 27-31-1(b), a leasehold interest in municipal property may still be subject to ad valorem
   taxes. The Mississippi Supreme Court explained that if a municipality owns real property and
   leases it, the leasehold interest is taxable unless a specific statutory exemption exists. Board of
   Supervisors v. Hattiesburg Coca-Cola Bottling Co., 448 So. 2d 917 (Miss. 1984); see also In re
   Assessment of Ad Valorem Taxes on Leasehold Interest Held by Reed Mfg., Inc., 854 So. 2d 1066,
   1076 (Miss. 2003) (relying on Hattiesburg Coca-Cola when holding that manufacturer's lease of
   county-owned property was subject to ad valorem taxes once the statutory exemption surpassed
   the constitutional ten-year limitation). This office has also relied on Hattiesburg Coca-Cola when
   opining that "the leasehold interest [in] property owned by a municipality and leased to a nonprofit
   corporation is taxable unless the leaseholder is entitled to a specific statutory exemption." MS AG
   Op., Vincent at 1 (Aug. 15, 2003) (internal citations omitted); see also MS AG Op., White at 1
   (May 21, 2010) ("Although [municipal property] is tax exempt, the privately-held leasehold
   interest is not exempt unless expressly authorized or provided by law.") Notably, exemptions are
   strictly construed in favor of taxation and against the exemption, and those claiming the exemption
   have the burden to establish their right to same. City of Jackson v. Sly, 343 So. 2d 473, 475 (Miss.
   1977).
   Section 27-31-1 enumerates property exempt from ad valorem taxation. Included in those
   exemptions is "[a]ll property, real or personal, belonging . . . to any historical or patriotic
   association or society, or to any garden or pilgrimage club or association and used exclusively for
   such society or association and not for profit. . . ." While leasehold interests are specifically
   addressed and included in other exemptions listed in Section 27-31-1, leasehold interests held by
   a historical society are neither addressed in the exemption provided in subsection (d) nor is there
   a separately stated exemption for leasehold interests held by historical societies. Relatedly, Section
   27-31-33 authorizes a tax exemption for leasehold interests held in any municipal property, real or
   personal, but the statute requires that the eligible leasehold interests were created prior to July 1,

3. Because you are asking about a potential leasehold interest and not a pre-existing one, this
   statute would not be applicable. Therefore, there is no statutory exemption for a leasehold interest
   held by a historical society.

In conclusion, the historical society has a leasehold interest rather than an ownership interest in
the property, and since we find no other statutory ad valorem tax exemption for a historical
society's new leasehold interest held in city property, it is the opinion of this office that the
contemplated leasehold interest to be held by the historical society would not be tax exempt.
Because the society is not entitled to an exemption, your second question is moot.
If this office may be of any further assistance to you, please do not hesitate to contact us.
Sincerely,
LYNN FITCH, ATTORNEY GENERAL
By:

/s/ Abigail C. Overby
Abigail C. Overby
Special Assistant Attorney General