Cost Containment Advisors

1-203-531-0770 15 East Putnam Avenue
Greenwich, CT 06830

July 2011 Newsletter

July 1, 2011 | Newsletter

TEXAS – Untimely rendition results in implied waiver of right to interstate allocation. Sturgis is a transportation company which leases a 1991 Cessna 560 to Allied Home Mortgage. Allied’s president, Jim Hodge, uses the plane to fly among the hundreds of Allied offices nationwide. When not in service, the aircraft is hangered at Hooks Airport in Harris County, near Hodge’s home. Section 21.055 of the Texas Tax Code provides: “[i]f an aircraft is used for a business purpose of the owner, is taxable by a taxing unit, and is continuously used outside this state, whether regularly or irregularly, the appraisal office shall allocate to this state the portion of the fair market value of the aircraft that fairly reflects its use in this state.” Prior to 2006, Sturgis had never reported the aircraft for property tax purposes to any taxing authority. When the aircraft was discovered hangered in Harris County, Sturgis finally did render the aircraft, reporting the number of departures made from Texas and the total number of departures made during the year, but its renditions were always made after the April 15 deadline. Harris County refused to apportion, and both the trial court and the court of appeals agreed that a late rendition results in an implied waiver of the right to apportionment. Sturgis Air One, L.L.C. v. Harris County Appraisal District, 2011 WL 1045296 (Tex. App.-Hous. (14th Dist.) March 24, 2011.

NEW JERSEY – Think ahead when drafting abatement agreements with municipalities. Union Montclair Housing Associates entered into a fifty-year tax abatement agreement with the Township of Montclair in 1978, which substituted Union’s payment of property taxes with an annual charge for receipt of “municipal services” based on a percentage of its gross revenue. “Municipal services” are not defined in the contract nor are they defined by statute. At the time that Union and Montclair entered into the agreement, Montclair charged a separate fee for water usage, but not for sewer usage, which was paid for instead by property tax revenue. In January 2006, Montclair enacted an ordinance establishing a sewer authority and requiring property owners to pay a separate bill for sewer use and access, instead of including it in their property tax bills. Montclair sent Union a sewer use bill, which it paid under protest the basis that it was among the services covered by the agreement. The trial court defined “municipal services” as any services currently provided to other tax-paying residents without a user fee, and held that Montclair had to pay the bill. The Appellate Court reversed, reasoning that it would be unfair to apply the ordinance to Union because its practical effect would be the unilateral imposition of an increase in costs with no change in services. Union Montclair Housing Associates v. Township of Montclair, 2011 WL 1225851 (N.J. Super A.D.) April 4, 2011.

LOUISIANA – Reduction for obsolescence requires “extraordinary showing.” Pipelines are assessed in Louisiana at 15% of fair market value. In 2006, three natural gas companies filed returns with the assessors of Ouachita, Union and Lincoln Parishes reporting the depreciated replacement cost of their property and requesting a reduction in value for obsolescence, claiming that the pipelines were operating at less than full capacity. The supporting documents provided by the companies listed only “percentage of pipeline capacity used” for each year, based on a nationwide average of the entire pipeline system and without stating the throughput and rated capacity of the lines in the respective parishes. Finding that the reported capacities were unreliable and lacking in factual support, the assessors rejected the companies’ claims and assessed the property at the values stated on the face of the returns. The Louisiana Tax Commission agreed that the values should be reduced to account for obsolescence, and the assessors appealed. The District Court vacated the Commission’s order, finding that the companies failed to provide any specific, substantive evidence of obsolescence, only throughput figures, which the assessors were entitled to disregard as inadequate. The Court also rejected the companies’ claim that they were entitled to an additional deduction for the effect of FERC regulation, which causes economic obsolescence and otherwise diminishes the price that a willing and informed buyer would pay for heavily regulated property. The Court of Appeal rejected all of these arguments, holding that parish assessors are not required to reduce for economic obsolescence “absent an extraordinary showing.” The Court noted that the companies did not give the assessors financial data or other evidence of economic loss, only a document listing the percentages of pipeline capacity used for each tax year. The percentages were not specific to the individual parishes but based on a systemwide average. The companies did not introduce a third-party engineering report or long-term production levels. Taken as a whole, the Court of Appeal concluded, the evidence did not rise to the level of an “extraordinary showing” that would obligate the parish assessors to exercise their discretion in applying a reduction for functional or economic obsolescence. Jones v. Southern Natural Gas Co., 2011 WL 1405149 (La.App. 2 Cir.) April 13, 2011.

MINNESOTA – Delay in using property for intended charitable purpose costs taxpayer exemption. Living Word Bible Camp is a 501(c)(3) tax-exempt organization which owns several parcels of land on Deer Lake in Itasca County. Living Word purchased the parcels in 2000 and has been attempting to develop the land for use as a summer camp ever since, but has become mired in oppressive land-use regulation , neighborhood opposition and litigation. Thus far, it has been able to use the land only for incidental purposes, such as seasonal offices, counselor training and work or family retreats, and has been forced to rent lake property in another county for its summer camp activities. The Itasca County assessor reclassified the land as non-exempt in 2008, because the land was not being used as a public charity, and the court agreed. An organization is entitled to receive a property tax exemption for a reasonable time until it can commence providing its planned charitable benefits, but an organization may not maintain exempt status indefinitely based only on plans and projections. Living Word Bible Camp v. County of Itasca, 2011 WL 1303396 (Minn. Tax Regular Div.) March 28, 2011.

NEW HAMPSHIRE – Sign your assessment appeal or forfeit your rights. Ned and Theresa Wilson hired Northeast Property Tax Consultants to request an abatement of their real property taxes. The appeal application form required that they sign the application and certify that the information provided was true, and that their representative sign and certify that the Wilsons had signed it. The Wilsons, however, did not sign the form. The Town denied the abatement request, and the Wilsons appealed to the New Hampshire Board of Tax and Land Appeals, which dismissed their appeal because they had failed to sign the application. The Supreme Court affirmed. Although it was not necessary to use the form provided, the statutory scheme requires the taxpayer’s signature and certification that the information provided is true. Appeal of Ned Wilson, 2011 WL 1219782 (N.H.) March 31, 2011.

MICHIGAN – Keep the Cap. Michigan Properties acquired several parcels of real estate in December 2004. Under the Michigan Constitution and statutes, the valuation of a parcel of real estate for property tax purposes may be increased no more than five percent a year. A transfer of ownership allows the taxable value to be set at the state equalized valuation for the next tax year, commonly referred to as “uncapping.” It is triggered by the owner filing a property transfer affidavit, which notifies the assessor of the transfer. Michigan Properties filed the required property transfer affidavits in January 2005, but by oversight, the Township where the property was located failed to “uncap” the taxable values of the property for the 2005 tax year. The Township agreed not to adjust the values for 2005 and 2006, but then “uncapped” the taxable value of the parcels for tax year 2007, based on the 2004 transfer. Michigan Properties appealed, arguing that under MCL 211.27a(3), when a taxpayer correctly files a property transfer affidavit, the relevant authority has but one year to uncap the property for tax purposes. The court agreed with Michigan Properties that uncapping was strictly limited to the year following the transfer, if the transferee reports the transfer as required. Otherwise taxpayers would be subject to “perpetual uncertainty.” Michigan Properties, LLC v. Meridian Township, 2011 WL 1273519 (Mich.App.) April 5, 2011.

NORTH CAROLINA – Not expert enough. After receiving tax notices from the Wake County Revenue Department, Marathon Holdings, LLC appealed the valuations of its three aircraft to the County Board of Equalization and Review. The County Board affirmed the valuations, and Marathon appealed to the State Property Tax Commission. Marathon claimed that the taxation statute violated the uniformity requirements of the North Carolina Constitution and the equal protection clause of the United States Constitution, and offered the testimony of Kirk Boone, a Commission staff member, in support of its argument. In offering his testimony, Marathon argued that, because Boone taught classes across the State to county tax assessors, he could testify that the tax statutes were applied inconsistently from county to county, thus supporting its equal protection argument. The Commission excluded Boone’s testimony, and the Court of Appeals affirmed. The testimony was not necessary to prevent manifest injustice to Marathon. Even if Boone’s teaching experience could be said to qualify him to testify about how counties handled property valuation and taxation, Marathon could have avoided calling a staff member by subpoenaing tax assessors from various counties to establish the alleged inconsistency of tax valuation across the State. In the Matter of Appeal of Marathon Holdings, LLC, 2011 WL 1238311 (N.C.App.) April 5, 2011.

MASSACHUSETTS – Income capitalization approach used to “adjust” RCNLD appraisal of utility property. Boston Gas Company applied to the Boston board of assessors for abatement of the tax imposed on its rate-regulated utility property in the city of Boston for fiscal year 2004. After being denied abatements by the assessors, the company appealed to the Appellate Tax Board. With respect to the company’s personal property, the board determined that a valuation methodology according equal weight to the property’s net book value and its reproduction cost new less depreciation provided a reliable estimate of the fair cash value of the property. Since that value exceeded the assessed value, the board denied the company relief. With respect to the company’s real property, the board concluded that neither the company nor the assessors had provided a sufficient basis for valuing the property, and so left the assessed value unchanged. The plaintiff filed a notice of appeal from the decision of the board, and the Supreme Judicial Court of Massachusetts granted direct appellate review. The court began by noting that various methods are used to value taxable utility personal property. These include (1) a determination of the property’s net book value, (2) an income capitalization valuation, (3) a sales comparison valuation, and (4) a determination of reproduction cost new less depreciation. Net book value, defined as “the original cost of the property at the time it was originally devoted to public use, less accrued depreciation,” is the appropriate method for valuing utility property unless the assessors offer evidence to show that special circumstances render such a valuation unreliable. The court found that the assessors had met their burden in this regard by introducing detailed evidence of prior utility sales that featured acquisition premiums.

The court observed that although the board’s final valuation rested on an equal weighting of net book value and the RCNLD approach, the RCNLD approach relied on the outcome of the assessors’ expert’s separate income capitalization approach. After estimating the cost of reproducing the property in the RCNLD approach, and after accounting for physical depreciation and functional obsolescence, the expert took the further step in the RCNLD analysis of accounting for the external, or economic, obsolescence of the property as hypothetically determined by simply decreasing the RCNLD value to the value derived from the income capitalization approach. Although the court deferred to the board with respect to its choice of methodology, it remanded for the board to consider potential errors in the estimation and capitalization of earnings in the income capitalization analysis of the valuation of the personal property. The court agreed with the board’s conclusion that there was insufficient evidence to determine the value of the real property, and thus affirmed the board’s decision to leave the assessed value undisturbed since the burden of proof was on the company to show that it was excessive. Boston Gas Company v. Board of Assessors of Boston, 458 Mass. 715, 941 N.E.2d 595 (2011)

FLORIDA – Leasehold interests in government property subject to Florida intangible personal property tax. Boca Airport, Inc. and two other companies are “Fixed Base Operators” that provide goods and services to the public on land leased from the government by offering hangar space for private and commercial aircraft, aviation fuel, aircraft repairs, tie-down services, pilot briefing and weather information services, and amenities for pilots and the public in the form of food, beverages, ground transportation, and reservations for rental cars and lodging. In 2008, the Florida Department of Revenue issued intangible personal property tax assessments to the companies under section 199.023(1)(d), Florida Statutes (2005), which subject to taxation the leasehold interests of nongovernmental lessees on government-owned real property “predominantly used for … commercial purposes” where rental payments are due. The companies appealed, arguing they were exempt from intangible personal property tax under sections 196.199(2)(a) and 196.012(6), Florida Statutes, which exempt from ad valorem taxation nongovernmental lessees on government-owned real property who serve “a governmental, municipal, or public purpose or function.” The court held that while their leasehold interests are exempt from ad valorem taxation pursuant to sections 196.199(2)(a) and 196.012(6), the Department’s assessment of intangible taxes was proper under the plain language of section 199.023 (1)(d), which excludes from exemption “leases of governmental leasehold property for commercial purposes where rental payments are due.” Boca Airport, Inc. v. Florida Department of Revenue, 2011 WL 890945 (Fla.App. 4 Dist.) March 16, 2011.