Cost Containment Advisors

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October 2012 Newsletter

October 1, 2012 | Newsletter
TEXAS – Misapplication of statutory allocation formula costs Southwest Airlines $25 million. Tex. Tax Code § 25.25 (c) allows changes to the appraisal roll for the preceding five years to correct a “clerical error” that affects a property owner’s tax liability. Southwest Airlines Co. sued the Dallas Central Appraisal District and Dallas County Appraisal Review Board alleging it had made a clerical error when reporting the fair market value of its aircraft fleet allocable to Dallas County for tax years 2003 through 2007.
Section 21.05 of the Tex. Tax Code sets out an allocation formula for determining the taxable value of aircraft used in interstate commerce. The formula takes into account the fair market value of the aircraft and degree of contact with the state. Specifically, the allocation percentage is calculated by (1) taking the number of departures from the State of Texas, (2) multiplying by 1.5, and (3) then dividing by 8,760 (the number of hours in a year). The resulting percentage represents the amount of time the aircraft operated in Texas during that year and is therefore the percentage of the aircraft taxable in Texas. The allocation percentage is applied to the fair market value of the aircraft to determine the taxable value.

Southwest filed business personal property renditions for tax years 2003 – 2007 by applying the statutory allocation formula on the number of departures of the fleet as a whole instead of computing the formula for each individual aircraft. In 2008, in response to an inquiry from another department, Southwest’s property tax manager discovered that had Southwest calculated the allocated value of its fleet on an aircraft-by-aircraft basis, it would have paid nearly $25 million less in taxes for the years in question.

Although the trial court agreed with Southwest and ordered the appraised value of the aircraft reduced for the tax years in question, the Court of Appeals reversed. The Tex. Tax Code § 1.04 (18) defines “clerical error” as an error: “(A) that is or results from a mistake or failure in writing, copying, transcribing, entering or retrieving computer data, computing, or calculating; or (B) that prevents an appraisal roll or a tax roll from accurately reflecting a finding or determination made by the chief appraiser, the appraisal review board, or the assessor; however, “clerical error” does not include an error that is or results from a mistake in judgment or reasoning in the making of the finding or determination.” “ What Southwest wants,” said the Court of Appeals, “is to revise the methodology it used to calculate the renditions. Applying one methodology when another is either called for or would produce better results is simply not a clerical error as that term is contemplated by the statute.” Dallas Central Appraisal District v. Southwest Airlines Co., 2012 WL 210964 (Tex. App. Dallas, Jan. 24, 2012).

CONNECTICUT – Charitable exemption claim may not be raised in defense of action to foreclose municipal tax lien. The plaintiff town brought a foreclosure action against the Saugatuck Land Trust Co., seeking to foreclose tax liens on three of its properties for the years 2006 through 2009. Saugatuck filed a special defense stating that it is a charitable organization and, as such, is exempt from property taxation under state law. The town moved to strike the special defense on the basis that a claim of unlawful assessment of taxes cannot be raised in an action to collect those taxes, and the court granted the motion. A taxpayer may not plead as a special defense to a property tax lien foreclosure action that the property is entitled to a charitable exemption and so is exempt from taxation. Such a claim may only be raised by taking an appeal from the property tax assessment within the time permitted by statute. Town of Weston v. Saugatuck Land Trust Co., 2011 WL 3890994 (Conn. Super., July 19, 2011).

ARKANSAS – Supreme Court rejects claim that the ad valorem tax on oil and gas royalties is an illegal exaction prohibited by the Arkansas Constitution. Tax assessors in Arkansas assess an “ad valorem royalty tax” against property owners and companies exploiting oil and gas located on their property The tax is calculated by using an “average contract price” for the sale of the oil or gas derived from the owner’s property, multiplying that price by a “working interest percent,” subtracting the production expenses (set at 13%), and multiplying the total by a .20 assessment rate to obtain an “Assessment Value per Thousand Cubic Feet of Average Daily Production.”

A group of taxpayers, owners of the oil and gas in, on and under their respective properties located in several counties, brought suit against the County Assessor, challenging the tax on a number of grounds: (1) the assessment of an ad valorem tax on properties from which there is production of oil and gas, without assessment of such ad valorem tax on properties that contain oil and gas but from which there is no production, violates the Equal Protection Clauses of the Arkansas and U.S. Constitutions; (2) royalties paid for the sale of oil or gas produced from their properties are “intangible personal property,” and Ark. Code Ann. § 26–3–302 prohibits levying an ad valorem tax on money; (3) the oil or gas upon which the royalty is paid is included in the ad valorem taxes assessed against the property owners prior to the time that the oil or gas is removed from the their property, resulting in double taxation of the same property; (4) the oil or gas upon which the royalty is paid is assessed a severance tax and an income tax, resulting in multiple taxation of the same property; (5) the tax upon which royalty is paid for oil or gas production and sale is a privilege or excise tax in that it is assessed after the oil or gas is separated from the realty in which it is located, and is a tax upon the privilege of separating such oil or gas, or upon the sale of such oil or gas, and is therefore a privilege or excise tax in violation of Ark. Code Ann. § 28–58–110; (6) the tax is an income tax that the counties are not authorized by law to assess; and (7) the “average contract price” used in the determination of the ad valorem tax is not based upon and does not reflect the actual contract prices paid for oil or gas produced from the property owned by the taxpayers, a violation of Arkansas Constitution article 16, section 5.

The Circuit Court dismissed the taxpayer’s lawsuit, and the Supreme Court affirmed, on the basis that the taxpayers failed to make a proper illegal exaction challenge. The taxpayers actually took issue with the manner in which the tax was assessed, not the tax itself. The court first noted that mineral interests constitute tangible real property, subject to property tax. The court observed that the taxpayers in no way dispute the validity of an ad valorem tax on oil and gas. The crux of the taxpayers’ complaint, said the court, is that the tax assessed against them is illegal because of when it is assessed—at the point of sale. The taxpayers argue that to value the gas for an ad valorem tax based upon a price at a distant market, after it is separated from the ground, is a misapplication of an ad valorem tax and greatly distorts the value to the prejudice of the landowner because, at that point, the value of the gas has been enhanced by capture, treatment and transportation to a point of sale. However, Ark. Code Ann. § 26-26-1110 (c) expressly provides that oil and gas that remains as a mineral in the ground is to be valued at zero, but allows a value to be assessed for tax purposes if it is produced and sold. Flaws in the assessment procedure, no matter how serious, do not make the exaction itself illegal – the taxpayer’s remedy is to appeal to the county equalization board. Nor is the tax an illegal duplicative tax, said the court, because Ark. Code Ann. § 26-58-109 expressly authorizes a severance tax in addition to the general property tax. Finally, the court rejected the taxpayers’ Equal Protection claim because they failed to show that they were situated similarly to owners of nonproducing mineral interests, and because the gist of their claim was that the value of nonproducing mineral interests has been set at zero while they are taxed at some higher value – an objection with how taxes are assessed, not to the tax itself. May v. Akers-Lang, __S.W.3d__, 2012 Ark. 7, 2012 WL 90015 (Jan. 12, 2012).

TEXAS – Taxpayer who forgot to deduct depreciation in valuation rendered to appraisal district was not entitled to correction as “clerical error” under Tex. Tax Code Ann. § 1.04 (18). LFD Holdings rendered appraisals of its merchandise inventory to the Cameron County Appraisal District for tax years 2003, 2004 and 2005 which, by oversight, did not deduct any amount for depreciation of the property. The District then valued the property in accordance with LFD’s rendered values, and notified LFD accordingly. When LFD discovered the error, it appealed the District valuations to the District’s appraisal review board, which dismissed the appeal. LFD then brought suit against the District, claiming that “clerical errors” were made in determining the market value of its inventory for the tax years in question. Relying on Lack’s Valley Stores Ltd. V. Hidalgo County Appraisal District, 2011 Tex. App. LEXIS 4752 (Tex. App. – Corpus Christi June 23, 2011), the court said that the District’s failure to account for depreciation of LFD’s inventory was the result of a “deliberate determination” in which it assessed the property and gave it a value which it deemed appropriate, not a “mistake in writing or copying,” or a “simple, inadvertent omission made while reducing a judgment into writing,” such as would qualify as a “clerical error” under the statutory definition. LFD Holdings, LLP v. Cameron County Appraisal District, 2012 WL 29337 (Tex. App. – Corpus Christi, Jan. 5, 2012).

CALIFORNIA – Court of Appeals rules that State Board of Equalization regulation combining petroleum refineries’ fixtures with their land and improvements as a single appraisal unit (Rule 474) violates statute requiring separate appraisals (Cal. Rev. and Tax. Code Section 51 (d)). Under Proposition 13, adopted in June 1978, California real property owners do not pay property taxes on unrealized or non-monetized increases in the value of their real property as it is defined under the law. In its original version, Proposition 13 did not address what would occur when the market value of real property declined below its trended or indexed taxable value—its Proposition 13 value—due to a disaster or economic conditions. In November 1978, the voters of California addressed this issue by adopting Proposition 8, which amended Proposition 13 by providing that the taxable trended or indexed value of real property enrolled on an assessor’s books may be adjusted down to reflect its actual fair market value when the actual fair market value of the property declines below its taxable trended or indexed value, due to a disaster or economic conditions.

Until recently, the California State Board of Equalization followed California Code of Regulations, title 18, section 461 in determining “real property value changes” resulting from a “purchase, change of ownership or a decline in value.” Rule 461(e) provides: “Declines in values will be determined by comparing the current lien date full value of the appraisal unit [i.e., its value in the event it was exposed for sale in a fair, open market transaction] to the indexed base year full value of the same unit [i.e., the taxable value of the appraisal unit as measured and enrolled under Proposition 13] for the current lien date. Land and improvements constitute an appraisal unit …. For purposes of this subdivision, [i.e., for purposes of determining a decline in value] fixtures and other machinery and equipment classified as improvements constitute a separate appraisal unit.”

In September 2006, after Rule 461 had been applied to petroleum refineries for more than 25 years, Board of Equalization members voted to adopt new Rule 474 to address specifically “the valuation of the real property, personal property, and fixtures used for the refining of petroleum.” Rule 474 differs from Rule 461 in a number of ways, but most notably, by providing that “the land, improvements, and fixtures and other machinery and equipment classified as improvements for a petroleum refining property are rebuttably presumed to constitute a single appraisal unit.”

The petroleum industry opposed the adoption of Rule 474 on the ground that a special valuation methodology applicable to petroleum refinery properties only was based on the false premise that such properties should be considered unique from other manufacturers, such as breweries or sawmills, for purposes of assessing the taxable value of “real property.” In 2008, the Western States Petroleum Association filed suit for a declaratory judgment that Rule 474 violated Proposition 13 and the petroleum refiners’ right to Equal Protection. The trial court granted the Association’s motion for summary judgment on the basis that Rule 474 was inconsistent with both the statutory and constitutional law of California.

In affirming the trial court, the Appellate Court noted that fixtures associated with industrial properties have always been valued separately, to account for depreciation. Rule 474 “fails to fully account for reductions in value due to depreciation and obsolescence or other factors … by permitting increases in land value to offset declines in fixtures value.” The Appellate Court rejected the Board’s argument that Cal. Rev. and Tax. Code section 51 (d), which prescribes formulas for fixing the two real property value figures which are to be compared in determining whether a decline in value has occurred, may be construed to mean that the value of real property at one type of industrial enterprise may be assessed using a “sold as a single unit” appraisal formula, while the value of real property at a different type of industrial enterprise may be assessed by viewing the property as having separate parts. The statute requires that fixtures be assessed as a separate appraisal unit of real property. Western States Petroleum Association v. State Board of Equalization, __ Cal Rptr.3d __, 202 Cal. App. 4th 1092, 2012 WL 149633 (Cal. App. 2 Dist., Jan. 19, 2012).

UTAH – “Non-exclusive possession” exemption to Utah privilege tax (U.C.A. § 59–4–101) applies unless possession is exclusive against all parties, including the property owner. Alliant Techsystems, Inc. is a defense contractor that leases property from the federal government pursuant to a “facilities use agreement.” Salt Lake County levied a privilege tax on the property in the same amount as the property tax that would have been assessed if the property were not owned by the federal government. Utah’s privilege tax statute (U.C.A. § 59–4–101) provides that an entity may be taxed on the privilege of beneficially using or possessing property in connection with a for-profit business, when the owner of that property is exempt from taxation. To be assessed a privilege tax, three statutory criteria must be satisfied: first, the property being used or possessed must be of the type that ordinarily is exempt from taxation; second, the property must be used or possessed by a private individual, association, or corporation in connection with a for-profit business; and finally, the use or possession of the property cannot fall into one of the privilege tax statute’s exemptions.

Alliant Techsystems appealed the imposition of the privilege tax to the Salt Lake County Board of Equalization, and later to the Utah State Tax Commission, on the basis that it was entitled to the “non-exclusive possession” exemption under the statute because the Navy exercised management and control of the property. Both the Board and the Commission rejected Alliant Techsystems’ argument, so Alliant challenged the ruling in the District Court, which granted summary judgment in favor of the Board. On appeal, the Utah Supreme Court reversed and remanded. The Supreme Court held that the District Court erred in determining that the term “exclusive possession” as used in the statute meant “exclusive” as to third parties only. The Supreme Court remanded the case back to the District Court because the Court determined that there remained genuine issues of material fact as to the degree of control that the Navy retained over the property which was the subject of the facilities use agreement. Alliant Techsystems, Inc. v. Salt Lake Board of Equalization, __P. 3d__, 700 Utah Adv. Rep. 89, 2012 UT 4, 2012 WL 169763 (Jan. 20, 2012).

NEBRASKA – Placing personal property tax return in office “outgoing mail” box not sufficient to avoid late penalty if return does not arrive on time. Midwest Renewable Energy’s controller prepared its 2009 personal property tax return and deposited it, correctly addressed and with proper postage, in the office’s “outgoing mail” box on April 23, a week prior to the May 1 due date. The return, for reasons unknown, never arrived at the Lincoln County Assessor’s office, and on August 27, 2009, the assessor sent Midwest a notice of failure to file a personal property tax return, and applied the 25 percent statutory penalty. On appeal, the Nebraska Court of Appeals held that the penalty was proper. Although Neb. Rev. Stat. § 49-1201 requires that a tax return be treated as made and received when “mailed,” Midwest’s controller failed to place the return in a regular U.S. Postal Service depository, which was a necessary prerequisite to establish the receipt-of-mail presumption. Midwest Renewable Energy, LLC v. Lincoln County Board of Equalization, 19 Neb. App. 441, 807 N.W.2d 558 (Dec. 27, 2011).

OREGON – Tax court finds equipment retailer’s efforts to establish real market value of his equipment using Craigslist and eBay unconvincing. Dean Stockwell buys used commercial dishwashers and then leases them to various businesses in Oregon and elsewhere. After Stockwell failed to file a personal property tax return with the Lane County Assessor for the 2009-2010 tax year, the Assessor added the property to the assessment and tax rolls as “omitted property” and set the “real market value” at $108,000, later reduced to $50,352.

Stockwell appealed the assessments, representing himself and his company, claiming that the value of his business equipment was $11,420. At trial, Stockwell, who has been in business for more than twenty years, testified that he pays between $200 and $500 for the used machines he purchases, and then leases those machines for amounts ranging from $1500 to $2000 per year. According to Stockwell, he buys most of his equipment from sellers marketing their goods on two well-known Internet goods and services marketers: eBay and Craigslist. The court found that Stockwell acquired the equipment at the bottom end of the value range, and “simply was not persuaded that Stockwell was paying fair market value.”

The County Assessor’s valuation of Stockwell’s equipment at $50,352 was based upon cost information on the dishwashers obtained over the Internet from another commercial dishwasher retailer and then adjusted for depreciation based on information he obtained from the Oregon Department of Revenue. The court accepted the Assessor’s valuation, holding that Stockwell failed to show by a preponderance of the evidence that his equipment had been overvalued. Kleen Solutions Inc. v. Lane County Asssessor, 2012 WL 75810 (Or. Tax Magistrate Div., Jan. 10, 2012).

GEORGIA – Change in valuation pending final determination of appeal is not correction of “clerical error” authorized by OCGA § 48-5-299 (a). In 2003, Allen and Jennifer Denyse paid $1,525,000 for commercial property located in Douglas County, Georgia. In 2008, the Board of Assessors listed the fair market value of the property as $3,822,332, and the taxpayers appealed to the Board of Equalization, which set the fair market value at $1,992,000. The Board of Assessors appealed that value to the Superior Court. While the appeal was pending, the Taxpayers filed their 2009 return on the property and listed the fair market value as $1,767,893. On May 15, 2009, the Board sent the taxpayers a tax assessment notice listing the fair market value as $1,992,500 and stating the reason for the value as “Return Made by Taxpayer.” Three days later, the Board sent a second notice valuing the property at $3,814,088, slightly lower than the Board’s original 2008 value, and stating, “Reason: 2008 Value Reinstated Pending Court Decision.” Eight days after that, the Board sent a third notice, again listing the value as $3,814,088, and stating, “Reason: 2008 Value Reinstated Pending Court Decision Correction Notice.”

Mr. and Mrs. Denyse appealed the 2009 value to the Board of Equalization, which found that the property “value did not increase from 2008–2009” and set the 2009 value at $1,992,500. The Board of Assessors appealed that value to the Superior Court, and the court rendered judgment for the taxpayers on the ground that the Board of Assessors lacked the authority to issue multiple notices with differing values except to correct a clerical error. The Board of Assessors then appealed to the George Court of Appeals, claiming that the second and third notices did indeed merely correct a clerical error in the original notice. The Court of Appeals disagreed, and affirmed the Superior Court’s judgment. OCGA § 48-5-299 (a) “empowers the Board to issue a new assessment notice to correct [an] obvious and undisputed clerical error.”

Here, however, the Board’s second and third notices were not sent merely to remedy a clerical error, but rather to revise the Board’s view of the proper value of the property during a pending appeal of the prior year valuation. This difference in value, said the Court, was not the result of a clerical error, such as the omission of a digit or the transposition of numbers, but went instead to the substantive valuation decision made by the Board. Douglas County Board of Assessors v. Denyse, 2012 WL 540079 (Ga. App., Feb. 21, 2012).