July 2010 NewsletterJuly 1, 2010 | appeal to tax court, asset management, commercial property tax reduction, commercial property taxes, corporate property tax savings, Cost Containment, cost containment definition, Department of Revenue, forfeit right to appeal, how to apply for property tax reduction, Increase Assets, methods of cost containment, Newsletter, power plant property tax, Property Tax Code, property tax reduction, property tax reduction consultants
N.C. Court rejects use of standard depreciation tables in assessment of computer equipment: IBM appealed from Durham county’s personal property tax assessment of 40,799 pieces of its leased computer equipment based on the North Carolina Department of Revenue standard depreciation schedule, claiming that an additional adjustment should be made for functional or economic obsolescence. The schedule in question takes a 30 percent deduction for functional and economic obsolescence and then applies straight line depreciation for five years down to a residual value of ten percent, until the property is no longer listed for taxation. IBM Credit argued rapid technological change in the computer industry causes rapid decreases in the market value of computer equipment, and the court agreed. The county claimed that applying the schedule to acquisition cost is similar to the cost approach to value, but the court observed that the county’s approach missed a critical step in the appraisal analysis, particularly when technological improvements in the equipment being trended, such as computers, may have all the utility of the machine being appraised but sell for less money than the subject machine cost several years previous. Historical costs, said the court, simply capture the starting value. Replacement cost new for similar capacity computer machines is the cost to replace identical equipment in the current market.
The court also noted that the schedule failed to address a fundamental issue in the application of any trending or depreciation schedule-the useful life of the property under appraisal. The useful life of most of the computer equipment at issue is three years, based upon the uncontested fact that IBM Credit leases its equipment for three years to most lessees at which time the property reaches its residual value. Yet the schedule assumes a useful life of five years before it reaches its residual value. While it is possible to assume that computer equipment could have a five-year useful life as part of an operating business, such assumption was clearly rebutted by IBM Credit. A solid win for the taxpayer! IBM Credit Corporation, 689 S.E.2d 487 (N.C. App. (Dec. 8, 2009)).
strong>When it doubt, file a return: The federal tax code allows a taxpayer under some circumstances to rely on the inattention or negligence of an attorney, accountant or other tax advisor as “reasonable cause” excusing failure to file a tax return or pay tax. § 6651 (a) Internal Revenue Code of 1986, 26 U.S.C.A. § 6651 (a). Not so with property tax returns. In Oregon, for example, if a required return is not filed, any taxpayer responsible for making the filing who has not done so “shall be subject to a penalty equal to 50 percent of the tax attributable to the taxable personal property of the taxpayer.” ORS 308.296(4). A taxpayer’s lack of knowledge, or the lack of knowledge or failure to carry out the taxpayer’s responsibility by its professional advisor, do not constitute good and sufficient cause for failing to file personal property tax returns. Elim Sushi, Inc. v. Multnomah County Assessor, 2010 WL 2246668 (Or. Tax Magistrate Div. (June 4, 2010)).
Bankruptcy sales relevant to FMV: In an appeal of coke production property, the court could consider the sales price of that property sold in bankruptcy proceedings in determining its fair market value, but evidence of comparable sales was admissible in order to challenge the arm’s length nature of the sale in bankruptcy. Calumet Transfer, LLC v. Property Tax Appeal Board, 2010 WL 1960882 (Ill. App. 1 Dist. (May 14, 2010)).
Easements not taxable, but acquisition costs are: In Central Hudson Gas & Electric Corporation v. Assessor of Town of Newburgh, 2010 WL 2000316 (N.Y.A.D. 2 Dept.), 2010 N.Y. Slip Op. 04381 (May 18, 2010), the taxpayer challenged the real property tax assessments of gas and electric transmission lines, three substations, and a switching station. The transmission lines were located within easements, which are not taxable in New York. The New York Supreme Court held that the easements could not be considered in calculating the reproduction cost of the transmission lines, but the Appellate Division reversed. Application of the cost approach to valuation requires “the inclusion not only of payments for material, equipment, labor and other obvious physical ingredients which go directly into construction, but also of those charges which may be termed indirect or less direct, such as … [the] cost of procuring necessary licenses and the miscellany of other essential overhead or incidental expenses” Matter of City of New York [Salvation Army], 43 N.Y.2d 512, 516 (1978). This is because “a fair and realistic appraisal of reproduction costs must embrace in its reckoning all expenditures that reasonably and necessarily are to be expected in the re-creation of a structure so idiosyncratic as to leave no alternative method by which to measure fair compensation” (id. at 516). Thus, while the easements are not subject to tax as real property, the costs of acquiring the easements, which are costs undeniably necessary to re-creation of functioning transmission lines, are properly considered in calculating the reproduction cost of the taxpayer’s transmission lines.
Check before paying a disputed tax bill: Failure to make timely payment of property tax before the statutory delinquency date, even if the tax is disputed, may result in the forfeiture of a taxpayer’s right to challenge the assessment on which the property tax is based. Hotel Corp. International v. Harris County Appraisal District, 2010 WL 2195461 (Tex. App. – Houston [14 Dist.] (June 3, 2010)). But in some states, the assessment may not be challenged if payment has been made. Connecticut General Statutes § 12-119.
Appeal first to the local board: In Gibbs v. Washington County Assessor, 2010 WL 2165079 (Or. Tax Magistrate Div. (May 28, 2010)), the taxpayer did not appeal its assessment to the county board of appeals before appealing to the tax court. Like many states, Oregon has a structured property tax system that requires a taxpayer wishing to challenge an assessment to petition the local board of property tax appeals within a specified period after receiving notice of its assessment – usually not more than a few months – before appealing to court. If the taxpayer is unhappy with the decision of the local board, it can appeal to court, but it must go to the local board first. There may be statutory exceptions – usually involving illegality of a tax or gross overassessment – but why take the chance?
Send the appeal to the correct address: The taxpayer could not find the address for the clerk of the Clackamas county board of property tax appeals, so it sent its personal property tax appeal to the county assessor on December 31, the due date. Because the applicable statute requires that personal property tax returns be filed with the county clerk by December 31, and not with the county assessor, the taxpayer lost its right to appeal, even though the website from which the taxpayer downloaded the appeal form did not contain the correct address. Classic Mfg. NW LLC v. Clackamas County Assessor, 2010 WL 2165081 (Or. Tax Magistrate Div. (May 28, 2010)).
Consistency can be important: Taxpayers should avoid inconsistency in reporting property values on returns for different types of taxes. In FirstCal Indus. 2 Acquisitions, L.L.C. v. Franklin City Board of Revision, 2010 WL 1816350 (Ohio (May 6, 2010)), the purchaser at a bulk sale of several properties reported one valuation on its conveyance fee statement and another in its appeal to the board of tax appeals. Because of this, the taxpayer was unable to meet its burden of proof that the aggregate sales price of the properties located in Franklin county as reported on the conveyance fee statement did not correctly reflect the aggregate true value of the parcels located in that county for property taxation purposes.
Careful record keeping helps determine tax situs of construction equipment: A Nebraska contractor entered into a construction contract with the Army Corps of Engineers to relocate an existing railroad and build a levy and road in Marshall county. It moved heavy construction equipment to a trailer park in the city of Marysville, which it used as a staging area. Based on the testimony of the taxpayer’s quality control manager, who kept careful records and was able to identify the specific pieces of equipment that were stored at the job site outside the park, in the township of Maryville, not in the city, the Kansas Appellate Court agreed that equipment had a tax situs outside of the city. In re City of Marysville, 223 P.3d 837, 2010 WL 597002 (Kan. App. (Feb. 12, 2010)).
Floating docks and finger piers are real property, not personalty: In Gulia v. City of Bridgeport, 2010 WL 526246 (Conn. Super. (Jan. 10, 2010)), the Connecticut tax court decided that docks and piers are “fixtures,” that is, personal property which has become attached to the realty, and so subject to tax as real property, not personal property. To decide whether personal property is a “fixture,” the court looks at how the personal property is attached to the realty, the nature and adaptation of the property to the uses to which it is put at the time of annexation, and whether the owner intended to make a permanent accession to the realty. The difference can be important, because in Connecticut, failure to declare personal property subjects the owner to a 25 percent penalty assessment.
Recent sales data does not relate back to valuation date: Big Foot owned three convenience stores and an office building in Grant county, Indiana. Following a sale of the four properties, the county assessors sent Big Foot a notice that their assessments had been increased because the sales price disclosure forms filed by Bigfoot indicated that the properties were undervalued. Big Foot challenged the interim assessments as improper on the basis that they were the result of “sales chasing,” “selective reappraisals,” or “spot assessments”. “Sales chasing,” also known as selective reappraisal, is the practice of selectively changing values for properties that have been sold, while leaving other values alone. “Selective reappraisal” occurs when either one taxpayer or a small group of taxpayers are singled-out for revaluation or for first-time assessment when similar property is not assessed for any additional tax liability. “Spot assessment” is the practice of reassessing only those properties that were the subjects of recent sales while leaving undisturbed the assessed valuations of properties in the same class of property that have not been sold. The Indiana Tax Court condemned these practices as arbitrarily, but purposefully, subjecting the owners of comparable properties to both disparate treatment and disproportionate rates of taxation. However, the Court decided the case in favor of Big Foot, not on the basis of selective reappraisal, but because the interim assessments were based on 2002 and 2003 sales prices, which had no probative value with respect to the appropriate valuation date, which was 1999. Big Foot Stores LLC v. Franklin Township, 919 N.E. 2d 621 (Ind. Tax (Dec. 9, 2009)).
Unlit fiber optic cable and empty conduit pipe taxable in Ohio: American Fiber Optic Systems, a telecommunications company, owns and operates a 41-mile telecommunication network or “loop” in Cuyahoga county, Ohio. The network consists of fiber optic cable, conduit pipes, above-ground poles, and computer monitoring equipment. The cable contains 288 strands of fiber bundled together, which run through one conduit pipe throughout the 41-mile loop; only 36 strands of which have ever been “lit” or used to provide telecommunications services. There are also two other conduit pipes in the loop which American Fiber was required by the city to install; they are empty. American Fiber claimed the unlit cable and empty conduits were not subject to personal property tax because they were not “used in business” as required by the applicable statute. The Supreme Court of Ohio disagreed, holding that because American Fiber built its fiber optic network to lease fiber to third parties, the unlit fiber is held for lease, a business use. The empty conduits were also found to be taxable, even though American Fiber claimed it did not own them, because it failed to meet its burden of proof on ownership and valuation. American Fiber Systems, Inc. v. Levin, 2010 WL 1407184 (Ohio (April 7, 2010)).