Ohio Tax. Ohio Tax & Jobs Significant Developments in Real Property Valuation & Classification

Transcription

1 26th Annual Tuesday & Wednesday, January 24 25, 2017 Hya Regency Columbus, Columbus, Ohio Ohio Tax Ohio Tax & Jobs Significant Developments in Real Property Valuation & Classification Mark A. Engel, Partner Bricker & Eckler LLP Cincinnati Tuesday, January 24, :00 a.m. to 12:15 p.m.

2 Biographical Information Mark A. Engel, Partner, Bricker & Eckler LLP 9277 Centre Pointe Drive, Suite 100 West Chester, OH Fax Mark Engel is the partner in charge of Bricker & Eckler s Cincinnati/Dayton office. Mark's practice is taxation, with concentrated experience in all aspects of state and local taxation, including tax planning, compliance, and litigation in sales and use, income, commercial activity, public utility, and property taxation. In addition, Mark works in the areas of economic development, executive compensation, federal personal and corporate taxation, and nonprofit and social enterprise tax issues. He serves as tax counsel to the Ohio Manufacturers' Association and played a key role in helping to design several provisions of Ohio tax reform efforts. Mark has briefed and argued more than 80 cases in the Supreme Court of Ohio, and appeared in every appellate district in Ohio. He successfully litigated several precedent setting cases involving key issues of state taxation in Ohio. In addition, Mark negotiated numerous incentive packages for enterprises looking to expand in Ohio. He served as tax counsel to the electric industry during industry restructuring, including assisting in drafting numerous tax provisions to the restructuring legislation. He also was heavily involved in legislation to reform the taxation of alternative energy production facilities. Mark graduated from the University of Michigan with a B.A. in sociology, and received his J.D. and LLM (Taxation) from Capital University Law School.

3 26th Annual Ohio Tax Conference 1 OHIO TAXES & JOBS Significant Developments in Real Property Taxation Mark Engel mengel@bricker.com th Annual Ohio Tax Conference 2 Overview Leased fee/fee simple Reliance on Auditor s value Independent investigation by BOR Odd procedural outcomes Exemption cases and leased properties Jurisdiction Transfer of title vs. transfer of ownership interest

4 26th Annual Ohio Tax Conference 3 Leased fee/fee simple Large structure, typically constructed to user s specifications First generation user contests valuation Some are owner-occupied Some are sale-leaseback transactions Validity of leased property sales, dark store sales, and income and expense comparable properties 26th Annual Ohio Tax Conference 4 Leased fee/fee simple Rite Aid of Ohio, 2016-Ohio-371, and Lowe s Home Centers 2016-Ohio-372 Both owner-occupied stores Appraisals submitted in both cases Is an adjustment necessary for leased properties? Value in exchange is the normal standard of valuation If property is owner-occupied, leased fee properties will normally need to be adjusted No adjustment needed if property is special purpose property specific finding is required Impact of R.C fee simple as if unencumbered

5 26th Annual Ohio Tax Conference 5 Reliance on Auditor s value BOR makes an adjustment to value On appeal BTA disagrees with evidence presented to BOR What is the BTA s recourse Reinstate the auditor s value Independently determine value 26th Annual Ohio Tax Conference 6 Reliance on Auditor s value Dublin City Schools, 2016-Ohio-3025 General rule: So long as evidence presented to BOR was competent and minimally plausible, BOE may not invoke the auditor s initial valuation. Four conditions for the rule: Property owner file complaint or counter-complaint BOR reduce value based on evidence presented BOE appeals to BTA BOR decision based on evidence other than a sale May reinstate if evidence is not competent, or if BOR fails to explain its reduction

6 26th Annual Ohio Tax Conference 7 Independent investigation by BOR BOR conducts a hearing, consults with its staff after the hearing, and issues a decision 7991 Columbus Pike LLC, 2016-Ohio-5758 BOR announced, without objection, that it would investigate Copy of additional information included in the record At CCP, property owner did not present any additional evidence to the contrary R.C authority for BOR to investigate complaints 26th Annual Ohio Tax Conference 8 Procedure: Odd remedies Withintime, Inc., 2016-Ohio-2944 Action for declaratory judgment, mandamus and injunctive relief that contested valuation was not appropriate Special statutory scheme for contesting valuation must be followed Ryan LLC, 2016-Ohio-3234 Failure to appeal a decision of the BOR May not bring a separate action under R.C to enjoin the illegal levy or collection of a tax based on BOR decision

7 26th Annual Ohio Tax Conference 9 Exemptions leased properties Property owned by for-profit entity, leased to nonprofit entity 250 Shoup Mill, 2016-Ohio-5012 Property used for a community school, excess revenues Geneva Area Rec. Edn. & Athl. Trust, 2016-Ohio year lease Used for recreational purposes for public at large Lessee generated revenues in excess of $15,000,000 ShadowArt Productions, 2016-Ohio year lease Owner leased with a for-profit motive 26th Annual Ohio Tax Conference 10 Jurisdiction House of Prayer Ministries, BTA (5/31/16) Notice of appeal signed by a non-lawyer NOA no longer needs to specify error; it is sufficient to make a short and plain statement of the claimed errors R.C (C)

8 26th Annual Ohio Tax Conference 11 Transfers of Title/Ownership Interest Property sold at price in excess of existing valuation New owner files conveyance fee statement Local school district files complaint to increase value to purchase price Owner not happy What if the ownership interest in the owner, rather than the title to the property, is transferred? 26th Annual Ohio Tax Conference 12 Transfer of Title/Ownership Interest Salem Medical Arts Purchase of stock of single-asset corporation, claim value is price paid for stock Supreme Court rejected the argument Stock represents value of the entity, not the property Gahanna-Jefferson Pub. Schools Sale of partnership interest Partnership interest is personal property Transaction not a sale of the property

9 26th Annual Ohio Tax Conference 13 Transfer of Title/Ownership Interest BTA declining to follow these cases: Parkland Associates LTD (June 25, 2014) Akron City Schools (March 6, 2015) BTA claims cases involve no going concern value Documents in Akron City Schools admitted parties were attempting to avoid valuation increase complaint School Districts response Check with appraisers Look for name changes Look for new mortgages 26th Annual Ohio Tax Conference 14 Q & A Mark A. Engel Partner, Bricker & Eckler LLP Cincinnati Office 201 East Fifth Street, Suite 1110 Cincinnati, OH mengel@bricker.com

10 Ohio Tax & Jobs 2017: Developments in Real Property Taxation 26 th annual Ohio Tax Conference January 24, 2017 Mark A. Engel, Esq. Bricker & Eckler LLP Sale: In Lunn v. Lorain Cty. Bd. Of Revision, Ohio St. 3d, 2016-Ohio-8075, the Court ruled that evidence of the sale of a property within a reasonable time of tax lien date raised the presumption that the sale was arm s length and represented the value of the property. This shifted the burden of producing evidence that the sale was not arm s-length to the party opposing the sale. Where such evidence was provided, the burden of going forward shifted back to the original proponent of the sale to establish the arm s-length nature of the transactions. In Westerville City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision, 146 Ohio St 3d Ohio-1506, the Court held that so long as appropriate adjustments were made for the passage of time, an appraiser could rely upon a sales occurring more than two years remote from the tax lien date in deriving a value for the subject property, and it was not error for the BTA to rely upon such evidence. In Columbus City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision, 146 Ohio St. 3d 470, 2016-Ohio-757, the Court held that the testimony and written report of an appraiser that contained information of changes in the general market could be used to rebut the presumption that the price paid in a sale of the property, occurring two years prior to tax lien date, was recent. In this case, the appraiser was able to point to sales of properties that actually demonstrated changes in the market during the interim period. In Columbus City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision, 2016-Ohio-4554 (10 th Dist.), the Court of Appeals upheld a decision of the BTA that the sale of a property was arm slength and not conducted under duress. There was no evidence the price was inflated, or that lenders refused to finance the transaction. In fact, an appraisal done at the time of the purchase supported the purchase price. Also, the fact the purchaser who occupied the property believed it had to buy the property in order to avoid moving was not sufficient to invalidate the sale. In Zimmer v. Stark Cty. Bd. of Revision, 2016-Ohio-7056 (5 th Dist.), the Court of Appeals affirmed a decision of the BTA that the price paid in a recent purchase from Fanny Mae raised the presumption of value and that the burden to demonstrate that the sale was not arm s-length shifted to the party opposing the use of the transaction. Since that person failed to represent any evidence to show that the sale was not arm s-length, the BTA s reliance on the sales price was upheld. In Brecksville-Broadview Heights Bd. of Edn. v. Cuyahoga Cty. Bd. of Revision, 2016-Ohio-3166 (8 th Dist.), the Court of Appeals affirmed a decision of the BTA that the price paid for a property during an auction did not reflect the value of the property. While the auction was open, there v1

11 was no reservation to reject any or all bids by the owner and there was no evidence regarding the owner s motive in selling the property. Therefore, the presumption of R.C that the price paid at auction shall not be taken as the value of the property was not overcome. In Columbus City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision, BTA No (August 10, 2016), the BTA held that the purchase price paid for a property represented the value of the property. Although inventory and a telephone system were also purchased, those items were separately listed and it did not appear the items were included in the purchase price, but rather were paid separately. In Hilliard City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision, BTA No (Feb. 8, 2016), the BTA held that a sale subject to a number of contingencies that were not fulfilled until after tax lien date was too remote to establish the value of the property. In Columbus City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision, BTA No (Feb. 9, 2016), the BTA held that a sale through bankruptcy was forced sale that did not establish the value of the property. Therefore, where the BOR erroneously reduced value based upon that sale, it was proper to reinstate the auditor s original valuation. In Easy Stop I Inc. v. Franklin Cty. Bd. of Revision, BTA No (Feb. 26, 2016), the BTA held that oral testimony that the acquisition of real estate included the acquisition of the inventory and equipment of an on-going business, together with an appraisal of the real estate, was sufficient to overcome the presumption that the price paid for the property was its value. In Columbus City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision, BTA No (August 9, 2016), the BTA ruled that substantial changes made to a building between the date it was purchased and the subsequent tax lien date rendered the sale remote for purposes of determining the value of the property. In Town Square Limited Partnership v. Franklin Cty. Bd. of Revision, BTA No (Aug. 22, 2016), the BTA held that the price paid for property at a sale after the tax lien date did not represent the value of the property on tax lien date where the property had been converted from single use to condominiums during the interim period. These changes rendered the sale remote. In 5009 Cherry Creek LLC v. Franklin Cty. Bd. of Revision, BTA No (Aug. 9, 2016), the BTA declined to find that the price paid for property acquired at auction represented the value of the property. R.C specifically provided that the price is not evidence of value when the underlying transaction was an auction or a forced sale. Lacking evidence that the transaction otherwise qualified as a valid transaction, the value was not changed. But see Keny Blvd Estates LLC v. Madison Cty. Bd. of Revision, Ohio BTA No (Aug. 2, 2016), in which the BTA found that the purchase of a property in an on-line auction was a qualifying sale such that the price did represent the value of the property. Leased Fee/Fee Simple: In Rite Aid of Ohio, Inc. v. Washington Cty. Bd. of Revision, 146 Ohio St. 3d 173, 2016-Ohio- 371, the Court ruled that information from leased-fee properties should be adjusted when used to determine the value of unleased properties. It also held that under Ohio law, value in exchange v1 2

12 is the rule, and value in use is a limited exception to that rule when the property in question is special purpose property. See also Steak N Shake, Inc v. Warren Cty. Bd of Revision, 145 Ohio St. 3d 244, 2015-Ohio In Lowe s Home Centers, Inc. v. Washington Cty. Bd. of Revision, 145 Ohio St. 3d 375, Ohio-372, the Court vacated and remanded a decision of the BTA involving an owner-occupied big box property. The parties offered competing appraisals; the taxpayer s appraisal was based on the assumption that the taxpayer would vacate the property in the event of a sale, while the BOE s appraisal assumed the subject property was occupied if transferred. The Court reiterated that where a property is unencumbered, leased comparables will ordinarily need to be adjusted to account for the difference unless the property is a special purpose property. Because the BTA failed to make such a finding, it was error for the BTA to base its decision on an appraisal that failed to make such adjustments. The Court also noted that the amendment of R.C in 2012, which required the value of property to be determined as if unencumbered, did not apply to the prior years that were in issue in this appeal. In Jackson Local Schools Bd. of Edn. v. Stark Cty. Bd. of Revision, BTA No (Aug. 8, 2016), the BTA determined that the price paid in the acquisition of property subject to a lease represented the value of the property. It asserted that one of the rights included in fee simple ownership is the right to lease the property. In short, the existence of the encumbering lease did not render the sale something other than fee simple. Although the tax year in question was 2014, the BTA did not address the provision in RC that the estate to be valued was the fee simple estate as if unencumbered. Procedure: In Musto v. Lorain Cty. Bd. Of Revision, Ohio St. 3d, 2016-Ohio-8058, the Court ruled that it was not error for the BTA to refuse to continue a hearing where a party was unable to explain why a witness was absent or how long a delay was necessary for the witness to appear. In addition, where a party introduces evidence of value, but does not sufficiently establish a foundation for it such that the BTA refuses to accept it, the BTA may retain the auditor s value. Finally, the Court noted that it was troubled that an attorney who participated in the BOR proceedings as a representative of the county auditor and who then appeared as the BTA as an assistant county prosecutor to represent the auditor and BOR. However, it held that absent a showing of prejudice to the taxpayer, it would not rule that this required a remand to the BOR to redetermine the value of the property. In Olentangy Local Schools v. Delaware Cty. Bd. of Revision, Ohio St. 3d, 2016-Ohio- 7381, the Court ruled that the BTA must evaluate the evidence upon which the BOR bases a reduction in value, and the BTA must make an independent determination of value where the BOR rejected the auditor s value. In Copley-Fairlawn City Sch. Dist. v. Summit Cty. Bd. of Revision, Ohio St. 3d, Ohio-1485, the Court held that where a BOR changed the value of property based on an appraisal report, it was error for the BTA to ignore the report and revert to the auditor s valuation where the report was prepared for financing purposes, opined a value as of a date other than tax lien date, and for which the appraiser did not testify. The Court noted the appraisal was prepared v1 3

13 for business purposes and was relied upon by the parties for those purposes. Since the BOR had determined value based upon the report, the BTA should have used the evidence, including the report, to make an independent determination of value. In Cannata v. Cuyahoga Cty. Bd. of Revision, 147 Ohio St. 3d 129, 2016-Ohio-1094, the BOR failed to transmit a recording of its proceedings. When the BTA reduced the value of the property based upon an appraisal for which the appraiser appeared before the BOR and provided testimony, the Court rejected the arguments of the BOR that the record before the BTA was incomplete and, therefore, the BTA s decision was unreasonable. However, a BOE that elected not to participate before the BTA could still object to the BTA s decision on the basis that the record was incomplete. Therefore, the Court vacated the decision of the BTA and remanded for a reconsideration of the value of the property. In Johnson v. Clark Cty. Bd. of Revision, 2016-Ohio-7518 (2 nd Dist.), the Court of Appeals rejected several procedural arguments raised the property owner. It held that the owner waived his argument that the BOR refused to allow certain evidence when he failed to introduce that evidence to the BTA. It rejected the argument that both bodies denied him due process by initially indicating time limits for his hearing, even though both bodies extended the hearings to accommodate all the evidence that was presented. Finally, it held that it would not reverse factual findings of the BTA where those findings were based on its weighing of the evidence that was presented. In 7991 Columbus Pike LLC v. Delaware Cty. Bd. of Revision, 2016-Ohio-5758 (5 th Dist.), the Court of Appeals held that where a BOR announces without objection by the property owner that it is going to make further investigation after the hearing, does so, and bases its decision on that information, it is not error for either the BOR, or the Court of Common Pleas on appeal, to consider that information. Not only is the BOR authorized to make such an investigation, but the property owner could have presented contrary evidence on appeal and failed to do so. In Withintime, Inc. v. Cuyahoga Cty. Fiscal Officer, 2016-Ohio-2944 (8 th Dist.), the Court of Appeals upheld a decision of the court of common pleas dismissing an action for declaratory judgement, mandamus, and injunctive relief that contested the valuation of two parcels of property for years for which valuation complaints had not been filed. The Court of Appeals held that given the special statutory scheme for contesting valuation, declaratory, injunctive relief would be inappropriate. In Turney LLC v. Cuyahoga Cty. Bd. of Revision, 2015-Ohio-4086 (8 th Dist.), the Court of Appeals reversed the decision of the court of common pleas and held that a purchaser that received title at a closing occurring before the date the complaint was filed was the owner of the property entitled to file the complaint under R.C , notwithstanding the fact the title was not recorded until 6 weeks after the filing deadline. The Court of Appeals specifically rejected the argument that recordation of the title was necessary to effect a transfer of title as between the seller and buyer. In Ryan, LLC v. Franklin Cty. Treasurer, 2016-Ohio-3234 (10 th Dist.), the Court of Appeals affirmed a decision of the Court of Common Pleas that the failure of a property owner to appeal v1 4

14 a decision of the Board of Revision precluded a separate action under R.C to enjoin the illegal levy or collection of taxes resulting from the BOR decision. In House of Prayer Ministries #2 LLC v. Testa, BTA No (May 31, 2016), the BTA rejected two arguments made against its jurisdiction. First, it rejected the argument that a notice of appeal that was signed by a non-lawyer was jurisdictionally defective because it constituted the unauthorized practice of law. Second, it held that the change in R.C (C), that a notice of appeal shall contain a short and plain statement of the claimed errors, means that the notice no longer must specify the errors complained of with the particularity required by prior law. Procedure - Appraisals In Jefferson Industries Corp. v. Madison Cty. Bd. of Revision, Ohio St. 3d, 2016-Ohio- 7089, the Court ruled that the BTA must discuss the differences between dueling appraisal reports and explain why it accepted portions of one or the other. Its failure to do so is unreasonable and unlawful. In Columbus City Schools v. Franklin Cty. Bd. Of Revision, Ohio St. 3d, 2016-Ohio-7466, the Court held that the BTA could base a determination of value on a restricted use appraisal because the evidentiary value of the appraisal report was not limited by the USPAP characterization of the report. The Court also stated that market data need not be set forth in the report where the appraiser testifies and the information is subject to examination and cross examination. It noted that if the BOE felt the appraisal report was defective, it could have presented its own evidence of value. In Lucy C. Luisi, Trustee, v. Summit Cty. Bd. of Revision, BTA No (May 31, 2016), the BTA held that appraisal evidence, which provides an opinion of value as of tax lien date, was prepared for tax valuation purposes, and was attested by a qualified expert, is competent probative evidence of value. Where an opponent provides no evidence and merely attempts to take issue with the actions of the appraiser, the opinion of value expressed in the appraisal will be deemed the value of the property. In Columbus City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision, BTA No , the BTA held that the it was property to determine the percentage of completion for a property under construction with reference to the testimony of an appraiser, rather than merely based on the AIA payments made in relation to the total contract price. The appraiser explained how he arrived as his calculation and the BOE failed to demonstrate that the portion of the payments made was a better indicator of value. See also Residences at Riverpointe Place LLC v. Franklin Cty. Bd. of Revision, BTA Nos, and 4862 (January 22, 2016). Reinstate Auditor s Value In Dublin City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision, 147 Ohio St. 3d 38, Ohio-3025, the Court provided additional guidance when the BOR may revert to the auditor s initial valuation. It stated that so long as the evidence presented to the BOR was competent and minimally plausible the BOE may not invoke the auditor s initial valuation. It noted the four elements for invoking the rule were (i) the property owner files a complaint or a countercomplaint; (ii) the BOR has reduced value based on the evidence presented by the owner; (iii) v1 5

15 the BOE is the appellant before the BTA; and (iv) the BOR s decision is based on an appraisal rather than a sale. In Copley-Fairlawn City Sch. Dist. v. Summit Cty. Bd. of Revision, Ohio St. 3d, Ohio-1485, the Court held that where a BOR changed the value of property based on an appraisal report, it was error for the BTA to ignore the report and revert to the auditor s valuation where the report was prepared for financing purposes, opined a value as of a date other than tax lien date, and for which the appraiser did not testify. The Court noted the appraisal was prepared for business purposes and was relied upon by the parties for those purposes. Since the BOR had determined value based upon the report, the BTA should have used the evidence, including the report, to make an independent determination of value. In Columbus City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision, BTA No (August 9, 2016), the BTA reverted to the value determined by the auditor where it deemed information submitted by the property owner to the BOR as insufficient, and the BOR failed to explain the basis for its reduction in value. Exemption In 250 Shoup Mill, LLC v. Testa, 147 Ohio St. 3d 98, 2016-Ohio-5012, the Court ruled that property that was leased to a nonprofit lessee that used the property as a community school was not entitled to exemption. The record showed that the owner, which failed to demonstrate that it was a charitable entity, generated a profit through the operation of the property. In Innkeeper Ministries, Inc. v. Testa, Ohio St. 3d, 2016-Ohio-5104, the Court reversed a decision of the BTA and held that a property at which religious leaders could stay without charge when participating in religious activities on other portions of the property did not qualify for exemption as being used exclusively for charitable purposes. The property was not available to the general public and the owner failed to demonstrate that it was a charitable institution. In Christian Voice of Central Ohio v. Testa, Ohio St. 3d, 2016-Ohio-1527, the Court found that property used to broadcast Christian radio programming, thereby raising millions of dollars of revenue annually, qualified for exemption as a house used exclusively for public worship. The three members of the minority had difficulty as to how the broad cast of Christian music and programming that raises millions of dollars equates to the claimed tax exemption as a house of public worship. In Rural Health Collaborative v. Testa, 145 Ohio St. 3d 430, No Ohio-508, the Supreme Court rejected an argument of the Tax Commissioner that a real property exemption case involving land owned by a kidney dialysis clinic that was a lessee of a different property, in a different tax year, was not controlling precedent for the current case. The BTA had reviewed the record in the current case and reached a different conclusion as to the exempt nature of the clinic lessee. The Supreme Court agreed that in a new case, the BTA had to base its decision on the record presented in the current case, rather than be bound by the prior case. On remand, the BTA determined that the entity using the property was not a charitable institution and denied the exemption v1 6

16 In Geneva Area Recreational, Educational & Athletic Trust v. Testa, 146 Ohio St. 3d 345, Ohio-2695, the Court ruled that property leased for 99 years to a nonprofit organization and used for recreational purposes by the general public nevertheless remained taxable because the owner was a for-profit entity, the lessee charged most patrons for their use of the facility, and the lessee generated excess revenues in excess of $15,000,000. In Cuyahoga Cty. v. Testa, 145 Ohio St. 3d 157, 2016-Ohio-134, the Court ruled that where the tax commissioner granted an exemption for a portion of the property, but not for another portion, it (and the BTA) lacked jurisdiction to consider the two portions together where the property owner failed to raise that issue in its notice of appeal. In ShadowArt Productions, Inc. v. Testa, 146 Ohio St. 3d 263, 2016-Ohio-511, the Court held that while R.C permitted a lessee under a 30-year lease to file an application for exemption for real property, the strictures for an exemption that apply to an owner still apply. Thus, where the owner of the property was a for-profit entity, the property was not entitled to a charitable use exemption notwithstanding the fact the lessee may have been a charitable entity. In Veolia Water North America Operating Service, Inc. v. Testa, 146 Ohio St. 3d 52, 2016-Ohio- 756, the court affirmed the BTA and Tax Commissioner in finding that only a portion of a water pollution control facility qualified for exemption. The facility treated both residential and industrial effluent. By flow, industrial use made up only 17 percent of the pollution treated at the facility. Therefore, the Court rejected the argument that the entire facility was intended to be used for industrial water pollution control, and affirmed the decision to examine each separate piece of equipment to see whether it qualified for exemption. In Columbus Regional Airport Authority v. Testa, BTA No (May 11, 2016), the BTA construed the limitation on property tax exemptions for property owned by a port authority contained in R.C The statute limits the exemption to property that is leased for no longer than one year. While month-to-month tenancies that renew automatically appear to be a perpetual lease that defeats the exemption, the looked to the rental terms, which provided for rent to be determined annually. The lease also contained a provision that the hold-over provision beyond the base term of the lease was not intended to create a tenancy of any duration. In Columbus City Schools Bd. of Edn. v. Testa, BTA Nos , (June 15, 2016), the BTA upheld the determination of the Tax Commissioner that property, owned and used by a fraternal lodge, qualified for exemption under R.C (D). The Lodge and its predecessors had existed for more than 85 years, and financial documents demonstrated that rental from the building never exceeded $36,000 in any year v1 7

17 Avoiding Valuation Increases When Property Is Sold? By Mark A. Engel Real property is assessed for taxation at 35 percent of its true, or fair market, value. Fair market value is defined as the price that would be paid for the property in an arm s length transaction, both parties fully knowledgeable about the facts and neither under compulsion. Where property changes hands in an arm s length transaction within a reasonable time (before or after) tax lien date, the price paid is the value of the property. Ohio imposes a transfer tax on transfers of title to real property. The tax, collected by the county in which the property is located, is a specified percentage of the price paid. When real property is transferred the purchaser must complete and file a conveyance fee statement. This statement, completed under oath, includes information regarding the total price paid in the transaction, the portion that may be attributed to assets such as tangible personal property, and the amount paid for the real property. In many cases, the price paid for the property exceeds the value at which the property is currently assessed for taxation. By searching these records, it becomes an easy matter for school districts, especially, to find those properties and to file valuation complaints to have the value of the property increased. Many districts are diligent in this task, hiring third parties to review transfer records for properties located within the district. While the owner has an opportunity to present evidence that the transaction was not arm s length or that the price paid was provided for more than the real property, in most cases the price reflected on the conveyance fee statement ends up being the new value of the property. Ohio also recognizes that the ownership interest in a partnership or limited liability company is an interest in personal property. Thus, it distinguishes between the property interest in the entity, and the property interest of the entity in the property that the entity owns. It is a v1 8

18 common occurrence that pass-through entities are formed to hold title to, and perhaps to operate, individual properties, such as an office or an apartment building. The question arises whether by the purchase of the partnership interest in the partnership, or the single membership interest in the limited liability company, the new owner can avoid the inevitable increase in value occasioned by the price paid for the property, 1 or, whether the transfer of the membership interest in a pass-through entity that owns the property as its only asset, is a proxy for the sale of the property that represents its value for tax purposes. Two cases decided almost 20 years ago set the stage for this question. In Salem Med. Arts & Development Corp. v. Bd. of Revision, 2 a corporation owned a medical office building in which it leased offices to doctors, and the surrounding land. The purchasers of the stock of the corporation attempted to have the value of the property reduced to the sum of the total amount paid for the stock and certain liabilities that were assumed. In affirming the decision of the Board of Tax Appeals rejecting this position, the Supreme Court observed: Valuing property based on a company s stock price fails to account for the complexities of corporate finance.... Stock value represents the company s value.... The sale price of all of the shares of stock of a company, therefore, does not establish the value of that company s real property (emphasis in original). The Court observed that stock represents the value of an entire going concern, and not just of its assets. 1 An additional benefit is the avoidance of the payment of the transfer tax, which is typically 1-2 percent of the price paid. As the transfer tax is revenue for the use of the county in which the property is located, not having to pay the transfer tax can have a significant impact on county resources and services Ohio St. 3d 193, 694 N.E.2d 1324 (1998) v1 9

19 Two years later the Court reached a similar decision with respect to the sale of the partnership interest in a partnership. In Gahanna-Jefferson Public Schools v. Bd. of Revision, 3 a partnership owned an apartment complex. The Board of Education argued that the sale of the partnership interest should be considered as a sale of the real property owned by the partnership. The Court flatly rejected that position. It noted that Ohio law defines a partnership interest as personal property; thus, the sale of a partnership interest was the sale of personal property, not of real property. In doing so, the Court expressly relied upon its decision in Salem Med. Arts & Development Corp. for the proposition that the transaction was not a sale of the real property that made up the sole asset of the entity. In recent years, purchasers of real property have sought to benefit from these two decisions by acquiring the membership interest of a limited liability company that owns real property, as opposed to acquiring the real property, itself. While this technique initially enjoyed some success, two relatively recent decisions from the Board of Tax Appeals have failed to follow this precedent and have concluded that the sale of the ownership interest of a single-asset entity was the sale of the property. In Parkland Associates LTD. v. Bd. of Revision, 4 the transaction involved the sale of the partnership interest in the partnership that owned the property. The Board distinguished the decisions of the Supreme Court on the basis that the instant transaction involved no going concern value. The Board did not let the fact there was no evidence as to this point interfere with its conclusion Ohio St. 3d 450, 732 N.E.2d 978 (2000). 4 BTA Nos and (June 25, 2014) v1 10

20 Similarly, in Akron City Schools v. Bd. of Revision, 5 the membership interest of the limited liability company that owned an apartment complex was sold. The property was owned by a partnership; the partnership created a single-member limited liability company and dropped the property down into the limited liability company. It then sold the membership interest in the limited liability company. In that case, the membership purchase agreement outlined the transaction. The agreement also recited that the transaction was designed to avoid the real estate transfer taxes and the valuation process. Once again, the Board concluded that the limited liability company had no other going concern value, therefore the transfer of the membership interest was the sale of the real property. One might argue that the parties to the transaction in Akron City Schools were a little too cute and deserved the decision that they received. However, that observation ignores the larger issue of whether such transactions, which are perfectly legal, establish the value of the property for tax purposes. The Supreme Court has clearly indicated that the sale of the ownership interest in an entity is not the sale of the property owned by the entity. Even where an entity holds title to real property as its primary asset, there may be other assets, including going concern value, a track record of success, and the good name of the member involved. The Board of Tax Appeals never inquired as to the existence of other factors. Rather, it simply accepted the argument of the boards of education that in the case of a single-asset entity, there is no other value to be acquired. Not only is that position unlawful in light of the Supreme Court s decision and Ohio statutory provisions regarding the nature of the ownership interest in a partnership and limited liability company, but it would also appear to be unreasonable in the absence of facts to support it. 5 BTA No (March 6, 2015) v1 11

21 Current controlling case and statutory law seem to support the position of the owners that the sale of the ownership interest is not the sale of the property. Therefore, the price paid in the transfer of that ownership interest cannot be taken as the value of the property. If this situation is to be changed, a couple of alternatives exist to do so. Existing statutory law provides that when the property is sold in an arm s length transaction within a reasonable time of tax lien date, the price paid shall be taken as the value of the property. It would be a relatively direct matter to amend the statute to include the transfer of the ownership interest in a single-asset entity. The concern of the counties that they are not collecting conveyance fees on these transactions could likewise be addressed by a statutory amendment to allow the imposition of the conveyance fee on such transactions. Alternatively, where the ownership interest in the entity is sold, one of the parties might be tasked with the burden to establish the existence or nonexistence of going concern value and that the price paid represents the value of the property. This is similar to the current state of the law when property sold: A sale is presumed to be at arm s length and the party who seeks to avoid the sale price has the burden of establishing that the transaction is not at arm s length. This might place one of the parties at a disadvantage initially, but the discovery process at the Board of Tax Appeals and the Board s investigative powers would assist in this endeavor. School districts have also begun to search mortgage records. The assumption made is that when a mortgage is given on a property, the lender is lending no more than 75 percent of the value of the property. Where that presumed value exceeds the existing assessed value, the school district then files a complaint and submits the mortgage as evidence of a sale or the value of the property. Again, a statutory remedy would seem to be the better course to address this issue v1 12

22 The sale of the ownership interest in the entity that owns property, rather than of the property itself, is just another step in the long-standing dance between property owners and taxing jurisdictions. Once this strategy is countered, the parties will move on to the next effort. However the issue is resolved, however, the manner in which the Board of Tax Appeals addressed the question is of dubious validity. Its attempt to distinguish the controlling law reduces respect for the Board in particular, and for the process in general. It is an unacceptable way to address the issue and should not be continued. Ohio parties have a right of direct appeal from decisions of the Board of Tax Appeals to the Supreme Court. One of these cases will inevitably be appealed to that Court for a decision. Until that happens, taxpayers and boards of education will continue to grapple with the issue v1 13