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The Michigan Tax Tribunal (“MTT”), Attorney General’s Office, and State Tax Commission (“STC”) released updates regarding property tax issues and procedures this year that can help townships in the new year. In addition, the Court of Appeals and Supreme Court have recently released property tax-related decisions that may impact how townships are assessing properties for tax collection. In this E-Letter we discuss and highlight those updates and decisions.
Big Box Litigation Update: Will 2018 Be More Favorable for Townships Fighting Tax Appeals?
For years, “big box” retail stores have been slashing their property taxes by appealing to the MTT and lowering assessments to a fraction of construction costs, even for brand new buildings. Starting in approximately 2008, it seemed like every Meijer, WalMart, Lowe’s, Target, Kohl’s, and every other major retailer started appealing their taxes. The big box retailers argued that the custom buildings built to the exact specifications of a big box retailer were worth much less than the cost of construction. The theory was based upon the notion that no subsequent buyer would find equal value in the building. The theory found traction in the MTT through numerous decisions. According to an estimate by the Michigan Association of Counties, and as reported by the Detroit Free Press, local tax revenues have been reduced by over $100 million statewide since 2013 as a result of big box appeals. But recently, the Michigan Supreme Court rejected an appeal by a big box retailer.
The most recent case involves a more than 150,000 square foot Menards in Escanaba. Menards appealed its 2012 through 2014 property taxes, which were based on a true cash or market value of approximately $8 million for each year. Menards contended, based on an appraisal report, that the property was worth $3.3 million for all three years. The City’s assessment was based on the cost approach. Menards’ value estimate was essentially based on the sales comparison approach. Menards’ comparable sales followed the “dark store” theory of valuation, relying on sales of vacant or “dark” buildings to value an occupied, big box retail store. The City argued that following the dark store theory of valuation results in erroneous, low values because sales of vacant big box stores are typically for uses other than the property’s highest and best use (due to deed restrictions on use, for example).
After the initial MTT hearing, the MTT adopted Menards’ value and rejected the City’s value. The Court of Appeals then reversed the MTT and remanded the case, holding that because there were flaws in both parties’ approaches to value, the MTT must make a new determination of value after the parties present additional evidence. The Court of Appeals also held that: (1) deed restrictions limiting the potential uses of a “comparable” property likewise reduce the number of potential buyers of the property – and there was insufficient evidence presented at the MTT level as to the effect of the deed-restricted sales relied upon by Menards; and (2) the MTT improperly rejected the City’s cost approach – since the deed restrictions on the sales of other big-box stores limited the market, the MTT should have examined the cost approach to value.
On October 20, 2017, the Michigan Supreme Court denied Menards’ application for leave to appeal. The case has now returned to the MTT for further proceedings. The MTT has assigned a three-judge panel to hear the case, and the next status conference is scheduled for January 11, 2018. The purpose of the status conference is to discuss whether the parties should have the opportunity to file additional valuation evidence, the trial process, and scheduling deadlines for the evidence mentioned by the Court of Appeals.
The outcome of this case will be important for townships as this may exemplify the weakening of the dark store theory, the use of deed restrictions, and the sales comparison approach. Stay tuned in 2018 as we continue to watch this significant issue.
Disabled Veteran’s Exemption and “Ownership.”
Where a property is owned by a trust, a disabled veteran residing in the property is not entitled to the disabled veteran’s exemption because he or she is not the owner. The “owner” for purposes of the disabled veteran’s exemption is the holder of legal title. Joanne Evangelista Revocable Trust et al v City of Farmington Hills. This is important for those disabled veteran’s applying for the exemption, as it may be denied.
Clarifying the Charitable Institution Test.
To qualify for a tax exemption as a charitable institution, the property must be owned and occupied by an institution that: (1) is a nonprofit; (2) is organized chiefly, if not solely, for charity; (3) does not offer its charity on a discriminatory basis; (4) brings people’s minds or hearts under the influence of education or religion; (5) does not charge for profit; and (6) need not meet any monetary threshold of charity if the overall nature of the institution is charitable. The analysis of whether an institution’s fees account for more than what is needed for its successful maintenance should be conducted under the fifth factor. The third factor intends to exclude institutions that discriminate by restricting who benefits from the charity without purpose. Any restrictions, in order to still qualify for the exemption, must bear a reasonable relationship to the organization’s legitimate charitable goals. But the “reasonable relationship” test is broad. Any reasonable restriction that furthers a charitable goal (that passes the fourth factor) is satisfactory. Baruch SLS, Inc v Tittabawassee Township.
Applying the Charitable Institution Test.
Where a foundation provided funds benefitting service area communities, subject to a restriction that proposals were properly researched and documented and would advance one of the foundation’s core elements (eating better, moving more, avoiding unhealthy substances, or connecting with others in a healthy way), such restrictions are reasonably related to the foundation’s charitable goals, meeting the “reasonable relationship” test for the exemption. For the foundation’s wellness center membership fees, scholarship opportunities to low-income individuals were restricted by verifying the applicant’s financial status and requiring use of the facility at least twice a week. Likewise, such restrictions are reasonably related to the foundation’s goals of creating a culture of wellness and fostering sustained health improvements, meeting the “reasonable relationship” test for the charitable exemption. Chelsea Health & Wellness Foundation v Scio Township et al.
Grimm Factors Revisited.
Before dismissing an appeal for a taxpayer’s failure to comply with MTT rules or orders, the MTT must consider seven factors (Grimm v Treasury Dep’t): (1) whether the violation was willful or accidental; (2) the party’s history of refusing to comply with previous court orders; (3) the prejudice to the opposing party; (4) whether there exists a history of deliberate delay; (5) the degree of compliance with other parts of the court’s orders; (6) attempts to cure the defect; and (7) whether a lesser sanction would better serve the interests of justice. Where the MTT’s notice of hearing was automatically rerouted to a taxpayer’s “clutter” email folder, the MTT must consider the seven Grimm factors before deciding whether to dismiss the case. Peach Tree Association, LLC v Henrietta Township.
Incompatible Offices: Board of Review and County Board of Commissioners.
Michigan’s Incompatible Public Offices Act prohibits the same person from simultaneously holding two or more incompatible public offices. In an opinion released in August 2017, the Michigan Attorney General opined that the offices of county commissioner and local board of review member are incompatible because the county-level public office was deemed to serve in a supervisory capacity over the local-level public office. In addition, and for the same reason, the offices of township assessor and county commissioner are incompatible; the offices of township board of review member and county assessor are incompatible; and the offices of county commissioner and city treasurer are incompatible. AG Opinion No. 7297, August 31, 2017.
Principal Residence Exemption and Rentals.
Michigan’s principal residence exemption (or “homestead exemption”) provides an exemption from the tax levied by a local school district for school operating purposes, if the property is owned and occupied as a principal residence by that owner. The Michigan Department of Treasury Guidelines include instructions on how to treat property that is occasionally rented out, but would otherwise qualify as homestead property: “[I]f an owner rents his [or her] property for more than 14 days a year, the property is not entitled to a principal residence exemption.” The Treasury Guideline is based on a federal income tax law that allows an owner to rent their principal residence for less than 15 days during a calendar year without declaring it as a rental property on their tax return. But the Guideline is inconsistent with Michigan’s General Property Tax Act (GPTA), and the GPTA controls whether a property is entitled to a principal residence exemption. Thus, renting one’s home for more than 14 days does not disqualify a homeowner from receiving a principal residence exemption. Rentschler v Melrose Township.
MTT Adding Omitted Property.
Typically, value for property that was previously omitted from the tax rolls is added to the rolls by filing a petition with the STC. MCL 211.154 authorizes the STC to add omitted property to the tax roll. However, where a taxpayer challenges his or her assessment and brings an appeal to the MTT, the MTT must make an independent determination of value, which includes the issue of any omitted property. Therefore, the MTT has jurisdiction to add the previously omitted property to the tax roll. Sunnybrook Golf Bowl & Motel v Sterling Heights.
Where a previously privately-owned golf course donates land to a local governmental entity, and the governmental entity contracts with a private, for-profit business to manage the property, the private entity may not necessarily be a “user” subject to taxation under Michigan’s lessee-user law. If property otherwise exempt is leased, loaned, or used by a private corporation in connection with a business conducted for profit, the lessee or “user” of the property is subject to taxation. The question of whether a property is entitled to a tax exemption is strictly construed against the taxpayer (the burden of proof is on the taxpayer to prove entitlement to the exemption). But the question of whether a lessee or user is subject to taxation is strictly construed in favor of the taxpayer (the burden of proof is on the government to prove imposition of a tax). If the government does not prove that the user of otherwise tax exempt property is using the property in connection with a business conducted for profit, then the property is left exempt, and not subject to the lessee-user tax. Northport Creek Golf Course v Leelanau Township.
MTT Updates and STC Bulletins:
- The MTT keeps the public, assessors, and attorneys updated with developments and procedure updates by electronic updates called “GovDelivery.” To subscribe to the MTT’s GovDelivery message system, go to www.michigan.gov/taxtrib, click on “GovDelivery,” and then click “subscribe.” Copies of all of the MTT’s prior GovDelivery messages are available in .pdf format on the MTT’s website as well.
- The MTT is going paperless. Beginning with the 2017 tax year, all Entire Tribunal cases are being saved electronically. Beginning in 2018, all Small Claims cases will be saved electronically. While Townships may continue filing document electronically or in paper form, paper documents will be scanned in at the MTT and then destroyed.
- Electronic copies of files can be accessed online. Go to www.michigan.gov/taxtrib and click on “Tax Tribunal Docket Search.” Searches can be done by docket number, petitioner name, or township (respondent name).
- The taxable value inflation rate for 2018 is 1.021. The 2018 capped value formula is: 2018 capped value = (2017 taxable value – losses) x 1.021 + additions.
- The STC issued a Bulletin addressing transfers of ownership (Bulletin 20 of 2017). In Michigan, transferring ownership of property causes the taxable value of the property to be uncapped in the calendar year following the transfer. When the “uncapping” occurs, the taxable value becomes equal to the State Equalized Value. Thereafter, the taxable value remains “capped” (limited to increases of 5% or less). In 2018, the “capped” increase is 2.1% (see 2018 inflation rate above). Some transfers are not “transfers of ownership” causing an uncapping, however. A “transfer of ownership” is defined as the “conveyance of title to or a present interest in property, including the beneficial use of the property, the value of which is substantially equal to the value of the fee interest.” “Transfers” include conveyances by deed; conveyances by land contract (on the date the contract is entered into); conveyances to a trust, with some exceptions; conveyances by distribution from a will, with some exceptions; and conveyances of more than 50% of the ownership interest in a corporation, partnership, sole proprietorship, limited liability company, or other legal entity. “Transfers” do not include transfers of property from one spouse to the other spouse; transfers from a decedent to a surviving spouse; transfers of a portion of property subject to a life estate or life lease; transfers of residential property to a spouse, mother, father, brother, sister, biological child, adopted child, or grandchild; transfers among commonly controlled corporations and other entities; and transfers of qualified agricultural property, if the property remains qualified agricultural property after the transfer. The complete list of transfer of ownership exemptions is found in MCL 211.27a(7).
- The STC issued a Bulletin addressing poverty exemptions (Bulletin 6 of 2017), which apply to principal residences. Even if a corporation or a limited liability company meets the definition of a principal residence or a qualified agricultural property, it is not eligible to receive a poverty exemption. STC Bulletin 6 also includes a discussion of taxpayer and local unit responsibilities, as well as sample resolutions and applications.
- The STC issued a Bulletin addressing qualified errors (Bulletin 5 of 2017). July and December Boards of Review have authority to correct qualified errors. Corrections are generally limited to the current year and the immediately preceding year only. Corrections of principal residence exemptions may be made for the current year and the three immediately preceding years. Qualified errors include clerical errors, mutual mistakes of fact, errors of measurement or calculations, errors of omission or inclusion of part of the real property being assessed, errors regarding the taxable status of real property being assessed, errors by the taxpayer in preparing the personal property statement, and errors in denying a claim of exemption for eligible personal property under MCL 211.9o.
- To access STC bulletins, go to www.michigan.gov/treasury. Hover over the “Local Government” Tab in the middle of the top of the page and click “State Tax Commission.” Then click “State Tax Commission Bulletins & Correspondence” in the list in the middle of the page.
— Ross K. Bower II
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Fahey Schultz Burzych Rhodes PLC, Your Township Attorneys, is a Michigan law firm specializing in the representation of Michigan townships. Our lawyers have more than 150 years of experience in township law, and have represented more than 150 townships across the state of Michigan. This publication is intended for our clients and friends. This communication highlights specific areas of law, and is not legal advice. The reader should consult an attorney to determine how the information applies to any specific situation.
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