A recent ruling has been made regarding Creative Label, Inc. v. Tuck, Weakley County Assessor of PropertyTennessee Court of Appeals, No. W2010-01557-COA-R3-CV.  In this case, it was decided that a payment in lieu of Tennessee property taxes did not serve to discharge a lessee’s total tax liability on its leasehold interest on property leased from a city’s industrial development board (IDB) but, instead, merely reduced the tax liability by an amount equal to the payment in lieu of taxes. The court found nothing in the legislative history of the applicable sections as they existed at the time to indicate that the Legislature intended a blanket exemption from taxation upon payment of a minimal payment in lieu of taxes.

When property is conveyed to an IDB or to an HEHB, the ownership interest in the property clearly is exempt from taxation. The user of the property holds a leasehold interest in the property, however, and in structuring a tax abatement transaction, the potential taxation of this leasehold interest must be considered. In the case of real property, Tennessee case law clearly indicates that a leasehold interest may be taxed separately from the fee interest in the real property if the leasehold interest has any value. Therefore, if the leasehold interest of a lesseefrom an IDB or HEHB is determined to have value, the lessee may not receive the expected benefit of a tax abatement agreement. In the case of leased personal property, the applicable statute provides that leased personal property is assessed to the lessee unless that property is the subject of a lawful tax abatement agreement with a local government. Therefore, in the case of personal property, as long as a legal tax abatement agreement is in effect, the leasehold interest of the lessee should not be taxable. Consequently, when structuring a tax abatement agreement that involves real property, careful attention should be paid to minimizing the value of the leasehold estate.

Silver Oak Advisors has an expertise in this area and has recently assisted Fortune 500 companies in Alabama and Georgia to receive refunds during the abatement period and negotiate future filing methodologies as they exited the bond agreements.