June 8, 2016

Oops! Board Holds PVA Lacks Statutory Authority to Correct Error

Written By

By: Erica Horn and Maddie Schueler

In Union Underwear Company, Inc., d/b/a Fruit of the Loom v. Russell County Property Valuation Administrator[1], the Russell County Property Valuation Administrator (“PVA”) issued alleged “omitted property” tax bills to the taxpayer for tax years 2009-2014.  The Kentucky Board of Tax Appeals held that the PVA was without statutory authority to issue a “retroactive” assessment.  The case involved industrial revenue bonds (“IRBs”).  Kentucky law permits local governments such as counties and cities to issue IRBs to finance certain types of projects, such as manufacturing facilities that will increase employment and other economic activity.  The IRB structure reduces a portion of the real and tangible personal property taxes otherwise payable by the taxpayer to local and state government.  Kentucky law provides that real and tangible personal property held by a county or city is exempt from property tax (with the exception of an economically insignificant state leasehold tax).  By transferring title in the project to the governmental authority and leasing the project back over a period of years, there is a reduction in the taxpayer’s property taxes during the term of the lease.  Once the IRBs are paid in full, the taxpayer is subject to property tax at regular state and local tax rates.

In this case, the City of Jamestown issued IRBs in order for the taxpayer to construct a manufacturing facility.  The taxpayer conveyed the real property it purchased from the Russell County Development Association and the manufacturing facility to the City in 1983 and the City leased the property back to the taxpayer.  The terms of the lease provided that the lease commenced on the date of the issuance of the bonds and expired on the date the bonds were retired or December 1, 2010, whichever was later.  In 2000, the bonds were paid off and by its terms, the lease expired.  The City was not notified by the trustee of the bonds, as required, that the bonds had been retired.  Thus, while the PVA was assessing the property, the taxpayer continued to receive the statutory exemption from local taxation and the reduced state rate through 2014 when it closed the plant.

In 2015, the PVA sent a letter to the taxpayer stating “he had deemed the property to be omitted property for the tax years 2009-2014” and the PVA issued “omitted tax bills” based on an assessed value of $24,873,800.  Initially, the property was assessed at $4,000,000 and the assessment had increased to $10,000,000 by 2005.  While there was no question that the property should have been taxed at full state and local tax rates once the bonds were retired, the question presented was whether the PVA had the statutory authority to issue retroactive tax bills in this circumstance.  The Board held that the PVA lacked such authority.

The PVA noted that there are two limited circumstances in which a PVA can amend or send additional bills.  Those circumstances included property that was not listed, i.e., omitted property, and instances in which the taxpayer intentionally fails to provide additional information requested in writing by the PVA.  The property at issue was not “omitted property” because it was on the tax rolls nor had the PVA requested information that the taxpayer had failed to provide.  As a result, the Board held that the PVA lacked the statutory authority to attempt to retroactively assess the property and the tax bills were held to be invalid.  It is unknown whether the PVA will appeal.

[1] Kentucky Board of Tax Appeals, KBTA File No. 15-S-01, Final Order No. K-25071 (April 11, 2016).