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In federal income tax law, restrictions upon tax benefits for commercial real estate license used by exempt organizations have led to converse but in many respect comparable inquiries concerning governmental rights in taxable property. A second use of valuation data permits the recharacterization of property transfers through a comparison of the actual amount paid with the market value of the rights nominally exchanged.
The income tax designation of ambiguous transactions in property as sales, leases, or secured loans often relies upon valuation information in this way. Similarly, transfers of partial interests may be subject to special restrictions when they are found not to be of an arm's-length character, a concern directly tested by a valuation inquiry.In many of these instances, property and income tax disputes face parallel characterization questions in similar factual settings. These mutual problems, and the relevance of valuation data to determinations of ownership in both contexts, present an opportunity for profitable comparison of the two areas and an examination of the ways in which the more successful approaches developed in each may benefit the other.
The classification of partial interests for property tax purposes has remained ill-defined for two reasons. First, as with income taxation, the commonplace equation of ownership with legal title is consistent with economic reality in the great majority of cases. Second, even when rights in a given parcel are divided in a complex manner, the owner is usually taxed upon the value of all interests as a single unit. Property tax assessments are not generally divided among lessors and lessees, mortgagors and mortgagees, or life tenants and remainder-men.
The most important exception to this rule concerns private rights in property otherwise exempt or immune from taxation, such as the interest of a lessee of federal land. The private interest, not being exempt, can be taxed separately even though leaseholds generally are included within the valuation of the entire unit. This expansion of the tax base requires an identification and appraisal of the private partial interest.
Neither the county clerk nor the county assessor is required to search out divided ownerships created by leases, many of which are unrecorded. To impose this search on county clerks and assessors would perhaps prohibitively increase the administrative burdens placed on those county officials, and would eliminate the certainty now present in the unitary assessment method.
The complexities of valuing partial interests in exempt property could be avoided under various alternate tax systems. For example, a property tax could be structured as an annual charge upon the occupant, the extent of the occupant's particular interest having no effect upon the assessment. The Supreme Court has upheld such a tax upon the use of federal property, when the lessee paid an amount equivalent to the tax it would owe if it owned the property outright.
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