How the Grinch Stole All The Personal Property in Who-Ville!
How the Grinch Stole All The Personal Property in Who-Ville!
Sixty years ago this upcoming Christmas Day, Dr. Suess (Theodor Geisel) released his holiday opus, How The Grinch Stole Christmas!. Fifty years ago (minus one week), that book was made into a movie starring Boris Karloff as both the Grinch and the Narrator. It is a magnificent story of anger and theft and meanness … and, eventually, redemption. And a heart growing three sizes that day. But I digress…
One of the classic arguments that arises within many otherwise-straightforward appeal hearings is the differentiation discussion between REAL property and PERSONAL property. Between the “sticks and bricks” of the land and building, and the “stuff” (furniture, fixtures, machinery, equipment, supplies, and inventory) within that structure. The argument varies among asset classes and among the sovereign states. But it is an important argument, as realty and personalty are taxed differently – in some locations, personal property (“personalty”) is not taxed at all. Also, if the “stuff” of personalty is intermingled with the structure (“sticks and bricks”), the tax benefit of the faster depreciation of personalty could become moot. Real property and personal property are not conjoined twins. They need to be carefully, almost surgically, separated…teased apart so that each can be clearly distinguished from the other. I am oversimplifying, but you’re not getting any continuing education credit for reading this blog anyway!
In the most basic form, we can go back to the Grinch. When he decided that he had had enough of the joy of the residents of Whoville in their holiday reverie, he plotted to take all of their “stuff” – because he erroneously assumed that without the celebratory stuff, the spirit of the happy day of Christmas would evaporate into the cold, Who-air. So he masked his intent, and made his way by night to the Town of Whoville with an empty sleigh pulled by the much-abused Max. He went to each building (I’m stretching a bit here – it’s my version of the story after all!) and skulked in, and took away the Christmas tree, the gifts, all the decorations, the furniture, the rugs. Everything and anything that wasn’t nailed down. No, wait – he also took all the stockings which were nail-hung on the mantle! And the holly Who wreath, even the roast beast and the Who pudding! And poor Max lugged the overburdened (with all the stuff) sleigh back up to Mt. Crumpit. He was a mean one, Mr. Grinch!
Although not presented as a case study at any of your certification or licensure courses, the story of the Grinch is a good entrée into the divided world of realty and personalty. At first pass, personalty within a structure is very much like the items which the Grinch removed. Furniture, carpeting, artwork, decoration…and then computers, all-things-moveable, vehicles, inventory, et al … anything NOT attached to the land or building. That first mini-list of personalty fits under the umbrella of tangible personal property , stuff that can be touched or felt. There is a second world of personalty, the intangibles. These include money and money-like items (stocks and bonds), intellectual property, trained workforce, the value of the “flag” of a hotel, and the like. Depending on the asset type, there can be a myriad of intangibles.
That “moveable” aspect of personalty is a bit tricky. For example, a furnace in a building, although technically moveable, becomes affixed to the property and ordinarily becomes part of the realty. The fact that it is affixed drops it into the category of fixtures. But what about a microwave that was installed by a tenant, affixed to the wall with a kit from Sears? In most cases and jurisdictions, at the end of the lease, the tenant has the right to take that microwave with him. What about the stove (on sliders) and the refrigerator (on rollers) in a leased, unfurnished apartment? Since they stay with an apartment from lease-to-lease, are they taxable personalty belonging to the apartment building owner? Is the refrigerator a “fixture” if it is both plumbed in for ice-making and connected to the Internet to make it “smart”? Plants which require human intervention and work, like crops of vegetables, are personalty. What about plants and trees that grow naturally on the land – realty or personalty? What if those trees were planted by the owner, and are regularly trimmed, shaped, watered, mulched, and pampered – almost big-bonsai-like? What about the stream which was installed and secured by the owner, or the bridge that goes to a created island within a created pond? Or the bubblers which keep that pond from freezing in the winter?
What about the trailered-in MRI unit, around which a simple building is constructed to attach its walkway to the hospital and to protect it from the weather elements and security threats? The building can be opened up, and the MRI unit wheeled out, at the end of its useful life. What about the computerized racking system that takes up most of the floor space of a mega-warehouse? It can be disassembled and switched out when a better system is available. What about the WiFi system which enables connections throughout a mall? An apartment? An academic building?
You can see the pitfalls. States and other jurisdictions see the pitfalls, too. Many localities, especially those that tax personalty separately from realty, have volumes of laws and regulations that specify how one tells the difference between the two. Sometimes the jurisdictions can get very specific, to the point of listing the individual items that fall into each category. Even with lists, a taxing authority can fall short. As progress is made in industry and invention and modernization, new “stuff” comes along which didn’t exist when the lists were first made. Where do they fall, before a jurisdiction has the time to add it to a list?
So with all the lists, misses, exceptions, exemptions, and what-ifs, how does a simple tax consultant delve into the world of teasing apart the pieces that make up “property”? First and foremost, it’s best to assume the traverse of this landscape is an obstacle course, at best. Each jurisdiction defines to some extent the differences within its (oft-changing) tax code. So before taking your final steps into this potential world of hurt and missed filings/mixed property types, do your research into the applicable authority’s most recent code. With thanks to the folks who edit the IPT – Property Taxation texts, there are also some general guidelines which might help…might. Remember, this is not a pasture, it’s a potential minefield!
The traditional triad which makes up the general “rules” of determining whether property is real or personal, taken for the most part from variants on English Common Law, is as follows:
Annexation – or the manner and means by which a considered item or element is attached to the undisputed and obvious real property. So, if a questioned piece of property is connected in such a way that removing it would cause material and/or not-easily-reparable damage to the underlying real property, it is usually considered to also be a part of the real property…but not always!
Appropriation – or how intricately or complexly a considered item or element is attached to or intertwined with the realty. You can see immediately that the annexation rule and the appropriation rule can twist among themselves. As in the refrigerator example above, the apartment refrigerators are “attached” and “integrated” into the individual apartments often only by an electrical cord, and maybe a ¼” water line and a WiFi signal. If that is the case, can’t it be considered personalty? Rulings fall in a number of directions. If the refrigerator is installed in a furnished apartment, and therefore considered fundamental to the building’s use as a furnished apartment, the refrigerator can be considered part of the integral real estate which creates the rent base. Which seems to contradict the annexation rule where simply unplugging/unscrewing the unit and rolling it out would cause no damage to the apartment unit. Except if the “damage” was spelled out in the lease. How’s that minefield look now?!
Intention — or what was the original intent of the “installer”, the person who made the initial annexation. If the intent was to make the installation permanent, the item would likely be considered part of the real estate. If the intent was that the item was planned to be eventually removed (perhaps at the end of a lease or other timeline), then the item would likely be considered personal property. Sounds simple, right?
Well, not so easy, Mr. Grinch! All three of these rules, including intention, were initially designed and promulgated for purposes other than taxation matters. But in taxation matters and law, it is imperative that principles (like the three above) be applied both objectively and uniformly. You can see, on the face of it, that just the principle of intention could be utilized in a variety of directions that conflicted with the other two principles.
So in this very high (and seasonal!) level of consideration, where do we stand? Can we still refer to the common law triad? Sure, but with caution. Generally, if there is a statute which lists a particular as personalty, it’s personalty. If a lease specifies that an item is to be removed from a structure at the end of the term (regardless of the damage it might cause to the absolute realty), it’s personalty. If the lease specifies that any item affixed in any manner to the structure becomes part of the building, it’s realty.
You might remember in the Grinch movie that the only other speaking part besides the Grinch/Narrator (and I suppose the residents of Whoville, jointly singing their Christmas morning song!) was little Cindy Lou Who. Cindy Lou awakens when the disguised-as-Santa Grinch is stealing all her family’s things “to take them to [my] workshop, for repairs”. In her innocence she believes the smarmy Grinch, and after a drink of water, returns to a peaceful Eve’s slumber. Would that the classification distinctions between realty and personalty were so simple.
Instead, it is up to the research and clarity and persistence in our discussions to win the day with an assessor. And perhaps to puzzle and puzzle “until [our] puzzler is sore”. For the assessor is not the Grinch, though he may be misguided on a given day or on a few points. Nor is “his heart filled with unwashed socks, his soul full of gunk”. We at Altus are ready and trained and prepared to update our assessor colleagues, and to achieve a fair and equitable and correctly-applied assessment for the coming New Year!
Happy Holidays, and enjoy a Healthy 2017!