“Tax Uncapping – The Commonly Controlled Entity Exception”

Tax Uncapping – The Commonly Controlled Entity Exception

Some time ago I wrote on real property tax uncapping and exceptions to transfers to relatives within a certain degree of residential real property. Recently, the Michigan Court of Appeals dealt with a similar issue in the context of the transfer of an apartment building to a “commonly controlled entity”. Before getting into the gist of the opinion, let’s review a little history. Back in 1994, as part of general tax reform, the voters of the State of Michigan enacted Proposal A. It amended the state constitution to increase the state sales tax and reduce (for the time being) taxes imposed upon residential real estate. This legislation also included a “cap” on future tax increases on residential real property, which was designed to limit the rate of increases in taxable values (and thus future real estate taxes). The increases were limited to the rate of inflation or 5% per year, whichever was less. (Property taxes are calculated by taking the taxable value of the property – which is roughly one-half of what the property is worth – and multiplying such value by the number of mills (a mill is 1/1000^thof a dollar) imposed by the local taxing authorities).

This artificial valuation or cap, however, would be “blown off”, and the property taxes would be “uncapped,” whenever the property changed hands; i.e. whenever there was a change in ownership. At that point, the taxable value would be reset to the new sales price in the year after the sale was made (assuming an arms-length transaction), and the subject property would be assessed, going forward, based upon such sales price, plus future valuation increases, limited as set forth above.

One of the exceptions to “uncapping” is if the transfer was between commonly controlled entities. In the recent case of TRJ & E Properties, LLC v. City of Lansing, decided April 17, 2018, an apartment building was owned by TRJ Properties, whose ownership was comprised of a father (40%) and 3 of his sons (20% each). TRJ Properties transferred this apartment building to TRJ & E Properties, LLC, which was owned 25% each by the father’s 4 sons. After the transfer occurred the new owner sought an exemption from property tax uncapping under the provisions of the relevant statute, being MCL 211.27(a)(7)(m), which excludes “{ a} transfer of real property … among corporations or other legal entities if the entities involved are commonly controlled.” The City of Lansing, relying on the provisions of a State Tax Commission Revenue Administrative Bulletin, objected to such exemption, claiming the two entities involved were not commonly controlled as they were not 80% owned by the same parties, as such Bulletin required. The Tax Tribunal decided the matter in favor of the Petitioner and the City of Lansing appealed.

While the Court of Appeals declined to adopt any specific percentage as the definition of common control or otherwise set a “bright-line’ test, it found that under the Articles of Organization of the Petitioner (and its predecessor in title) a mere majority of shares of members were required to act. As the sons controlled 60% of the first entity and those same 3 sons controlled 75% of the second entity (the Petitioning party seeking the exemption). The Court found sufficient evidence that such entities were commonly controlled. Thus, in relying upon statutory construction principles and not prior State Tax Commission Bulletins, which do not have the force of law, it found there was indeed common ownership and allowed such exemption, and thus upheld the Tax Tribunal decision.

In making this decision the Court distinguished its rulings in two prior cases in which it denied such exemption. In the first case the Court held that two trusts were not commonly controlled when they had the same Trustees, finding that the Trustee’s only manage – but do not own – the properties involved. In the second case, the Court referenced its decision in a case where the former owner of the Detroit Lions, William Clay Ford, had sought an exemption where he owned the first entity but did not control the second. These distinguishing factors were not present in the recent case.

In order to take advantage of these statutory provisions, a Property Transfer Affidavit (Michigan Department of Treasury Form 2766) must be filed with the local assessor by the grantee (buyer), within 45 days of the date of transfer. Thereafter, the assessor, or state treasurer, may request additional documentation supporting the claimed relationships between the parties, which should be supplied within 30 days of such request, or a fine of up to $200 can be imposed

If you have questions as to what might constitutes “common control”, are involved in a real estate transaction, and believe there may be a possible exception to uncapping due to common ownership in the entities (buyer/seller) or a transfer to certain related parties, please consult the knowledgeable real estate professionals at Damon, Ver Merris, Boyko & Witte, PLC. We can discuss how the transaction is to be structured and possible means of avoiding tax uncapping. The possible tax savings, over the years, can be quite significant. It’s your money. Call us today at (616) 975-9951. – Larry A. Ver Merris / April 23, 2018