Taxation of Possessory Interests in Exempt Property Under S.b. 02-157

• Publication year: 2003
• Pages: 81

32 Colo.Law. 81 Colorado Lawyer 2003.

2003, March, Pg. 81. Taxation of Possessory Interests in Exempt Property Under S.B. 02-157

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81

Vol. 32, No. 3, Pg. 81

The Colorado Lawyer
March 2003
Vol. 32, No. 3 [Page 81]

Specialty Law Columns
Tax Tips
Taxation of Possessory Interests in Exempt Property Under S.B. 02-157
by Mark W. Yoder

This column is sponsored by the CBA Taxation Law Section to provide timely updates and practical advice on federal state, and local tax matters of interest to Colorado practitioners

Column Editors

Larry Nemirow, Denver, of Davis, Graham & Stubbs LLP, (303) 892-7443, and John Warnick, Denver, of Holme Roberts & Owen llp - (303) 861-7000

About The Author:

This month's article was written by Mark W. Yoder, Denver, an associate with Otten, Johnson, Robinson, Neff & Ragonetti, P.C. - (303) 575-7552, myoder@ojrnr.com.

Senate Bill 157 authorizes the taxation of possessory interests in property that otherwise is exempt from such taxation under Colorado law. This article discusses the effects of and potential for future litigation under the bill.

Senate Bill 02-157 ("S.B. 157") authorizes the assessment of property taxes on possessory interests in tax-exempt property - namely, real or personal property that is exempt from property taxes. Under Colorado law, there are two general reasons property may be tax-exempt: (1) the property's ownership (for example, tax-exempt property may be owned by public libraries, the state and its political subdivisions, or public school districts);1 or (2) the property's use (for example, property exempt from taxes may be used for a charitable religious use or as an integral part of a nonprofit childcare center).2

The passage of S.B. 157 is perhaps the last round in a see-saw sequence regarding the imposition of tax on possessory interests in exempt property - a process that implicates both federal and state constitutional laws and that has been ongoing since the late 1800s.3 This article provides an overview of the history of the taxation of possessory interests in exempt property in Colorado and discusses the effects of S.B. 157. The article also addresses related issues to be resolved by the trial courts regarding definitions of what constitutes "possessory interests" in exempt property.

Overview of S.B. 157

On June 1, 2002, S.B. 157 was approved by the Colorado General Assembly. It is applicable to property tax years commencing on or after January 1, 2001. S.B. 157 states, in relevant part:

The property tax on possessory interests in real or personal property that is exempt from taxation under this article shall be assessed to the holder of the possessory interest and collected in the same manner as property taxes assessed to owners of real or personal property.4

S.B. 157 codifies the Colorado Supreme Court's position on the taxation of possessory interests in property articulated recently in Board of County Commissioners v. Vail Associates, Inc. ("Vail Associates").5 In Vail Associates, the Court reiterated its long-held position that possessory interests in property otherwise exempt from taxation are taxable under the Colorado property tax scheme.6

S.B. 157 also provides that if a holder of a possessory interest in land that is otherwise exempt from taxation fails to pay the amount assessed on such interest, the delinquent tax will not become a lien against the property itself. Instead, it will be deemed a debt that is due from the holder of the possessory interest to the county in which the possessory interest is located.7 Thus, the unpaid taxes on possessory interests in tax-exempt property will be recoverable in a direct action in debt against the holder of the interest.8

Historical Overview

Possessory interests in tax-exempt property have been taxed on and off in Colorado since the nineteenth century. In 1893, in Estes Park Toll-Road Co. v. Edwards,9 the Colorado Court of Appeals held that a grant of a right-of-way for the construction and operation of a toll road across land owned by the U.S. government had the effect of making the toll road the "property" of the company rather than the government. Thus, this portion of the property was taxable under Colorado law.10 The court found that when the company appropriated the right-of-way, all rights connected with it were removed from the public domain and the use and control of the right-of-way became separate from the underlying, federally-owned, tax-exempt land.

Over the next century, the Colorado Supreme Court decided two cases of note regarding the taxability of possessory interests in tax-exempt property. In Rummel v. Musgrave,11 the Colorado Supreme Court upheld the constitutionality of property taxes assessed on the leasehold interests of lessees of producing mineral mines, including mines leased from the U.S. government.12

In City and County of Denver v. Security Life and Accident Co.,13 the Court held that the City and County of Denver could not assess a tax based on the value of personal property held vis-Ã -vis a lease from two national banks, unless a state statute specifically authorized such an assessment. The lessee previously had sold the same personal property to the two national banks. Based on this previous sale, the City and County of Denver argued that the lessee actually was the owner of the personal property. However, the Court found that the City and County had failed to prove this fact.14

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