Owners for tax purposes only: the equitable ownership doctrine and ad valorem taxation of long-term leasehold interests.

• Author: Hogan, Steven M.
• Position: Tax Law

The equitable ownership doctrine is a common law concept that can convert lessees of real property into owners that are liable for property taxes. In its most ubiquitous form, the doctrine operates to create ad valorem tax liability for long-term lessees. (1) The equitable ownership doctrine is about which party is on the hook for the property tax bill.

The Florida Supreme Court addressed this doctrine in the spring of 2014 through two companion cases: Accardo v. Brown, 139 So. 3d 848 (Fla. 2014), and 1108 Ariola, LLC v. Jones, 139 So. 3d 857 (Fla. 2014). The court held in both cases that a lessee can be converted into an owner of real property or improvements for ad valorem tax purposes even though a tax-exempt government entity holds a fee simple interest in the underlying realty. (2) These cases reaffirm an odd result of the equitable ownership doctrine: Land that would otherwise be tax-exempt in the hands of a government entity can be placed on the ad valorem tax rolls through a government entity's lease of the land to a nonexempt entity. (3) This means that governments can take nonrevenue-producing property and gain one revenue stream through lease payments, and a second revenue stream through ad valorem taxation via the equitable ownership doctrine. The potentially disruptive impact of this dynamic cannot be understated.

The Accardo and 1108 Ariola decisions also create a unique problem for lessees of land owned by government entities. Such lessees may find themselves taxed twice, once on the value of the lease itself through the intangible tax, and again on an ad valorem basis with regard to the underlying property. Practitioners representing lessees of government lands should recognize this issue and help their clients plan accordingly.

Taxation of Leases from Government Entities

Commercial leases are generally subject to commercial rental tax under F.S. [section]212.031. The normal tax rate is equal to the sales and use tax rate, with a base rate of 6 percent that local governments may increase through discretionary surtaxes. (4) This tax does not apply to leases between a lessee and a government landlord, in which a government entity owns the underlying realty. (5) Such government leases are, instead, subject to intangible tax on the lease amount. (6)

Section 196.199 codifies the exemption from the commercial lease tax rate. This section provides a special methodology for taxing leases of government property when the lessee primarily uses the land for residential or commercial purposes. Section 196.199(2)(b) reads:

Except as provided in paragraph (c), the exemption [from tax on government property] provided by this subsection shall not apply to those portions of a leasehold or other interest defined by s. 199.023(1)(d), Florida Statutes 2005, subject to the provisions of subsection (7). Such leasehold or other interest shall be taxed only as intangible personal property pursuant to chapter 199, Florida Statutes 2005, if rental payments are due in consideration of such leasehold or other interest. All applicable collection, administration, and enforcement provisions of chapter 199, Florida Statutes 2005, shall apply to taxation of such leaseholds. If no rental payments are due pursuant to the agreement creating such leasehold or other interest, the leasehold or other interest shall be taxed as real property. Nothing in this paragraph shall be deemed to exempt personal property, buildings, or other real property improvements owned by the lessee from ad valorem taxation. (7)

Any property falling into the definition of a "leasehold or other interest" as defined by the 2005 version of [section]199.023(1)(d) is subject to intangible tax on the rental payments given in consideration for the interest. (8)

The reference to the 2005 version of [section]199.023(1)(d) is a purposeful acknowledgement that the 2005 definition applies to this levy of tax. In 2006, the Florida Legislature repealed [section]199.023 in its entirety as part of the general repeal of the annual intangible tax. (9) The same chapter of the Laws of Florida that repealed [section]199.023 added language to [section]196.199 specifying that the 2005 version of [section]199.023 should be used to determine whether a leasehold is subject to intangible tax under Ch. 199. (10)

As the survivor of the general repeal of [section]199.023, [section]199.023(1)(d) (2005) still provides the definition used to determine whether leases of government property qualify as intangible personal property subject to...