On January 19, 2018, the Texas Supreme Court granted review of an en banc Second Court of Appeals decision that would allow appraisal districts to tax wastewater disposal wells separately from the land on which the wells are located.
Petitioners, who own fee simple interests in the property at issue, make two primary arguments in support of the position that taxing their wastewater disposal wells separately from their land is improper: (1) the wastewater disposal wells do not constitute separate estates or property interests that can be taxed separately from the land, and (2) the appraisal district is improperly assessing intangible property, namely the permits allowing the Petitioners to operate the wells.
The Second Court of Appeals was unimpressed by the first argument, finding that "it is not the severance of the surface and subsurface estates by conveyance that gives a taxing authority the right to assess different types of property interest." The Court of Appeals similarly dismissed the second argument, stating that the "evidence does not show that the Appraisal District placed any value on the Railroad Commission's permits or other intangible property in valuing the interest associated with the saltwater wells." Instead, the Court of Appeals noted that, the appraisal district valued the wells based on the income their owners derived from them - that is, by using the income method of appraising property.
The case could present an opportunity for the Texas Supreme Court to clarify circumstances under which different aspects of a single tract of land may be separately assessed and taxed, an issue the Court has previously considered, but for which it has not provided clear guidance. For instance, in Matagorda County Appraisal District v. Coastal Liquid Partners, 165 S.W.3d 329 (Tex. 2005), the taxpayer argued that an aspect of real property had to fit into one of six categories the Tax Code uses to define "real property" - land, improvements, mines or quarries, minerals in place, standing timber, or an estate or interest in one of the above - in order to be separately assessed and taxed. The Court rejected the taxpayer's argument, but stopped short of defining when property may be separately assessed, stating: "it is difficult to state a precise rule about what property can be separately assessed because of the multitude of possible circumstances and the hundreds of Tax Code provisions that may govern them. Perhaps the most that can be said is that each property should be appraised 'based upon the individual characteristics that affect the property's market value.'" Perhaps the Court can be persuaded in this case to articulate a reasonable limitation on the appraisal districts' ability to endlessly carve out different aspects of real property and subject them to separate assessment.
The case, Bosque Disposal Systems, LLC, et al. v. Parker County Appraisal District, 17-0146, is set for oral argument on February 28, 2018.
This update is intended only to provide a general summary of certain tax provisions and proposals and not to constitute tax advice for any particular situation. If you have any questions about any of these tax provisions and proposals or their applicability to your particular circumstances, please contact any of the authors of this update.
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