Ruling Exposes Legal Loophole In Property Classification Process
The Oklahoma Court of Civil Appeals last month reversed a Washita County District Court ruling and granted the ad valorem tax appeal lawsuit filed against the Washita County Assessor’s Office by Kast Trust Farms.
The issue dates back to 2016, when 10 acres of a 160-acre farm owned by Kast Trust was reclassified by former Washita County Assessor Clayton Twyman from agricultural to commercial property. Twyman’s decision to reclassify the property was based upon Kast Trust’s granting of a surface site easement to Chesapeake Midstream Gas Services for a sum of $60,000, which was classified as surface damages. Chesapeake then constructed a gas compressor facility on the parcel, gravelling the entire site and surrounding it with a fence. Twyman’s position was that the property was obviously being used for commercial purposes and could no longer be used for any agricultural business, and as such should be reclassified as commercial property.
As a result of the reclassified 10 acres, the fair market value of the entire 160 acre property was determined by the assessor’s office to be $96,333 instead of the previous year’s $44,213.
Kast Trust challenged the assessment, arguing first that Twyman failed to apply the five percent cap as required by the Oklahoma Constitution. Twyman acknowledged the error and adjusted the taxable value to $44,374, with a scheduled five percent increase each year until it matched the $96,333.
Kast Trust also claimed the reclassification of the 10 acres resulted in an increase in that specific parcel’s value from $2,763 to $55,000. Twyman presented evidence of comparable land sales, which he used to support the increase in value. The Washita County Board of Equalization affirmed Twyman’s evaluation of the property.
Kast Trust then appealed the decision by filing suit in Washita County District Court. The company’s attorney, Donelle Ratheal, argued that the property cannot be reclassified as commercial, despite its obvious use as such, because Chesapeake does not own the property, but paid for an easement on the 10 acres and left the underlying property as part of the Kast Trust property. She further argued that the actual value of the entire property was diminished by the presence of the gas compressor facility, which is what justified the surface damages payment for the easement. She argued the gas compressor facility on the property, but that facility was owned and operated by Chesapeake and may be removed by Chesapeake at any time, hence the benefit of the facility was not to the property owner but only to Chesapeake.
Assessing an increase in taxable value on the property would also be double taxation, she argued, as the facility was taxed as Chesapeake’s business personal property.
The district court agreed with the Board of Equalization and upheld the reclassification of the 10 acres to commercial.
“A distinction must be made between the 10 acres used for the gas compressor facility and the remaining farmland,” the court noted.
The appellate court reversed the decision, arguing the net impact of the gas compressor facility was to decrease the value of the 10-acre tract for ad valorem tax purposes.
“Based on the foregoing, we find the instant easement has a negative effect on Taxpayer’s use value of the 10-acre tract for ad valorem tax purposes,” wrote Judge Robert Bell. “Due to this negative effect, we hold the higher commercial use value imposed by Assessor on Taxpayer’s real estate does not exist. We further reject the district court’s holding that Taxpayer’s reversionary interest in the easement makes Taxpayer liable for the increased ad valorem tax. Chesapeake has not abandoned the easement. Taxpayer’s interest in the real property consists only of what is left after Chesapeake’s taking of the easement.”
Washita County Assistant District Attorney Ricky McPhearson explained the ruling to the Washita County Excise Board during their Nov. 4, 2019, meeting. He explained his disagreement with the decision and its potential to create a precedent which would allow large companies to buy permanent easements on agricultural land and then develop the surface property for commercial use without actually buying the land, thereby leaving the property classified as agricultural indefinitely. Such a move, he said, would create a loophole that would allow companies to develop commercial property while the landowners continue to pay the agricultural ad valorem tax rates, which are the lowest tier tax rates in Oklahoma.
The county’s attorneys have filed a request for the appeals court to rehear the case. Should that prove unsuccessful, the next step would be an appeal to the Oklahoma Supreme Court. After explaining the situation again to the Washita County Board of Commissioners, the commissioners voted to accept the judgment of the appeals court regarding the rehearing.