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Tax, Intangible Assets, and the Value of Taking A Closer Look: A Case Study

In the buy-vs.-lease consideration, the overall tax burdens and advantages of each option must include a clear-eyed approach as to the precise components of each option and should assign appropriate values to each. When the lease option is chosen, a recent case illustrates the high value of getting a sense of the whole picture, especially as the protest period for real property tax assessments looms.

A client leased two large healthcare facilities in Louisville via a long-term triple net lease, which left it responsible for payment of all property taxes. As we evaluated the lease, we determined that the components of the lease that the PVA was attempting to tax as real property in fact included intangible assets such as the Certificate of Need and/or license for beds. By identifying the various, separable components of the lease, we were able to reduce this client/lessee’s real property tax burden. (Leases can also include tangible personal property which can be separated from (and not taxed as) real property.)

This systematic identification of separable components that can be pulled out from the overall value of the lease is a process that every lessee should be undertaking, as the majority of jurisdictions, including Kentucky, do not tax intangible assets. (Intangible assets are nonphysical assets, such as trademarks, mineral rights, equity, goodwill, and as above, Certificates of Need. These assets grant rights and privileges to the owner or lessee, and therefore have value, but this value may be winding up in a real property tax assessment--in error. Intangible assets are evaluated by being identifiable in their own right, being separate and divisible assets from real estate, providing some of sort of evidence of legal ownership, and remaining transferable to a new owner.) Assets that meet these four components can safely be culled from the assessment of the value of the property for real property tax purposes.

The review and identification of these items is important and timely – Kentucky PVAs are sending or will send notices of assessments no later than the first of May, and real property owners or lessees will have the first thirteen (13) days of May (the Inspection Period) to file a protest of the real property assessment. The time to take a look at whether your lease includes that intangible assets that may be assessed erroneously as real property is now.

Kenton L. Ball is Of Counsel with McBrayer law in the Lexington office.  Mr. Ball focuses his practice areas to taxation, tax compliance, tax controversy, tax planning, transaction tax, and corporate & business tax law.  He can be reached at kball@mcbrayerfirm.com or
(859) 231-8780, ext. 1222.  We take a team approach to deliver effective counsel to all our clients, so other attorneys in the firm may perform these services as well.

This article does not constitute legal advice.

Lexington, KYLouisville, KYFrankfort, KY: MML&K Government SolutionsWashington, D.C.