Jim Corum, a KWOA past president, updated the KWOA board at its November meeting on his fifteen-year effort to bring the tax valuation of Kentucky woodland properties in line with applicable legislation and case law. Don Miniard, Kentucky Farm Bureau, indicated that at the KFB committee level has agreed to support the idea of preferable tax treatment for certified woodlands. This proposal is scheduled to be presented to the KFB board of directors on December 1. It will not require new legislation and the intent is to meet with the Revenue Cabinet to present the idea.
For background on the timber property valuation issue see the Special Edition Fall 2012 and Special Property Tax Assessment (August 2013) KWOA newsletters. Those efforts include presentations, discussions, appeals and plaintiffs with the Kentucky Department of Revenue – 2011 and 2012, Kentucky Board of Tax Appeals – 2014, Kentucky Legislature and Harlan County Circuit Court – 2015.
Hearing before Kentucky Board of Tax Appeals – 2014
Corum challenged the assessment of the family tree farm on November 18, 2014 at the Kentucky Board of Tax Appeals. The Appellant Brief challenges the Harlan County property valuation administrator’s agricultural use assessment of the Corum tree farm. The Harlan County PVA assessed the tree farm on the basis of pasture rents, not income from timber. According to the appellant, this results in two errors: First, there is no rational relationship between the income generated by pasture land and the income generated by a tree farm. Second, pasture land yields an annual crop at a minimum whereas a tree farm operates on a 70-year cycle.
Therefore, instead of a pasture rent basis, cash rents from tree farms should be computed on the basis of a generally accepted forest industry standard measurement (the Faustmann method) which is used within the industry to value the annual growth of timber. The UK College of Agriculture has developed and published the average annual growth values of an acre of woodland based upon current market prices collected and published by the Kentucky Division of Forestry.
By the above method the tree farm’s annual growth would be multiplied by the current market price for such timber less the amount payable to the typical logger. The resulting cash rent amount (stumpage value) would be subjected to the same capitalization rate (9.2%) used for cropland and pastureland as well as a present value multiplier (.0021) to equalize the 70-year crop cycle of trees with the annual crop cycles of cropland and of pastureland.
Based on the above findings, the appellant brief requests rulings from the Board of Tax Appeals that assess the Corum property applying a timber-based process that yields an accurate agricultural use value.
Brief of Appellee, Harlan County Property Valuation Administrator, in response to the Corum appeal
Currently, forestland is classified as agricultural property. If the state provided a lower rate for forestland, it would have to also apply that lower rate to all agricultural property. The state cannot constitutionally mandate a particular valuation method. Application of the prevailing class cash rental is divided by rate of return to arrive at an assessment that is fair and “equally burdensome” to all farmers. The constitution mandates that all property shall be assessed for taxation at its fair market value. It also allows for the assessment of agricultural or horticultural land according to its value for agricultural or horticultural use. This value is based upon the income-producing capability and comparable sales of farmland purchased for farm purposes.
The brief also noted other “weaknesses” with the appellant’s argument including:
- Assessment of properties based upon their income only is inappropriate.
- Most tree farms conduct periodic harvests, not just one every 70 years.
- Most woodland properties have saleable timber at the time of purchase.
- Woodlands are used for agricultural purposes other than harvesting timber.
The appellee brief recommends that the Corums lobby the legislature to address the desire for timberland to be exempt or nearly exempt from ad valorem property taxation. It recommends denial of the appeal and sets a fair cash value for the subject property based on the above findings.
At the November board meeting Corum again referenced a 1984 Kentucky Supreme Court case Doland v. Land that concluded the current PVA method made no adjustments for the characteristics of individual farms and therefore did not result in an equal tax burden:
“The method employed by the Fayette County PVA in assessing agricultural lands did not achieve the result required by Section 172A of the Kentucky Constitution in that it did not result in an equal tax burden.”
“There is a violation of constitutional rights if the effective tax rate is not uniform and thereby results in an unequal tax burden. Any method of assessment which fails to follow the constitutional directions and accordingly does not produce an assessed value based on agricultural use of each individual parcel, violates the constitution.”
Corum’s on-going appeal regarding property assessment is based on a lack of constitutional appropriateness regarding the disparity in application of property assessment criteria. For example, as a percentage of net income, woodland owners pay 15.6 percent of net income compared to 3 percent for corn farmers. The current assessment has economic implications for landowners regarding forestland as an investment given the carrying cost of the tax burden.