Update: 2nd Court of Appeals Rejects Claim that a Business’s Profitability Determines Whether Tangible Personal Property is Held or Used for the Production of Income.
By Lee Winston | August 12, 2024
Lee v. Hood County Appraisal District, No. 02-23-00176-CV, 2024 WL 1100783 (Tex. App.—Fort Worth March 14, 2024, pet. denied)
What exactly does it mean for tangible personal property to be “held or used for the production of income?” This is an important question for a couple of reasons. The State of Texas only has the authority to tax tangible personal property that is “held or used for the production of income.” See Tex. Tax Code §§ 11.01(c), 11.14(a). And every year an owner must report all tangible personal property “used for the production of income,” otherwise they will be subjected to a 10% penalty of the taxes imposed. Tex. Tax Code §§ 22.01(a), 22.28(a). While important, property taxpayers and advisers should understand that it is a question that has not been definitively answered. Thankfully, a recent decision from the 2nd Court of Appeals provides some potential guidance.
In Lee v. Hood County Appraisal District, Lee argued1 that because his business did not make a profit in the relevant tax years, the property used by the business could not be deemed as used for income production. The 2nd Court found Lee failed to adequately brief this argument, so he waived it for review. But went on to say that even if Lee had adequately raised his argument, it would be meritless.
The 2nd Court asserted that it could not find one Texas court (and refused to be the first) recognizing Lee’s interpretation of the language “for the production of income” to be determined by whether or not the business that used the personal property made a profit. Instead, the 2nd Court interpreted that language to be determined by whether or not the property was held or used as part of a business venture or transaction, regardless of profit generation. This interpretation according to the 2nd Court is what other Texas courts have understood the “for the production of income” language to mean, though the cited cases do not directly address the interpretation of “for the production of income.” Nonetheless, the 2nd Court made itself clear on the language “for the production of income” as it relates to profits: simply claiming the business using the property did not generate a profit for the relevant tax year is insufficient.
In all, Lee v. Hood County Appraisal District does not definitively answer what it means for tangible personal property to be “held or used for the production of income,” but it provides some potential guidance. Claiming that personal property is not held or used for the production of income because the business using the property did not generate a profit will likely not work.
To review the Opinion from Lee v. Hood County Appraisal District, click the following link (or copy and paste): https://search.txcourts.gov/SearchMedia.aspx?MediaVersionID=d9404805-b117-42da-bb28-fc3d5fba685a&coa=coa02&DT=Opinion&MediaID=b8660c19-5c5a-4d4b-b584-448244e25de4.
Key Sections of Texas Property Tax Code:
§ 11.14(a), Tangible Personal Property Not Producing Income
- Lee also made other complaints and arguments, but those are not addressed by this article. Those were: The trial court erred in granting the District’s no-evidence motion as related to the 2021 tax appraisal because his 2021 claims were not barred by res judicata; the trial court erred in granting the District’s no-evidence motion because he conclusively proved that the appraised value of the business personal property was zero given the fact that the District had employed illegal appraisal methods; and the trial court erred in denying his attorney’s fees because he conclusively proved his entitlement to those fees. ↩︎