Deciphering the Tax Status of Leased Property

In the recent Arizona case of 100 Val Vista v. Penal Cty, 2019 Ariz. App. LEXIS 564 (6/22/2019), the contrast between what is a commercial property and what is agricultural property affected the tax assessment on the land in question and led to a dispute between the property owner/landlord and the County of Pinal, AZ (the County), over how the leased property should be categorized. Was it agricultural land, or had it become commercial property by the action of leasing it to another for a profit?

Arizona Grazing Land

Larry Yount and 100 Val Vista/Montgomery LLC and others, (collectively Landlord of landowner), as the owners of 2,000 acres of cattle grazing land in Pinal County, leased the land to cattle rancher Charles Bush and his ranching operation, known as Rancho Asueno. Tenant Bush used the leased property not for primary grazing land but as a sort of "insurance policy" — he could move his cattle from their primary grazing land to the leased property if food for the animals became scarce. The leased property was not contiguous with Bush's primary cattle-grazing land, but he and his Rancho Asueno ranching enterprise took care of the leased land by keeping its fences mended and performing other maintenance chores. From 2011 onward, Bush sublet the property to another ranching operation, and that rancher ran its cattle on the property.

In 2014, the County Assessor assessed the leased property for tax purposes, treating it as vacant land and not as agricultural land. Landlord protested, but the County Assessor's classification of the land was upheld by the State Board of Equalization. Landlord next appealed the designation to the State's tax court, which conducted a bench trial and ultimately reversed, ordering the County to re-classify the property as agricultural.