Abex Corp. v. Commissioner of Taxation

• Decision Date: 23 March 1973
• Docket Number: No. 42835,42835
• Citation: 207 N.W.2d 37,295 Minn. 445
• Parties: ABEX CORPORATION, Respondent, v. COMMISSIONER OF TAXATION, Relator.
• Court: Minnesota Supreme Court

Page 37

207 N.W.2d 37

295 Minn. 445

ABEX CORPORATION, Respondent, v. COMMISSIONER OF TAXATION, Relator.

No. 42835.

Supreme Court of Minnesota.

March 23, 1973.

Rehearing Denied May 4, 1973.

Syllabus by the Court

1. A tax exemption statute must be strictly construed, the presumption is against exemption from taxation, and the burden of proof is on the one seeking the exemption.

2. Machinery which is annexed to real property with the intention of making a nontemporary accession to the real property is a fixture for purposes of taxation and thus is not exempt as personal property under Minn.St.1969, § 272.02(11)(b).

3. Machinery which is annexed with the intention to make a nontemporary accession to real property is not exempt as personal property under Minn.St.1969, § 272.02(11)(b), even though it may be a 'trade fixture' as between landlord and tenant.

4. All of the disputed machinery in this case is either actually annexed or constructively annexed because of ponderousness. Intent to make a nontemporary accession can be implied because the machinery is ponderous, is necessary to the continuing operation of the foundry, and has been installed in the building for the remaining useful life of the machinery or until the use of the building unexpectedly changes.

Held, since the machines are fixtures within the meaning of Minn.St.1969, § 272.03, subd. 1, and are not personal property, they are not exempt from taxation under Minn.St.1969, § 272.02(11)(b).

Warren Spannaus, Atty. Gen., John R. Kenefick, Deputy Atty. Gen., St. Paul, for relator.

Dorsey Marquart, Windhorst, West & Halladay, John W. Windhorst, and John W. Windhorst, Jr., Minneapolis, for respondent.

George M. Scott, Hennepin Co. Atty., David E. Mikkelson, Asst. Co. Atty., Minneapolis, for Minn. Urban Co. Attys. Bd., Keith M. Brownell, Co. Atty., Curtis H. Foster, Asst. Co. Atty., Duluth, for St. Louis Co., William B. Randall and Steven C. DeCoster, St. Paul, Minn. Co. Attys. Assn., Harlan L. Nelson, Felhaber, Larson Fenlon & Vogt, Edward J. Bohrer, St. Paul, amici curiae on rehearing.

Heard before KNUTSON, C.J., and OTIS, ROGOSHESKE, PETERSON, KELLY, MacLAUGHLIN, and MURPHY, JJ.

MacLAUGHLIN, Justice.

The opinion filed on June 16, 1972, in this case is withdrawn and the following opinion is substituted in its place.

On petition of the commissioner of taxation, we issued a writ of certiorari to the Tax Court. The commissioner seeks review of a Tax Court decision determining that certain machinery qualifies for exemption from taxation pursuant to Minn.St.1969, § 272.02(11)(b). We reverse.

On January 2, 1967, the county assessor of Lake County determined that for tax purposes the market value of certain property of respondent, Abex Corporation, in that county was $1,990,406, and that the assessed value was $210,097. Included in that determination was the machinery which is disputed in this case. In appropriate and timely proceedings, Abex contended before the commissioner of taxation that the assessed value should be substantially decreased because the machinery was personal property and, therefore, exempt under § 272.02(11)(b). The classification and assessment of the county assessor were approved by the commissioner. On appeal, the Tax Court reversed the order of the commissioner and held that the machinery was personal property and eligible for the exemption.

The question to be decided is whether certain machinery (hereafter disputed property), owned and used by Abex in its plant in Two Harbors, Minnesota, is real or personal property for purposes of the exemption found in § 272.02(11) (b). The exemption statute, § 272.02, provided, in part, as follows: ¹

'All property described in this section to the extent herein limited shall be exempt from taxation:

(11) The taxpayer shall elect whether to be exempted with respect to category (a) or (b) as hereinafter defined.

(a) All inventories, stocks of merchandise of all sorts, manufacturers material, manufactured articles including the inventories of manufacturers, wholesalers, retailers and contractors; * * *

(b) Tools and machinery Which by law is considered as personal property used or useable in construction of buildings or highways or in the manufacture, processing, production, sale or distribution of marketable products * * *.' (Italics supplied.)

Abex elected to exempt its '(t)ools and machinery which by law is considered as personal property.'

Minn.St.1969, § 272.03, defined real and personal property as follows:

'Subdivision 1. For the purposes of taxation, 'real property' includes the land itself and all buildings, structures, and improvements or other Fixtures on it, and all rights and privileges belonging or appertaining to it, and all mines, minerals, quarries, fossils, and trees on or under it.

'Subd. 2. For the purposes of taxation, 'personal property' includes:

(1) All goods, chattels, money and effects.' (Italics supplied.)

It should be noted that the definition of real property includes the term 'fixtures' while there is no reference to fixtures in the definition of personal property. In a divided opinion the Tax Court held that the disputed property is personal property.

Abex Corporation owns and operates a foundry in Two Harbors, and the disputed property is used in that operation. The company produces wear-resistant components for taconite operations located on the Iron Range. Abex purchased the land and building for approximately $225,000 from the Duluth, Mesabi, and Iron Range Railroad. The building is generally one story, but the roof arches to a height of four stories at the center. The dimensions of the building are 275 feet by 300 feet, and it is about 80,000 square feet in area. Subsequent to the acquisition of the building, Abex spent about $242,000 in modification of the building, consisting mainly of additional service equipment such as water lines used for production, sanitary, and fire protection purposes; a gas line used in connection with the treating furnaces; and certain electrical power equipment.

A large amount of machinery usable in the operation of a foundry was acquired by Abex for use in the building. In one corner of the building it was necessary to go through the roof to accommodate some of the larger pieces of machinery. That particular corner of the building is approximately seven stories high because of the structural change.

A brief description of some of the largest items of the disputed property is helpful in analyzing and deciding the issues in this case.

a. There is a bond system which consists of three storage tanks with a pneumatic transport system for unloading and storing rail-car quantities of additives used in moldings. Each storage tank weighs 20,000 pounds and is bolted to the realty.

b. There are two shakeout systems with certain related equipment. A shakeout is a vibrating deck upon which the poured molds with the castings are placed. A conveyor system is located below the shakeout, and a dust collector is necessary to pull the smoke and dust created by the vibration outside the plant. Both systems and all related equipment in dispute weigh 113,000 pounds, and all items are bolted either to the realty or to the supports.

c. There is a so-called 'Eddystone Sand System' consisting of a batch sand preparation system, including an elevator, overhead storage bins, weigh hoppers, sand mullers, sand mixers, and a discharge conveyor. The system is 50 feet in height and rises above the roof of the plant. Structural steel was erected to form a cupola over the building to house the top of the system. The entire system weighs 633,970 pounds and is bolted to the realty.

d. There are two electric furnaces and transformers. These are 3-phase electricarc furnaces, each with its own transformer. The 8-foot furnace weighs 20,000 pounds, and the 9-foot furnace weighs 30,000 pounds. Each transformer weighs 60,000 pounds. The furnaces are bolted to the realty and the transformers are freestanding.

e. There are three heat-treat furnaces. They are gas-fired, car-bottom furnaces used to anneal and stress-relieve the castings. Each furnace weighs 40,000 pounds and is bolted to the floor.

f. There is a press used to straighten castings or correct distortion due to heat treatment or to mismolding during the operation. The press weighs 70,000 pounds and is bolted to the floor.

g. There is a vertical boring mill used on machine castings. It weighs 40,000 pounds and is bolted to the floor.

The disputed property in the case apparently has a total market value of approximately $1,295,420.

Because of the Tax Reform and Relief Act of 1967, Ex.Sess.L.1967, c. 32, the commissioner of taxation, local tax assessors, and those in their employ have been required to draw distinctions between personal property and real property. Prior to the passage of that act the distinction was not important, except as it affected the legal remedy available for collecting delinquent taxes, because all 'machinery, whether fixtures or otherwise,' was valued, assessed, and taxed at one-third of its full and true value pursuant to Minn.St.1965, § 273.13, subd. 4. Therefore, prior to the 1967 act, all machinery, whether a fixture or personal property, was valued, assessed, and taxed at one-third of full and true value.

In 1967, § 272.02(11)(b) was enacted. Ex.Sess.L.1967, c. 32, art. IV, § 2. It exempted either inventories or '(t)ools and machinery which by law is considered as personal property used or useable * * * in the manufacture * * * of marketable products.' It then became necessary for tax assessors to determine whether specific items of tools and machinery were personal property, and therefore exempt, or were fixtures, and therefore not exempt.

The following is a summary of the statutory provisions in effect at the times pertinent to the decision in this case.

a. Section 272.02(11)(b) exempted, upon election of the taxpayer, tools and machinery which by...