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Recent IBM Case Gives Taxpayers a Fighting Chance in Property Tax Appeals
Justin M. Hardy
RECENT IBM CASE GIVES TAXPAYERS A FIGHTING CHANCE IN PROPERTY TAX APPEALS
There was a time when businessmen paid little attention to how property taxes affected their businesses. More recently, however, property taxes have become a significant issue – due in part to the effect of inflation on property values and in remaining part to counties’ and cities’ increasing need for funds. The deteriorating fiscal situation at the State level caused by the financial meltdown of late 2008 and all of 2009 has only made matters worse.
Given this situation, knowledgeable businessmen have elected more frequently to exercise their property tax appeal rights in an attempt to achieve a fair valuation of their businesses’ property. Unfortunately, taxpayers have found it an uphill battle in getting their tax values reduced. The Property Tax Commission, the “court” in which property tax appeals are heard, has traditionally given substantial deference to the counties’ valuation determinations. However, a recent decision of the North Carolina Court of Appeals – In the Matter of Appeal of IBM Credit Corporation [“IBM”] - goes a long way toward leveling the playing field of property tax appeals.
Understanding the System
In order to appreciate the impact of IBM, a basic understanding of the property tax system and the appeal procedure in North Carolina is necessary. The law underlying the property tax system in North Carolina is set forth in Chapter 105 of the North Carolina General Statutes, Sections 105-271 through 105-398. These statutes are typically referred to as the "Machinery Act" because they provide the machinery for the "listing, appraisal, and assessment of property and the levy and collection of taxes on property by counties and municipalities." Pursuant to the Machinery Act, the North Carolina legislature has imposed a uniform, statewide system for the application of the property tax. Nonetheless, the administration of the property tax is carried out principally through local government, i.e., counties and municipalities. The tax assessor for each county handles the valuation and assessment of the property tax.
Essential to the understanding of the property tax system are the concepts of "listing" and "appraisal." Listing refers to the requirement that property owners file a report showing the property owned by them as of the listing date of January 1. The type of information required and the manner in which the listing is done varies between real property and personal property. Based on the listing, the property is then "appraised" or valued for property tax purposes. Again, the means by which this value is derived and how frequently this value is changed varies depending on whether the property is real or personal property. However, regardless of the method used in determining value, the county tax assessor is to value the property at “fair market value.”
Appealing the Valuation
Assuming the taxpayer believes his property is assessed in excess of fair market value, the Machinery Act provides the taxpayer with appeal rights. Typically, once the taxpayer receives notice of the assessed value of his property, he can appeal informally by meeting with a representative of the tax assessor's office to present information or arguments that he believes establishes a different value. Assuming the informal appeal is unsuccessful, the taxpayer can appeal the proposed valuation to the county Board of Equalization and Review. This is typically a local board consisting of citizens chosen by the county commissioners to hear property tax appeals. In some counties, this Board conducts a substantive review of the valuation. In others, this Board is merely a rubber stamp for the valuation determination of the tax assessor.
If the taxpayer is not satisfied with the results of his appeal to the local Board, he can file an appeal with the North Carolina Property Tax Commission [“PTC”]. The PTC is a five-member commission that typically hears appeals in Raleigh. The hearing before the PTC is a de novo hearing. This means that the determination of the local Board of Equalization and Review and any evidence or arguments made before it are of no consequence; the PTC bases its decision solely on the evidence presently in the hearing before the PTC. Finally, decisions of the PTC are appealable to the North Carolina Court of Appeals and, thereafter, in certain circumstances, to the North Carolina Supreme Court.
Understanding the Results
As stated above, the PTC has traditionally given great deference to the valuation determinations of the counties. Thus, only when the taxpayer has been able to present overwhelming evidence that the county’s value is not fair market value has the PTC been willing to lower the assessed value of the property. Furthermore, and perhaps more importantly, in upholding the county’s value, the PTC has rarely provided a substantial explanation for the basis of its decision or the manner in which the evidence supports the county’s value (and does not support the taxpayer’s value).
To the layman, this failure may not seem to mean much. The taxpayer either wins or loses. If the taxpayer loses, the reason why he lost doesn’t make much difference. From a legal perspective, however, the reasoning underlying the PTC’s decisions makes all the difference. The PTC is not “Solomon,” simply making decisions that it thinks are fair. Instead, the PTC is obligated to apply the law in reaching its decision. When the PTC fails to adequately explain its decision, there is no way to determine whether the PTC properly applied the law and, if not, to seek redress with the Court of Appeals.
Improving the Odds
In the recent case of IBM, the NC Court of Appeals reversed a decision of the PTC for this very reason. In particular, the Court stated that, while the PTC found that the county met its burden of proof, its final decision failed to address adequately key issues necessary to arrive at the ultimate decision required. Among its failures was the PTC’s failure to discuss which valuation approach [cost, income, or sales comparison] was appropriate to appraise the property at issue. Ultimately, the Court of Appeals determined that the PTC’s decision upholding the county’s value was unsupported by substantial evidence in the record and remanded the case back to the PTC for a reasoned decision.
There is hope that IBM will level the playing field for taxpayers by requiring that the PTC not only reach a decision, but also explain the basis for its decision in sufficient detail such that it can withstand scrutiny by the Court of Appeals.
John A. Cocklereece, Jr. is a director and attorney at the Winston-Salem law firm of Bell, Davis & Pitt, P.A. His principal areas of practice are general business law, estate planning and administration, and tax law, with particular emphasis on representation of counties and taxpayers in property tax appeals. Cocklereece is a former Chairman of the North Carolina Property Tax Commission.
Justin M. Hardy is an associate attorney at the Winston-Salem law firm of Bell, Davis & Pitt, P.A. His principal areas of practice are general business law, copyright and trademark law, and tax law.