Successful Use of Pre-Trial Discovery and Dispositive Motions in Property Tax Practice

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1 Successful Use of Pre-Trial Discovery and Dispositive Motions in Property Tax Practice Charles H. Mercer, Jr. Partner Nelson Mullins Riley & Scarborough LLP Raleigh, North Carolina

2 Introduction How to Correct Erroneous Property Tax Appraisals/Assessments Typical way: Battle of Appraisers Full Trial Alternative ways: - Assessment is procedurally defective - Assessment violates a statutory or constitutional limitation - Use of estoppel to prevent double taxation Each of these alternatives may be raised by summary judgment or similar motion, if the case is prepared correctly. 2

3 Example One: Procedurally Defective Assessment Failure to list, or underlisting, of personal property can lead to a "discovery assessment" for the current year + five years prior. N.C. Gen. Stat Counties may enter into contracts for auditing services, which are distinct from appraisal services. NC ad valorem tax law requires that the county assessor, his/her assistants, or an "appraisal firm" make the appraisal of property. N.C. Gen. Stat ; Results of audit identify which property was allegedly nonlisted or underlisted. Then, that property must be appraised and assessed. 3

4 Example One: Procedurally Defective Assessment In re Appeal of International Paper, Inc. NC PTC (2006) Halifax County issued multiple discovery assessments against International Paper covering tax years Audits prior to issuance of discovery assessments were conducted by a third party audit firm. Discovery assessments resulting from audits covered vast quantity of property dating back decades. 4

5 Example One: Procedurally Defective Assessment Rather than challenging the appraisal of the personal property, strategy was to attack the process by which the discovery was conducted. First, discovery requests to auditor and county for all documents related to audit and discovery, including auditing contract. Second, depositions of County (30(b)(6)), then Auditor. 5

6 Example One: Procedurally Defective Assessment Result of depositions County assessor denies any involvement in the auditing, classification, appraisal, penalty, or discovery drafting process. Only step is to sign the final letter. Outside auditor admits to doing all steps in the process, then giving the final letter to county assessor to sign. Summary judgment motion successful Dismissal of all discoveries for failure to comply with procedural requirements for conducting classification, appraisal, and assessment process. 6

7 Example Two: Assessment violates a statutory limitation For real property, NC uses an octennial revaluation process. Property value does not change in a non-revaluation year unless In the revaluation year, the county misapplied its schedule of values and rules for valuation of property; or There's a physical, legal, or other change to the property increasing or decreasing its value (but not normal depreciation or general economic changes affecting the county). N.C. Gen. Stat

8 Example Two: Assessment violates a statutory limitation In re Appeal of Pembroke Point LLC, NC PTC (2008) County revaluation was in Taxpayer property was appraised by county at $7,299,700. Taxpayer appealed value for 2005 tax year and presented appraisal report to county with value of $4,194,000. County briefly reviewed appraisal and proposed to settle at $4,580,600. Taxpayer agreed and case settled. 8

9 Example Two: Assessment violates a statutory limitation Consistent with NC law, county assessed property at same settled value ($4,580,600) for 2006 tax year. In 2007, assessor substantially increased value to $7,299,700 on grounds that he "misread" the 2005 appraisal report. Strategy: no document discovery; deposition of county assessor; motion for partial SJ. 9

10 Example Two: Assessment violates a statutory limitation Argument County is statutorily bound to maintain same value as determined in first year of revaluation, barring a change to the property or misapplication of the appraisal standards. County is bound by its 2005 settlement; failure to understand an appraisal report is not a statutorily authorized ground to change value. Result: Partial SJ granted and 2007 value lowered to match 2005 value. 10

11 Example Three: Assessment violates a constitutional limitation Atlantic Marine Corps Communities, LLC v. Onslow County, 497 F.Supp.2d 743 (E.D.N.C. 2007) US Dept. of Navy entered into public-private partnership with AMCC to develop on-base military housing at MCB Camp Lejeune and MCAS Cherry Point and New River. County assessed property tax against renovated and new housing built on base by AMCC. $1.75 million to $2.5 million in annual tax at issue. 11

12 Example Three: Assessment violates a constitutional limitation Issue: Article I, 8, cl. 17 of the U.S. Constitution provides exclusive federal jurisdiction over places ceded by states and accepted by the US government. Historical research at NC Archives established that exclusive federal jurisdiction over Camp Lejeune and other bases was ceded to the US government during WWII. 12

13 Example Three: Assessment violates a constitutional limitation Strategy: File detailed declaratory judgment suit backed by numerous exhibits in federal court seeking declaration of exclusive federal jurisdiction. Consequence of federal jurisdiction? No state law applied on these bases, except service of process law. Focus on broad principle, rather than tax problem, to mitigate risk of TIA defense. Detailed complaint led to answer admissions that narrowed issues for SJ arguments. No document discovery; no depositions. Assemble historical documents supplemented by case law and other research, then move for summary judgment. Result: Decision in favor of exclusive federal jurisdiction. County attempt to tax on base housing is barred by federal court order. 13

14 Example Four: Use of estoppel to prevent double taxation In states that tax real and personal property, taxpayers run the risk of the same property being double-taxed. For example a commercial building that is valued on an income or sales approach including all improvements for real property tax, but the owner/tenant is assessed for upfits as personal property leasehold improvements. 14

15 Example Four: Use of estoppel to prevent double taxation In re Appeal of Merck & Co., Inc., NC PTC (2013) Taxpayer had real property appeal and a personal property discovery appeal both pending before the NC PTC. Tried the real property case first. County discovery prior to real property trial included request for list of real property assets. Taxpayer list of real property assets introduced by County as trial exhibit, referenced by both parties, and referenced in PTC Final Decision 15

16 Example Four: Use of estoppel to prevent double taxation After real property case decided, list of real property assets was compared with list of assets picked up by county auditor as personal property. About 75% of the total cost of the "personal property" in the discovery were assets on the real property asset list. Strategy: "Motion for Identification of Real Property" filed in the personal property case. 16

17 Example Four: Use of estoppel to prevent double taxation Motion did not focus on dollar amounts. Goal was to obtain an order declaring that the county was bound by collateral or judicial estoppel not to change its position on the real property nature of that list of assets. Result: Motion granted on three grounds Collateral estoppel applies Judicial estoppel applies Independently, the assets are deemed real property. 17

18 Example Five: Combined Approach Statutory Violation + Estoppel/Equity In re Ocean Isle Palms LLC, NC PTC (2011) and 366 N.C. 351 (2013) Brunswick County revalued all real property in For 2007 County applied a "percent complete" adjustment to coastal parcels that were undeveloped or partially developed. In 2008, new assessor ordered tax office to remove all the "percent complete" adjustments for Taxpayer's properties, resulting in 4-5x increase in value. 18

19 Example Five: Combined Approach Statutory Violation + Estoppel/Equity County defended value change by arguing that it was correcting an appraisal error resulting from misapplication of schedule of values. (N.C. Gen. Stat (a)(2)) Vast increase of value from first year of revaluation cycle to subsequent years created opening for equitable argument along with statutory violation argument. 19

20 Example Five: Combined Approach Statutory Violation + Estoppel/Equity Goal: Demonstrate illegality of non-base year value change by eliminating any disputed facts, but without focusing on market value issues. Strategy: Document discovery (no interrogatories) Depositions of County tax office personnel in specific order Motion for Summary Judgment 20

21 Example Five: Combined Approach Statutory Violation + Estoppel/Equity Discovery uncovered: County had a long-standing practice of making condition adjustments to undeveloped parcels. County's schedule of values allowed full freedom/discretion in setting percent complete factor with no written guidelines regarding use. (Key issue due to statutory requirement, but came across as a merely technical issue in depositions) Decision to revoke the condition adjustments was done across-the-board, not on a parcel-by-parcel basis. Undisputed evidence proved statutory violation and inequitable treatment in light of long-standing practice. 21

22 Example Five: Combined Approach Statutory Violation + Estoppel/Equity Result: NC PTC unanimously granted TP motion for summary judgment and denied county crossmotion for summary judgment NC Court of Appeals reversed on 2-1 vote NC Supreme Court unanimously reversed Court of Appeals and affirmed NC PTC decision 22

23 Takeaways Shoot with a rifle, not a shotgun. Tax cases are well-suited to summary judgment and similar motions because the facts (particularly regarding tax office actions) can be solidly established. Think carefully about discovery and deposition sequencing and strategy. Top-down or bottom-up depositions Documents before depositions (but not always); interrogatories are less useful and may reveal case strategy Avoid getting into value issues, which won't be resolved on summary judgment Use the language of equity, but don't make that the focus of the legal argument. 23

24 Questions? Charles H. Mercer, Jr. (919) Raleigh, NC 24