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The “Burden of Proof” In PTC Hearings Steve Pelfrey Property Valuation Specialist II

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The “Burden of Proof” In PTC Hearings Steve Pelfrey Property Valuation Specialist II Property Tax Section Local Government Division, NCDOR 2014 Advanced Seminars. The Issue.

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Presentation Transcript
The “Burden of Proof”

In PTC Hearings

Steve Pelfrey

Property Valuation Specialist II

Property Tax Section

Local Government Division, NCDOR

2014 Advanced Seminars

the issue
The Issue
  • For purposes of a hearing before the Property Tax Commission, what sort of evidence is each party responsible for providing?
  • The question goes both to the procedure of the hearing and to the substance of what’s offered for evidence
  • The evidence offered, and how it’s offered, not only can affect the outcome of the PTC hearing, but also later appeals
  • Quick look at the appeals process
  • The AMP case and its test
  • How subsequent cases have refined the AMP test
  • Predicting the future—what this means for appeals
  • Local level: Informal & Board of E&R
  • State level: PTC
  • Appeals from the PTC can be made as a matter of right to the Court of Appeals
  • Appeals from the CoA go to the NC Supreme Court, but whether it’s heard is often at the discretion of that Court
the starting point
The Starting Point
  • There’s an underlying presumption at all appeal levels that the county’s assessment is correct—the taxability, situs, value, or any other part of the listing and assessing functions
  • This concept was the basis for the ruling in the AMP case, but what’s the reasoning behind it?
presumption of correctness
Presumption of Correctness
  • In the Albemarle Electric Membership Corp. case (1972), several EMC’s challenged the tax values placed on their property in the late 1960’s by the State Board of Assessment (precursor to the PTC)
  • During this time, the Board had both appraisal and appeal functions; now, NCDOR appraises utilities like EMC’s, and the PTC has jurisdiction over appeals
albemarle cont d
Albemarle, Cont’d.
  • The Court said,

“The Members of the [Board] are public officers, and the Board’s official acts are presumed to be made in good faith and in compliance with law. “

  • So, there you have it. But, even if you don’t trust that all public officers always act in good faith and in compliance with the law, there are still other good reasons to support the assessed value…more on this a little later (remember, this case involves no county staff)
enter the burden
Enter the Burden
  • The Court continued,

“The burden is upon the party asserting otherwise to overcome such presumptions by competent evidence to the contrary….It is only when the actions of the Board are found to be arbitrary and capricious that courts will interfere with tax assessments.”

and then went on to say that the taxpayer had to demonstrate both an arbitrary or illegal method by the Board, and that the Board’s assessment substantially exceeded true value

sound familiar
Sound Familiar?
  • The Court also listed several reasons for which it could review the State Board’s decisions:
    • Unconstitutional;
    • In excess of statutory or jurisdictional authority;
    • Unlawful proceedings;
    • Other errors of law;
    • Unsupported by evidence; or
    • Arbitrary or capricious
  • At the time, this list of reasons was in another section of the General Statutes, but it now appears in G.S. 105-345.2
so what
So What?
  • Albemarle gave us the start of the rule, but the appellant in this case didn’t meet its burden—what happens if the taxpayer can demonstrate that the assessment was arbitrary or illegal and substantially overstated?
  • Also, this was a situation where the assessing authority was a state board; what happens when a taxpayer takes issue with a value determined by the County Assessor?
along came amp
Along Came AMP
  • In 1975, just 2½ years after the Albemarlecase, electronics manufacturer AMP appealed to the State Board of Assessment (which was now known as the PTC) from the decision of Guilford County
  • At issue was the value of various type of metal used in AMP’s production process—some was raw material, some in process, some finished goods, and some scrap
the county is presumed correct too
The County is Presumed Correct, Too
  • Borrowing from the Albemarle decision, the (NC Supreme) Court in AMP said,

“All presumptions are in favor of the correctness of tax assessments. The good faith of tax assessors and the validity of their actions are presumed.”

  • It turns out that property tax cases don’t seems to distinguish between different taxing authorities
but what if i don t trust my assessor
But what if I don’t trust my Assessor?
  • This time, the Court threw in a couple of observations:

“The purpose underlying this presumption of correctness arises out of the obvious futility of allowing a taxpayer to fix the final value of his property for ad valorem taxation….If the presumption did not attach, then every taxpayer would have unlimited freedom to challenge the valuation placed on his property, regardless of the merit of such challenge.”

  • There are probably other good reasons to presume the correctness of the county’s value
  • For starters, there are statutory provisions for what must be considered in determining true value (e.g., G.S. 105-317 & 317.1)
  • For real property, a schedule of values has to be prepared, adopted, and survive an appeals process before it can be used
  • For personal property, the county’s value often starts with the taxpayer’s own historical cost information
back to amp
Back to AMP
  • The Court acknowledges that the presumption of correctness is rebuttable by the taxpayer
  • The Court adopts the Albemarle test for overcoming the presumption (arbitrary or illegal, plus substantial overstatement)
  • The Court finds that the county used an illegal method of valuation (book value), in that it was not authorized by statute to be used for all property types
close of amp
Close of AMP
  • The Court finds that the taxpayer had the right method for valuing scrap, and that the county would have substantially overstated the value by using book value, but there was no scrap on hand as of January 1 of any of the years in question (it got sold weekly)
  • The taxpayer got it wrong for everything else
  • What a letdown…
  • This was a 1981 case out of Wilkes County, where the taxpayers disputed the PUV valuations proposed in the Schedule of Values
  • Part of the problem was that the SOV was adopted in June, 1974, but the reappraisal wasn’t scheduled to take effect until January 1, 1977
  • The Court said this was plainly arbitrary
mcelwee cont d
McElwee, Cont’d.
  • Among other things, the taxpayers (who owned over 22,000 acres of woodland) provided evidence that the PUV of woodland should be $30-$40/acre, instead of the county’s $100, which was also their market rate
  • The Court said this was competent, material, and substantial evidence of substantial overvaluation
  • The Court went on to say,

“When a taxpayer has rebutted the presumption…as appellants have here, the burden then shifts to the county to demonstrate …that the values determined in the revaluation process were not substantially higher than that called for by the statutory formula, and the county must demonstrate the reasonableness of its valuation ‘by competent, material, and substantial evidence’”

  • Of course, that didn’t happen here, because both the PTC and CoA held for the county. Reversed & remanded, but at least we got the next step
southern railway
Southern Railway
  • 1981 case—railroads dispute DOR’s valuation
  • PTC and CoA uphold DOR’s value (they never felt that the burden shifted back to DOR)
  • Supremes send it back to the PTC, but not before expanding the AMP rule, to make it potentially easier for the taxpayer to shift the burden:

“When the Railroads offered evidence that the appraisal methods used by the Department would not produce true values for the Railroads, and that the values actually produced were substantially in excess of true value, they rebutted the presumption of correctness. The burden of going forward with evidence and of persuasion…then rested with the Department.”

southern rwy cont d
Southern Rwy., Cont’d.
  • Notice that there’s nothing about “arbitrary or illegal” in the Court’s holding
  • The implication here is that evidence of a substantial overstatement of value is also evidence that the assessed value was not “true value,” and therefore illegal by definition
ibm credit i
IBM Credit (I)
  • This case was heard by the CoA in 2007, but involved the value of personal property going back to the 2001 tax year
  • The PTC held that the taxpayer had not met its burden, and ruled for the county
  • There was a dissenting opinion, but the majority remanded to the PTC, holding that Southern Railway and later cases required the taxpayer to meet a burden of production, rather than of proof
side note about the burden
Side Note About the Burden
  • So, it turns out that we’re not talking about a burden of proof, or the obligation to establish something as a matter of absolute fact
  • Rather, this is about a burden of producing competent, material, and substantial evidence that disputes the presumption that the assessment is correct […but check out IBM (II)]
  • It’s usually easier to make a good argument than it is to establish a fact
ibm credit ii intro
IBM Credit (II) - Intro
  • Because there was a dissent in IBM (I), the county was entitled to review by the NC Supreme Court, which affirmed the decision to remand to the PTC
  • On remand, the PTC considered briefs from both sides, but heard no new evidence; the PTC again upheld the county’s value
  • The taxpayer again appealed to the CoA
ibm credit ii dispute
IBM Credit (II) – Dispute
  • The County’s approach to value was based on the historical cost of the property, which was then adjusted using DOR’s Cost Index and Depreciation schedules
  • The taxpayer’s expert provided value testimony that relied on the sales of used computers and computer-related equipment to develop a different depreciation rate for the property
ibm credit ii analysis
IBM Credit (II) - Analysis
  • For the first time, the Court explicitly sets out the three-step analysis:
    • Assessment presumed correct (AMP)
    • Presumption can be rebutted by providing evidence that “tends to show” that the value was (arbitrary or illegal, plus substantial overstatement)
    • Once the taxpayer produces the required evidence, the burden shifts to the taxing authority to show that is methods produce true value (Southern Railway) – more than McElwee?
ibm credit ii rule
IBM Credit (II) - Rule
  • The CoA calls the shifted burden one of proof and persuasion—in other words, the county needs to convince the PTC that its methods produce true value
  • The Court says this means that, once the burden shifts, the PTC is required to test the validity of the county’s methods, as well as the underlying assumptions used
ibm credit ii holding
IBM Credit (II) - Holding
  • The CoA says the PTC did not provide reasons for choosing the County’s valuation method over the taxpayer’s:
    • Why cost approach, rather than market?
    • Why wasn’t the income approach used?
    • What is the useful life of the property?
    • What’s the basis for the County’s depreciation rate?
    • What about functional or economic obsolescence?
ibm credit ii holding1
IBM Credit (II) - Holding
  • The Court went on to dispute the PTC’s finding that the County’s approach (using the U5 schedule prepared by DOR) was similar to the cost approach, saying no evidence had been provided to support this finding
  • The Court took issue with trending the historical cost to reach an estimate of replacement cost new
ibm credit ii bottom line
IBM Credit (II) – Bottom Line
  • This holding seems to mean that, once a taxpayer has made a reasonable argument, as determined by AMP, then:
    • The County must prove that its methods are both comprehensive and valid; and
    • The PTC must make findings that support the choice of one party’s appraisal methods over the other
  • The case was again remanded to the PTC
parkdale i
Parkdale (I)
  • While IBM was headed back to the PTC, this case, involving the value of two textile mills, showed up at the CoA
  • The case had been decided by the PTC before the IBM (II) decision came down
parkdale i holding
Parkdale (I) - Holding
  • The Court relied on the new IBM (II) decision to send the case back to the PTC to make

“specific findings of fact and conclusions of law explaining how it weighed the evidence to reach its conclusions using the burden-shifting framework articulated above and in this Court’s previous decisions.” (Emphasis added)

ibm iii 2012
IBM (III) - 2012
  • In 2011, the PTC again found for the County; the taxpayer again appealed to the CoA
  • By this time, a lot had changed from the time of the original appeal—county staff, attorney, PTC members
  • In its final decision, the PTC explained that some of the issues raised by the CoA could no longer be answered due to insufficient evidence in the original hearing
ibm iii result
IBM (III) - Result
  • The Court reasoned that:
    • Since the burden had shifted, the County’s original value must have been arbitrary or illegal;
    • There was no evidence that the County proved its value was accurate; and
    • There was no evidence that the taxpayer’s value was arbitrary or illegal;
    • Therefore, the taxpayer’s value must be correct
ibm iii result1
IBM (III) - Result
  • The appeal was remanded to the PTC for entry of a decision in favor of the taxpayer’s value
  • The CoA decision was unanimous, so there was no automatic appeal to the Supreme Court (they declined to review the decision)
  • Did the CoA get it right?
parkdale ii
Parkdale (II)
  • In 2013, the CoA heard a second appeal from the Parkdale (I) remand to the PTC
  • The PTC had held for the County again, and the CoA essentially asked, “Where’s the evidence that the County proved its value?”
  • The CoA sent the case back to the PTC, with a warning that it might again cause the PTC to adopt the taxpayer’s value if the County couldn’t carry its burden
parkdale at the ptc 2
Parkdale at the PTC #2
  • On September 17, 2013, the PTC heard a motion from the taxpayer, arguing that the additional hearings required by the CoA should be limited to evidence already submitted
  • The county argued that the CoA plainly expected the PTC to consider whatever additional evidence might be necessary to determine whether the county had met its burden
parkdale at the ptc 21
Parkdale at the PTC #2
  • The PTC granted the taxpayer’s motion
  • Additional arguments and briefs are expected to be heard in November or so
  • Will there be enough evidence in the record to allow the PTC to find that the county met its burden?
takeaway points
Takeaway Points
  • For taxpayers, it’s probably not that difficult to come up with a reasonable argument that the County’s value is wrong, and therefore illegal
  • For counties, be prepared not only to defend your value, but also to articulate it in enough detail so that the PTC has something to hang its hat on
  • Counties should probably also plan to provide enough documentary evidence to carry them through any subsequent appeal
  • Over the past 40+ years, it seems to have gotten relatively easier for taxpayers, and harder for counties, to prevail, at least at the CoA level
  • The biggest changes on the county side have had the greatest impact in just the last few years
  • Stay tuned for whatever happens next…