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October 21, 2011

New Paradigm - Municipalities Seek Relief Via Legislation?

During the 2011 Legislative Session, municipalities sought relief from possible large real property tax litigation via legislation. One such legislative proposal sought to amend Real Property Tax Law ("RPTL") Article 19. The proposed Legislation sought to change the playing field relative to a single large taxpayer seeking assessment relief through judicial review.

Real Property Tax Law Article 19 establishes a two class system (homestead and non-homestead) with the legislatively stated intent to reduce the tax burden on homestead parcels (primarily, residential owners). In 2011, a legislative proposal was introduced that sought to carve out a sub-class within the non-homestead class which would have been made of a single large taxpayer that happened to challenge the Town's assessed value. By the proposed legislation, the taxpayer's right to pay an equitable share of real property taxes would have been trampled, as the legislation limited the impact of any court ordered reduction in assessments subsequent to the tried proceeding; essentially, trumping the intent and effect of RPTL §§ 726 and 727. The proposed legislation would have eradicated the operation of RPTL §727's three year moratorium and froze the taxpayer's taxes for the assessment rolls of the year immediately following the challenged assessment rolls (regardless of the court ordered assessment reduction) at the same level of taxes it had paid prior to the ordered reduction and refunds and relative to the assessment rolls challenged.

By the proposed legislation, in the first year following the court ordered reduction in assessment, the taxpayer's taxes (in a RPTL Article 19 classification system, always a function of that taxpayer's percent of the total non-homestead class taxes) is statutorily required to be frozen at its percentage of the non-homestead taxes for the year challenged, and computed at the challenged assessed value (even though, the court finds such assessed value to be excessive and reduces the same). The long and short of the proposed legislation is that even if a court ordered an assessed value that was less than the assessed value on the subsequent year's assessment rolls, by freezing the taxpayer's percentage in the non-homestead class, the taxpayer would not recover any refunds in the immediate subsequent years. Instead, the legislation proposed to spread out the total impact of the court ordered assessment reduction over five years.

Such Legislation Must Be Challenged as Unconstitutional.
This type of proposed legislation is clearly unconstitutional, as it undermines the clear intent and application of RPTL Article 7 and the taxpayer's right to pay only its equitable share. It also discriminates against a single taxpayer. To challenge such legislation requires additional judicial review. The first question for such review becomes the forum in which to commence that challenge. There are two possible forums "“ United States District Court or the New York State Supreme Court, or both. For either forum, the taxpayer must also determine the appropriate court to commence the litigation. For the United States District Court, the taxpayer may have two possible districts to commence the litigation "“ where the Legislature is located or where the property is located. Similarly, if a state court forum is chosen, the taxpayer must choose between where the Legislature is located or where the property is located. As the primary defendant will be the taxing authority, the more apt court, state or federal, is where the property is located (i.e., where the statute would be enforced). Of course, litigating in the State Courts may be seen as too parochial, especially where substantial monetary refunds are involved. These considerations support a federal action. However, United States District Courts have not been receptive to state property tax issues.

For purposes of the United States District Court, jurisdiction arises pursuant to 28 U.S.C. § 1331. The issues raised would involve violations of the United States Constitution (and New York State Constitution, both of which are substantially controlled by the same standard of review). The Federal court will have personal jurisdiction over the parties, as each party is located within the District. Moreover, the case is a controversy arising between the parties that exists within the jurisdiction, and therefore, the District Court where the property is located will be authorized to grant the declaratory and injunctive relief sought pursuant to the Declaratory Judgment Act, 28 U.S.C. §§ 2201, et seq. (as implemented through Rule 57 of the Federal Rules of Civil Procedure, and pursuant to Rule 65 of the Federal Rules of Civil Procedure).

This particular legislation involved a large taxpayer that successfully obtained a significant reduction and refunds. At first the taxing authorities merely tweaked the RPTL Article 19 percentages so that all non-homestead taxpayers paid more taxes to amortize the effect of the court ordered assessment reduction. But, now, as the taxpayer seeks further large assessment reductions, the taxing authorities sought to limit the amortization for such anticipated reductions to the taxpayer, alone, this time.

In these hard economic times, do not be surprised if taxing authorities seek additional relief from the Legislature for their over assessment practices. If successful, the relief will likely reduce the impact of ordered assessment reductions for future assessments, and increase costs to the taxpayer to challenge their assessments. Additional policy implications may include municipalities viewing such legislation as giving them carte blanche to over assess large parcels, as they would be able to amortize those consequences over years.

If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact any of the members in our Real Property Tax & Condemnation practice area.


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