Montana Supreme Court upholds reappraisal system
In an Aug. 6 ruling, the Montana Supreme Court upheld the state’s six-year property reappraisal system.
The system has been under fire in areas of Montana, like the Flathead, where property values soared in the years prior to the 2008 Wall Street meltdown and then fell precipitously during the subsequent recession. Legislators in these areas have tried to change the system, by creating shorter reappraisal cycles, but so far without success.
The case involved Covenant Investments Inc., a Gallatin County developer which sued the state over its tax liability for a residential subdivision. The company claimed the state law requiring properties to be reappraised every six years was unconstitutional because it didn’t account for falling real estate values between cycles.
The Montana Department of Revenue appraised the subdivision at $17.6 million in 2008, and Covenant challenged that appraisal to the Gallatin County Tax Assessment Board. The board reduced the appraised value to $13.7 million.
Covenant then petitioned the State Tax Appeal Board, asking for a further reduction. The Department of Revenue had added 35 percent to the value based on the sale price of the subdivision’s first four parcels.
In testimony before the state board, it was established that those parcels had been sold to friends and family members of Covenant’s principals at an artificially high value in order to establish a higher market value for the subdivision. The state board ordered the Revenue Department to lower the 2008 value by removing the 35 percent increase.
But Covenant wanted the value lowered even more. It challenged the Revenue Department’s use of the revised 2008 appraisal for the rest of the six-year period ending in 2014. Covenant presented evidence that the property value of the subdivision had declined from 2008 to 2010, a time when real estate values were hammered by the recession.
Covenant argued that by using the revised 2008 value, the company was paying an inequitable share of taxes, and that the state law requiring six-year appraisals violated Covenant’s right to equal protection.
The company appealed to the Gallatin County District Court after the State Tax Appeal Board rejected its constitutional argument. District Court Judge Holly Brown agreed with Covenant’s argument, saying the Revenue Department’s failure to conduct mid-term reappraisals subjected taxpayers to disparate treatment.
Brown noted that taxing a property owner using an appraisal value that exceeded the actual market value was not rationally related to the Montana Legislature’s purpose in drafting the six-year appraisal system law. She ordered the Revenue Department to conduct a mid-cycle reappraisal, and the Department appealed to the Montana Supreme Court.
In a 5-0 ruling, the high court reversed Brown. First, the court said that Covenant had been treated no differently from all other taxpayers in 2008. That left the question of whether the company had a constitutional right to a mid-cycle reappraisal.
“The Montana Constitution requires only periodic attainment of equality in tax treatment,” the high court said, citing precedent. “The equal protection clause ‘does not require immediate general adjustment on the basis of the latest market developments ... The constitutional requirement is the seasonable attainment of a rough equality in tax treatment of similarly situated property owners.’”
The high court also had something to say about Brown’s ruling.
“The Montana Constitution prohibits courts from exercising legislative power,” the high court said. “The district court effectively inserted a provision into the statute that would require the department to conduct a mid-cycle reappraisal on Covenant’s property. The district court improperly exercised legislative power.”