Court of Appeals Attempts to Clarify "Immaterial Irregularity" Provision

I often describe GS 105-394 as a “get-out-of-jail-free” card for local tax officials because the provision excuses mistakes in the administration of property taxes. In other words, taxes are not waived just because the tax office messed up.  I wrote about this statute extensively here. While the provision can be extremely useful, its scope is murky at best. A recent opinion from the N.C. Court of Appeals attempts to provide some clarity but does so in a manner that raises more questions than it answers.

Before diving into the new opinion, here’s some background on G.S. 105-394. The statute provides a non-exclusive list of mistakes that qualify as “immaterial irregularities” and therefore do not affect the validity of a tax.  North Carolina courts have relied on those examples to excuse a wide variety of procedural and substantive failures, including a transposed number in an assessment value, the lack of notice in a discovery proceeding, the inadvertent destruction of a listing form, a drainage district’s failure to levy special assessments in a timely fashion, and the unexplained failure to assess a property that was properly listed by the taxpayer. But G.S. 105-394 does not identify the types of mistakes that would be material enough to invalidate a tax.  Before last month’s In re: Appeal of Pace/Dowd Properties Ltd decision, only once had a court identified a tax administration error that fell outside the scope of the immaterial irregularity provisions. In 1977 the North Carolina Supreme Court found that the in rem foreclosure notice provisions were necessary to satisfy constitutional due process concerns. The court invalidated a foreclosure sale that lacked the required notice, concluding that it would be unconstitutional for G.S. 105-394 to excuse the lack of notice.  (See this bulletin for more about previous “immaterial irregularity” cases.) In re: Appeal of Pace/Dowd Properties Ltd. adds a second category of errors that falls outside of GS 105-394: valuation errors. The court held that if a county places an inaccurate tax value on a property during the appraisal process, GS 105-394 does not authorize the county to correct that mistake retroactively. On its face, this conclusion is not very surprising.  I don’t think too many counties were in the habit of retroactively correcting under-valuation mistakes.  Most would simply correct the mistake for the current year going forward or, in the case of real property, do nothing until the next county-wide reappraisal. But if you dig a bit deeper into the opinion, you do find some surprises.  What the court considers a “valuation error” seems more like a coding or clerical error, one that most counties would correct retroactively. Here are the basic facts of the case.  The taxpayer, real estate development corporation Pace/Dowd, owned several parcels in Union County on which it intended to build a residential real estate development.  The two parcels at issue in the appeal were known as Parcel 3 and Parcel 3A.  During Union County’s 2008 countywide general reappraisal, Parcel 3 was valued at $10,201,240 and Parcel 3A was valued at $1,135,420. Pace/Dowd did not appeal the tax valuations in 2008 or 2009. However, in 2010 Pace/Dowd contested the value of both parcels by filing an appeal with the Union County Board of Equalization and Review (“BOER”). During Pace/Dowd’s appeal, Union County became aware it had wrongly classified Parcel 3A as subdivision common area instead of (more valuable) land to be used for the construction of residences.  The county notified Pace/Dowd that it was remedying this mistake by retroactively increasing the tax value of Parcel 3A from $1,135,420 to $9,166,280 for tax years 2008, 2009, and 2010.  After a hearing, the BOER lowered the tax value of Parcel 3 (from $10,201,240 to $7,975,200) but affirmed the (new, higher) tax value of Parcel 3A. The taxpayer appealed the BOER’s decision to the state Property Tax Commissioner (“PTC”), which found in favor of the taxpayer and determined that as of the January 2008 appraisal the “true" values of Parcel 3 and Parcel 3A were $3,987,600 and $4,583,140, respectively. The PTC reduced the values of both parcels because it concluded that county had not properly considered the limited availability of sewer and water to the parcels as a result of a new county development policy implemented in 2007. [Note that the attorneys for Union County strenuously dispute this conclusion.]  It appears that the PTC did not specifically address the county’s authority (or lack thereof) to retroactively increase the tax value of Parcel 3A due to the classification error. The county appealed the PTC decision to the state court of appeals.  On March 18, the court issued an opinion which affirmed the PTC’s decision to reduce the values of both parcels.  However, unlike the PTC, the court of appeals specifically addressed the retroactive valuation change made to Parcel 3A. In the court’s eyes, this change was not authorized by G.S. 105-394.  It analyzed previous cases that dealt with immaterial irregularity and concluded that the provision applies to an appraisal error only when the property in question was never appraised at all by the county.   In the Pace/Dowd case the property was in fact appraised back in January 2008. Again, I am not very surprised by this conclusion.  But the court’s analysis was curious. First,, they quoted at length the court of appeals opinion in the In re: Morgan case, an opinion which was later reversed by the N.C. Supreme Court.  Decisions that are reversed (and therefore no longer good law) are rarely cited in subsequent cases. Second, the court seems to reject the retroactive value change for Parcel 3A in part because the court believes the new value was arbitrary and just plain wrong (due to the county’s alleged failure to consider the limited availability of sewer and water hookups).  But the accuracy of the retroactive change is a completely different issue from the county’s authority to make the change in the first place. Third, the court’s description of the error involved differs dramatically from that of the county.  The court viewed the appraisal error at issue as simply one of valuation: the county placed a low tax value on Parcel 3A during the 2008 reappraisal and later realized the market value of that parcel was much higher.  But according to the county, the error was a coding error rather than a valuation error. The assessor’s office incorrectly coded Parcel 3A as subdivision common area rather than (more valuable) land on which houses would be built. I agree with the court that GS 105-394 should not be used to retroactively correct faulty market value judgments. I think those mistakes should be corrected only for the current and future years under GS 105-287. But if the county’s description of the error is accurate, this case did not involve a faulty market value judgment.  It involved a coding error: the county inaccurately coded the property as common area. I do think this type of mistake may be corrected under GS 105-394.  This result would be consistent with the (generally accepted) view that a taxpayer refund would be justified under GS 105-381’s “clerical error” category were the mistake reversed and the county had mistakenly coded the property as buildable land instead of (less valuable) common area. Regardless, the court of appeal’s conclusion controls unless and until N.C. Supreme Court takes it up on appeal.  Counties should heed the opinion’s warning and avoid retroactive changes to property valuations regardless of the potential justification for such changes.