In re FLS Owner II, LLC

• Decision Date: 05 January 2016
• Docket Number: No. COA14–1399.,COA14–1399.
• Citation: 781 S.E.2d 300,244 N.C.App. 611
• Parties: In the Matter of the Appeal of FLS OWNER II, LLC from the decision of the Randolph County Board of Equalization and Review regarding the valuation of certain property for tax year 2011.
• Court: North Carolina Court of Appeals

244 N.C.App. 611

781 S.E.2d 300

In the Matter of the Appeal of FLS OWNER II, LLC from the decision of the Randolph County Board of Equalization and Review regarding the valuation of certain property for tax year 2011.

No. COA14–1399.

Court of Appeals of North Carolina.

Jan. 5, 2016.

Turrentine Law Firm, PLLC, by S.C. Kitchen, Durham, for Taxpayer–Appellant.

Shelley T. Eason, for Randolph County–Appellee.

CALABRIA, Judge.

Taxpayer, FLS Owner II, LLC ("FLS"), appeals from a final decision of the North Carolina Property Tax Commission ("the Commission") affirming the appraisal of FLS's solar heating system by Randolph County ("the County") for ad valorem tax purposes. We reverse the decision of the Commission and remand.

I. Background

FLS purchased an industrial solar heating system ("the system") for $1,700,000 from its parent company, FLS Energy, Inc., on 15 August 2010. FLS then leased the system for use in a manufacturing facility ("the facility") in Asheboro. The system was designed specifically for, and was installed directly onto, the facility. It consists of two hundred solar panels, two heat exchangers, piping inside and outside of the facility, and two 10,000–gallon storage tanks, as well as "sleeves, bracers, and connectors associated with the system." The system produces hot water solely for the facility's industrial manufacturing processes.

According to stipulations by both parties, the County discovered the system in 2011 and initially appraised it at "a value of $571,000 based on [ ] an original cost of $635,000 [as] shown on the building permit." "The [C]ounty amended [its appraisal] in November of 2011 to show a value of $1,056,917 based on a press release from the North Carolina Governor's Office showing the original cost for the [system] to be $1,174,352."

FLS contested the County's appraisal, and a hearing was held before the Commission on 13 May 2014 ("the hearing"). During the hearing, Howard Blair Kincer ("Mr. Kincer") testified for FLS as an expert in the "appraisal of solar energy equipment and systems." Mr. Kincer testified, in part, that under a "cost comparison approach[,]" the value of the system was $56,000, because that was how much it would cost to replace the system with an equivalent conventional heating system. As a result, the County's appraisal of the system was almost nineteen times larger than Mr. Kincer's appraisal. The County maintained that it correctly appraised the system based on the cost of replacing it with another solar heating system. At the close of FLS's evidence, the County moved to dismiss the case. On 15 September 2014, the Commission entered a final decision ("the decision") which dismissed the case and affirmed the County's valuation of the system at $1,056,917. FLS appeals.

II. Standard of Review

The North Carolina Supreme Court has outlined the standard of review for appeals from final decisions of the Commission as follows:

We review decisions of the Commission pursuant to [N.C. Gen.Stat.] § 105–345.2 [ (2013) ]. Questions of law receive de novo review, while issues such as sufficiency of the evidence to support the Commission's decision are reviewed under the whole-record test. Under a de novo review, the court considers the matter anew and freely substitutes its own judgment for that of the Commission. Under the whole-record test, however, the reviewing court merely determines whether an administrative decision has a rational basis in the evidence.

In re Appeal of Greens of Pine Glen Ltd., 356 N.C. 642, 646–47, 576 S.E.2d 316, 319 (2003) (citations and internal quotation marks omitted).

Because this appeal presents a dispositive issue of statutory construction, we conduct a de novo review.

III. Analysis

FLS challenges the decision of the Commission to affirm the County's appraisal of the system for ad valorem tax purposes. "Ad valorem tax assessments are presumed to be correct." Id. at 647, 576 S.E.2d at 319.

However, a taxpayer may rebut this presumption if it produces competent, material and substantial evidence establishing that: (1) Either the county tax supervisor used an arbitrary method of valuation; or (2) the county tax supervisor used an illegal method of valuation; AND (3) the assessment substantially exceeded the true value in money of the property.

Id. This is a "two-prong test[.]" Id. However, "[i]n attempting to rebut the presumption of correctness, the burden upon the aggrieved taxpayer is one of production and not persuasion." In re Blue Ridge Mall LLC, 214 N.C.App. 263, 267, 713 S.E.2d 779, 782 (2011) (emphasis added) (citation and internal quotation marks omitted). "Once a taxpayer produces sufficient evidence to rebut the presumption, the burden shifts to the taxing authority to show that its methods [do] in fact produce true values [.]" In re IBM Credit Corp., 201 N.C.App. 343, 345, 689 S.E.2d 487, 489 (2009) (citation and internal quotation marks omitted).

A. Classification of Property

As a preliminary matter, we note that the County appraised FLS's system as "personal property" under N.C. Gen.Stat. § 105–317.1 (2013). Neither party disputes this classification. Since FLS's appeal turns almost entirely on determining the correct "replacement cost" of the system, the County would have had to consider this "replacement cost" while conducting its appraisal, regardless of whether the system was properly classified as real or personal property. See N.C. Gen.Stat. §§ 105–317(a)(2), –317.1(a) (respectively).

B. Application of N.C. Gen.Stat. § 105–277(g)

FLS contends the County used an arbitrary or illegal method to appraise the value of the system and that this appraised value "substantially exceeded" the system's "true value" as defined by North Carolina's Tax Code. See N.C. Gen.Stat. §§ 105–277(g) (requiring that buildings equipped with solar heating or cooling systems be "assessed for taxation in accordance with each county's schedule of values for buildings equipped with conventional heating or cooling systems") 283 (2013) (stating that all property must be "valued at its true value in money"). Specifically, FLS argues the County erred by appraising the system based upon the "reproduction cost" of the system. Under this method, the County reached it appraisal by determining the "replacement cost" of constructing another, identical solar heating system. FLS contends subsection 105–277(g) required the County to appraise the system based on the " replacement cost" of an equivalent conventional heating system. FLS also argues the Commission erred by concluding as a matter of law that subsection 105–277(g) was not applicable to the present case in affirming the County's appraisal. The interpretation of subsection 105–277(g) is a matter of first impression for this Court, and we agree with FLS.

Subsection 105–277(g) provides that

[b]uildings equipped with a solar energy heating or cooling system, or both, are hereby designated a special class of property under authority of Article V, Sec. 2(2) of the North Carolina Constitution. Such buildings shall be assessed for taxation in accordance with each county's schedules of value for buildings equipped with conventional heating or cooling systems and no additional value shall be assigned for the difference in cost between a solar energy heating or cooling system and a conventional system typically found in the county. As used in this classification, the term "system" includes all controls, tanks, pumps, heat exchangers and other equipment used directly and exclusively for the conversion of solar energy for heating or cooling. The term "system" does not include any land or structural elements of the building such as walls and roofs nor other equipment ordinarily contained in the structure.

N.C. Gen.Stat. § 105–277(g) (emphasis added). It is well settled that

[t]he principal goal of statutory construction is to accomplish the legislative intent. The intent of the General Assembly may be found first from the plain language of the statute, then from the legislative history, the spirit of the act and what the act seeks to accomplish. If the language of a statute is clear, the court must implement the statute according to the plain meaning of its terms so long as it is reasonable to do so. When the statute under consideration is one concerning taxation, special canons of statutory construction apply. If a taxing statute is susceptible to two constructions, any uncertainty in the statute or legislative intent should be resolved in favor of the taxpayer.

Lenox, Inc. v. Tolson, 353 N.C. 659, 664, 548 S.E.2d 513, 517 (2001) (citations and internal quotation marks omitted). For the following reasons, we conclude the statute is susceptible to competing reasonable constructions.

Subsection 105–277(g) specifically provides that "[b]uildings equipped with a solar energy heating or cooling system ... are hereby designated a special class of property" and sets forth the manner in which "[s]uch buildings shall be assessed for taxation[.]" N.C. Gen.Stat. § 105–277(g) (emphasis added). According to the County, this language necessarily means that "the statute's financial benefit goes to the building, not to the solar heating and cooling system itself[.]" The essence of this argument is that subsection 105–277(g) serves a very limited purpose: installation of (usually very expensive) solar equipment increases the value of the building to which it is attached. This increase in value subjects the building's owner to greater ad valorem tax liability. The County contends when a building is equipped with a solar heating or cooling system, it must be assessed for taxation without regard to the increased value of the real property due to the installation of such a system.

Even so, as FLS argues in its brief, the remainder of subsection 105–277(g) defines solar energy heating and cooling systems as entirely distinct from the buildings to which they are attached. See N.C. Gen.Stat. § 105–277(g) ("[T]he term ‘system’ includes all...