Mathias v. Department of Revenue, State of Or.

• Decision Date: 29 August 1991
• Citation: 312 Or. 50,817 P.2d 272
• Parties: Charles J. MATHIAS and Charlotte Mathias, Respondents, v. DEPARTMENT OF REVENUE, STATE OF OREGON, Appellant. OTC 2910; SC S37159.
• Court: Oregon Supreme Court

Page 272

817 P.2d 272

312 Or. 50

Charles J. MATHIAS and Charlotte Mathias, Respondents, v. DEPARTMENT OF REVENUE, STATE OF OREGON, Appellant.

OTC 2910; SC S37159.

Supreme Court of Oregon In Banc.

Argued and Submitted Sept. 5, 1990.

Decided Aug. 29, 1991.

[312 Or. 51] Ted E. Barbera, Asst. Atty. Gen., Salem, argued the cause, for appellant. With him on the brief, was Dave Frohnmayer, Atty. Gen., Salem.

No appearance contra.

Willard E. Fox, Salem, filed a brief on behalf of amicus curiae Or. State Home Builders Ass'n.

FADELEY, Justice.

Taxpayers complain that their fully developed, vacant residential subdivision lot was valued and taxed at higher amounts than identical lots adjacent to it in the same subdivision. Defendant Department of Revenue does not contest that taxpayers' lot was valued for real property tax purposes at a substantially higher amount than the taxable valuation applied to adjacent lots, or to lots located elsewhere in the same subdivision, or to very similar lots in other nearby subdivisions within the boundaries of the same taxing authority. Instead, the department defends the disparity in taxable value of the otherwise similar, fully developed, vacant lots by relying on a 1989 statutory amendment. The amendment added a new subsection (3) to ORS 308.205, providing that:

"If the property consists of four or more lots within one subdivision, and the lots are held under one ownership, the lots shall be valued under a method which recognizes the time period over which those lots must be sold in order to realize current market prices for those lots."

Taxpayers allege that the 1989 amendment mandates a "double standard of valuation, for the same class of property (subdivision lots)," thereby violating the rule of uniformity of taxation for the same class of property required by Article I, section 32, ¹ and the uniform assessment, levy, and collection required by ARTICLE IX, SECTION 1, OF THE OREGON CONSTITUTION². The department and taxpayers filed cross-motions for summary judgment on the constitutional issues thus raised.

The taxable value of taxpayers' lot is based on market value established by comparable sales. Where a single owner held multiple lots, the taxing authorities also started with a value based on the same comparable sales but then substantially reduced that value for tax purposes for all situations in which four or more lots had the same owner. Taxpayers' lot received no reduction from market value. Other lots held in ownerships of one through three lots likewise received no reduction from comparable-sales market value.

Rejecting the department's claim that the disparate valuations were permissible for four or more lots because the disparity was authorized by the numerical-ownership classification in the new statute, the tax court stated:

"The court finds that the statute directly violates the basic protection afforded by Article I, section 32 of the Oregon Constitution. Property of the same class, i.e., lots in subdivisions, are not subject to uniform taxation. Owners of lots of equal true cash value would not pay taxes on equal values. This is not because the properties are different or are used differently but simply because the owners are different. It is difficult for this court to imagine a more discriminatory scheme."

Mathias v. Dept. of Rev., 11 OTR 347, 352 (1990).

The tax court entered a declaratory judgment that:

"ORS 308.205(3) violates the uniformity of taxation requirements of Article I, section 32, and Article IX, section 1, of the Oregon Constitution, and is, therefore, null and void."

The issue presented by the department's appeal of the tax court decision is whether the classification attempted--treating four or more lots differently for ad valorem tax purposes than one, two, or three otherwise identical lots--is constitutionally permissible. We agree with the tax court that it is not and, therefore, affirm.

HISTORY OF THE CONTROVERSY LEADING TO THIS CASE

The background of this case starts with a memorandum that one of the department's managers sent to county assessors in 1983. The department's 1983 memorandum indicated that a "discount" could be used to reduce the assessed value of two or more fully developed lots in a subdivision, where the lots had a single owner. That memorandum did not require that four or more lots be commonly owned. It did not limit the discount to an original subdivider. It described the reduction or discount method as different from valuation by comparable sales of groups of lots in bulk in one transaction.

The memorandum described the "discount" approach as based on comparable sales of individual lots. The true cash value of each and every individual lot was first obtained by actual comparable sales. Then, if the assessor estimated that it would take more than one year to sell all of the lots in a multiple-lot ownership, the memorandum permitted a percentage discount to be applied to the true cash value of each lot to reduce taxable value of each and every lot below the value derived from comparable sales. The percentage of reduction was increased to allow for the fact that property taxes were to be paid annually. That is, the reduction or discount as applied offset future taxes that assumedly would be paid on the lot prior to its sale to a new owner. In effect, at least part of the taxes on the lots held in multiple-lot ownership would be shifted onto the individually owned lots.

Thereafter, the tax court limited this so-called developer's discount approach to "those cases where the value sought is the present worth of property which is yet to be developed" and held that "the tax authority has no legal or rational basis for discounting the value of each unit because of who owns the unit." CKW Enterprises v. Dept. of Rev., 10 OTR 49, 51 (1985).

Two years later, the tax court decided another case in which a taxpayer urged that a discount, or calculated cost to hold until sale, should be deducted from market price to reduce taxable value. In First Interstate Bank v. Dept. of Rev., 10 OTR 452, 455 (1987), the tax court stated: "The issue before the court is whether the assessed value of each lot should be discounted or reduced because two or more lots are owned by the same party."

The taxpayer in that case, who was not the original subdivider, but who had come into possession of multiple fully developed lots by foreclosure, relied on the department's 1983 memorandum. The tax court rejected the memorandum and the taxpayer's contentions based on it, stating:

"Perhaps the most compelling reason for rejecting the * * * memorandum is the constitutional requirement of uniformity in taxation. * * * If the individual's lot is contiguous to one of plaintiff's $14,000 lots, and both lots are listed for sale at $14,000, but plaintiff's lot is assessed at $9,000, there is no uniformity." 10 OTR at 456-57.

On appeal to this court, the taxpayer argued that the value of the real property, as fixed by the department, was too high because it failed to allow for either a "developer's discount" or a reduction in value for an assumed cost to hold until an undetermined future time when the property might be sold. This court rejected the argument:

"We agree with the Tax Court that the developer's discount is not a permissible method of valuation in the present case. Because we decide that this method of assessment does not comply with statutory requirements, we do not decide whether the application of a developer's discount would result in a violation of Article I, section 32, of the Oregon Constitution.

" * * * * *

" * * * The cost to hold is not different from the rate of return used in the developer's discount method. The true cash value is the market value, ORS 308.205(1), not the market value less a cost to hold." First Interstate Bank v. Dept. of Rev., 306 Or. 450, 455-56, 760 P.2d 880 (1988).

This court explained:

"The value of each lot by itself, not as a portion of a larger piece of property, must be assessed. [In a footnote the court explained that] [i]n certain situations * * * it would be appropriate to assess that lot based on its value as a part of a group. That is not the situation in the present case." 306 Or. at 453, 760 P.2d 880 (citation omitted).

This court rejected the taxpayer's argument--that the lots should be lumped together as one unit for valuation purposes--because the lots were fully developed and were on the market individually, concluding that:

"Therefore, this method of valuation does not assess the value of the appropriate unit. Although a separate value is assigned to each lot, this is the value of the lot as a part of the whole, not its value as a separate property." 306 Or. at 454, 760 P.2d 880.

Turning to a discussion of a separate, adjacent tract owned by the same taxpayer that had not yet been divided into separate lots nor improved with roads and utilities, the court indicated that assessment of the undivided tract as one unit was appropriate. The court explained, as to that tract: "Its undivided status affects its value, but it is that undivided status, not the common ownership, that affects the market value." 306 Or. at 456, 760 P.2d 880.

After this court's decision in First Interstate Bank v. Dept. of Rev., supra, the legislature amended ORS 308.205 by Oregon Laws 1989, chapter 796, section 30, to add a new subsection (3), quoted above. As stated, the department relies on the numerical classification enacted by that amendment to justify the reduced taxable valuation that it has applied only to lots of owners of four or more lots, but not to identical or similar lots when three or fewer lots are owned. In December of 1989, after it had ruled on taxpayers' departmental appeal of the taxable value used for the January 1, 1988, assessment year, ³ the department also promulgated a regulation based on the 1989 amendment that institutionalizes that disparate treatment. ⁴ The department...