Travis Cent. Appraisal Dist. v. FM Properties Operating Co.

• Decision Date: 26 June 1997
• Docket Number: No. 03-96-00043-CV,03-96-00043-CV
• Citation: 947 S.W.2d 724
• Parties: TRAVIS CENTRAL APPRAISAL DISTRICT, Appellant, v. FM PROPERTIES OPERATING COMPANY, Appellee.
• Court: Texas Court of Appeals

Page 724

947 S.W.2d 724

TRAVIS CENTRAL APPRAISAL DISTRICT, Appellant, v. FM PROPERTIES OPERATING COMPANY, Appellee.

No. 03-96-00043-CV.

Court of Appeals of Texas,

Austin.

June 26, 1997.

Rehearing Denied July 24, 1997.

Judith A. Hargrove, Calame, Linebarger, Graham & Pena, L.L.P., Austin, for appellant.

William Ikard, Popp & Ikard, Austin, for appellee.

Before POWERS, ABOUSSIE and JONES, JJ.

JONES, Justice.

FM Properties Operating Company ("FM"), appellee, sued the Travis Central Appraisal District ("the District"), appellant, challenging an order of the District's Appraisal Review Board that appraised, for ad valorem taxation purposes, the value of real estate owned by FM. Relying on section 23.12(a) of the Texas Tax Code, which requires that real estate inventory be valued as a unit, FM claimed the District's assessment based on individual lot values was excessive. See Tex. Tax Code Ann. § 23.12(a) (West Supp.1997) (hereinafter "Code"). The District answered by (1) challenging the trial court's jurisdiction to entertain the suit because FM had not paid the disputed taxes before filing suit, as required by section 42.08 of the Code; and (2) counterclaiming for a declaratory judgment that section 23.12(a) is unconstitutional. FM responded by seeking a declaratory judgment that section 42.08 is unconstitutional. After a trial to the court, the trial court rendered judgment for FM, ruling that section 23.12(a) is constitutional and that section 42.08 is unconstitutional. The District perfected this appeal. We will affirm.

FACTUAL BACKGROUND

FM is in the business of purchasing raw land or developed lots to sell to builders, who then build homes on the land as part of the development of a subdivision. On January 1, 1993, FM owned a total of 210 residential lots in four subdivisions; on January 1, 1994, FM

owned a total of 153 residential lots in three subdivisions. All of the lots were held by FM for sale in the ordinary course of its business, had not been occupied, leased, or rented, and produced no income during FM's ownership. The parties stipulated that (1) if section 23.12(a) of the Code is constitutional, an appraisal of FM's properties as a unit pursuant to that statute would yield market values of $9,933,326 for the tax year 1993 and $6,670,193 for the tax year 1994; and (2) if section 23.12(a) is unconstitutional, the sum of the individual lot values of FM's parcels would yield total market values of $13,932,875 for the tax year 1993 and $10,755,881 for the tax year 1994.

DISCUSSION

In point of error two, the District contends the trial court erred in declaring unconstitutional section 42.08 of the Code, which requires that a taxpayer pay the previous year's real property assessment as a condition for obtaining judicial review. The Texas Supreme Court's recent decision in Central Appraisal District v. Lall, 924 S.W.2d 686 (Tex.1996), holding section 42.08 unconstitutional, is dispositive on this issue. We overrule point of error two.

In point of error one, the District asserts that section 23.12(a) violates the Texas Constitution. The relevant portion of section 23.12(a) provides:

[T]he market value of an inventory is the price for which it would sell as a unit to a purchaser who would continue the business. An inventory shall include residential real property which has never been occupied as a residence and is held for sale in the ordinary course of a trade or business, provided that the residential real property remains unoccupied, is not leased or rented, and produces no income.

Code § 23.12(a). ¹ The District contends section 23.12(a) violates article VIII, sections 1 and 2 of the Texas Constitution, which provide:

§ 1. Equality and uniformity; tax in proportion to value; income tax; exemption of certain tangible personal property from ad valorem taxation

Sec. 1. (a) Taxation shall be equal and uniform.

(b) All real property and tangible personal property in this State, unless exempt as required or permitted by this Constitution, whether owned by natural persons or corporations, other than municipal, shall be taxed in proportion to its value, which shall be ascertained as may be provided by law.

* * * * * *

§ 2. Occupation taxes; equality and uniformity; exemptions from taxation

Sec. 2. (a) ... [T]he legislature may, by general laws, exempt from taxation [various types of property specifically described in this section]; and all laws exempting property from taxation other than the property mentioned in this Section shall be null and void.

Tex. Const. art. VIII, §§ 1, 2. The District asserts that section 23.12(a) violates the "equal and uniform" and "in proportion to its value" requirements contained in section 1 and constitutes an unauthorized exemption from taxation under section 2.

In two recent opinions, the Texas Supreme Court summarized the rules for determining the constitutionality of a taxation statute:

In determining the constitutionality of a statute, we begin with a presumption that it is constitutional. Courts presume that the Legislature "understands and correctly appreciates the needs of its own people, that its laws are directed to problems made manifest by experience, and that its Enron Corp. v. Spring Indep. Sch. Dist., 922 S.W.2d 931, 934 (Tex.1996) (citations omitted) (quoting Smith v. Davis, 426 S.W.2d 827, 831 (Tex.1968)).

                discriminations are based upon adequate grounds."   The wisdom or expediency of a law is for the Legislature to determine, not this court.  Furthermore, the party challenging the constitutionality of a statute bears the burden of demonstrating that the enactment fails to meet constitutional requirements
                

We presume that a statute passed by the Legislature is constitutional. Furthermore, this Court must liberally construe any constitutional provision that directs the Legislature to act for a particular purpose, and we must, if possible, construe statutes to avoid constitutional infirmities. Finally, we must reject interpretations of a statute that defeat the purpose of the legislation so long as another reasonable interpretation exists.

Nootsie, Ltd. v. Williamson County Appraisal Dist., 925 S.W.2d 659, 662 (Tex.1996) (citations omitted).

In Enron, the supreme court addressed an identical constitutional challenge to a taxation statute that is closely related to the one at issue here. Section 23.12(f) of the Code permits "[t]he owner of an inventory" to elect to have its inventory "appraised at its market value as of September 1 of the year preceding the tax year to which the appraisal applies" instead of January 1 of the tax year, the date when all other property must be appraised for ad valorem tax purposes. In upholding the constitutionality of the statute, the court held that "the Legislature may constitutionally draw distinctions in the manner in which market value of property is determined for ad valorem tax purposes, as long as the classifications are not unreasonable, arbitrary, or capricious." 922 S.W.2d at 936. In the present case, therefore, the touchstone for the District's constitutional challenge is whether section 23.12(a) creates a valuation method for inventory that is unreasonable, arbitrary, or capricious.

For ad valorem tax purposes, "value" must be based on "reasonable market value." Nootsie, 925 S.W.2d at 661; Enron, 922 S.W.2d at 935. The Code defines "market value" as:

the price at which a property would transfer for cash or its equivalent under prevailing market conditions if:

(A) exposed for sale in the open market with a reasonable time for the seller to find a purchaser;

(B) both the seller and the purchaser know of all the uses and purposes to which the property is adapted and for which it is capable of being used and of the enforceable restrictions on its use; and

(C) both the seller and purchaser seek to maximize their gains and neither is in a position to take advantage of the exigencies of the other.

Code § 1.04(7) (West 1992). This statutory definition, first enacted in 1979, accords with the traditional definition applied by Texas courts that market value means the price property would bring when offered for sale by one who desires, but is not obliged to sell, and is bought by one who is under no necessity of buying it. See State v. Windham, 837 S.W.2d 73, 77 (Tex.1992); Polk County v. Tenneco, Inc., 554 S.W.2d 918, 921 (Tex.1977); City of Pearland v. Alexander, 483 S.W.2d 244, 247 (Tex.1972); Humes v. Hallmark, 895 S.W.2d 475, 480 (Tex.App.--Austin 1995, no writ). See generally Gary A. Goff, Comment, Fair Market Value: A Primer for Texas Legal Practice, 15 Tex. Tech L.Rev. 637, 639-43 (1984).

The Code also provides:

The market value of property shall be determined by the application of generally accepted appraisal techniques, and the same or similar appraisal techniques shall be used in appraising the same or similar kinds of property. However, each property shall be appraised based upon the individual characteristics that affect the property's market value.

Code § 23.01(b) (West 1992).

The District complains that section 23.12(a): (1) violates the "equal and uniform" requirement of article VIII, § 1(a) of the constitution by treating some owners of real

property (those whose property comes within the statutory description of "inventory") differently from other owners of real property; (2) violates the "in proportion to its value" requirement of article VIII, § 1(b) by imposing a valuation methodology that does not yield market value; and (3) violates the exemption provision of article VIII, § 2(a) by exempting from taxation certain real property that is not mentioned in that section. We will address the District's arguments in that order.

I. Equal and Uniform

The District's primary complaint about section 23.12(a) is that it discriminates against the owners of real estate whose property does not satisfy the prerequisites of "inventory" set out in the statute. The District argues that, by...