blank.gif (51 bytes) Turning a Ceiling
into a Roadblock

by Steven Miller

o how much extra did you pay in property taxes during the last six years while your right to due process was effectively denied?

Siderbar:
The Widows
of Incline

Hundreds of thousands of Nevada taxpayers have been unlawfully deprived of their appeal rights, Nevada Journal has learned, because of a refusal by the Office of Attorney General Frankie Sue Del Papa to publicly correct—even after a clear Nevada Supreme Court ruling—years of erroneous interpretations by the A.G.’s office of the state’s most fundamental property tax law.

And because not only taxpayers but many appraisers serving both state and county offices remain ignorant of Nevada’s unique-in-the-nation property tax valuation rules, millions of dollars in taxes have been assessed and paid at the county level under unlawful appeal criteria.

What is at stake is the tax relief for property owners that the Nevada legislature passed into law in 1981.

"That was at the time," says former state budget director Howard Barrett, "when Proposition 13 was riding very high in California."

As support grew for a similar constitutional amendment in Nevada, he says, Senate Majority Leader James Gibson, D-Clark, successfully led the push for a legislative alternative. The result was Nevada Revised Statute 361.277.

"That relief was put in there, mainly through Jim Gibson, to provide some relief for the retired property owner on a fixed income," Barrett told Nevada Journal.

Nevada’s Unique Assessment Method

n lieu of the California solution—which mandated that despite soaring market values, the assessed value of a home couldn’t change until the house changed hands—the Gibson plan softened the tax burden on homeowners by a new and different method, virtually unique in the nation. While land would continue to be assessed at its market value, homes and other improvements on that land were to be assessed at replacement costs, depreciated over the course of 50 years.

Originally the law specified 2 percent as the annual depreciation rate, says Barrett, but in 1983—at the request of Nevada counties and cities—that rate was cut by lawmakers to 1.5 percent. According to Nevada Taxpayers Association Executive Director Carol Vilardo, local jurisdictions, ever hungry for more tax revenue, are preparing to ask for another cut from the 1999 legislature.

Assessors from 16 of the state’s 17 counties have said "they could live with" taxpayers receiving a mere 1 percent depreciation, Vilardo told Nevada Journal.

In actuality, however, even receiving the current 1.5 percent depreciation has turned out to be no sure thing for Nevada property owners. The reason? At some point after the 1981 tax relief measure became law, a whole new hurdle for taxpayers was smuggled—consciously or unconsciously—into the appeal process.

Attack of the Officious Lawyers

It took the form of a new point of view about who could appeal that the Office of the Attorney General and the state’s Department of Taxation began to advance. Never authorized by the legislature but soon diffused throughout Nevada’s counties by both state agencies, this viewpoint has denied thousands of taxpayers the opportunity to enforce through the appeal process fairness and accuracy in their tax assessments.

Who first came up with the new point of view, and when, is still not clear. It may in fact have originated during the 1983-1991 tenure of Attorney General Brian McKay. Or it may have emerged only after Del Papa took over as Attorney General in 1991. But by 1992, when Del Papa’s office argued the position before the Nevada Supreme Court, it clearly reigned supreme in state government.

What happened to produce the new barrier for taxpayer appeals seems to have been the misinterpretation by tax officials—originally innocently, perhaps—of an important section of the 1981 property tax law, NRS 361.277.

The heart of the Gibson innovation in Nevada tax assessment had been contained in that law’s Section 1, paragraphs (a) and (b) [see box]. But because that formula could conceivably, under unique circumstances, yield a taxable value far above a property’s actual market value, Section 5 of the law was added to protect taxpayers.

There are many examples from Nevada’s boom-and-bust history that show the need for Section 5. If a mine gives out, nearby properties usually become essentially worthless. In this situation the replacement-cost standard, without some kind of mitigation, would mean now-worthless buildings would still carry heavy tax liabilities.

NRS 361.227

Determination of taxable value.
1. Any person determining the taxable value of real property shall appraise:

(a) The full cash value of:

1) Vacant land by considering the uses to which it may lawfully be put, any legal or physical restrictions upon those uses, the character of the terrain, and the uses of other land in the vicinity.
(2) Improved land consistently with the use to which the improvements are being put.

b) Any improvements made on the land by subtracting from the cost of replacement of the improvements all applicable depreciation and obsolescence. Depreciation of an improvement made on real property must be calculated at 1.5 percent of the cost of replacement for each year of adjusted actual age of the improvement, up to a maximum of 50 years.

*  *   *

5. The computed taxable value of any property must not exceed its full cash value. Each person determining the taxable value of property shall reduce it if necessary to comply with this requirement. A person determining whether taxable value exceeds full cash value or whether obsolescence is a factor in valuation may consider:

(a) Comparative sales, based on prices actually paid in market transactions.
(b) A summation of the estimated full cash value of the land and contributory value of the improvements.
(c) Capitalization of the fair economic income expectancy or fair economic rent.

A county assessor is required to make the reduction prescribed in this subsection if the owner calls to his attention the facts warranting it, if he discovers those facts during physical reappraisal of the property or if he is otherwise aware of those facts.

So Section 5 of the law was intended as that mitigation—a protective tax ceiling. However, by 1992, Section 5 was being interpreted by the Nevada Attorney General’s Office as the one and only gateway through which all appeals of property taxes have to pass.

Frankie Sue Repudiated

hat, said the Nevada Supreme Court, is wrong. Ruling the same year in the case of Imperial Palace v. State Department of Taxation, the high court explicitly repudiated the argument of the attorney general.

"The State argues that if an assessor computes the taxable value by a method prescribed by law and if the taxable value does not exceed the property’s full cash value," wrote the court, "the taxpayer cannot challenge the valuation."

"We disagree with this position," continued the justices. "If an assessor utilizes a correct method pursuant to NRS 361.227, but inaccurately calculates the taxable value, a taxpayer may challenge an assessor’s incorrect valuation under NRS 361.345 regardless of whether the erroneously calculated taxable value exceeds the full cash value."

Nevertheless, despite the clear message of the Nevada Supreme Court, when the office of Attorney General Frankie Sue Del Papa in 1993 published for state and county tax officials a new Nevada Property Tax Manual, subtitled Guide to Understanding the Administrative Process and the Fundamentals of Creating a Solid Record, the notably significant ruling by the high court was ignored.

"Full cash value is the measuring stick by which to judge any computed taxable value," stated the manual, ignoring the core methodology set forth in Section 1 of NRS 361.227.

Similarly, and even more egregiously, the Nevada Department of Taxation continued to distribute to county assessors, county boards of equalization and taxpayers throughout the state the precise point of view rejected by the Nevada Supreme Court.

The bad information was on a legal size sheet titled "Information and Instructions for Taxpayers and Boards of Equalization" sent out by the department for at least the better part of the last decade. But according to a source familiar with department practice in 1992, the bad-info sheet was probably already being sent out even earlier.

Authoritative Misinformation

he idea behind the sheet, the source told Nevada Journal, was to save time for department employees. One easily mailable information sheet, it was thought, would be a more efficient way to disseminate the state of Nevada’s authoritative answers to all the most frequently asked questions. Those questions were coming in not only from taxpayers, but staff people at assessor offices and equalization boards throughout the state’s 17 counties.

But the sheet’s impact didn’t stop there. Any taxpayer who informed his local assessor’s office that he intended to appeal his property valuation, would, as a matter of course, be sent the bad information. Along with the required appeal form—called the "Petition for Review of Assessed Valuation"—would come a copy of the state tax department’s "Information and Instructions" sheet, with its incorrectly constricted account of appeal rights.

The taxpayer would read that it was "Persons claiming that the full cash value of their property is less than the taxable value" who "shall appear before the county board of equalization and submit proof…." Only people intimately familiar with the law and the legislative intent behind it would know that this formula—excluding anyone able to show that the assessment had not been done correctly under Section 1 of the governing state law—was wrong.

Reading further, the taxpayer would find the constricted standard repeated: "Any petitioner who seeks to change the valuation placed upon a property shall have the burden of proof to show that the valuation is not at taxable value and that taxable value exceeds full cash value."

And should the taxpayer be so bull-headed as to consider pushing his appeal on to the State Board of Equalization, the sheet again informed him that merely incorrect assessments were no grounds for appeal: "The State Board will review the land and improvement value separately to determine if each value is correct and then examine the total property value to determine if taxable value exceeds full cash value and a reduction should be granted."

It is difficult to estimate how many Nevada property owners, systematically misinformed by state and county officials, have over the years paid thousands of dollars in taxes they didn’t really owe. But finally, in 1996, one Nevada taxpayer knew enough to raise the core issue.

Cut Out That There
Misplaced Bifurcatin’

es Barta, manager of a family real estate investment company with properties in several Western states, knew that Nevada property tax assessment rules were virtually unique in the United States. He also had learned of the Imperial Palace ruling. Writing Nevada Attorney General Frankie Sue Del Papa several times, he warned of "strong evidence that thousands of taxpayers are being denied the opportunity to fairly appeal their property taxes." Each time, Del Papa or her deputy attorney generals charged with tax matters wrote back letters that explicitly repudiated both Section 1 of the governing statute and the wording of the supreme court decision.

"Your attempt to bifurcate the valuation process between land and improvements is misplaced. There is no legal authority in chapter 361 of the Nevada Revised Statutes or otherwise which authorizes or permits such a valuation technique," wrote Deputy A.G. Norman Azevedo. Del Papa herself made the same claim in another letter: "[T]here is no legal authority permitting the bifurcated valuation technique you delineated to Mr. Azevedo."

When Barta sent back a detailed four-page letter, patiently disposing of all the state’s arguments, Azevedo simply wrote back a brief note that he was "unable to agree" and suggested Barta take the state to court after exhausting the board of equalization appeals.

Later in the year, however, Barta and some associates, after consulting with legal specialists, drafted a writ of mandamus to ask a court to compel the attorney general to obey state law. The draft motion also asked punitive damages for an alleged failure by Del Papa to keep her oath as a constitutional officer of the state and faithfully enforce the law.

Faced with the looming prospect of the writ, attorneys representing the Nevada Department of Taxation had a deathbed conversion.

In suddenly cordial talks with Barta, they agreed that the information the department had been disseminating statewide in its "Information and Instruction" sheets needed to be corrected. Further, they indicated, they would make a real effort to correct misinformation existing in assessor offices and boards of equalization.

"Every indication at the time was that they were going to try to make amends for their error," says Barta.

The A.G.’s lawyers in the state tax department finally produced a revised version of the "Information and Instruction" sheet. Now all the statements limiting taxpayer appeals to cases where taxable value had been assessed higher than a property’s cash value were removed. Thanks to Barta, in 1997 and 1998 assessor offices all across the state had new, corrected sheets to give or send out to taxpayers.

But in the end, he says, Del Papa’s office and her long-time top deputy A.G. for taxation, John Bartlett, backed out of full implementation of the agreement.

"They did make some changes in the State Board of Equalization, but the problem is they didn’t submit these revised guidelines to the counties with any instructions, or to the county boards with any instructions," says Barta. "And as a result of that, there are still hundreds if not thousands of taxpayers who are not given proper instruction and are still being subjected to the market-value standard for determining taxable value."

So far as he can tell, says Barta, most of those taxpayers in Nevada are in Washoe County. He notes that Clark County Assessor Mark Scofield, though not originally aware of the supreme court’s Imperial Palace ruling, has nevertheless correctly followed the statute for years.

Scofield is apparently not the only tax assessment specialist aware that Del Papa’s office has long been promulgating an error-filled interpretation of Nevada’s fundamental property tax statute.

"I know from listening to the assessors," said the Nevada Taxpayer Association’s Carol Vilardo, "that the old A.G. opinion was not valid." That fact became clear to her during the 1997 legislative session, she told Nevada Journal, as she listened closely to the testimony of county assessors before committees considering amendment of existing tax assessment law.

So the tax collectors know what’s up.

Now if only the state cared enough about its taxpayers to let more of them in on the secret. u

 Steven Miller is managing editor of Nevada Journal.

News to Use
Cato Institute Policy Analysis No. 280
Renewable Energy: Not Cheap, Not 'Green'

http://www.cato.org/pubs/pas/pa-280.html

CEI Update: A Time and Place for Solar
http://www.cei.org/update/1998/0698-jm.html

Citizens for State Power: (800)536-5920

D.Dowd Muska: ddm@npri.org


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