INSIGHT: Virginia Supreme Court Ruling Issued on Erroneous Real Estate Assessments

The Virginia Supreme Court recently issued a ruling on the 2011 amendment to the real estate assessment statute, indicating that the presumption of correctness of an assessment is not absolute.

The court published its opinion in McKee Foods Corp. v. County of Augusta, 830 S.E.2d 25 (7/18/19), a case that involves McKee Foods’ challenge to the county’s real estate assessments for the county’s 2011-2014 tax years. Virginia Code Section 58.1-3984, the statute that governs appeals of assessments to circuit courts, was amended in 2011 effective for tax years beginning on or after Jan. 1, 2012, so different principles governed the court’s review of McKee Foods’ challenge to the 2011 assessment versus the 2012-2014 assessments. The court’s analysis and holdings are important to taxpayers and localities, and contractors who perform appraisal work for localities for ad valorem tax purposes.

Because the litigation of McKee Foods’ case is not concluded, this article is not an exhaustive analysis of the court’s opinion. For ease of reference, “GAAP” refers to “generally accepted appraisal practices, procedures, rules, and standards as prescribed by nationally recognized professional appraisal organizations such as the International Association of Assessing Officers (IAAO).”

As amended, Section 58.1-3984(B) provides, in pertinent part:

“In circuit court proceedings to seek relief from real property taxes, there shall be a presumption that the valuation determined by the assessor or as adjusted by the board of equalization is correct. The burden of proof shall be on the taxpayer to rebut such presumption and show by a preponderance of the evidence that the property in question is valued at more than its fair market value or that the assessment is not uniform in its application, and that it was not arrived at in accordance with generally accepted appraisal practices, procedures, rules, and standards as prescribed by nationally recognized professional appraisal organizations such as the International Association of Assessing Officers (IAAO) and applicable Virginia law relating to valuation of property.”

Presumption of Correctness Is (Still) Not Absolute

Prior to the 2011 amendments, Section 58.1-3984(A) imposed on taxpayer’s the burden to prove assessments were incorrect but made no mention of a presumption of correctness. The presumption—which the court had applied for 100 years or more—was a creature of judicial interpretation. Over the decades, the court articulated only one limitation to its attachment to an assessment: When a taxing authority uses only one of the generally-accepted appraisal approaches (i.e., the cost, income, or sales comparison approaches) to arrive at an assessment, the assessment is entitled to a presumption of correctness only if the other two (unused) appraisal approaches were considered and properly rejected. See, e.g., Bd. of Supervisors v. HCA Health Servs. of Va. Inc..

The 2011 amendments to Section 58.1-3984 appeared to change all that, but McKee Foods makes clear that the statutorily-created presumption of correctness is not absolute: “[T]he preliminary question whether a taxing authority is entitled to the presumption of correctness must first be considered, and the revisions to Section 58.1-3984 do not impact that inquiry.” The court reaffirmed that “[a]s our prior decisions make clear, an assessment that is based on a single approach, where the taxing authority has failed to consider and properly reject the other approaches, is not entitled to this presumption of correctness.”

Section 58.1-3984(B) Establishes an Order of Analysis to Rebut a Presumption of Correctness

If a taxing authority bases its assessment on a single appraisal approach after considering and properly rejecting the other approaches, McKee Foods makes clear that a court’s inquiry advances past the “preliminary question” to an analysis of the taxpayer’s evidence to rebut the presumption of correctness. McKee Foods establishes an order of analysis under Section 58.1-3984(B):

“Under [Section 58.1-3984(B)], in order to rebut the presumption of correctness, a taxpayer must first prove either that (1) the property has been valued at more than its fair market value, or (2) that that the assessment is not uniform in its application. If they prove either of those two prongs by a preponderance of evidence, then the taxpayer moves to the next requirement. In this second step, the taxpayer must also prove by a preponderance of the evidence that the assessment was not arrived at in accordance with [GAAP] and applicable Virginia law relating to the valuation of property.”

Within what appears to be a two-step analysis, the necessity of proving the fair market value of the property lurks in the first prong of Step 1. As the court stated previously regarding the pre-amendment Section 58.1-3984, “In order to satisfy the statutory requirement of showing that real property is assessed at more than its fair market value, a taxpayer must necessarily establish the property’s fair market value.” W. Creek Assocs., LLC v. County of Goochland.

The court did not elaborate on the types of evidence that will satisfy a court’s inquiry into Step 2, that is, whether an “assessment was arrived at in accordance with [GAAP] and applicable Virginia law relating to the valuation of property.” Section 58.1-3984(B), but the court makes clear that the previously-required “clear preponderance” standard is no longer applicable. The standard of proof now required of taxpayers is a simple “preponderance of the evidence.”

Employees of Mass Appraisal Contractors Must Be Licensed Appropriately

The real estate at issue in McKee Foods is an 828,619-square-foot manufacturing building on 171.54 acres. Don Thomas, the Wingate employee who performed the appraisal on which the County’s 2014 assessment was based, admitted that McKee Foods’ property was a complex industrial property with a value greater than $250,000. Mr. Thomas also admitted that he was only a licensed residential real estate appraiser at the time he appraised the property. Mr. Thomas asserted, however, that he was exempt from compliance with Virginia’s standards of professional appraisal practice even though he was not an employee of the County. See 18 Va. Admin. Code Section 130-20-180(A), (C)-(L) (exempting “local, state and federal employees performing in their official capacity” from compliance with, among other things, regulations governing the development and reporting of mass appraisals for ad valorem tax purposes).

McKee Foods makes clear that mass appraisal contractors who perform appraisal work for ad valorem tax purposes must comply with Virginia’s standards of professional appraisal practice, including compliance with the Uniform Standards of Professional Appraisal Practice. Employees of mass appraisal contractors working on assessment projects in Virginia should not appraise properties that they are not licensed or certified to appraise by the Virginia Real Estate Appraiser Board.

Conclusion

McKee Foods establishes an order of analysis and confirms a different burden of proof for taxpayers in Section 58.1-3984(B). In addition, mass appraisal contractors and the Virginia localities that contract with them should be aware of the qualifications (i.e., experience and appropriate licensing and certifications) necessary to perform mass appraisals for ad valorem tax purposes. Having the appropriate qualifications should reduce the likelihood of improper appraisal methodologies, but localities should ensure—and taxpayers should demand—that mass appraisal contractors are qualified and that they perform their work in accordance with GAAP and Virginia law governing the valuation of property.

This column does not necessarily reflect the opinion of The Bureau of National Affairs Inc. or its owners.

Shane L. Smith is a partner at Williams Mullen in Norfolk, Va., and Virginia Beach, Va. His practice focuses on commercial litigation, specializing in real and personal property tax disputes.