Did Phila.’s 2018 Selective Tax Reassessment Violate the Uniformity Clause?

In Duffield House Associates v. City of Philadelphia, 2021 Pa. Commw. LEXIS 520 (July 29, 2021), the Pennsylvania Commonwealth Court recently analyzed whether the city of Philadelphia’s selective reassessment in tax year 2018 of only commercial properties at current market value violated the uniformity clause and the assessment law’s requirement that the city assess all properties annually at actual market value.

For the 2018 tax year, the city reassessed 41,730 commercial properties in the city at current market values, imposing more than $118 million in additional real estate taxes on those properties, the opinion said. However, the city did not reassess 538,380 residential properties in the city, leaving their assessments at 2017 tax year values and imposing no additional real estate taxes on those properties.

According to the opinion, Duffield House Associates filed a complaint alleging that the city selectively reassessed only commercial properties at fair market value for tax year 2018, in violation of the uniformity clause and Section 8565(b)(2) and (c) of the Consolidated First-Class County Assessment Law (Assessment Law), 53 Pa. C.S. Section 8565(b)(2) and (c), which requires annual reassessments of all city properties.

Months later, the owners and tenants of approximately 700 commercial properties in the city, filed 12 other complaints against the city asserting similar claims. Eventually, the Philadelphia Common Pleas Court consolidated the 13 actions into the one originally filed.

The trial court issued a decree in favor of these taxpayers and against the city.

Relying upon the Pennsylvania Supreme Court’s decision in Valley Forge Towers Apartments North v. Upper Merion Area School District and Keystone Realty Advisors, 163 A.3d 962 (Pa. 2017), the trial court concluded that the city deliberately targeted only commercial properties for reassessment in tax year 2018, thereby violating the uniformity clause.

Accordingly, the trial court struck the selective reassessment of the taxpayers’ properties, reinstated the prior tax year’s assessments, and ordered the city to refund the excess real estate taxes paid to the city.

On appeal, the city argued that the trial court erred in rejecting its ratio studies and mandating that only a method that revalues every property in the city would satisfy uniformity. The city claimed that uniformity does not require perfection; it only requires rough equalization.  According to the city, commercial properties were grossly under assessed for years. Thus, focusing only on the egregiously nonuniform properties constituted “rough equalization” as a matter of law and was not unconstitutional.

In response, the taxpayers argued that revaluing a small minority of properties in the city at current market value, while leaving the vast majority of properties at prior base-year values, violates the uniformity clause and Section 8565 of the Assessment Law, which requires the city to assess all properties annually at actual market value.

Prior to addressing the merits of the arguments, the Commonwealth Court in Duffield provided an overview of the uniformity clause.

The Commonwealth Court in Duffield noted that the uniformity clause precludes a taxing jurisdiction from treating similarly situated taxpayers differently.

According to the Commonwealth Court in Duffield, to establish the imposition of a tax violates the uniformity clause, a taxpayer must demonstrate that the administration of a tax deliberately and purposefully discriminates in the application of the tax.

The Commonwealth Court in Duffield further clarified that the term deliberate in this context “does not exclusively connote wrongful conduct, but also includes any intentional or systematic method of enforcement of the tax laws.”

In light of the trial court’s heavy reliance on the Supreme Court’s decision in Valley Forge, the Commonwealth Court in Duffield applied the principals of Valley Forge to the underlying appeal.

In Valley Forge, the taxpayers brought an action against a school district, as a taxing district, asserting that the school district violated the uniformity clause by systematically appealing only assessments of commercial properties. The trial court in in Valley Forge sustained the school district’s preliminary objections and dismissed the taxpayers’ complaint with prejudice. The Commonwealth Court in Valley Forge affirmed the trial court’s ruling.

On appeal, the Supreme Court in Valley Forge considered “whether the uniformity clause of the Pennsylvania Constitution permits a taxing authority to selectively appeal only the assessments of commercial properties, such as apartment complexes, while choosing not to appeal the assessments of other types of property—most notably, single-family residential homes—many of which are under-assessed by a greater percentage.”

The Supreme Court in Valley Forge commenced its uniformity analysis by stating two key principles of law, drawn from prior precedent: “all property in a taxing district is a single class, and, as a consequence, the uniformity clause does not permit the government, including taxing authorities, to treat different property sub-classifications in a disparate manner”; and “this prohibition applies to any intentional or systematic enforcement of the tax laws, and is not limited solely to wrongful conduct.”

Ultimately, the Supreme Court in Valley Forge held that “a taxing authority is not permitted to implement a program of only appealing the assessment of one sub-classification of properties, where that sub-classification is drawn according to property type—that is, its use as a commercial, apartment complex, single-family residential, industrial or the like.”

In an effort to distinguish the pending appeal in Duffield from the factual circumstances set forth in Valley Forge, the city asserted that it did not target nonresidential properties for reassessment in tax year 2018. Instead, the city claimed that it chose to reassess the taxpayers’ properties not because of their commercial nature, but because of the city’s ratio studies revealed that commercial properties were the “most underassessed” properties in the city and had been “grossly underassessed” for several years.

The Commonwealth Court in Duffield rejected the city’s argument based on the overwhelming evidence demonstrating that the city specifically targeted commercial properties for reassessment in tax year 2018.

In doing so, the Commonwealth Court in Duffield highlighted the testimony of the taxpayers’ economic expert, Kevin Gillen, Ph.D. and the city’s expert, Robert Gloudemans.

At trial, Gillen’s testified that his studies found that residential properties were underassessed as compared to their market value for tax year 2018 by approximately $20 billion, the opinion said.

In addition, Gillen found that the housing market in Philadelphia grew from the years 2014 to 2018 by 31.5%, however, assessed values of residential properties during that same time period only increased only by 3.2%, the opinion said.

According to the opinion, Gillen went on to demonstrate the unreliable nature of the city’s ratio studies, opining that they were based on a “flawed” sales validation process.

Similarly, Robert Gloudemans, the city’s expert, testified that the city’s ratio studies were “unreliable” and had to be “taken with a grain of salt,” the opinion said.

The Commonwealth Court in Duffield also took into consideration that representatives of the city repeatedly stated, on numerous occasions, that, for the tax year 2018, the city was reassessing only commercial properties and that, for the tax year 2019, the city would conduct the first countywide reassessment since 2014.

For example, Michael Piper, the city’s chief assessment officer at the time, made reference to a “commercial reassessment” in tax year 2018 and a “citywide reassessment” in tax year 2019 during a senior staff meeting, according to the opinion.

By singling out the taxpayers’ properties for reassessment based solely upon their commercial nature, the Commonwealth Court in Duffield noted that the city engaged in disparate treatment of sub-classes of properties within a taxing district.

Ultimately, the Commonwealth Court in Duffield held that, under the Supreme Court’s holding in Valley Forge, the taxpayers established that the city’s selective reassessment in the tax year 2018 of only commercial properties violated the uniformity clause of the Pennsylvania Constitution and, as such, the trial court’s remedy of issuing tax refunds to the taxpayers was appropriate under the circumstances.

— Clementa Amazan, an associate at Nochumson P.C., is the co-author of this article.

Reprinted with permission from The Legal Intelligencer © 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.