March 2, 2003 – A U.S. 3rd Circuit Court of Appeals judicial panel has rejected the V.I. government's argument that a lawsuit in District Court challenging the territory's manner of assessing commercial properties for tax purposes should be thrown out because the federal court lacks jurisdiction in the matter.
The three-judge panel ruled that the plaintiff, Equivest St. Thomas Inc., "properly alleged a violation of a federal requirement." Equivest is the corporate owner of three St. Thomas hotels — Bluebeard's Castle, Bluebeard's Beach Club (once known at Limetree) and Elysian Beach Resort.
The Circuit Court opinion was filed on Friday, the same day that Gov. Charles W. Turnbull announced his signing into law of a bill calling for commercial property taxes to be assessed for 2001 through 2004 on the basis of 1999 valuations. (See "Governor signs special session bills into law".)
The appellate opinion upholds the authority of District Judge Thomas K. Moore, who is currently hearing a consolidated case of 11 property owners challenging the V.I. government's tax assessments for 2000 on the same basis as that argued by Equivest, and before that, by Berne Corp.
In the landmark case brought against the V.I. government in District Court by St. Thomas businessman Gary Berne, a settlement was reached in December 2000 calling for a Special Master to be appointed to oversee reforms in the Tax Collector's Office. The terms of the settlement were sealed. However, Tax Assessor Roy Martin has said he cannot implement the reforms without a bigger budget.
The case brought by Bluebeard's Castle Inc. and Castle Acquisitions Inc., which were later consolidated into Equivest, advanced the same argument as Berne had: challenging the government's assessing of commercial property for 2000 tax purposes on the basis of replacement value, not actual market value. The government's total assessment of the properties was $98.4 million, resulting in a tax bill of about $740,000. They had been appraised independently in 1999 for $38.2 million and actually sold that year for $22.5 million.
In the Equivest case, Moore issued a preliminary injunction last year to prevent the territory from collecting property taxes against the three hotels "until the tax assessor can establish at a trial on the merits that the property taxes on those properties have been assessed on their actual value."
The Circuit Court of Appeals opinion was rendered by Judges Samuel A. Alito Jr., Marjorie Rendell and Anthony Joseph Scirica. Nandi Sekou and Kerry Drue of the Attorney General's Office represented the V.I. government. Simone R.D. Francis, Chad C. Messier and William S. McConnell of Dudley Topper and Feuerzeig represented Equivest.
In their opinion, the jurists said the appeal involved their addressing "the special relationship between federal and territorial law." They wrote: "The District Court enjoined the Virgin Islands tax assessor from employing a certain tax-assessment method, concluding it violated federal law. Contending that any claims can only arise under territorial law, the government of the Virgin Islands maintains the District Court lacked federal subject-matter jurisdiction. We hold that plaintiff has properly pled a federal claim."
The V.I. government also argued in its appeal that Moore abused his discretion in rejecting its argument that the injunction should be denied because Equivest had "failed to pursue avenues for relief within the Virgin Islands and insufficiently cooperated with Virgin Islands officials." The appellate panel found "no abuse of discretion."
The opinion notes that the V.I. government "does not contest the District Court's resolution of the merits" of the Equivest lawsuit. It also states that Martin said the territory "primarily employed replacement-cost value and declaration value in assessing the properties, methods he conceded do not reflect fair market value."
Equivest also contends that the government is in breach of the Berne case settlement.
The panel affirmed Moore's preliminary injunction and remanded the case back to District Court for further proceedings.
Amid ongoing cases, a new law
Meanwhile, on Feb. 19, in court for the consolidated case of the 11 property owners, Moore took issue with Turnbull's submitting of his bill to proceed with tax assessments using the 1999 valuations. All of the cases challenging the government's assessment procedures have to do with 2000 property taxes. Moore accused the governor of seeking to circumvent his order against issuing any more tax bills until the current challenge is adjudicated.
In the first week of February, Turnbull called the Legislature into special session to act on his bill to assess commercial properties for 2001-2004 on the basis of 1999 valuations, and on Feb. 12 the Senate passed the measure. That's the bill the governor signed last week.
The governor cited an opinion from Attorney General Iver Stridiron that if the law were to be changed as Turnbull proposed, "there would be no violation of the current settlement agreement, and the government would still be able to continue … sending out corrected commercial real property tax bills until such time as new guidelines are implemented."
Last November, the governor told the Senate that "no 2001 commercial real property tax bills have been issued by the tax assessor due to concern that the court case V.I. Berne Corp. et al. vs. the Government of the V.I. prohibited the government from issuing tax bills until such time as the tax assessor develops and correctly implements uniform appraisal standards."
Martin said last September that his office would have to reassess all commercial properties because of a ruling by Moore in August that some 25 commercial property owners did not have to meet the Aug. 30 deadline for paying their 2001 taxes pending the court's determination of whether those bills were proper. Martin said then that his office was working on the reappraisals, to apply to 2002 taxes, and that what to do regarding the 2001 taxes "hasn't been decided."
In July, Martin had testified at a budget hearing that tax revenues for the territory's 1,500 commercial properties assessed on the basis of replacement value would be $9 million to $10 million for 2002, but based on market value, they could be as little as $7 million.
A "hybrid federal/territorial" tax system
The Circuit Court opinion noted that property taxes are generally governed by state law but further noted that "the Virgin Islands is not a state; it is a territory subject to Congress's broad power" under the Constitution to govern territories. And as a territory, it "does not share with the states the same sovereign independence."
Were it a state, the judges said, "the District Court may have been subject to" federal law providing that "the district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under state law where a plain, speedy and efficient remedy may be had in the courts of such state."
Specifically, in 1936 Congress provided that "all taxes on real property in the Virgin Islands shall be computed on the basis of the actual value of such property" and also that they be uniformly assessed. (Historically, the appellate opinion states, Congress took the action "to replace a system viewed as encouraging unproductive use of land" by taxing such land at a very low rate. "It was thought that federal legislation was needed, as the local legislature was unlikely to pass a change to a value-based tax system," the jurists wrote.)
Federal statute, the circuit panel said, provides that "the general requirements are set by the federal government, with specif
ics established as a matter of territorial law consistent with federal law."
The V.I. government argued that the federal statute was supplanted in 1955 when a territorial real property assessment law was passed. The appellate panel rejected this argument, saying expiratory language in the 1936 law applies only to specific requirements, not to general ones, including that tax be computed on the "actual value" of property. "Congress's intent to enter this area of law suffers from no ambiguity," the jurists said.
Further, they said, "the tax system is not a state tax system, nor is it entirely a territorial tax system. It is partially a federal tax system, and it is not apparent that the federal government should adopt a hands-off approach to the federal aspects of a hybrid federal/territorial system."
But at the same time, they said, it has been the choice of Congress "to treat Virgin Islands law — including its taxation regime — with much of the independence of state law."
Equivest's case is properly before the federal court, the panel said, not because it is protesting the government's "actual value" dollar figure but because it is arguing that "the assessment method does not constitute a reasonable attempt to determine the actual value."
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