State Board of Tax Commissioners v. Montgomery

ATTORNEYS FOR APPELLANTS

Jeffrey A. Modisett

Attorney General of Indiana

Jon Laramore

Deputy Attorney General

Indianapolis, Indiana

ATTORNEYS FOR APPELLEES

Peter L. Benjamin

Merrillville, Indiana

Gerald M. Bishop

Merrillville, Indiana

John S. Dull

Indianapolis, Indiana

__________________________________________________________________

IN THE

SUPREME COURT OF INDIANA

__________________________________________________________________

STATE BOARD OF TAX )

COMMISSIONERS, et al., )

)

Appellants (Respondents Below), )

) Indiana Supreme Court

v. ) Cause No. 45S00-9906-TA-340

)

TROY MONTGOMERY, et al., )

)

Appellees (Petitioners Below). )

__________________________________________________________________

APPEAL FROM THE INDIANA TAX COURT

The Honorable Thomas G. Fisher, Judge

Cause No. 45T10-9807-TA-84

__________________________________________________________________

ON PETITION FOR INTERLOCUTORY APPEAL

__________________________________________________________________

June 27, 2000

BOEHM, Justice.

The petitioners in this case are Lake County, on its own behalf and on

behalf of property owners in that county, the Lake County Council, the

Board of Commissioners of Lake County, and several individual members of

the Council or the Board who seek to sue in their official capacities and

as taxpayers owning property in Lake County. All petitioners brought suit

in the Indiana Tax Court against the Indiana State Board of Tax

Commissioners, seeking a declaratory judgment that the Health Care for the

Indigent program (“HCI”) violates Article 10, Section 1 and Article 1,

Section 23 of the Indiana Constitution. The Tax Court held that it had

subject matter jurisdiction, despite the State’s contention that the

taxpayers had not exhausted their administrative remedies. That issue was

certified for interlocutory review, and we granted the State Board’s

Petition for Review to address whether under these circumstances the

taxpayers must first exhaust administrative remedies. We hold that the

taxpayers must first exhaust the administrative remedy of requesting a

refund, and that the Tax Court is without jurisdiction because no

petitioner seeks review of a final order of the State Board.

Factual and Procedural Background

HCI was first enacted in 1986 and recodified in 1992 at Indiana Code §

12-16-2-1 to 12-16-16-3. It is designed to provide emergency medical care

to indigent patients who do not qualify for Medicaid benefits. Before

1986, the counties bore all responsibility for indigent health care. HCI

transferred the administration of indigent health care to the State and

imposed an “HCI tax levy” to fund it. The State Board of Tax Commissioners

is required to “review each county’s property tax levy under this chapter

and . . . enforce the requirements of this chapter with respect to that

levy.” Ind. Code § 12-16-14-4 (1998). The levy is imposed as a property

tax, but unlike the general property tax levy,[1] the amount of the HCI

levy for each county is statutorily prescribed as last year’s levy

increased by the percentage of growth in assessed value of all property in

the state.[2] Certain statutory limits on property tax rates may be

exceeded “[t]o meet the requirements of the county hospital care for the

indigent fund.” Id. § 6-1.1-18-3(7).

The Act provides for the establishment of an HCI fund in each county.

Each county fund’s balance is transferred monthly to a state fund. The

initial HCI levy for each county was set at the average over 1984-86 of its

indigent hospital care expenditures, with certain adjustments not relevant

here.

The petitioners contend that the statutory formula for setting the HCI

tax levy has resulted in a wide disparity between the contribution of Lake

County residents to the HCI state fund and Lake County’s percentage of

statewide assessed value. According to petitioners, even though the

assessed value of property in Lake County is 6.5% of the statewide assessed

value, 37% of the HCI tax levy is imposed on Lake County.

Two taxpayers who are parties to this action, Troy Montgomery and

Frances DuPey,[3] directed a letter to the State Board in which they posed

four questions:

(1) Is the State Tax Board of Commissioners willing to voluntarily

adjust and revise the current funding formula for the HCI tax levy to

assure that Lake County health care providers substantially receive

the benefit of tax dollars that are paid in?

(2) If the answer to question number one is in the affirmative, please

further state the mechanism and timetable regarding same.

(3) Please itemize where the distribution of the remaining sum of

approximately $42,000,000.00 paid in by Lake County is allocated?

(4) On behalf of Lake County taxpayers, we are requesting a refund of

the HCI overpayment for the past three (3) years. Members of the

County council have filed timely objections over the years regarding

our inflated HCI tax levy. Please advise us regarding your position

to voluntarily repay to Lake County the amount of overpayment into the

HCI fund for the past three (3) years.

The Chairman of the State Board, Frank J. Sabatine, was sympathetic to

the concerns expressed by Montgomery and DuPey, but he responded that,

“there is nothing the Board can do to voluntarily adjust the amount of Lake

County’s HCI property tax levy.” He described the State Board’s role as

“ministerial” in nature, and told Montgomery and DuPey that the Board had

no discretion either to adjust the formula for assessing the HCI tax levy,

or to order a refund of taxes for the alleged overpayment.

Sabatine expressed the State Board’s willingness to “review the

funding and reimbursement formulas[4] to determine if there are ways to

improve the HCI program.” He also directed a letter to the Citizens’

Commission on Taxes, asking it to consider Lake County’s concerns in its

recommendations to the General Assembly on proposals to remove the HCI tax

levy from the property tax. Sabatine explained to Montgomery and DuPey

that some of the apparent inequity of the HCI program is counterbalanced by

its interaction with Medicaid.[5] He concluded that any “concerns

regarding inequities in the current levy calculation . . . must be

addressed to the General Assembly and not to this agency.”[6]

The petitioners, along with the Lake County Council and Board of

Commissioners, then brought suit in the Indiana Tax Court against the State

Board. They allege that the HCI tax levy violates the Indiana

Constitution, specifically, Article 1, Section 23, the Privileges and

Immunities Clause, and Article 10, Section 1, which provides for a uniform

and equal rate of property assessment and taxation. They sought a

declaration that the formula for calculating the tax levy was

unconstitutional. They contended that jurisdiction of the Tax Court was

conferred by the Sabatine letter, which constituted a “final determination”

within the meaning of the Tax Court’s jurisdictional statute. The State

Board responded with a motion to dismiss, contending that the governmental

entities lacked standing and the taxpayers were barred by the doctrine of

exhaustion of remedies because they had neither objected to the levy nor

claimed a refund pursuant to procedures set forth in the tax code.

The Tax Court concluded that the Sabatine letter did not constitute a

final determination conferring subject matter jurisdiction, but

nevertheless concluded that the claim was proper because administrative

remedies for challenging the HCI levy were inadequate and therefore the

parties were excused from pursuing them. See Lake County Council v. State

Bd. of Tax Comm’rs, 706 N.E.2d 270, 275-77 (Ind. Tax 1999). The Tax Court

first held that the taxpayers’ ability to object to the tax levy was an

insufficient remedy because an objection could be filed only by a group of

ten taxpayers, and the adjudication of a constitutional claim could not be

made to depend on agreement by nine others to bring the claim. See id. at

275-76. The Tax Court viewed the option of filing a claim for a refund as

“more promising,” but it nevertheless concluded that the refund process was

also impractical. If a refund were ordered as to amounts remitted from the

county fund to the State, the Tax Court surmised, it would have to be paid

out of the county coffers, even though the ultimate recipient of the funds

from the county tax was the State. See id. at 277-78. The Tax Court then

noted the absence of any mention of a refund process in the HCI statute and

concluded that the legislature did not intend the county to be commandeered

into granting refunds of money it had forwarded to the State. In the Tax

Court’s view, the legislature “could not have intended” the refund

provisions of the property tax to apply to the HCI tax levy. Id. at 277.

The Tax Court then concluded that jurisdiction properly lay with the Tax

Court. See id. at 278-79. It also ruled that the governmental entities,

with the exception of Lake County itself, had no standing to contest the

constitutionality of the HCI levy. See id. at 279-81.

Lake County was deemed a proper party to the declaratory judgment

action because it had a cognizable interest in the lawsuit. If the

petitioners were successful, the county would be required both to fund and

also to administer the refund process. See id. at 281.

The State Board sought rehearing, arguing that because Lake County

could seek reimbursement from the State for any refunds it would be forced

to pay, the taxpayers’ remedies were adequate and exhaustion should not be

excused. [7] In a second opinion,[8] the Tax Court again concluded that it

had subject matter jurisdiction and that petitioners’ administrative

remedies were inadequate and exhaustion was excused. See Montgomery v.

State Bd. of Tax Comm’rs, 708 N.E.2d 936 (Ind. Tax 1999). The Tax Court

also concluded that reimbursement was too speculative. See id. at 938.

The Tax Court subsequently certified its opinions for interlocutory review

by this Court, and this appeal followed.

The State Board argues that: (1) the taxpayers failed to exhaust their

administrative remedies and they are not excused from pursuing these

remedies on grounds of futility; (2) even if exhaustion were not required,

the taxpayers still had no final determination by the State Board and

therefore jurisdiction was improper in Tax Court; and (3) Lake County lacks

standing to assert this claim against the State Board.

I. Exhaustion of Administrative Remedies

In State v. Sproles, as here, the taxpayer sought a declaration that

the tax at issue was unconstitutional. See 672 N.E.2d 1353, 1354-55 (Ind.

1996). Sproles held that the taxpayer there could not circumvent

administrative remedies and challenge the constitutionality of a tax

directly in court, even if the administrative agency to which the taxpayer

appeals is without the power to grant the exact remedy the taxpayer seeks.

See id. at 1358-61. Rather, a taxpayer must first exhaust administrative

remedies. See id.

The reasons for requiring a party to seek administrative remedies are

well established. Premature litigation may be avoided, an adequate record

for judicial review may be compiled, and agencies retain the opportunity

and autonomy to correct their own errors. See Austin Lakes Joint Venture

v. Avon Utils., Inc., 648 N.E.2d 641, 644 (Ind. 1995). Even if the ground

of complaint is the unconstitutionality of the statute, which may be beyond

the agency’s power to resolve, exhaustion may still be required because

“administrative action may resolve the case on other grounds without

confronting broader legal issues.” Sproles, 672 N.E.2d at 1358.

A. Objecting to the Tax Levy

The State Board points to two administrative remedies that it contends

must be pursued before the taxpayers may bring suit. First, pursuant to

Indiana Code § 6-1.1-17-5(b), “Ten (10) or more taxpayers may object to a

budget, tax rate, or tax levy of a political subdivision . . . by filing an

objection petition with the proper officers of the political subdivision

not more than seven (7) days after the hearing.” Under Indiana Code § 6-

1.1-17-3, a political subdivision is required to hold a public hearing

after it has formulated its estimated budget. If an objection petition is

subsequently filed, then the political subdivision must, along with its

budget, adopt a finding regarding the petition.[9] This provision appears

in the general property tax statutes. It is not, in our view, an

administrative remedy required to be exhausted before a taxpayer may

challenge an unlawfully collected tax. Theoretically, each property’s

valuation and every amount budgeted affects the levy of each “political

subdivision.” The effect of a requirement that each taxpayer who wishes to

challenge, for example, the assessment of his property, must object to the

budget or levy would be to cause a large volume of essentially pro forma

objections to no practical purpose. This could not have been the intent of

the legislature. The tax code otherwise allows petitions for reassessment

of real property. See Ind. Code § 6-1.1-4-5 (1998). In addition, the

State Board has the discretion to revise an assessment of all or a portion

of the property located in this state “[i]n order to maintain a just and

equitable valuation of real property.” Id. § 6-1.1-4-9. There is no

comparable provision for the property owner who wishes to challenge the

assessment of the HCI levy, and even if a property owner challenges the

levy with nine other taxpayers, the formula for calculating the HCI tax

levy is statutorily prescribed, and therefore the State Board cannot alter

it.

B. Claim for Refund

The second remedy the State Board identifies is a claim for a refund.

Pursuant to Indiana Code § 6-1.1-26-1, a taxpayer may file a claim for

refund, which, if denied, constitutes a final determination reviewable by

the Tax Court.[10] The petitioners correctly point out that there is no

statute authorizing the State Board to order a refund, even if it should

determine, pursuant to Ind. Code § 6-1.1-26-1(4)(ii), that the tax is

“illegal” as a matter of law. In that respect, they are in the same

position as the taxpayer in Sproles, who protested that exhaustion of

remedies was not required because the agency could not declare its own

statute unconstitutional. See Sproles, 672 N.E.2d at 1353. We

nevertheless held that exhaustion was required. The Tax Court recognized

this point, but nonetheless found the claim for a refund unavailable

because the legislature “could not have intended” that the refund procedure

of Ind. Code § 6-1.1-26-5 apply. See Lake County Council, 706 N.E.2d at

278. For the reasons the Tax Court identified in support of its own

jurisdiction, however, one reason to require that procedure is to force the

dispute into a channel that leads ultimately to the Tax Court. This, as

noted in Sproles, avoids the problem of multiple conflicting litigation on

a matter as complex and critical to state government as the validity of a

tax. This also provides for the legal infrastructure to process the case

in an orderly manner, including timetables for decision.

The Tax Court rejected this contention on the ground that the County

must pay the refund, and there is no explicit provision under the HCI

statute for the State to reimburse the County for refunds to taxpayers.

This result would be, the Tax Court pointed out, highly problematic in

terms of fairness and perhaps also legality. For that reason, the Tax

Court concluded that the legislature did not consider the procedure to

obtain a refund of the HCI tax unlawfully collected and therefore there was

none available.

The State Board points out, however, that Ind. Code § 6-1.1-27-6(b)

provides for repayment by the State of tax overpayments, and applies

generally to all taxes. It therefore provides a workable mechanism for the

county to recover from the State for any required taxpayer refunds. It

thereby avoids the difficulties the Tax Court identified in reliance on the

refund procedure as a remedy for unlawfully collected HCI taxes. In short,

a claim for refund may be presented and, if refused, will permit the

taxpayer petitioners to proceed to the Tax Court with their

contentions.[11]

II. The Jurisdiction of the Tax Court

The Tax Court identified a number of reasons why in its view this case

should be presented directly to the Tax Court, notwithstanding the absence

of any specific grant of jurisdiction. In general, these track the

considerations outlined in Sproles that favor concentration of tax

litigation in one forum with expertise and avoiding inconsistent results on

issues of significance to financing state and local government statewide.

The sound policy reasons supporting the Tax Court’s direct jurisdiction

also argue in favor of requiring exhaustion of the refund procedure,

because that process ultimately brings the case to the Tax Court. If the

legislature wishes to confer original jurisdiction on the Tax Court to

entertain claims of unconstitutional taxation, it is of course free to do

so. The current statutory framework limits access to the Tax Court to

specified procedural channels. For the reasons discussed in Sproles, it is

not irrational to require plaintiffs who wish to present such a claim to

proceed through the administrative apparatus the legislature has set up to

deal with tax disputes, even if the ultimate constitutional issue may be

resolved only at the Tax Court stage. That requirement assures that an

adequate record is developed and that nonconstitutional issues that may

moot the constitutional challenge will be considered. The advantages of

consolidating the litigation in a forum with expertise are retained. If

the cost in time and effort imposed by this procedure is too great, the

remedy lies with the General Assembly.

Finally, the Tax Court held that Lake County, but not the other non-

taxpayer petitioners, had standing to pursue this claim. Because we have

concluded that the tax court has jurisdiction only to the extent granted by

statute, the claims of Lake County and the other governmental entities and

officials must also be dismissed. None of these petitioners sought review

of an order of the State Board or otherwise meets the jurisdictional

requirements of the Tax Court. Thus, we need not address whether they have

standing to pursue this claim.

Conclusion

We reverse the judgment of the Tax Court and remand with direction to

dismiss the petitioners’ claim for declaratory relief against the State

Board of Tax Commissioners.

SHEPARD, C.J., and DICKSON, SULLIVAN and RUCKER, JJ., concur.

-----------------------

[1] “Levy” is a term used to describe the aggregate dollar amount of

property taxes imposed to fund a given operation of local government. The

levies imposed under the general property tax are subject to review by the

State Board. See Ind. Code §§ 6-1.1-17-1 to 20 (1998).

[2] This description is not precisely correct, but is adequate for purposes

of this opinion and is hopefully more easily understood than the statutory

formulation:

Each county shall impose a hospital care for the indigent property tax

levy equal to the product of:

(1) the hospital care for the indigent property tax levy imposed for

taxes first due and payable in the preceding year; multiplied by

(2) the statewide average assessed value growth quotient, using all

the county assessed value growth quotients determined under IC 6-1.1-

18.5-2 for the year in which the tax levy under this section will be

first due and payable.

Ind. Code § 12-16-14-3 (1998).

[3] Montgomery is a member of the Lake County Council and DuPey is a

member of the Lake County Board of Commissioners.

[4] Counties receive money back from the HCI state fund to reimburse them

for the cost of indigent care.

[5] Sabatine emphasized that the HCI program and Medicaid funds are

interrelated. The State Board makes the same point in its Brief to this

Court. According to the Board, HCI funds have been used to leverage

federal Medicaid funds, a significant portion of which go to Lake County.

Citing Kerr v. Perry School Township, 162 Ind. 310, 70 N.E. 246 (1904),

petitioners respond that the relationship between the HCI levy and Medicaid

is irrelevant because their constitutional claims are based on provisions

dealing with the assessment of taxes that do not relate one way or the

other to benefits received from tax-supported programs.

[6] Sabatine reiterated in the letter to the Chairman of the Citizens’

Commission on Taxes that “the HCI tax levy formula is mandated by statute,

so there is no action the Board can take at this time.”

[7] The State Board argued that the County could seek reimbursement from

the State pursuant to Indiana Code § 6-1.1-27-6(b), which provides for

refunds from the state treasurer for “improper or erroneous payments” by a

county, and also pursuant to Indiana Code § 6-1.1-26-5(b): “[T]he county

auditor shall deduct the amount refunded from the gross tax collections of

the taxing units for which the refunded taxes were originally paid and

shall pay the amount so deducted into the general fund of the county.”

[8] The Tax Court issued its original opinion on January 19, 1999, see Lake

County, 706 N.E.2d at 270, and granted reconsideration in view of our

intervening modification of State Board of Tax Commissioners v. Mixmill

Manufacturing Co., 702 N.E.2d 701 (Ind. 1998), as modified Feb. 5, 1999.

See Montgomery, 708 N.E.2d at 936.

[9] The Indiana Code provides for revision or reduction of a political

subdivision’s budget by the County Board of Tax Adjustment in order to:

“limit the tax rate to the maximum amount permitted under IC 1971, 6-1.1-18

[Limitations on Property Tax Rates and Appropriations]” and “limit the

budget to the amount of revenue to be available in the ensuing budget year

for the political subdivision.” Ind. Code § 6-1.1-17-6 (1998). The County

Board of Tax Adjustment is also directed to make recommendations for

revision of the budget to the State Board of Tax Commissioners if the

County Board determines “that the maximum aggregate tax rate permitted

within a political subdivision . . . is inadequate,” Id. § 6-1.1-17-8, or

if “the aggregate tax rate within a political subdivision, as approved or

modified by the county board of tax adjustment, exceeds the maximum

aggregate tax rate prescribed . . . .” Id. § 6-1.1-17-10 (1998).

Under Indiana Code § 6-1.1-17-11, the budget, tax rate, or tax levy

is final unless “(2) the action of the county board is subject to review by

the state board of tax commissioners under section 8 or section 10 of this

chapter; or (3) an appeal to the state board of tax commissioners is

initiated with respect to the budget, tax rate, or tax levy.”

[10] A claim for a refund pursuant to Ind. Code § 6-1.1-26-1 must be:

(1) filed with the auditor of the county in which the taxes were

originally paid;

(2) filed within three (3) years after the taxes were first due;

(3) filed on the form prescribed by the state board of accounts and

approved by the state board of tax commissioners; and based upon one

(1) of the following grounds:

. . .

(ii) The taxes, as a matter of law, were illegal.

. . . .

[11] Subsection 6(a) also provides for deduction of refunds for amounts

paid. That remedy may or may not be adequate depending on the timing and

amounts of the refund compared to subsequent amounts due.