Amicus Curiae Brief — Philip Morris Inc. v. Cabarrus County

I

Ed

=

~

z

(,)

Wy,

No. 93-1710

IN THE

Supreme Court of the United States

OCTOBER TERM, 1993

Puitip Morris INCORPORATED

(d/b/a Puitip Morris, U.S.A.),

Petitioner,

V.

CABARRUS CouUNTY, NORTH CAROLINA,

Respondent.

On Petition for a Writ of Certiorari

to the

Supreme Court of North Carolina

MOTION FOR LEAVE TO FILE BRIEF AMICUS CURIAE

IN SUPPORT OF PETITIONER

AND

BRIEF AMICUS CURIAE FOR NORTH CAROLINA

CITIZENS FOR BUSINESS AND INDUSTRY

ARMISTEAD JONES MAUPIN

(Counsel of Record)

CHARLES B. NEELY, JR.

NANCY S. RENDLEMAN

LINDA F. NELSON

MAUPIN TAYLOR ELLis & ADAMS, P.A.

3200 Beechleaf Court

Raleigh, North Carolina 27604-1064

Telephone: (919) 981-4000

Counsel for North Carolina Citizens

for Business and Industry

PRESS OF BYRON 8. ADAMS, WASHINGTON, D.C. 1-800-347-8208

» -2

IN THE

Supreme Court of the United States

OCTOBER TERM, 1993

SS

No. 93-1710

PHILIP Morris INCORPORATED

(d/b/a PHILIP Morris, U.S.A.),

Petitioner,

Vv.

CABARRUS CouNTY, NorRTH CAROLINA,

Respondent.

—_—_—

On Petition for a Writ of Certiorari

to the

Supreme Court of North Carolina

MOTION FOR LEAVE TO FILE BRIEF AMICUS CURIAE

IN SUPPORT OF PETITIONER

North Carolina Citizens for Business and Industry

hereby respectfully moves for leave to file the at-

tached brief amicus curiae in this case. The consent

of the attorney for the petitioner has been obtained.

The consent of the attorney for the respondent was

requested but refused.

North Carolina Citizens for Business and Industry

(““NCCBI’’) was founded in 1942 as a non-profit, non-

partisan organization dedicated to the creation of a

better business environment in North Carolina.

NCCBI, whose members include over 1,500 companies

representing every sector of the North Carolina busi-

ness community, is recognized as a leading advocate

of industry’s position on issues affecting North Car-

olina business.

The decision of the North Carolina Supreme Court

in this case sanctioning the use by counties of con-

tingent fee auditors affects the rights of members of

NCCBI and all other North Carolina taxpayers to fair

and impartial property tax assessments.

NCCBI, through its members, has a broader per-

spective on the practices of contingent fee auditors

in North Carolina than does the petitioner. Members

of NCCBI have been audited by counties other than

Cabarrus County and by contingent fee auditors other

than the auditors which audited the petitioner. Also,

members of NCCBI own a wider range of business

property than does the petitioner, and thus the mem-

bership of NCCBI has experienced due process vio-

lations not experienced by petitioner.

Members of NCCBI have also had broader exper-

iences with the county assessors with whom contin-

gent fee auditors work and with the county boards

which review the assessments derived from the work

of contingent fee auditors.

The broad experience of NCCBI members with con-

tingent fee auditors and the process of property tax

assessment in North Carolina in general renders

NCCBI uniquely capable of assisting the Court in un-

derstanding the ways in which the use of contingent

adits) Cat

ra BI ly SGA Ded IB IANS des ms eB

fee auditors have violated the due process rights of

North Carolina taxpayers.

Respectfully submitted,

/s/ Armistead Jones Maupin

ARMISTEAD JONES MAUPIN

(Counsel of Record)

CHARLES B. NEELY, JR.

NANCY S. RENDLEMAN

LINDA F. NELSON

MAUPIN TAYLOR ELLIS & ADAMS, P.A.

3200 Beechleaf Court

Raleigh, North Carolina 27604-1064

Telephone: (919) 981-4000

Counsel for North Carolina Citizens

for Business and Industry

Dated: May 31, 1994

TABLE OF CONTENTS

Page

INTRODUCTORY STATEMENT .0.0..cccccccececoceseeesees... 1

INTEREST OF AMICUS CURIAE oeeeececcccccccccooeocses.... 2

SUMMARY OF ARGUMENT. ........cccccccscccccocoseeesss-s... 2

FER hs a 3

I. THE USE OF CONTINGENT FEE AUDITORS

IN MAKING PROPERTY TAX ASSESSMENTS

VIOLATES THE DUE PROCESS CLAUSE .... 3

Il. THE COUNTY REVIEW PROCEDURE DOES

NOT CURE THE DUE PROCESS

WOT seoninstbcisctadadntn bia laiccs sesuinceccssances 7

SSN siuichsncdeliniatidainindcebiinisauines ies ies, <.0).2 10

ii

TABLE OF AUTHORITIES

U.S. Constitution: Page

Amoenemenh. ASF ,. BOG. 5 ncscccsssecesasesvccntasctnnninnswsines passim

Cases:

Appeal of AMP Inc., 287 N.C. 547, 215 S.E.2d 752

C1GTED sccksscicsecstseuntipiidemedbiiadmassdiidiaimieiimmniiinens 7

Appeal of McElwee, et. al, 304 N.C. 68, 283 S.E.2d

LLG CREED scnscaccsccossnmssvecsentanmisdindistadiiniabeeteere 7

Hagar v. Reclamation Dist. No. 108, 111 U.S. 701

(1GGD .cnrsiidnscstsnetabiadicaniaiaadliidiiatiniaiiimseatedanmen 4

Tumey v. Ohio, 273 U.S. 510 (1927) ..............020000 3,9

Ward v. Village of Monroeville, 409 U.S. 57

CRIED . cnccusssactsacodetabuliaiaeniiaaseadiaindaatipeaatess 9

Statutes:

North Carolina General Statutes:

com Se ES Ee ee are x

N.C. Geom, GRR, Bee iieiicncietentdnenencetotnvesenicbicee &

N.C. Gon. SE: 2 Be intiiecnennedeichistnstedusiens a

IN THE

Supreme Court of the United States

OCTOBER TERM, 1993

—

No. 93-1710

PHILIP Morris INCORPORATED

(d/b/a PHitip Morris U.S.A.),

Petitioner,

Vv.

CABARRUS CouNTY, NorTH CAROLINA,

Respondent.

_

On Petition for a Writ of Certiorari

to the

Supreme Court of North Carolina

BRIEF OF NORTH CAROLINA CITIZENS FOR

BUSINESS AND INDUSTRY AS AMICUS CURIAE IN

SUPPORT OF PETITIONER

INTRODUCTORY STATEMENT

This brief is submitted by North Carolina Citizens

for Business and Industry as amicus curiae in support

of petitioner in the above-captioned case. Written con-

sent of petitioner has been obtained and has been

filed with this Court. The consent of respondent was

requested but refused.

INTEREST OF AMICUS CURIAE

North Carolina Citizens for Business and Industry

(‘““NCCBI’’) was founded in 1942 as a non-profit, non-

partisan organization dedicated to the creation of a

better business environment in North Carolina.

NCCBI, whose members include over 1,500 companies

representing every sector of the North Carolina busi-

ness community, is recognized as a leading advocate

of industry’s position on issues affecting North Car-

olina business.

The decision of the North Carolina Supreme Court

in this case sanctioning the use by counties of con-

tingent fee auditors affects the rights of members of

NCCBI and all other North Carolina taxpayers to fair

and impartial property tax assessments.

SUMMARY OF ARGUMENT

Contingent fee audit contracts used to assist in the

property tax process violate the Due Process Clause

of the Fourteenth Amendment because they provide

an incentive to produce unfairly high tax assessments.

The role of the contingent fee auditor involves the

exercise of significant judgment and discretion which

directly affects the final assessments issued by county

assessors. The interest of the contingent fee auditor

in the highest possible assessment so permeates the

assessment process as to irremediably taint the as-

sessment. This problem has been exacerbated by the

fact that the work of contingent fee auditors in North

Carolina has been inadequately supervised because

most tax assessors have inadequate training, expertise

and experience to be able to properly oversee the

activities of these auditors, particularly in the complex

area of personal property assessment.

mepeaiiniiee eencrmennn mann

The review procedure provided by North Carolina

law is inadequate to remedy the due process violations

inherent in contingent fee audits. Not only does the

taxpayer have the burden of proof to prove that the

assessment derived from the contingent fee audit was

arbitrary or illegal and that the assessment substan-

tially exceeded the true value in money of the prop-

erty assessed, the taxpayer must prove this before a

county board which itself has an interest in the high-

est possible assessment and which is highly defer-

ential to the actions of the county assessor.

ARGUMENT

I. THE USE OF CONTINGENT FEE AUDITORS IN MAK-

ING PROPERTY TAX ASSESSMENTS VIOLATES THE

DUE PROCESS CLAUSE.

A contract that gives a person engaged in deter-

mining tax liability a direct financial interest in the

amount of taxes assessed gives that person an incen-

tive to induce the local government to issue as high

an assessment as possible. The bias inherent in such

a contract necessarily infects the entire assessment

process and deprives taxpayers of an impartial ad-

judicator in violation of the Fourteenth Amendment

to the United States Constitution, which prohibits the

states from depriving any person of property without

due process of law.

This Court held in Tumey. v. Ohio, 273 U.S. 510

(1927), that the Due Process Clause requires that a

judicial officer have no pecuniary interest in the out-

come of an adjudication. Twmey involved a mayor

acting as judge in a proceeding from which he re-

ceived a percentage of the fine he imposed. This Court

stated: “That officers acting in a judicial or quasi-

judicial capacity are disqualified by their interest in

the controversy to be decided is, of course, the gen-

eral rule.” 273 U.S. at 522.

In tracing the right to a judicial officer free of

pecuniary interest back to the Middle Ages, the Court

stated flatly that, ‘‘the slightest pecuniary interest of

any officer, judicial or quasi-judicial, in the resolving

of the subject matter which he was to decide, ren-

dered the decision voidable.’’ 273 U.S. at 524.

The general rule is that the assessment process is

a judicial or quasi-judicial process. In Hagar v. Re-

clamation District No. 108, 111 U.S. 701 (1884), this

Court stated: ‘“‘where a tax is levied on property not

specifically, but according to its value, to be ascer-

tained by assessors appointed for that purpose upon

such evidence as they may obtain, a different principle

comes in. The officers in estimating the value act

judicially.”” 111 U.S. at 710.

The Court added that, ‘‘the duties of assessors in

estimating the value of property for purposes of gen-

eral taxation are judicial.’”’ 111 U.S. at 710 n.

In the instant case, the auditing work performed

by the contingent fee auditor was an integral part of

the assessment function. The activities of the auditor

were completely interwoven with the activities of the

assessor. The assessment itself was the direct result

of the work of an auditor with a pecuniary interest

in a high assessment. (Petitioner’s Appendix 26a.)

In an amici curiae brief in support of the use of

contingent fee auditors which was filed by the North

Carolina Association of County Commissioners and

North Carolina League of Municipalities with the

Supreme Court of North Carolina in this case, the

amici curiae pointed out that approximately 27 of the

100 counties in North Carolina have used contingent

fee auditors for the property tax assessment of busi-

ness personal property. Thus, the use of contingent

fee auditors is a pervasive practice in North Carolina.

The amici curiae also pointed out that with few

exceptions, North Carolina counties do not employ

auditors on their assessors’ staffs. This lack of in-

house expertise inevitably renders it difficult, if not

impossible, for an assessor to effectively supervise the

contingent fee auditor or evaluate the auditor’s re-

port.

It has been the experience of NCCBI members that

North Carolina assessors have generally accepted,

without significant change, the recommendations of

contingent fee auditors, in effect merely rubber

stamping their reports, which then become the as-

sessments. Thus, the auditor, with a pecuniary inter-

est in the highest possible assessment, is the true

decision maker in most contingent fee audits in North

Carolina.

Persona! property tax auditing is a complex process

encompassing the review of a broad range of taxpayer

records and requiring the exercise of the auditor’s

judgment throughout the process. This exercise of dis-

cretion in large part determines the value conclusions

inherent in an assessment. Contingent fee auditors

auditing members of NCCBI have made decisions such

as those listed below:

(a) selective decisions as to what taxpayer rec-

ords to review or to exclude from review or

consideration;

(b) the classification of particular items of prop-

erty as real property or personal property or

mixed real property and personal property.

As an example, boilers for heating systems,

air conditioning, wiring, venting, flooring,

conveyors, shelving and displays are all items

that may be considered either real estate or

personalty and as such subject to different

valuation techniques;

(c) the classification and valuation of items of in-

ventory as raw inventory, work in process, or

finished product;

(d) in the event that certain cost data and dates

of acquisition are unavailable, the estimation

of the value of particular items of personalty;

(e) the determination of whether entries on a tax-

payer’s books reflect property which is prop-

erly assessable;

(f) the classification of particular items of ma-

chinery and equipment into categories which

have short lives and rapid depreciation re-

sulting in lower assessments or into cate-

gories with longer lives and less rapid

depreciation resulting in higher assessments;

(g) the recommendation of trending and depre-

ciation tables used by counties to value ma-

chinery and equipment, the decision as to

which may result in higher values or lower

values depending upon which tables are rec-

ommended by the auditor and accepted by the

assessor.

Further, in many counties, contingent fee auditors

have been given broad discretion as to choice of audit

targets, invariably choosing the larger taxpayers in

the county for audit.

In short, in the instant case and in other cases in

which contingent fee auditors have audited members

of NCCBI, the role of the contingent fee auditor has -

involved significant judgment and discretion, partic-

ularly given the typical assessor’s lack of resources

and independent expertise. An inevitable bias towards

inflated assessments is inherent in this process.

II. THE COUNTY REVIEW PROCEDURE DOES NOT CURE

THE DUE PROCESS VIOLATION.

The procedure required by North Carolina law and

followed by North Carolina counties in reviewing a

decision of an assessor is not adequate to remove the

taint of the pecuniary interest of the contingent fee

auditor from the assessment rendered by the assessor

acting on the contingent fee auditor’s recommenda-

tion.

In North Carolina, tax assessments rendered by an

assessor are presumed to be correct and the burden

of proof is on the taxpayer to show that the assess-

ment is erroneous. In order to rebut the presumption

of correctness, the taxpayer must produce competent,

material and substantial evidence that the assessor

used an arbitrary or illegal method of valuation and

that the assessment substantially exceeded the true

value in money of the property. Appeal of McElwee,

et. al, 304 N.C. 68, 75, 283 S.E.2d 115, 120 (1981);

Appeal of AMP, Inc., 287 N.C. 547, 562-63, 215 S.E.2d

752, 761-62 (1975). While this burden of proof may

be appropriate where the assessment is made by one

with no financial interest in the outcome, it is con-

stitutionally offensive where the assessment process

SS

is tainted by the use of a contingent fee auditor who

has a direct financial interest in the assessment. In

this latter situation, the underlying basis for presum-

ing the correctness of a tax assessment does not exist.

Under North Carolina law, an assessor’s decisions

are subject to review by the county commission, the

elected governing body of each county, sitting as the

board of equalization and review or by a special board

of equalization and review appointed by the county

commissioners. N.C. Gen. Stat. § 105-312 and N.C.

Gen. Stat. § 105-322. If the commissioners decide to

appoint a special board of equalization and review,

the special board often includes members of the

county commission themselves and it generally meets

for only a limited period of time. At all other times,

appeals from assessments are heard by the county

commission.

The assessor is a county employee appointed by the

board of county commissioners. N.C. Gen. Stat. § 105-

294(a). The board inevitably relies on the supposed

expertise of the assessor and is not likely to overturn

his decision. More frequently than not, if any action

is taken other than approving the assessment, in com-

plex cases the board will merely remand the asses-

sor’s decision to the assessor for further consideration

rather than attempt to resolve the case itself.

County commissioners in North Carolina are under

great pressure to raise revenues in order to meet the

increasing demands placed upon county governments

for social services and other spending. Unfunded man-

dates imposed upon counties by state government also

exert pressure on county commissioners to raise rev-

enues. County commissioners are under significant po-

litical pressure to keep taxes on homeowners low. All

of these factors frequently result in the overly ag-

gressive—and unfair—pursuit of business taxpayers.

A business taxpayer, when confronted with the ne-

cessity to appeal an inflated assessment made by an

assessor based upon the recommendation of a contin-

gent fee auditor, finds itself facing not only the bur-

den of proof to prove that the assessment is wrong

and substantially excessive, but having to meet this

heavy burden before a body predisposed to approve

the assessment without change in order to increase

revenues in the least politically painful fashion.

The same concerns for due process that impelled

the decision of this Court in Tumey v. Ohio, supra,

and Ward v. Village of Monroeville, 409 U.S. 57

(1972), are present in this case. County commission-

ers, even though they do not profit personally from

ad valorem tax assessments, have such a stake in the

outcome of the proceedings in which a taxpayer chal-

lenges an assessment produced by a contingent fee

audit that the review process cannot remove the taint

of the contingent fee audit which resulted in the chal-

ienged assessment.

The experience of NCCBI members has been that

the county appeals process does not remove the taint

of an unfair assessment. If anything, the local appeals

process exacerbates the due process violations inher-

ent in the contingent fee audit process, given the

burden of proof placed upon a taxpayer to rebut a

tainted assessment not rendered by a disinterested

assessor and the pressures on county commissioners

to produce a balanced budget.

10

CONCLUSION

For all of the foregoing reasons, North Carolina

Citizens for Business and Industry respectfully re-

quest that petitioner’s Petition for Writ of Certiorari

be granted.

Respectfully submitted,

ARMISTEAD JONES MAUPIN

(Counsel of Record)

CHARLES B. NEELY, JR.

NANcY S. RENDLEMAN

LINDA F. NELSON

MAUPIN, TAYLOR, ELLIS & ADAMS, P.A.

3200 Beechleaf Court

Raleigh, North Carolina 27604-1064

Telephone: (919) 981-4000

Counsel for Amicus Curiae

Dated: May 31, 1994