Opposition Brief — Philip Morris Inc. v. Cabarrus County

¥ | Supreme Court, U.S

FILED

ve wee MAY 27 1994

f OFFICE OF iHE CLERK

: In The Seeeueeecaeeees

Supreme Court of the United States

October Term, 1993

© —_—

PHILIP MORRIS INCORPORATED

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

Petitioner,

V.

CABARRUS COUNTY, NORTH CAROLINA,

Respondent

_ os ——

On Petition For A Writ Of Certiorari

To The Supreme Court Of North Carolina

——— + a

RESPONDENT’S BRIEF IN OPPOSITION

-~@-- a

Ropsert H. Tiiver

(Counsel of Record)

CHARLES C. MEBFKER

PARKER, Por, ADAMS &

BERNSTEIN L.L.P.

One Exchange Plaza

Post Office Box 389

Raleigh, North Carolina 27602

(919) 828-0564

Davip L. Terry

BLAKENEY & ALEXANDER

3700 NCNB Plaza

Charlotte, North Carolina 28280

(704) 372-3680

Ft he

- > , > i>

Attorneys for Resyondent

Cabarrus County

COCKLE LAW BRIEF PRINTING Ct ROO) 225-6964

OR CALL COLLECT (402) 342-2831

|

|

!

QUESTION PRESENTED

Whether a local government may pay for property

tax auditing services on a percentage-fee basis without

violating the requirements of the Due Process Clause of

the Fourteenth Amendment.

i |

ii

TABLE OF CONTENTS

Page

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SURREY OF ASEMUIOIR 05 oo ckdcanedetamihieiaeeen 5

Reasons for Denying the Writ ..................... 7

I. The Decision Below Does Not Merit Review,

Since It Involves Neither A Conflict Nor An

Important Federal Question................... 7

II. The Compensation Of Tax Auditors Here Did Not

Violate The Requirements Of Due Process....... 8

III. The Lack Of A Well-Developed Record And

Lack Of Finality Make Review Here Particularly

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TABLE OF AUTHORITIES

Page

Cases

Arkansas Corp. Comm'n v. Thompson, 313 U.S. 132

a iiss ¥e-be (Ui cehedheadsteieietiwusecaess 11, 12

Cox Broadcasting Corp. v. Cohn, 420 U.S. 469 (1975) .... 13

Delta Air Lines, Inc. v. August, 450 U.S. 346 (1981) .... 11

Dillon Stores v. Lovelady, 253 Kan. 487, 855 P.2d 487

CCC USGG RG DEGWORG duiebewd dhs b40Nbs0unsveeessecs 8

Flynt v. Ohio, 451 U.S. 619 (1981) ...........0e 000 ee. 14

General Electric Co. v. City of Bridgeport, CV93 30 45

71 S (Conn. Super. Ct. Dec. 16, 1993).............. 8

General Motors Corp. v. State Tax Comm’n, 200

Mich. App. 117, 504 N.W.2d 10 (1993), appeal

dismissed, 509 N.W.2d 157 (Mich. 1993)............. 8

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

TTI USGN AEN GhH SEs s hee deesddvakbcscedees bes 11

Illinois v. Gates, 462 U.S. 213 (1983) ................. 11

Marshall v. Jerrico, Inc., 446 U.S. 238 (1980).......... 12

Mathews v. Eldridge, 424 U.S. 319 (1976)............. 10

Philip Morris, Inc. v. Cabarrus County, 335 N.C. 227,

i es in ov es or hy secs ewe ce bw ese 1

Sears, Roebuck & Co. v. Parsons, 260 Ga. 824, 401

eae Cece e ls iiss ks cunts ca aeaeas 8

Tumey v. Ohio, 273 U.S. 510 (1927) .............. passim

Union Pacific Resources Co. v. State, 839 P.2d 356

Cs Kid Coke cde adtabdeedcertedhws 7

__——— a

iv

TABLE OF AUTHORITIES - Continued

Page

STATUTES

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MISCELLANEOUS

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No. 93-1710

+

In The

Supreme Court of the United States

October Term, 1993

+

PHILIP MORRIS INCORPORATED

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

Petitioner,

CABARRUS COUNTY, NORTH CAROLINA,

Respondent.

+

On Petition For A Writ Of Certiorari

To The Supreme Court Of North Carolina

«

RESPONDENT'S BRIEF IN OPPOSITION

¢

Respondent Cabarrus County, North Carolina,

respectfully requests that the Court deny the petition for

a writ of certiorari seeking review of the opinion of the

Supreme Court of North Carolina reported at 335 N.C.

227, 436 S.E.2d 828 (1993).

JURISDICTION

Petitioner has sought review under 28 U.S.C. § 1257.

The decision below should not, however, be deemed final

within the meaning of this statute. See infra pp. 13-14. For

1

this reason, the case does not lie within this Court’s

jurisdiction.

STATEMENT OF THE CASE

Cabarrus County is a largely rural county of approx-

imately 100,000 residents in central North Carolina. As its

primary source of revenue, the County taxes real and

personal property, and requires all taxpayers to list their

property as of January 1 each year. For owners of busi-

ness personal property, such as a cigarette manufacturing

facility with extensive machinery and equipment, the

County requires that 100 percent of the original historic

costs of this equipment be listed, along with the year of

acquisition. The County then applies trending tables rec-

ommended by the North Carolina Department of Reve-

nue to depreciate these costs. Property tax assessments

are made on the basis of these depreciated amounts.

Under North Carolina statutes, each county assessor

is required “to see that all property not properly listed

during the regular listing period be listed.” N.C. Gen.

Stat. § 105-312(b). Whenever an assessor finds unlisted or

underlisted property, he must issue a discovery assess-

ment. See id. § 105-312(d).

Prior to 1988, Cabarrus County did not audit busi-

ness personal property taxpayers. In response to concerns

about possible underlisting of property, the Cabarrus

County assessor in early 1988 retained a firm on a per-

centage-fee basis to conduct tax audits. See N.C. Gen.

Stat. § 105-296(a). This contract was approved by the

Board of County Commissioners. See id. § 105-299. A

short time after the auditors were employed, the county

assessor (not the auditors) selected the businesses to be

audited. The assessor had no financial or personal inter-

est in the outcome of any audit or discovery. An esti-

mated 600 business personal property audits were

directed by the county assessor, and in approximately

two-thirds of the audits, the taxpayers had reported their

costs accurately. Approximately five percent of the tax-

payers had over-reported their costs and were informed

that they were entitled to refunds. The remainder had

under-reported their costs and were sent discovery

notices.

In the fall of 1988, the assessor wrote Philip Morris to

request that its internal cost and asset records be made

available for an audit. Despite several verbal and written

requests over a period of nine months, Philip Morris

refused to make its records available. The assessor then

issued a jeopardy assessment to assure that the statute of

limitations would not expire.! Philip Morris’ attorneys

finally sent copies of the needed records in December

1989, over a year after they were requested.

These records revealed that, for each year between

1984 and 1989, Philip Morris had listed less than one-half

of the costs for its business personal property located in

Cabarrus County, rather than the full actual costs as

required. Indeed, before the North Carolina Property Tax

Commission, Philip Morris stipulated to cost figures that

showed that it had listed less than one-half of its costs. By

1 This assessment was for the total value of the property.

The actual tax would have been approximately one percent of

the assessed amount.

underlisting its business personal property, Philip Morris

avoided over one million dollars per year of property

taxes in Cabarrus County.?

In early 1990, the auditors completed their review of

Philip Morris’ records and filed a preliminary report of

the Philip Morris underlistings to the assessor. The

Cabarrus County assessor reviewed this report and then

met with Philip Morris officials, attorneys and other rep-

resentatives on several occasions. The Cabarrus County

assessor then made his decision to issue the subject dis-

covery assessment on May 8, 1990. The assessor’s discov-

ery assessment was less than the auditor’s report,

because Philip Morris persuaded the assessor that certain

property was exempt from taxation or otherwise should

not be included in the discovery.

After an appeal hearing was concluded before the

local equalization and review board, the state Property

Tax Commission by a 3-2 vote ruled that the discovery

was null and void because the auditors’ percentage-fee

contract violated state public policy. Prior to the ruling,

the parties submitted no affidavits and no testimony; the

ruling was based on Philip Morris’ motion and argument

by counsel. The Court of Appeals affirmed without hold-

ing oral argument. On December 3, 1993, the Supreme

Court of North Carolina reversed the decision of the

Court of Appeals, ruling that the auditors’ percentage fee

contract did not violate public policy and thus the discov-

ery was valid. The Supreme Court remanded the case for

2 Philip Morris’ financial statements reflect that its operat-

ing profit on the cigarettes from the Cabarrus County facility

substantially exceeds one billion dollars per year.

a hearing on the merits by the Property Tax Commission.

Such hearing commenced May 9, 1994, and while the

evidentiary hearing has been concluded, a final decision

of the Commission has not been rendered as of this date.

Before both the North Carolina Court of Appeals and

the Supreme Court of North Carolina, Philip Morris

pressed its due process argument that the auditor should

be viewed as a judicial official. Philip Morris did not,

however, argue that the auditor should be viewed as a

prosecutorial official.

SUMMARY OF ARGUMENT

Petitioner, one of the largest and most profitabie

consumer products companies in the world, seeks to con-

tinue avoiding its local tax obligations by asking this

Court to decide if due process prevents a\local govern-

ment from hiring a private company as tax auditor and

compensating it on a percentage-fee basis. Respondent

Cabarrus County used such a system out of necessity

because it had no budgeted funds to hire staff auditors.

The system has benefitted the County by uncovering

underlisting of business personal property that had pre-

viously deprived the County of substantial revenue. Such

revenue funds county schools, social services, and munic-

ipal projects.

There are strong reasons to conclude that this issue

does not require the Court's attention, particularly as it is

presented in this case. First, the issue is notably uncon-

troversial. No court has found a due process violation in

such circumstances. Indeed, only one other state court

has even addressed this due process issue, and that court,

like the court below, found no constitutional violation.

In apparent recognition that the question presented

does not involve a conflict or an issue of practical impor-

tance, petitioner contends that the issue is one of at least

academic interest. This contention is undermined by

Tumey v. Ohio, 273 U.S. 510, 535 (1927), where this Court

recognized that offering rewards to citizens for their aid

in the apprehension of wrongdoers raised no due process

difficulties. The same rule applies here. The limited func-

tion played by the tax auditor in Cabarrus County and

the multi-layered review process leave no doubt that the

procedures here satisfied the requirements of due pro-

cess.

Finally, even if there were serious questions as to the

constitutionality of the procedures here - a proposition

that respondent emphatically rejects — this case would

present a particularly inappropriate vehicle for resolving

them. The decisions below gave little discussion to the

constitutional issue. The issue was presented and decided

without any factual record on significant aspects of the

auditor’s duties, even though there were disputes as to

the nature of those duties. The lack of jurisprudential

guideposts combined with unresolved factual issues

makes this case a poor candidate for review.

Even more important, this case does not appear to

satisfy the finality requirement of 28 U.S.C. § 1257. Peti-

tioner is continuing to contest its tax liability on non-

constitutional grounds in state proceedings, and the

merits of the case have not been resolved. The case does

not fall within any established exception to the finality

requirement. Even if this apparent lack of finality did not

deprive this Court of jurisdiction, it would argue against

use of this Court’s limited resources here, since it is

possible that further proceedings will moot the issue.

+

REASONS FOR DENYING THE WRIT

I. THE DECISION BELOW DOES NOT MERIT

REVIEW, SINCE IT INVOLVES NEITHER A CON-

FLICT NOR AN IMPORTANT FEDERAL QUES-

TION.

The established grounds for discretionary review - a

conflict in the case law or a federal question of excep-

tional importance — are simply not present in this case.

See Sup. Ct. R. 10.1. Instead of pointing up a sound basis

for review, the authority cited by petitioner tends to show

that the due process implications of the compensation of

tax auditors is an issue involving no controversy. See Pet.

at 9, 20.

In fact, of the several state cases cited by petitioner,

only one case even addressed the argument that due

process precluded paying tax auditors on a contingency

basis — and that case unceremoniously rejected the argu-

ment. Union Pacific Resources Co. v. State, 839 P.2d 356, 377

(Wyo. 1992). The other state cases on which petitioner

relies did not address constitutional issues, but consid-

ered whether various compensation arrangements

offended public policy. Of those cases, only one (in Geor-

gia) rejected a contingency arrangement as contrary to

public policy. There is plainly no conflict on the constitu-

tional issue presented here.

Thus there is no apparent basis for a grant of cer-

tiorari. There is not even an arguable conflict in the lower

court decisions, and the lack of controversy indicates that

there is not an issue of exceptional importance. Moreover,

as explained in the next section, the decision below is

entirely consistent with this Court’s prior decisions.

Il. THE COMPENSATION OF TAX AUDITORS HERE

DID NOT VIOLATE THE REQUIREMENTS OF

DUE PROCESS.

The lack of controversy over whether due process

proscribes compensating tax auditors on a percentage-fee

basis is perhaps explained by the fact that the question is

not a difficult one. This Court spoke to it indirectly in

Tumey v. Ohio, 273 U.S. 437, 510 (1927). In Tumey, the

Court had before it statutes that allowed a mayor acting

as a judge to be compensated out of the fines he imposed.

The statutes also provided for compensating of deputy

marshals, detectives, and others by awarding a percent-

age of fines collected. Id. at 439. Although the Court held

that paying the mayor, acting as judge, based on the fines

3 Sears, Roebuck & Co. v. Parsons, 260 Ga. 824, 835, 401 S.E.2d

4,5 (1991). But see General Electric Co. v. City of Bridgeport, CV93

30 45 71 S (Conn. Super. Ct. Dec. 16, 1993); Dillon Stores, Inc. v.

Lovelady, 253 Kan. 274, 280, 855 P.2d 487, 491 (1993); General

Motors Corp. v. State Tax Comm’n, 200 Mich. App. 117, 121, 504

N.W.2d 10, 12 (1993), appeal dismissed, 509 N.W.2d 157 (Mich.

1993).

he imposed was a violation of due process, it also explic-

itly recognized in dicta that contingency arrangements in

other contexts raise no due process concerns.

The Tumey Court made clear that the Constitution

does not generally prohibit States from paying for the

assistance of private citizens or from paying them on a

percentage-fee basis:

[T]he Legislature of a state may and often ought

to stimulate prosecutions for crime by offering

to those who shall initiate and carry on such

prosecutions rewards for thus acting in the

interest of the state and the people. The Legisla-

ture may offer rewards or a percentage of the

recovery to informers. . . . It may authorize the

employment of detectives.

273 U.S. at 445.

The compensation system here is, if anything, less

problematic than the rewards and contingency arrange-

ments approved in Tumey. As described in the Statement

of the Case above, the auditors in Cabarrus County

merely make a report to the assessor. This report is based

on the taxpayer’s own records. The assessor, in turn,

considers not only the report, but also any information

made available by the taxpayer in meetings between the

assessor and the taxpayer. See N.C. Gen. Stat.

§ 105-312(d). The assessor — not the auditor — determines

whether to make a discovery assessment and the amount

of the discovery. See id. § 105-312(b).

The assessor’s decision is subject to several levels of

review. First, the taxpayer may appeal a discovery assess-

ment to the county Board of Equalization and Review. See

10

N.C. Gen. Stat. § 105-322. If the taxpayer is dissatisfied

with that Board’s decision, it may appeal to the state

Property Tax Commission for a de novo evidentiary hear-

ing and decision. See id. § 105-288. Next, the taxpayer

may appeal of right to the North Carolina Court of

Appeals. See id. § 105-345. Finally, the taxpayer may seek

review by the Supreme Court of North Carolina. See id.

§§ 7A-30, 7A-31. Thus there are ample procedural protec-

tions built into the assessment process. The limited role

played by the auditor and the multiple safeguards in

connection with any assessment put to rest any due pro-

cess concerns. See Mathews v. Eldridge, 424 U.S. 319 (1976).

At bottom, petitioner’s due process argument rests

on the proposition that contingent fees involve intoler-

able risks — a proposition with no support either in hard

facts or in intuition. Contingency arrangements are com-

monplace throughout our society. They are well accepted

in certain kinds of attorney-client relationships, in busi-

ness, and in the reward situation described in Tumey. The

widespread use of contingency arrangements is explained

by their considerable benefits, of which this case provides

a dramatic example. Without the compensation at issue

here, a rural county would not have uncovered a massive

tax underlisting by a large corporation.

Petitioner attempts to argue that a tax auditor is

equivalent to an assessor, and the assessor is a judicial or

prosecutorial official subject to strict due process require-

ments. Pet. at 15-16. This chain of reasoning breaks at the

first link. As explained above, the auditor’s role is clearly

distinct from the assessor’s. The assessor issues the dis-

covery and has no financial interest in the outcome of any

11

audit. To equate the auditor with the assessor is like

equating a detective with a judge or prosecutor.

Moreover, there is ample reason to doubt that even

the assessor (as distinguished from the auditor) is a judi-

cial or prosecutorial official. For example, this Court, in

its most recent pronouncement on the subject, expressly

stated that “[t]he governmental function of fixing the

value for tax purposes has rarely, if ever, been a judicial

function.” Arkansas Corp. Comm’n v. Thompson, 313 U.S.

132, 142-43 (1941).* There is little force, then, to the argu-

ment that the tax auditor in this case should be subject to

the same standard as the judicial officer in Tumey.

With respect to prosecutors, petitioners failed to raise

below any argument regarding prosecutorial due process.

See, e.g., Illinois v. Gates, 462 U.S. 213, 217 (1983) (declin-

ing to decide issue not previously presented in state

court); Delta Air Lines, Inc. v. August, 450 U.S. 346, 362

\

4 Petitioner relies on isolated language from a case from

more than half a century prior to Arkansas Corp. Comm'n — Hagar

v. Reclamation District No. 108, 111 U.S. 701 (1884). In Hagar, the

Court in passing referred to the duties of a tax assessor as

judicial. Id. at 710. Nothing turned on this characterization,

however.

In fact, the Hagar Court made clear that the due process

requirements of notice and an opportunity to be heard did not

apply to the decision of the assessor, but rather to administra-

tive or judicial review of that decision. Id. at 710-11. That is,

Hagar did not treat the assessor’s decision as equivalent to that

of a judge. In view of this treatment and in view of the subse-

quent discussion of the role of the assessor in Arkansas Corp.

Comm'n, Hagar’s reference to the assessor’s judicial activities

sheds little light on the due process limits on compensation of

assessors — much less on compensation of auditors.

12

(1981) (same). This Court in Marshall v. Jerrico, Inc., 446

U.S. 238 (1980) found that the requirements for satisfying

due process were less rigorous than for judges, but recog-

nized the possibility that compensation of prosecutorial

officials could in some future case raise constitutional

problems. Whatever the due process limits on prosecu-

tors might be, they would give little guidance here,

because of the obvious distinctions between tax assessors

and prosecutors. Moreover, the conduct of an assessor (as

opposed to tax auditor) is not even at issue here. Peti-

tioner’s failure to raise this issue previously is itself a

strong indicator of its lack of substance.

In sum, this Court’s prior decisions either support

the decision below (Tumey, Arkansas Corp. Comm’n) or

have no bearing on it (Marshall). The soundness of the

decision below argues against review here.

Ill. THE LACK OF A WELL-DEVELOPED RECORD

AND LACK OF FINALITY MAKE REVIEW HERE

PARTICULARLY INAPPROPRIATE.

In addition to the unimportance of the issue and the

lack of merit to petitioner’s argument, other consider-

ations also argue against a grant of certiorari here. There

was hardly any legal discussion in the decisions below.

This lack of reasoning is not remedied by case law else-

where; rather, there is almost no jurisprudence on the

issue presented. The undeveloped state of the law not

only suggests the lack of real significance to the issue, but

also suggests that consideration of the issue would be at

best premature.

ee a ce

13

Just as important, the issue presented here was

decided below with hardly any factual development.

There was no evidence presented in court or in adminis-

trative hearings as to the activities of tax auditors in

Cabarrus County. Instead, petitioner relied on its coun-

sel’s representations as to those activities. These repre-

sentations were disputed in certain respects (though

similarly without record eviderice) by counsel for respon-

dent. Disputed issues included whether certain taxpayers

were unfairly singled out for audits and what role the

auditor played in the discovery process. The lack of a

clear factual record and unresolved factual issues make

this case a poor vehicle for clarifying any arguable uncer-

tainty in the law.

Finally, the ongoing nature of the proceedings here

argues against review. The decision below should not be

deemed to satisfy the finality requirement of 28 U.S.C.

§ 1257, since the case was remanded for further state

proceedings. To be sure, petitioner attempts to vely on the

exception set forth in Cox Broadcasting Corp. v. Cohn, 420

U.S. 469, 480, 506 (1975) (majority and Rehnquist, J.,

dissenting) for federal questions “bound to sur-

vive .. . regardless of the outcome of future state-court

proceedings.” The question here, however, is not “bound

to survive.” In the remand proceedings, petitioner has

attempted to present state-law arguments that, if

accepted, would eliminate liability and moot the federal

issue.

Of the four categories set out in Cox, the exception

that comes closest to fitting this case is the fourth, for

cases “with further proceedings pending in which the

party seeking review here might prevail on the merits on

ies

nonfederal grounds, thus rendering unnecessary review

of the federal issue by this Court, and where reversal of

the state court on the federal issue would be preclusive of

any further litigation. .. . ” 420 U.S. at 482-83. This

exception applies, however, only “if a refusal imme-

diately to review the state court decision might seriously

erode federal policy. ...” Ibid. Thus in Flynt v. Ohio, 451

U.S. 619, 622 (1981), this Court declined to apply the |

fourth Cox exception in the context of an Equal Protection |

Clause challenge alleging selective prosecution because |

“resolution of this question can await final judgment )

without any adverse effect upon important federal inter-

ests.”

The same is true here: there is no important federal

policy that would be undermined by putting off review

until a final determination in the state proceedings. Even

leaving aside the apparent lack of jurisdiction here, the |

possibility that petitioner will eventually prevail argues

against a grant of certiorari. Particularly when added to

the other strong reasons not to review this case (the lack

of a conflict, lack of an important issue, and the sound-

ness of the decision below), denial is appropriate since

the case might become moot.

+

CONCLUSION

This case presents no conflict among state courts, no

question of unusual importance, and no other reason to

merit a place on this Court’s docket. Even if there were

some reason to examine the question presented, this case

would present a number of problems, because of the

15

undeveloped state of the legal and factual record. Partic-

ularly given that state proceedings are still in progress,

review here is unjustified. For all these reasons, respon-

dent requests that the petition be denied.

This the 27 day of May, 1994.

Respectfully submitted,

Rosert H. TILver

(Counsel of Record)

CHARLES C. MEEKER

PARKER, Poe, ADAmMs &

BERNSTEIN L.L.P.

One Exchange Plaza

Post Office Box 389

Raleigh, North Carolina 27602

(919) 828-0564

Davip L. Terry

BLAKENEY & ALEXANDER

3700 NCNB Plaza

Charlotte, North Carolina 28280

(704) 372-3680

Attorneys for Respondent

Cabarrus County