Christmas in May: Tax Court Judge Lynn W. Davis' Extraordinary Decision

While the state must prove criminal guilt “beyond a reasonable doubt,” the reverse applies to taxpayers, who must prove the taxing authorities’ presumptively correct assessments are wrong. The usual presumption favoring taxing authorities against taxpayers is not only offensive, it has an enormous practical, and usually adverse, impact upon taxpayers, especially those with limited budgets to fight what may be an unfair confiscation of their property. County assessors may passionately argue that efficient tax collection would plummet if the presumption in their favor were repealed, as if nothing on earth could be more horrible. Assessors’ fears are likely correct, though it could be similarly argued that it would be much more efficient and less costly if we simply shot accused felons rather try them first.

Another taxpayer complaint is that tax assessors (such as the Tax Commission’s divisions) are statutorily subordinate to tax adjudicators (the Commissioners themselves) , or are, at least, affiliated and intertwined. Such a system undermines another constitutional concept: “separation of powers,” where those who promulgate the rules and issue assessments should be different from those who adjudicate them. This is not to impugn the integrity of tax administrators, only to stress the founders’ wisdom in declining to assign incompatible roles to a single branch of government.

Faced with a decisively “unlevel playing field,” taxpayers in 1993 lobbied the Utah Legislature to pass what is commonly called the “Tax Court Act,” now codified at Utah Code Ann. § 59-1-601. The Act gave taxpayers the right to a “trial de novo,” following a Tax Commission loss, before an independent District Court. Then disaster struck. In Evans & Sutherland Corp. v. Utah St. Tax Comm., 953 P.2d 435 (Utah 1997), the Utah Supreme Court invalidated the “trial de novo” aspect of the Act, holding that it violated article XIII, § 11 of the Utah Constitution by vesting District Courts with powers constitutionally delegated to the Tax Commission.

In perhaps an unprecedented move, the Utah Legislature in 1998 reversed Evans & Sutherland to pass SJR 13, which was a joint resolution proposing an amendment to article XIII, § 11. SJR 13 provided:

Notwithstanding the powers granted to the State Tax Commission in this Constitution, the Legislature may authorize any court established under Article VIII to adjudicate, review, reconsider, or redetermine any matter decided they the State Tax Commission or by a County Board of Equalization relating to revenue and taxation as provided by statute.

On November 5, 1998, 74.5% of Utah voters passed Proposition 6, which embodied the concepts of SJR 13. Two legislators (Representative John Valentine and Senator Howard Stephenson) who sponsored SB 62 wrote the arguments for Proposition 6 in the Voter Information Pamphlet:

"a vote for Proposition 6 will help ensure fair and equitable taxation in Utah by reestablishing a tax court in the state and providing a more taxpayer-favorable place to appeal a tax assessment ."

As the sponsors envisioned the reinstated Tax Court Act;

“tax court judges will be able to hear all evidence in a case, and make a ruling based solely on the facts and law, without paying deference to the tax assessing body.” Voter Information Pamphlet, 1998 General Election, Proposition 6.

Despite the Tax Court Act, lawyers for the Tax Commission have aggressively sought to limit District Court jurisdiction to adjudicate tax cases. To this day, Tax Commission lawyers argue that appeals to District Court for a “trial de novo,” following a Tax Commission formal hearing, are limited to what the Tax Commission actually heard. To them, there can be no new issues. The Tax Commission has also resisted having any original tax cases filed in District Court (thus bypassing the Tax Commission entirely), even for those cases the Tax Commission has no jurisdiction to decide, such as constitutional challenges to the legality of state tax laws and/or their application.

Enter Judge Lynn W. Davis of the Fourth District Court, one of the six statewide “Tax Court” judges. On May 20, 2003, Judge Davis issued an extremely significant decision: “Ruling Respecting the Legal Effect of Bluth v. Utah State Tax Commission” in a case captioned Alliant Techsystems, Inc. v. Salt Lake County and The Utah State Tax Commission, No. 990402607. Alliant involves the taxpayer’s claim that Salt Lake County’s assessments are too high (which must first be heard and decided by the Tax Commission); and the taxpayer’s claim that any assessment of an unapportioned privilege tax on its use of government property is unconstitutional (which the Tax Commission cannot decide).

Judge Davis’ Ruling is extraordinary because it clearly delineates for the first time a proper understanding of how tax cases must be decided. In general, taxpayers must “exhaust their administrative remedies” before going to court, meaning the Tax Commission must first hear and rule upon most tax disputes. Theoretically, there are statutory and constitutional exceptions to this general rule, though lawyers for the Tax Commission tend not to concede the application of these exceptions.

In Bluth v. State Tax Commission, 2002 Ut 91, the Utah Supreme Court, from the Tax Commission’s read of the case, sided with the taxing authorities by dismissing a taxpayer lawsuit that challenged the legality of a Tax Commission rule. Bluth holds that the Tax Commission must be given first crack at resolving a challenge to its own rules. Hence, taxpayers must “exhaust administrative remedies.” That usually makes eminent sense; yet armed with Bluth, the County and the Tax Commission argued in Alliant that the District Court has no jurisdiction to hear any case that had not first run the Tax Commission gauntlet, including Alliant’s challenge to the constitutionality of County imposition of a privilege tax on Alliant for its use of property the United States Navy owns and controls. Judge Davis rejected the taxing authorities’ arguments, stating:

Whatever the Tax Commission ruled in the 1995-1999 valuation cases, or could rule in the 2000 valuation case, on Alliant’s claim that County taxation of NIROP [the federally owned plant] violates state law, the federal law claims (specifically including the civil rights violation under 42 U.S.C. § 1983), and the claim for injunctive relief on prospective years remain unadjudicated. Neither of these claims challenges the Tax Commission’s promulgation of a rule under the Administrative Rulemaking Act. Bluth’s exhaustion requirement is, accordingly, inapplicable to the NIROP action. The Utah cases the Court of Appeals [in Bluth I] cited, as well as other that permit direct challenges to unlawful taxation, remain applicable.

Judge Davis’ ruling came as Christmas in May; its significance can hardly be exaggerated. Those cases in which the legality of a tax is an issue (as distinguished from the application of an admittedly valid tax law) can appropriately be brought as an original action in District Court. To the chagrin of taxing authorities, Judge Davis’ ruling will necessarily save the taxpayer considerable time and expense. Though the Tax Commission must initially adjudicate valuation cases, as it always has, taxpayers need not “exhaust” what ultimately would be a charade in those cases calling for injunctive relief the Board and the Commission can never grant anyway. In his follow-up Findings of Fact and Conclusions of Law in Alliant, Judge Davis ruled, even as to matters for which the Tax Commission had original and unquestioned jurisdiction: “This Court is not bound by the Tax Commission’s decision of rejection of [a] Settlement Agreement” between the County and Alliant, which Alliant sought to enforce.

As a not too subtle reminder, Judge Davis instructed the Tax Commission that its primary job was to fairly adjudicate tax issues, nothing else.

The legality of taxing Alliant for its use of NIROP property is pending before this Court and the Tax Commission for the year 2000. On the one hand, the Tax Commission should be an impartial adjudicator of issues before it. Yet on the other hand, the Tax Commission chose to intervene as a party defendant in the NIROP action [filed by Alliant] to ‘contest’ proposed facts in the affidavits Alliant submitted. Since then, the Tax Commission has continuously fought against Alliant in the NIROP action. The incompatibility of the Tax Commission as ‘impartial adjudicator’ and simultaneous ‘advocate’ is obvious. . . [L]egal questions, which the Tax Commission cannot answer (or should not answer because the Tax Commission has chosen to compromise its roles), must be resolved in District Court.

Judge Davis’ ruling has transcendental significance for every Utah taxpayer who believes in the rule of law. The words “trial de novo” in the Tax Court Act mean precisely what they say – appeals from the Tax Commission to the District Court will be tried as if they originated there, without deference to the Tax Commission. Equally important, those cases which the Tax Commission has no jurisdiction to adjudicate, such as federal constitutional challenges to assessments, can and should be heard by District Courts.