W.R. Co. v. North Carolina Property Tax Commission

VAUGHN, Judge. Judicial review of a decision of the Property Tax Commission sitting as the State Board of Equalization and Review is pursuant to G.S. 150A-51, which provides: The court may affirm the decision of the agency or remand the case for further proceedings; or it may reverse or modify the decision if the substantial rights of the petitioners may have been prejudiced because the agency findings, inferences, conclusions, or decisions are: (1) In violation of constitutional provisions; or (2) In excess of the statutory authority or jurisdiction of the agency; or (3) Made upon unlawful procedure; or (4) Affected by other error of law; or (5) Unsupported by substantial evidence admissible under G.S. 150A-29(a) or G.S. 150A-30 in view of the entire record as submitted; or (6) Arbitrary or capricious. If the court reverses or modifies the decision of the agency, the judge shall set out in writing, which writing shall become a part of the record, the reasons for such reversal or modification. In its judgment, the trial court concluded, as a matter of law, that “the facts found by the North Carolina Property Tax Commission fail to support its conclusion of law that the principal *255 activity of W.R. Company is the sale of land for development.” The trial court also concluded as a matter of law that “upon review ... of the entire record ... the principal activity of W.R. Company is the commercial production of agricultural or forest products.” The trial court reversed the decision of the Property Tax Commission, pursuant to G.S. 150A-51(4), because it was affected by “error of law.” The trial court also reversed the Property Tax Commission decision pursuant to G.S. 150A-51(5) because it was “unsupported by substantial evidence ... in view of the entire record as submitted.” The question raised by this appeal is whether petitioner, a corporation, qualifies for present use value assessment. This involves interpreting the statutory definition of a qualifying corporation in the context of the present use valuation, i.e., whether the Property Tax Commission decision was “affected ... by error of law.” It also involves a review of the Property Tax Commission decision pursuant to the “whole record” test to determine whether the decision is supported by competent, material and substantial evidence in view of the entire record as submitted. See Underwood v. Board of Alcoholic Control, 278 N.C. 623, 181 S.E. 2d 1 (1971). At least thirty-five states other than North Carolina have enacted some sort of preferential assessment statute which provides a lower property tax for land used for agricultural purposes. Alaska Stat. § 29.53.035 (1979); Ariz. Rev. Stat. Ann. §§ 42-136, -227 (Supp. 1979); Ark. Stat. Ann. §§ 84-483 to -486 (Supp. 1979); Cal. Gov’t code §§ 65560-65570 (West Supp. 1979), Cal. Rev. and Tax Code §§ 421-430.5 (West Supp. 1979); Colo. Rev. Stat. Ann. § 39-1-103(5) (1974), § 137-1-3(6) (Supp. 1971); Conn. Gen. Stat. Ann. §§ 7-131c to -131k, 12-63 (1972); Del. Code Ann. tit. 9, §§ 8328-8337 (1975); Fla. Const. art. VII, § 4(a), Fla. Stat. Ann. § 193.461 (Supp. 1980); Hawaii Rev. Stat. § 246-12(b) (1976); Idaho Code § 63-112 (Supp. 1979); Ill. Ann. Stat. ch. 120, § 501a-1 (Smith-Hurd Supp. 1980); Ind. Code Ann. § 6-1.1-4-13 (Burns 1978); Iowa Code Ann. § 441.21 (West Supp. 1980); Ky. Const. § 172A, Ky. Rev. Stat. Ann. §§ 132.450, .454 (1979); Me. Rev. Stat. tit. 36, §§ 1101-1118 (1978); Md. Ann. Code art. 81, § 19(b) (1975); Mass. Gen. Laws Ann. ch. 61A, §§ 1-24 (West Supp. 1980); Minn. Stat. Ann. §§ 273.111, .13 (West Supp. 1980); Mo. Ann. Stat. §§ 137.017-.026 (Vernon Supp. 1980); Mont. Rev. Codes Ann. §§ *256 15-7-201 to -215 (1979); Neb. Const. art. VIII § 1, Neb. Rev. Stat. § 77-1343 to -1348 (1976); N.J. Const. art. VIII, § 1(b), N.J. Stat. Ann. §§ 54:4-23.1 to -23.23 (Supp. 1980); N.M. Stat. Ann. § 7-36-20 (1978); Ohio Rev. Code Ann. §§ 5713.30-.38 (Anderson Supp. 1979); Or. Rev. Stat. §§ 308.345-.406 (1979); Pa. Stat. Ann. tit. 16, §§ 11941-11947 (Purdon Supp. 1980); R.I. Gen. Laws § 44-5-12 (1970); S.D. Compiled Laws Ann. § 10-6-31 to-31.3 (Supp. 1979); Tenn. Const. art. 2, § 28, Tenn. Code Ann. § 67-601(10) (1976); Tex. Const. art. 8, § 1-d (Supp. 1980); Utah Const. art. XIII, § 3, Utah Code Ann. §§ 59-5-86 to -105 (1973); Vt. Stat. Ann. tit. 32, § 3751-3760 (Supp. 1979); Va. Code §§ 58-769.4 to -769.15:1 (1974, Supp. 1980); Wash. Rev. Code Ann. §§ 84.34.010-.922 (Supp. 1980); Wyo. Stat. § 39-2-103 (1977). North Carolina provides for this preferential assessment in G.S. 105-277.2 to -277.7. At least three reasons have been offered for the adoption of such tax legislation. First, such legislation is intended to relieve those maintaining land in a productive agricultural state rather than developing it for its commercial or residential use from rising property tax bills based on the higher value of the land in a developed, nonagricultural use. Henke, Preferential Property Tax Treatment for Farmland, 53 Or. L. Rev. 117, 119 n. 8 (1974); Note, Ad Valorem Taxation for Agricultural Land in Tennessee, 4 Mem. St. L. Rev. 127, 136 n. 38 (1973). Second, it is seen as a way of preserving arable land in fringe areas near large markets and as providing open or green spaces near these heavily populated areas. Henke, supra, at 120. Third, most of the legislative enactments contain provisions for penalties or tax recapture if the lands given preferential treatment are developed into nonagricultural uses which thereby provides a deterrent to such development. This type of legislation has received considerable criticism which tends to refute the three reasons for its adoption. First, the programs are for the most part applicable to all people and all lands statewide resulting in a tax windfall for those not financially pressed by taxes and tax reduction for land which is not the object of development pressures. It is an unfair subsidization of farmers and land speculators who are not in need of tax shelter. See Carman & Polson, Tax Shifts Occurring as a Result of Differential Assessment of Farmland: California, 1968-69, 24 Nat’l Tax J. 449, 455 (1971). Second, the use valuation method does not really preserve *257 prime agricultural land near urban cities for any great length of time but instead extends development speculation for a short period of time. Henke, supra, at 123-24. Third, the tax base is reduced, placing an undue burden on those holding nonagri-cultural land to make up the deficit, and the tax penalties and recaptures on sale in effect benefit a land speculator who can use them to reduce his ordinary income and capital gains from the sale in the year in which he makes the sale. See IRS Code § 164 (a) (1); G.S. 105-147(6). The penalties would likely be deductible interest. In fact, for federal income tax purposes, it may be extremely beneficial to defer these taxes to the year in which the speculator converts the property to a higher value for its use. It does not keep anyone down on the farm when the right price is offered. The 1973 General Assembly enacted legislation permitting preferential assessment of agricultural, forest and horticultural lands which reduces the property tax burden of the landowner. 1973 N.C. Sess. Laws c. 709. The law was substantially amended in 1975.1975 N.C. Sess. Laws c. 746. The law is presently codified in G.S. 105-277.2 to -277.7. The three special classes of land are defined by form of ownership, use, income and acreage. Id. -277.3(a); -277.2 (1) (2) (3). An owner of agricultural, forest or horticultural lands which have a use value higher than one of these three which is a present use may apply to the county tax supervisor to have the land appraised at its present use value. Id. -277.4(a). The land must be maintained in a “sound management program” which is defined as “a program of production designed to obtain the greatest net return from land consistent with its conservation and long term improvement.” Id. 277.2(6). This provision may disqualify a weekend or hobby farmer or speculator who does not maintain these lands in a “sound management program.” Once property qualifies, dual records are maintained, one reflecting the true or fair market value of the land and the other reflecting the property’s value in its present use. Each county must now have a present use value schedule which insures county wide uniformity of appraisal. Id. -277.6(c). Property tax is paid annually on the basis of present use value. “The difference between the taxes due on the present-use basis and the taxes which would have been payable in absence of this classification, together with any interest, penalties or costs *258 that accrue thereon, shall be a lien on the real property of the taxpayer as provided in G.S. 105-355(a).” Id. -277.4(c). The tax deferral continues as long as the property is maintained in a qualifying use or until it passes to ownership outside of those qualified for the present use assessment. Upon disqualification, all deferred taxes for the preceding three years become due together with statutory interest charges which accrue as of the date the taxes would have originally become due if not for the present use valuation. Id.; see also G.S. 105-360(a) (2) (3). A ten percent penalty is levied on the deferred tax and interest if the property owner does not notify the county tax supervisor of the disqualifications. Id. -277.5. The General Assembly limited those owners who could seek present use valuation of their property. As originally written, the present use valuation was available only for “individually owned land” which was defined in former G.S. 105-277.2(4) to mean land “owned by a natural person or persons and not a corporation.” The law as written in 1973 appears to be an attempt to deprive agribusiness and development corporations of the benefits of present use valuation. Proposals were made in the 1975 General Assembly to liberalize the present use valuation statutes. House Bill 852, Senate Bill 691. When the law was rewritten in 1975, only “individually owned” agricultural, forest or horticultural land could qualify. “Individually owned” was defined as follows. “Individually owned” means owned by: a. A natural person or persons or b. A corporation having as its principal business one of the activities described in subdivisions (1), (2) and (3), above, the real owners of all of the shares of such corporation being natural persons actively engaged in such activities, or the spouse, siblings or parents of such persons. G.S. 105-277.2(4). Certain corporations were thus permitted to qualify for present use valuation. These corporations can be characterized as “family corporations.” See Institute of Gov *259 ernment Property Tax Bulletin # 44 (20 August 1975). The amendment was enacted at a time when farm families were advised to incorporate for estate planning purposes. See, e.g., Pinna, Wells & Harwood, Estate Planning for North Carolina Farm Families, Economic Information Report # 15, N.C.S.U., April 1974. A bill was introduced into the 1979 General Assembly which in effect would have allowed any corporate entity to obtain use value assessment for its agricultural, forest and horticultural lands. House Bill 856-Use Value Assessment for Farms. This bill was referred to the House Finance Committee. Consideration of this bill was postponed indefinitely on recommendation of the committee on 24 June 1980. 1980 N.C. House Journal, p. 186. The intent of the legislature seems quite clear. Its intent has been to be very restrictive with regard to what corporate entities can receive the benefit of present use valuation. The law is generally restrictive and answers much of the criticism leveled at such tax statutes in other jurisdictions. Under G.S. 105-277.2(4), corporate holdings are excluded unless the corporation’s principal business is agriculture, forestry or horticulture and its shareholders are natural persons who are actively engaged in agriculture, forestry and horticulture or the spouse, siblings or parents of such persons. The issue in this case is whether petitioner, a corporation, qualifies for present use valuation. The intent of the legislature in limiting qualification to “[a] corporation having as its principal business one of the activities described ... .”, G.S. 105-277.2(4) (emphasis added), is at issue. To qualify, petitioner must have as its principal business agriculture, forestry or horticulture. The words “principal business” designate the operations of the qualifying corporation. These words have been interpreted by courts before but not in the context of this or a similar statute. See, e.g., Hartford Steam Service Co. v. Sullivan, 26 Conn. Sup. 277, 220 A. 2d 772 (1966); Henderson v. Board of Examiners of Electrical Contractors, 85 N.J. Super. 509, 205 A. 2d 333 (1964); Norwood Shopping Center, Inc. v. MKR Corp., 135 So. 2d 448 (Fla. Dist. Ct. App. 1961); Thomas v. Creager, 107 S.W. 2d 705 (Tx. Civ. App. 1937). The narrow question of law in this appeal is by what standards principal business is to be determined. “Principal” is defined as “most important, consequential, or influential,” Webster’s Third New International Dictionary 1802 *260 (1964), and as “[c]hief; leading; most important or considerable; primary; original.” Black’s Law Dictionary 1073 (5th ed. 1979). The dictionary definitions would seem to preclude either equality or plurality. There might possibly be a corporation qualifying in other respects which would have agriculture, forestry, or horticulture as a major activity with another minor activity such as sale of fertilizer, for example. The term does not, however, imply the equality or plurality which might exist in a large multifaceted conglomerate corporation. There must be criteria for determining what is or is not a principal business. Respondents advocate the sole test should be based on gross income. While gross income is undoubtedly a major criterion, we do not think it should be the sole determining factor. Another court has pointed out a simple illustration of why this is inappropriate. One may safely assume that revenue received by newspapers from the sale of advertising space far exceeds that derived from the sale of newspapers, and yet few people would suggest that the principal business of newspapers is commercial advertising. Hartford Steam Service Co. v. Sullivan, 26 Conn. Sup. 277, 282-83, 220 A. 2d 772, 775 (1966). We think factors which should be looked at in determining the principal business of a corporation for present use valuation other than gross income are net income or profit and its source, annual receipts and disbursements, the purpose of the corporation as stated in its corporate charter and the actual corporate function in relation to its stated corporate purpose. There is a constitutional requirement of uniformity in property taxation. N.C. Const. art. V, § 2(1) (2). The statute expressly indicates the constitutional base found in N.C. Const. Art. V, § 2(2) upon which special classification is made and permitted. G.S. 105-277.3(a). Petitioner has not on this appeal raised as an argument that it would be an impermissible discrimination to deny it present use valuation. See Hagman, Open Space Planning and Property Taxation — Some Suggestions, 1964 Wisconsin L. Rev. 628, 638-45 (1964); Annot. 98 A.L.R. 3d 916 (1980). Its only argument is that it, in fact, qualifies. *261 It was the conclusion of the Property Tax Commission that petitioner’s principal business was not one of the activities which would qualify it for present use assessment. In all other respects, petitioner would qualify. It is a corporation owned by natural persons who are themselves actively engaged in farming. The gross income of petitioner clearly indicates petitioner’s principal business is not agriculture or forestry. Since incorporation in 1967, petitioner has received in gross income from the sales of land a total of $4,444,600.00, while its farming operations have brought it only $31,694.42. Over 99% of the gross income of petitioner comes from a source other than one qualified for present use valuation. The record indicates that none of this income was disbursed in a way which would contribute to the farming operations. Rather, it went to retiring the mortgage indebtedness of $1,200,000.00 and to the income of the shareholders. The actual corporate function is to sell land. In every year of its existence, except the recession year of 1974, petitioner has made at least one sale of real estate. This evidence on the income and activity of the corporation is sufficient to support the decision of the Property Tax Commission. We feel the purpose of the corporation as stated in the corporate charter could be a factor in determining its principal business. The document does not appear in the record of the case. It was a stipulated fact before the Property Tax Commission that petitioner was a North Carolina corporation chartered on 10 October 1967. The charter is a public document on file with the Secretary of State. We possibly could take judicial notice of this document of public record. Commissioners v. Prudden, 180 N.C. 496, 105 S.E. 7 (1920); Staton v. Railroad, 144 N.C. 135, 56 S.E. 794 (1907); 1 Stansbury’s N.C. Evidence § 13 (Brandis rev. 1973); see also Bland v. City of Wilmington, 278 N.C. 657, 180 S.E. 2d 813 (1971). Although we do not base our holding on it, the charter, which was drafted before 1 October 1973 at a time when a statement of particular purpose or purposes of the corporation was required, see G.S. 55-7(3), 1973 N.C. Sess. Laws c. 469 s. 2, 47, is a particularly enlightening postscript to our decision. The charter states the following purposes for petitioner: *262 To carry on and transact a general real estate business, including the right to take, acquire, buy, hold, maintain, rent, develop, sell, convey, mortgage, exchange, improve and otherwise deal in and dispose of real estate, chattels, real and personal property of every nature and description whatever, or any interest or right therein without limit as to amount; to convey, subdivide, plot, improve, and develop land and property for sale and otherwise; to do and perform all things needed and lawful for the development and improvement of the same for residence, trade or business; to erect and construct houses, buildings, or works of every description on any lands of the corporation, or upon other lands, and to rebuild, enlarge, alter, and improve existing houses, buildings or works; to convert and use for roads and other conveniences, and generally to deal with and improve the property of the company; and to undertake or direct the management and sale of the property, building, and land of the corporation, or any other lands. Not once is an agricultural, horticultural or forestry activity mentioned. Even without the corporate charter, the record supports the Property Tax Commission decision that petitioner is not a corporation which qualifies for present use valuation. The principal business of petitioner is not farming land but selling land. Such a principal business activity does not qualify for present use valuation. The decision of the trial court reversing the decision of the Property Tax Commission is Reversed. Chief Judge Morris and Judge Wells concur.