The Tax Win That Doesn’t Last

Nothing is certain but death and taxes. And nothing is certain about the tax commission except that if you don’t challenge your tax assessment – well, it’s not life or death, but it can feel like it.

“Real estate taxes have suddenly become the highest line item in a co-op’s budget, and that being the case, boards should understand the process,” says attorney Eric Weiss, a tax specialist and partner at Tuchman Korngold Weiss Lippman & Gelles. “And they should be able to participate in the process if they feel that’s important. I think it is important, from a budgetary standpoint.”

It’s not just a tax attorney saying that. Bob Friedrich, board president of the 110-building, 10,000-resident Glen Oaks Village co-op in Queens, agrees. “I think it’s very important that all co-ops understand why they must appeal the valuations assessed against their properties,” he says.

And the New York City Tax Commission – less ominous than the name suggests – is where you go to do just that: appeal the property values that the city’s Department of Finance assigns each year for tax purposes, and which are inevitably too high, to hear co-op/condo board members tell it.

Strangely enough, those board members may have a point. Despite the up-and-down nature of the real estate market, the Department of Finance has issued higher assessments in New York City every year since 1995, even through the two most recent economic recessions and the drop in commercial-property values in prime downtown Manhattan after 9/11. And though values are down or flat nationally, the city’s $876 billion property-value assessment in January marks a $31 billion increase from last year’s record $845.4 billion.

“The Department of Finance has to get out close to a million assessed values, a million tax lots,” Weiss sympathizes. “Finance is mass-producing these things, crunching numbers. And the tax commission is looking at them on a case-by-case basis.”

So, not surprisingly, most boards routinely file an “Application for Correction of Assessed Value” with the commission each year, just to be safe and keep all options open. “As we’ve seen in the last two years” – when values for some buildings spiked by unrealistic triple-digit percentages – “these [valuation] numbers are arbitrary,” says Friedrich, a vocal critic of New York State’s tax classification for co-ops and most condos, which treats them as income-producing rental property. “We believe there’s no foundation or basis for them, and they’ve even acknowledged there was a computer glitch that created some of these problems,” he notes, referring to the finance department stating in April 2011 that some excessively high valuations that year were the result of computer error.

Even the president of the tax commission himself agrees there are fundamental problems requiring a place for appeal. “Co-ops and condos are valued as if they were comparable rental buildings,” Glenn Newman, president of the commission since 2002, says of the finance department’s state-mandated methodology (see box, p. 16). “So what we have for co-ops and condos is a hypothetical income-and-expense [statement] based on the fiction they’re a rental. And as I said to the mayor, no one should be surprised when a hypothetical based on a fiction doesn’t reflect reality.”

Ye Olde Beginnings

The tax commission was created by state legislation in 1857 to supervise the agency responsible for setting property-tax assessments. That agency was called, logically enough, the Tax Department initially and later the Real Property Assessment Department. In 1968, after a reorganization of city government, the Department of Finance began doing the assessments, and the tax commission – “an independent administrative review body,” in the city’s words – became responsible for determining tax appeals.

So here’s the thing: before that, if the finance department assessed what you considered an exorbitant property value (and a commensurately high property tax), your only recourse was to complain about it to, oh, the finance department.

“That was inherently a problem,” says Newman, who in addition to having held several city posts through the years was a partner in the tax law firm of Roberts & Holland. “There’s potential for conflict when you have the same agency that issues assessments reviewing assessments. So the function was split off.”

“You had the Department of Finance reviewing its own assessments,” observes Weiss. “It was felt that a separate agency was necessary so there would be no conflict of interest: Finance values properties, sets assessments, and collects taxes from those assessments. The tax commission reviews assessments that people protest.”

The Last Walz

At least one protest reached the Supreme Court, though it involved tax exemptions rather than appeals of property valuation. Frederick Walz, a reclusive Bronx lawyer who’d bought a 22-by-29-foot tract of land on Staten Island in 1967, sued the tax commission, arguing that his $5.24 annual real estate tax was helping subsidize churches, which were not taxed. The landmark Walz v. Tax Commission of the City of New York eventually worked its way to Washington, where the Supreme Court ruled 7-1, on May 4, 1970, that property-tax exemptions for religious properties used solely for religious worship do not violate the Establishment Clause of the First Amendment, which says, “Congress shall make no law respecting an establishment of religion.” Major, major case.

One other famous tax commission case involved the Church of Scientology of New York, which sought to reverse the tax commission’s denying exemption for some property the organization owned. In 1984, New York County Supreme Court Justice Richard Lee Price ruled that while “a bona fide religious organization does not use coercion … does not threaten its opponents with baseless defamation suits, financial reprisals or physical violence. … [and] is not run in the same manner as a high pressure sales organization,” he was nonetheless remanding the case to the commission so that it could “set forth the objective tests used to determine whether or not the Church of Scientology is a bona fide religion.”

“The case was settled with some property taxes paid for some older years and they were granted an exemption for later years,” says Newman, who was not then involved with the commission. “We don’t look behind what a religion believes but look to, ‘Is it properly organized, does it have a federal exemption, and what is the use of the premises?’”

From the Supreme to the Prosaic

Most co-op and condo board interactions with the tax commission are less momentous, of course. The process starts early each year in January, when the finance department issues tentative valuations for over one million separately assessed land parcels called “tax lots” for the fiscal year beginning July 1. Condo apartments – unlike co-op apartments – are real property and not shares in a corporation. Therefore, each is a separate tax lot. So most condo boards do one certiorari appeal covering all of them.

Boards have until March 1 to file a protest with the tax commission; there’s a $175 fee applied to properties with assessed values of $2 million or more that are scheduled for hearing.

The hearings themselves run from April 1 through about October, says Newman. But since the finance department’s tentative assessments “become final around May 25,” says Weiss, “not a lot of the properties that have filed protests have had hearings. Most hearings occur after the final assessment rolls have been published” – meaning that in nearly every case, you’re expected to pay a tax bill that may eventually be ruled higher than what you actually owe.

Boards make these applications through a specialized certiorari attorney, with your managing agent generally serving as liaison. “The managing agent has to take the lead, because we are the point person for the certiorari attorney,” says Dan Wurtzel, president of Cooper Square Realty, which manages some 600 buildings. “We have the certiorari attorney provide a status report, and if there are questions [from the board], the certiorari attorney will either provide a follow-up correspondence or if necessary attend the board meeting. In the event of an offer from the tax commission, because it’s time-sensitive, the certiorari attorney either has to come to the next board meeting or, if the next board meeting isn’t scheduled until an offer-acceptance is due, then the board would have to have a conference call” with the attorney.

“We’re not the individual who can make the recommendation” to accept or reject the offer, Wurtzel notes. “This is for the certiorari attorney. They’re the experts in a position to say whether it is a fair offer from the tax commission or not. We make sure the process is moving along and that the certiorari attorney keeps in touch so the board is aware of what’s going on.”

Killer Apps

Last year, the commission received 50,249 applications, covering 184,100 tax lots (including commercial property) encompassing nearly $149 billion in assessed value. About 9,000 applications, says Newman, were ineligible for review since “people filed late, didn’t complete the application, didn’t submit income-and-expense statements, or didn’t establish they have the right to file. Sometimes they withdrew, since people file and then Finance makes a correction” between the tentative assessment and the final roll.

The commission heard and closed 25,064 cases that lowered property values by $6.1 billion, yielding $542,799,712 in tax relief to protesting property owners. It also closed 22,354 cases claiming errors in assessments for prior years. About 4,090 applications involved co-ops, and 1,856 involved condos. (Separately in 2011, the city’s law department disposed of roughly 1,372 “Article 7” certiorari proceedings on tax appeal, with one case actually going to trial. You have to try to settle with the tax commission first before you can move on to the courts.)

So, with some 50,000 applications, there must be a couple hundred examiners to handle this workload, right? “We have about 24 people hearing cases,” Newman notes. “We batch these cases, so we have up to 36 properties per hearing per calendar page,” i.e., per day. “So one hearing officer will be assigned a calendar for a day with up to 36 applications. For condos we do fewer. We’re talking about ordinary, run-of-the-mill cases” that take about 15 minutes (though complex or unique cases can take up to an hour). Cases involving properties with assessments of $55 million or more get two hearing officers, including a commission executive. You receive a mailed notice of the commission’s determination within 40 days.

Classes Now in Session

The commission can review four types of claims: (1) misclassification, in which the property is being assessed in the wrong class of the four types (see box, p. 16); (2) excessiveness, in which the property fails to receive all or a portion of a partial tax exemption; (3) inequality, where assessed value is set at a higher proportion than that applied to all other properties in the same tax class; and (4) unlawfulness, which is principally that the property failed to receive a complete tax exemption.

“The tax commission will review a case and arrive at a proper value and either make an offer the taxpayer can accept or not,” says Newman. “If it’s not accepted, then the original assessment stays as is. If he accepts the offer, part of that settlement requires the discontinuance of pending Article 7 court proceedings for the earlier years. So a taxpayer has to make a decision: is the tax commission making an offer that’s reasonable and the right value? If you’re not happy with the tax commission, the next step is to go to court.”

Roughly 80 percent of the commission’s offers are accepted, “for many reasons,” Newman says. “Sometimes the taxpayer just wants to get quick relief. We finish within the year, but court proceedings can take five years or more.”

As the commission puts it in its annual report, all this “helps the City maintain the integrity of the property-tax assessment rolls [and] the sound and equitable allocation of the property-tax burden and promotes public confidence in government and the tax system. A fair and efficient review process is essential to reducing costly litigation of assessment disputes … that might be further contested [in court], costing additional time and resources for taxpayers and the city.”

One odd thing about that – no one appears to have told the finance department. Although the tax commission may lower an assessment to a mutually agreed-upon number, the following year, when Finance is preparing its tax rolls, it returns to the original, higher number.

“Finance will take its originally published assessment and increase that,” says Weiss. “The starting point is the old assessment before reduction. You can’t say it’s because the Department of Finance doesn’t know about it, because the Department of Finance gets communications from the tax commission that an offer to reduce the assessment has been accepted.” In fact, Weiss notes, “The Department of Finance is the agency that generates the correction letter and issues a refund check or a credit.”

“He’s not wrong,” says Newman. “They see if we made an offer or not, and how much that offer was. We enter it into a computer system they have access to. But Finance is not bound to follow what the tax commission did. They know about our changes and our offers, and they implement the assessments, but they’re not required to follow them the next year. We’re trying to coordinate better with Finance and provide them with the basis of our analysis,” he adds.

Does the commission give a fair hearing? Even Friedrich – who’s helped spearhead tax protests and has gone so far as to call for Finance Commissioner David Frankel’s resignation following the 2011 valuation debacle – thinks so. “They’ve been reasonably OK in that you get an agency that has a willingness to listen,” he says. “I think we get as fair a hearing as we can expect to get, although it’s not anywhere near a perfect system.

The whole issue of tax fairness for co-ops and condos is a lengthy separate issue since they’re the only form of New York residential housing without annual tax caps and the only one treated like commercial real estate; since last year, legislators in Albany have been trying to create a new tax classification to address the inequity, without success.

In the meantime, the tax commission is the first step in reaching a fair number – a responsibility that certiorari attorneys say Newman takes very seriously. “We do in-person hearings in each of the boroughs, give somebody an opportunity to go face-to-face and get individualized, personal treatment,” he says. Ironically, in New York, the tax commission is one place where you can fight City Hall.