On July 18, the Virginia Supreme Court issued its opinion in McKee Foods Corporation v. County of Augusta (Record No. 180521). McKee is the latest in the Court’s line of cases considering landowner challenges to Virginia localities’ assessment of real estate taxes. As set forth below, the decision reminds localities that their assessments of real estate are not automatically entitled to a presumption of correctness.
McKee owned an 800,000-plus square foot industrial building in Augusta County, which was used as a manufacturing facility for, among other things, Little Debbie snacks. In 2011, 2012, and 2013, the County assessed McKee’s property at $28,525,300, and in 2014, the County raised the assessment to $31,745,800. McKee challenged the assessments for these four tax years in Augusta County Circuit Court. McKee contended that the actual fair market value of the property was more in the range of $17,000,000 for all years at issue, and sought a refund in accordance with this lower valuation.
At trial, the evidence showed that the County developed its assessments for the property solely by reference to the cost approach, which is one of the three recognized methods of assessment and appraisal of real estate (the other two being the income approach and the sales comparison approach). The evidence showed that in 2011 through 2013, the County did not attempt to use the income approach to assess the property, and used an incorrect and overly simplistic variant of the sales comparison approach, which was ultimately rejected in favor of the cost approach. In 2014, the County claimed it was unable to use the sales approach because of the lack of comparable sales and rejected the income approach because appropriate rental data would be unavailable.
After hearing all of the evidence, the trial court found in favor of the County. The trial court found no error in the methodology used by the County and, as a result, the County’s assessments were entitled to a presumption of correctness under Virginia law. In the trial court’s view, when stacked against this presumption, McKee’s evidence did not justify a reduction in the assessments.
The Supreme Court reversed the trial court’s decision. In doing so, the Court focused its attention squarely on the trial court’s application of the presumption of correctness. The Court reiterated its holding in Keswick Club, L.P. v. County of Albemarle that “[i]n cases where a taxing authority bases an assessment of fair market value solely on one approach, the resulting assessment is still entitled to the presumption of validity so long as the taxing authority considered and properly rejected the other valuation methods.” 273 Va. 128, 137 (2007).
In McKee, the Court focused on this last clause and held that the trial court erred by automatically arming the County’s assessments with a presumption of validity without meaningfully evaluating the County’s methodology. The Court carefully examined the County’s process, which revealed that the County had not properly considered the income and sales comparison approaches and, in some instances, failed to consider these alternatives at all. In instances when the County purported to apply these two approaches, it did so incorrectly, thereby casting doubt on the County’s decision to reject these methodologies. Ultimately, the Court held that the trial court’s validation of the County’s methodology and the decision to apply the presumption of correctness were reversible errors. The Court remanded the case back to the trial court for further proceedings without the presumption in place.
McKee gives teeth to the Court’s prior decision in Keswick and looks poised to keep localities honest about their assessment practices. For years, localities have been able to claim the presumption of correctness by focusing on one assessment approach, while seemingly paying mere lip-service to the other two. McKee signals that this will no longer be sufficient and that localities’ assessment methodologies will be subject to closer scrutiny when challenged administratively or in court.
For taxpayers, this is an important development because the presumption of correctness is often determinative in assessment appeal cases. If the locality enjoys the benefit of the presumption, the taxpayer bears an incredible burden, which includes proving that the assessment was not developed in accordance with generally accepted appraisal practices, among others. If, on the other hand, there is no such presumption, the taxpayer is placed on even footing with the locality and the question is simply one of valuation.