The North Carolina Court of Appeals recently confirmed – as a matter of law – that disqualification of land enrolled in present use value (PUV) is not a reappraisal or other increase in property tax assessment, but rather simply notice that deferred taxes are now due and payable. As such, notice of appeal rights regarding disqualification is not as advanced as required by the Machinery Act for reappraisals and assessments. The case also highlights an assessor’s investigative authority upon disposal (e.g. sale) of a parcel enrolled in PUV, as well the premise that a taxpayer take advantage of any time afforded to build a case before rushing to appeal at an early scheduled hearing.

The case – In the Matter of the Appeal of Trade Land Company, LLC (COA 24-884) – explains the nature of the present use value (PUV) deferred property tax program in terms of landowner due-process right to hearing when a decision is reached by the county that the enrolled land has been disqualified, specifically when the landowner has a right to hearing on the matter. The case arises from a property taxpayer’s contention that it was not provided proper notice of hearing following receipt of the notice of disqualification and bill for deferred taxes.

The Facts

The taxpayer in question is a limited liability company (LLC) with landholdings in Pitt County. The LLC owned 47 tax parcels, and enrolled 11 of those parcels in the PUV program from 2018 to 2021. A key requirement of NC’s PUV program is that a business entity – such as an LLC – be a “qualified owner;” such qualification is partially met when the principal business of the LLC is farming or forestry. The LLC in the case survived a 2021 ‘audit’ of the parcels, and was allowed to enjoy continued enrollment. (Note: per NCGS §105-296[j], counties are required to confirm qualifications for a parcel every eight years.)

However, in December of 2022 and following the appointment of a new county tax assessor, the LLC sold “a portion of one of its tax parcels.” The sale – which resulted in removal from the PUV program – caught the attention of the new assessor who conducted an investigation of the qualification of the remaining enrolled parcels. The assessor determined that the LLC was not in the principal business of farming or forestry, and thus declared that the parcels had lost their enrollment (known as a ‘disqualifying event’). The tax office immediately notified the LLC by letter (dated December 5) that the parcels no longer qualified for and were being removed from the PUV program, and that the deferred taxes – 3 years of the differential (plus interest) between the use-appraised value and the highest appraised value – were now due. The LLC was notified by email (December 8) that it could appeal this decision at the next board meeting that month, or wait until the first board meeting in early 2023 (date unspecified).

The Tax Appeal Process

The LLC elected to appeal the assessor’s decision at the December 2022 meeting of the Pitt County Board of Equalization and Review (the Board). After the hearing, the Board affirmed the assessor’s decision to remove the parcels. The LLC then appealed to the North Carolina Property Tax Commission, who held hearing on the matter in January 2024. The LLC plead improper notice of the dis-enrollment and right to hearing – citing NCGS §105-296(i) – but the Commission affirmed the Pitt County Board’s decision. The Commission based its decision on NCGS §105-394, which defines failure to give notice as an “immaterial irregularity,” and ruled that such failure would not have affected the Board’s decision. Further, the Commission ruled that the LLC taxpayer had actual notice. The LLC appealed directly to the NC Court of Appeals (as per NCGS § 105-345).

The LLC taxpayer (“appellant”) raised two issues on appeal: 1) whether the Commission failed to make proper notice (of the disqualification and right to hearing) as required under NCGS §105-296(i); and 2) whether the Commission erred in relying on NCGS §105-394 which was declared unconstitutional by the North Carolina Supreme Court.

The Court’s Analysis Part One – Improper Notice

As to the issue of proper notice, the Court looked to the legislative intent behind the governing statute – known as the Machinery Act (the Act) – which it noted is a “labyrinthine compilation of statutes that requires careful interpretation.” (p. 5). Section 105-296(i) of the Act requires:

Prior to the first meeting of the board of equalization and review, the assessor may, for good cause, change the appraisal of any property subject to assessment for the current year. Written notice of a change in assessment shall be given to the taxpayer at his last known address prior to the first meeting of the board of equalization and review.

The Court noted the statutory effect of disqualification of a parcel under the separate PUV statute (NCGS §105-277.1F) which states that the “deferred taxes are ‘due and payable on the day the property loses its eligibility for the deferral program as a result of a disqualifying event.” (emphasis in original). These sections would appear to be in conflict, since a disqualifying event can occur anytime after the first Board meeting in a given year.

The Court reconciled the apparent conflict by examining the essence of the PUV program as a tax deferment program, whereby taxes are owed but deferred until such time the parcel loses its qualifying status. In other words, the Machinery Act requires notice for a reappraisal resulting in a change in the amount of tax assessed. The PUV program does not reappraise property upon disqualification; upon entering the program, the parcel’s appraisal (at its highest and best use) is already known to both county and taxpayer. Likewise the use value “lower appraisal” as determined by the county (following the NC Department of Revenue’s use value rate guide) is known; both amounts normally appear on the parcel’s tax card. Thus, when a parcel suffers a disqualification event, its value is not reappraised nor an increased amount assessed: the assessed taxes merely become due and payable. Thus, the new tax bill issued to the LLC upon disqualification was not a notice of reappraisal or increased assessment. As the Court described: “[R]ather, [the new tax bill] was simply changing the status of appellant’s already-assessed taxes from deferred to due.” Thus, the requirement of notice under §105-296(i) did not apply, and the time-period requirement (“prior to the first meeting of the Board”) was irrelevant. The letter and email from the assessor to the taxpayer satisfied any notification requirements. As the Court stated:

[W]hen there is a change in the determination of whether a property qualifies for PUV status, the question is not the value of the property or the amount of taxes to be assessed, but rather whether the property owners will lose the benefit of a lower tax rate. The issue then is not the value of the property but whether the property qualifies under the PUV statute for a deferral of some of the taxes already assessed. Given that a loss of PUV status can occur at any time within a tax year, there is no logical reason to require a hearing at the first meeting of the Board, as opposed to another meeting after the loss of PUV status has been noted. (Opinion p. 8)

Court’s Analysis Part Two – Unconstitutionality of Notice Statute

As to the issue of whether the Board improperly relied on NCGS §105-394 that notice was irrelevant when the NC Supreme Court had previously ruled the section unconstitutional in Henderson County v. Osteen, 292 N.C. 692 (1977). That case held that a county’s failure to notify the estate of a deceased taxpayer was violated the North Carolina Constitution Article 1, §19. (That section is North Carolina’s “law of the land” and “equal protection” requirement akin to the federal Constitution’s Fifth Amendment requirement of due process before deprivation of life, liberty or property.)

The Court distinguished Osteen because, in that case, the NC Supreme Court merely declared that NCGS §105-394 was unconstitutional as applied (to the taxpayer in that case), not unconstitutional as written (i.e. “on its face”). The statute was still valid, and regardless, the present case dealt with a challenge untimely notice under the Machinery Act, not a total failure of notice as under the facts of Osteen. The Court noted that “[t]he fundamental premise of procedural due process protection is notice and the opportunity to be heard” (citing Peace v. Emp. Sec. Comm’n of N.C., 349 N.C. 315, 322 [1998]), and that such notice depends on the circumstances of each case. Further, the court relied on its previous holding that where a plaintiff knew of the existence and scope of a hearing, and while present at the hearing asked questions and presented testimony, his procedural due process rights had not been violated” (citing as precedent Lipinski v. Town of Summerfield, 230 N.C. App. 305 [2013]).

In its present case, the Court held that because the LLC taxpayer received a similar opportunity to be heard (ie. the December county hearing), and took advantage of the opportunity, such was sufficient acknowledgment of their due process rights. Further, though the letter and email (December 5 and 8 respectively) were issued in the week prior to the first hearing opportunity on December 12, the taxpayer chose to attend that hearing rather than wait until a later hearing (date unspecified in facts) as offered in the email. The taxpayer’s contention that it did not have time to hire counsel and develop facts to contest the disqualification were disregarded in that the taxpayer did not raise these issues with the Commission, or even in its appellate brief (there were brought up in oral argument only). (The court did not opine on the legal relevance of failure to secure counsel, other than noting the taxpayer had the option to better prepare for the later hearing after the new year.)

As it turned out, as the Court noted in its opinion, the appellant did try to rectify the deficiency in status by creating a new entity that only owned the land that would otherwise qualify for PUV, presumably claiming that the new entity was in the business of farming. That application for PUV by the new entity owning qualifying parcels was – after initial rejection by the assessor – subsequently approved by the equalization board.

The Takeaways – When Property Taxes Are Assessed vs. Due (and take time to prepare your appeal)

But the case does offer a reaffirmation of what those who administer the program already know: that the Present Use Value program is merely a tax deferment program, one where property values are known, as is the amount of tax assessed on that value. Disqualification from the program is not a reappraisal, and the difference in appraisal from the use value to the highest and best use value is not a reassessment, triggering the advanced hearing notice requirement of the Machinery Act. Disqualification is simply a change in deferred tax status, and can happen at any time the facts of taxpayer identify – or its use of the land – change. The essence of the program is at deferred taxes – at least the previous 3 years – will be paid at some point, and thus are always owed to the county, and it is a statutory privilege that all deferred taxes prior to the 3 year ‘roll back’ are abated for all time.

The case also illustrates that when one is disqualified from the PUV program, the taxpayer does not necessarily benefit from rushing to address the problem, but may benefit from additional time to prepare for their appeal (perhaps by hiring legal counsel) at a later hearing. (Note: the timing involved in this case is unique to this case; the disqualification discovery just happened to occur before a fast-approaching equalization board meeting). Upon disqualification, a taxpayer has 60 days from the date of notice to appeal the assessor’s decision the county board of equalization; the taxpayer also has the privilege – upon notification of disqualification – to supply the assessor with additional information for reconsideration of the decision, and the 60 day appeal clock then runs from the date of the negative reconsideration decision. (NCGS § 105-277.4[b1]). The appeal “must be made” within the 60 day window, and if the board of equalization is not in session, the appeal may be made directly to the County Board of Commissioners).

Though the issues may be technical and arcane, any time the North Carolina Court of Appeals or Supreme Court issues an opinion on the Present Use Value program, we at Extension Farm Law and Tax are going to write about it!