                                                                                            August 6 2013


                                          DA 13-0005

                  IN THE SUPREME COURT OF THE STATE OF MONTANA

                                          2013 MT 215



COVENANT INVESTMENTS, INC.,

              Petitioner and Appellee,

         v.

STATE OF MONTANA,
DEPARTMENT OF REVENUE,

              Respondent and Appellant.



APPEAL FROM:           District Court of the Eighteenth Judicial District,
                       In and For the County of Gallatin, Cause No. DV-11-913A
                       Honorable Holly Brown, Presiding Judge


COUNSEL OF RECORD:

                For Appellant:

                       Michelle R. Crepeau, Special Assistant Attorney General, Montana Dept. of
                       Revenue; Helena, Montana

                For Appellee:

                       Michael Green, D. Wiley Barker, Crowley Fleck PLLP; Helena, Montana



                                                    Submitted on Briefs: June 19, 2013

                                                               Decided: August 6, 2013


Filed:

                       __________________________________________
                                         Clerk
Justice Brian Morris delivered the Opinion of the Court.

¶1    Covenant Investments, Inc. (Covenant), challenged the constitutionality of the six-

year tax cycle mandated by § 15-7-111, MCA. The District Court for the Eighteenth Judicial

District, Gallatin County, determined that § 15-7-111, MCA, as applied to Covenant,

violated Covenant’s right to equal protection. The Department of Revenue (Department)

appeals. We reverse.

¶2    We address the following issue on appeal:

¶3    Whether the District Court correctly determined that § 15-7-111, MCA, violated

Covenant’s right to equal protection?

                   PROCEDURAL AND FACTUAL BACKGROUND

¶4    Covenant owns property for residential subdivision development in Gallatin County.

Section 15-7-211, MCA, requires the Department to reappraise all residential property in

Montana every six years. The Department assessed the value of Covenant’s property in

2008. The Department used the 2008 appraisal to establish Covenant’s tax liability for the

six-year tax cycle ending in 2014.

¶5    The Department valued Covenant’s property at $17,600,988. Covenant challenged

the 2008 appraisal value of its property. The Gallatin County Tax Assessment Board

reduced the appraised value of Covenant’s property from $17,600,988 to $13,745,684.

¶6    Covenant submitted a petition to the State Tax Appeal Board (STAB) asking it to

reduce further Covenant’s 2008 appraisal value. The Department had added 35% to the

value of Covenant’s property based on the sale price of the first four parcels in the

subdivision. Testimony before STAB established, however, that Covenant had sold these
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parcels to close friends and families of Covenant’s principals at an artificially high value in

order to establish a higher market value for the subdivision. STAB determined that this

artificially high value did not correctly represent the true value of the property. STAB

accordingly ordered the Department to further reduce Covenant’s 2008 appraisal value by

removing this 35% increase.

¶7     Covenant further challenged the Department’s use of this revised 2008 assessment for

the six-year period ending in 2014. Covenant presented to STAB evidence from an appraiser

that its property value had declined from 2008 to 2010.            Covenant argued that the

Department required Covenant to pay an inequitable share of taxes by assessing Covenant’s

tax liability for the six-year cycle based on the revised 2008 value. Covenant argued that §

15-7-111, MCA, as applied to Covenant, violated Covenant’s right to equal protection.

STAB rejected the claim that § 15-7-111, MCA, impermissibly discriminated against

Covenant. Covenant appealed to the District Court.

¶8     The District Court determined that the Department’s failure to conduct a mid-term

reevaluation of property values subjected taxpayers to disparate treatment. The six-year tax

cycle, according to the District Court, caused some taxpayers to pay a disproportionate share

of taxes due to their over-assessed property value, and other taxpayers to pay less than their

fair share of taxes due to their under-assessed property value. The District Court determined

that the Department had forced Covenant to pay taxes based on a 2008 property value that

exceeded the actual market value of its property in 2010. The District Court further

determined that taxing a residential property owner on a value that exceeded the actual

market value of the property was not rationally related to the legislature’s purpose in drafting
                                              3
§ 15-7-111, MCA. The District Court concluded that § 15-7-111, MCA, violated Covenant’s

right to equal protection. In addition, although § 15-7-111, MCA, contains no such

provision, the District Court directed the Department to conduct a mid-cycle reappraisal of

Covenant’s property for the 2010 tax year.

                                STANDARD OF REVIEW

¶9     We review for correctness a district court’s conclusions of law. Roosevelt v. Montana

Dep’t of Revenue, 1999 MT 30, ¶ 25, 293 Mont. 240, 975 P.2d 295. We presume that all

legislative enactments are constitutional. Roosevelt, ¶ 26. The party challenging the

constitutionality of a statute bears the burden of proving the statute unconstitutional beyond a

reasonable doubt. Roosevelt, ¶ 26.

                                       DISCUSSION

¶10    Whether the District Court correctly determined that § 15-7-111, MCA, violated

Covenant’s right to equal protection?

¶11    To prevail on an equal protection claim, an injured party must first demonstrate that

the law or governmental action at issue discriminates by impermissibly classifying persons

and treating them differently on the basis of that classification. State v. Spina, 1999 MT 113,

¶ 85, 294 Mont. 367, 982 P.2d 421. The Department contends that Covenant has failed to

point to any evidence that the Department treated Covenant differently than similarly

situated taxpayers.

¶12    The Department points out that in all cases where this Court has found an equal

protection violation, the Department had used different standards to value similar property.

The property owners therefore started out the tax-cycle with inequitable property valuations.
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See, e.g., Montana Dep’t of Revenue v. Barron, 245 Mont. 100, 109, 799 P.2d 538 (1990);

Montana Dep’t of Revenue v. Sheehy, 262 Mont. 104, 862 P.2d 1181 (1993) (both

determining that the Department’s use of a ratio factor to increase a property’s actual

appraisal value violated equal protection).

¶13    Covenant does not argue that it started out the six-year tax cycle with an inequitable

valuation of its property. Covenant instead challenges the Department’s use of the 2008

appraisal value for the six-year tax cycle, rather than providing for a mid-cycle reevaluation.

Covenant contends that Roosevelt stands for the proposition that the Department violates a

property owner’s right to equal protection each time the Department assesses property taxes

based on an appraisal value that exceeds the property’s actual value.

¶14    This Court considered the Department’s “phase-in” of a property owner’s decreased

property value in Roosevelt. The Department appraised Roosevelt’s property at $820,597 in

1996. The Department reappraised Roosevelt’s property in 1997 at $658,840. Roosevelt, ¶

5. Rather than assessing Roosevelt’s property tax based on the 1997 property value of

$658,840, the Department phased-in the decrease in value of Roosevelt’s property at 2% per

year. Roosevelt, ¶ 5. Although Roosevelt’s property value had declined by $161,757, the

Department assessed property taxes as though Roosevelt’s property had declined only

$3,235. Roosevelt, ¶ 5. Roosevelt therefore paid property taxes based on a valuation set at

124% of his property’s value. Roosevelt, ¶ 15.

¶15    This Court determined that the 2% phase-in violated Roosevelt’s right to equal

protection. The Montana Constitution requires the Department seasonably to attain equality

in tax treatment of similarly situated property owners. Roosevelt, ¶ 45. The Department
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failed to treat Roosevelt like other similarly situated property owners when it reassessed

Roosevelt’s property value, but did not tax Roosevelt based on this revised property value.

Roosevelt, ¶ 45.

¶16    Like Roosevelt, Covenant contends, the Department has failed to tax Covenant on its

revised property value. Covenant overlooks the fact, however, that Roosevelt began the five-

year tax cycle with an inequitable valuation of his property due to the Department’s use of

the 2% phase-in. Covenant, in contrast, began the six-year tax cycle with a fair property

valuation. Covenant challenges the application of the property value throughout the six-year

tax cycle, rather than the initial property value assessment.

¶17    This Court upheld a five-year appraisal cycle in Patterson v. Department of Revenue,

171 Mont. 168, 557 P.2d 798 (1976) (superseded by statute). The Department applied an

appraisal rotation that allowed counties to reappraise 20% of the properties each year during

the five-year cycle. The Court recognized any cyclical revaluation plan inevitably would

create temporary disparities between individual property valuations. Patterson, 171 Mont. at

176, 557 P.2d at 802. Courts uniformly had upheld such cyclical reevaluations against equal

protection challenges provided that no intentional, systematic, arbitrary, or fraudulent

discrimination was present. Patterson, 171 Mont. at 176, 557 P.2d at 802; see also Larson v.

State and Department of Revenue, 166 Mont. 449, 455, 534 P.2d 854, 857 (1975) (“[W]e are

aware of the abundance of authority which finds no violation of constitutional or statutory

mandates in the temporary inequalities which accompany a cyclical plan of reappraisal.”).

¶18    The Montana Constitution requires only periodic attainment of equality in tax

treatment. Roosevelt, ¶ 45. The equal protection clause “ ‘does not require immediate
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general adjustment on the basis of the latest market developments . . . [T]he constitutional

requirement is the seasonable attainment of a rough equality in tax treatment of similarly

situated property owners.’ ” Roosevelt, ¶ 45, quoting Allegheny Pittsburgh Coal Co. v.

County Com., 288 U.S. 226, 343, 109 S. Ct. 633, 638 (1989). Even similarly situated

taxpayers, for a short time, may pay divergent taxes. Powder River Co. v. State, 2002 MT

259, ¶ 84, 312 Mont. 198, 60 P.3d 357 (discussing Roosevelt). Such a divergence in taxes

does not violate equal protection privileges. Powder River Co., ¶ 84.

¶19    Covenant began the six-year tax cycle in 2008 with tax liability based on 100% of its

property value. The Department treated Covenant like other similarly situated property

owners when it assessed Covenant’s property value. The fact that Covenant’s property may

have declined in value during the six-year cycle, and that Covenant may pay taxes, for some

portion of the remainder of the six-year cycle, on a valuation greater than 100% of its

property value, does not violate Covenant’s right to equal protection. See Powder River Co.,

¶ 84; Patterson, 171 Mont. at 176, 557 P.2d at 802.

¶20    In addition, the Montana Constitution prohibits courts from exercising legislative

power. Ingraham v. Champion Int’l, 243 Mont. 42, 49, 793 P.2d 769, 773 (1990). Montana

courts are not at liberty to amend statutes. Ingraham, 243 Mont. at 49, 793 P.2d at 769. The

District Court effectively inserted a provision into the statute that would require the

Department to conduct a mid-cycle reappraisal on Covenant’s property. The District Court

improperly exercised legislative power.

¶21    Reversed.

                                                 /S/ BRIAN MORRIS
                                             7
We concur:

/S/ PATRICIA COTTER
/S/ BETH BAKER
/S/ MICHAEL E WHEAT
/S/ LAURIE McKINNON




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