THE NEW YORK SUSQUEHANNA & WESTERN RAILWAY CORPORATION v. STATE OF NEW JERSEY, DIRECTOR, DIVISION OF TAXATION

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-2506-05T12506-05T1

THE NEW YORK SUSQUEHANNA &

WESTERN RAILWAY CORPORATION,

Plaintiff-Respondent,

v.

STATE OF NEW JERSEY, DIRECTOR,

DIVISION OF TAXATION,

Defendant-Appellant.

________________________________________

 

Argued January 17, 2007 - Decided May 24, 2007

Before Judges Lisa, Holston, Jr. and Grall.

On appeal from the Tax Court of New Jersey,

Docket No. 3468-2003.

Julian F. Gorelli, Deputy Attorney General,

argued the cause for appellant (Stuart

Rabner, Attorney General, attorney; Patrick

DeAlmeida, Assistant Attorney General, of

counsel; Mr. Gorelli, on the brief).

John K. Fiorilla argued the cause for respondent (Capehart & Scatchard, attorneys; Mr. Fiorilla, of counsel; Mary Ellen E. Schetter, on the brief).

PER CURIAM

Defendant, the Director of the Division of Taxation (Director), appeals from a final judgment of the Tax Court whose opinion is published at New York Susquehanna & Western Railroad Corp. v. Director, Division of Taxation, 22 N.J. Tax 501 (Tax 2005) (NYSWRC). The judgment is in favor of plaintiff, NYSWRC. Pursuant to N.J.S.A. 54:29A-31, NYSWRC filed a complaint challenging additional assessments for tax years 2001 and 2002. NYSWRC alleged that the Director imposed the additional assessments after the parties entered into closing agreements settling NYSWRC's tax liability for 2001 and 2002. Following a trial, the Tax Court rescinded the additional assessments on the ground that the closing agreements resolved NYSWRC's liability for the years in question and were entitled to finality.

We conclude that Judge Menyuk's factual findings are supported by the record and that her evaluation of the facts and their implications is not "plainly arbitrary" or "wide of the mark." Yilmaz, Inc. v. Dir., Div. of Taxation, 390 N.J. Super. 435, 442-43 (App. Div. 2007); C.B. Snyder Realty, Inc. v. BMW of N. Am., Inc., 233 N.J. Super. 65, 69 (App. Div.), certif. denied, 117 N.J. 165 (1989). Substantially for the reasons stated in Judge Menyuk's published opinion, NYSWRC, supra, as amplified and qualified herein, we affirm.

The procedural history and evidence are set forth in Judge Menyuk's opinion. The assessments at issue are on NYSWRC's Class II railroad property, which includes real property and improvements "other than main stem and facilities used in passenger service," N.J.S.A. 54:29A-17. The annual tax on Class II property is based on the value of the property and improvements as of January 1 of the preceding tax year. Ibid. For example, the tax for 2001 would be based on the value of the railroad's Class II property on January 1, 2000. This dispute centers on tax assessed for improvements to NYSWRC's real property - pavement, lighting and fencing.

The annual valuation process commences with reports on holdings of Class II property that railroads must submit in March of the preceding year. N.J.S.A. 54:29A-44. The report NYSWRC filed in March 2000 reflected improvements prior to January 1 of that year, but did not include the pavement, lighting and fencing at issue here. NYSWRC, supra, 22 N.J. Tax at 512. Judge Menyuk found, on the basis of the testimony of NYSWRC's representative, that NYSWRC's failure to report these improvements was an oversight and not a knowing or intentional omission. Id. at 515-16, 520.

Upon receipt of reports required by N.J.S.A. 54:29A-44, the Director's staff reviews the information and may inspect the property. N.J.S.A. 54:29A-63. In November and December 2000, a member of the Director's staff, who reviewed NYSWRC's returns, inspected the property. She and members of her inspection team noted that NYSWRC failed to report paving and lighting and understated the quantity of fencing it had installed. NYSWRC, supra, 22 N.J. Tax at 512.

Pursuant to N.J.S.A. 54:29A-17, by November of each year the Director must provide a detailed statement of the taxpayer's Class II property and its value. "These detailed statements are generally known as 'bill books.'" NYSWRC, supra, 22 N.J. Tax at 505. Due to a problem with the Division's computerized records, the Director's bill book was not corrected to reflect the additional improvements noted by the Director's staff. Id. at 512-13, 520-21.

Pursuant to N.J.S.A. 54:29A-18.1, upon receipt of the Director's statement, the taxpayer may request a conference to discuss the Director's itemization and valuation of its Class II property. In this case, because of the problems with the computerized records, the Director did not notify NYSWRC about the improvements its inspectors had discovered until October 29, 2002. NYSWRC, supra, 22 N.J. Tax at 512-13, 520-21.

In the interim, between December 2000 and October 29, 2002, the Director and NYSWRC entered into closing agreements addressing the tax on NYSWRC's Class II property for 2001 and 2002. The dates of the closing agreements, as stated therein, are June 1, 2001, for tax year 2001, and April 1, 2002, for tax year 2002. Closing agreements of this sort are authorized by N.J.S.A. 54:53-1, which permits agreements related to tax liability, for a period ending prior or subsequent to the agreement, when the Director determines that the "State will sustain no disadvantage." Closing agreements may address all or some issues relevant to the taxpayer's liability. Ibid. On issues of liability that are addressed, the agreements are "final and conclusive," "except upon a showing of fraud or malfeasance, or misrepresentation of fact." N.J.S.A. 54:53-4.

Section one of both the 2001 and 2002 closing agreements provides:

The true value of each tax parcel of [NYSWRC's] Class II property for [the tax year covered] shall be based on the attached schedule of that parcel's value for Tax Year 1996, subject to adjustments made pursuant to Section 2 [two] of this Agreement.

[Emphasis added.]

Neither the 2001 nor 2002 schedule that are referenced and incorporated in Section one of the respective agreements include the paving, lighting and fencing at issue here.

Section two of both agreements, which provides for adjustments in value, was intended to be written as follows:

Tax parcels in the bill books as of January 1 of the year preceding the agreement, which cease to be NYSWRC's Class II property during the term of this Agreement shall be removed from the bill book at their tax year 1996 value, as increased by the percentages as set forth in the attached schedules. Tax parcels or improvements which are added subsequent to January 1 of the year preceding the agreement and cease to be NYSWRC's Class II property during the term of this agreement shall be removed from the bill book at the same value as they were entered into the bill book.

[Emphasis added.]

On October 29, 2002, the Director gave notice of additional tax for 2002, based on the paving, lighting and fencing observed by staff members in December 2000; the additional tax assessed was approximately $69,000. NYSWRC, supra, 22 N.J. Tax at 513. On December 15, 2003, the Director assessed additional tax in the same approximate amount for tax year 2001. Ibid.

There is no dispute that the Director has statutory authority to assess Class II property that has been "omitted from assessment by failure of the taxpayer to include it in a return of information . . . ." N.J.S.A. 54:29A-25b (emphasis added). This dispute centers on whether the Director could exercise that authority after the closing agreements - either because reassessment was consistent with the terms of the 2001 and 2002 agreements or because N.J.S.A. 54:53-4 permits reopening of a closing agreement upon a showing of "misrepresentation of fact."

The Director's first argument is based on Section two of the closing agreements. Judge Menyuk concluded that, by its terms, Section two is irrelevant to this dispute because it addresses nothing more than the value at which property no longer held by NYSWRC will be removed from the Director's bill book. NYSWRC, supra, 22 N.J. Tax at 522. We agree that Section two of the agreement has no relevance to the question whether the Director may assess property or improvements that were in existence but omitted from the schedules incorporated in the 2001 and 2002 closing agreements.

There is only one reference to "added" property in Section two, and that reference is made in the context of setting the value that will be deducted from the bill book when NYSWRC ceases to hold property listed in the bill book. Courts construing closing agreements, like courts construing other contracts, begin with the terms of the agreement and give them effect where the meaning is plain. See GNOC, Corp. v. Dir., Div. of Taxation, 328 N.J. Super. 467, 476 (App. Div. 2000), aff'd as modified on other grounds, 167 N.J. 62 (2001). Section two, at most, suggests that property and improvements may be added to the Director's bill book under some circumstances, but it does not address that issue.

Despite the limited import of the terms of Section two, the Director contends that Judge Menyuk's interpretation of the provision is erroneous. He argues, as he did below, that the agreement "expressly provides for, and contemplates, increases and decreases in assessment as additional property comes in and out of railroad use . . . ." On that ground he claims that property "may be added to [NYSWRC's] assessment where, as here, the property comes into railroad use during the years covered by the [a]greements."

The Director's argument overlooks the source and purpose of Section two. The parties agree that Section two is based on Section seven of their 1999 closing agreement. NYSWRC, supra, 22 N.J. Tax at 506-07, 511. The 1999 agreement covered five tax years and temporarily resolved a dispute about the methodology for valuation of Class II property. Id. at 505-10 (discussing the dispute, the negotiations and the resolution reached). The parties resolved that dispute by simply agreeing to use the value assigned to Class II property for the 1996 tax year and to adjust that value upward annually based on a set percentage increase. Id. at 507. The 2001 and 2002 closing agreements each extend this temporary solution to the problem of valuation methodology for one year. Id. at 509.

Viewed in light of the circumstances that these agreements were designed to address, the purpose of Section two, formerly Section seven, is apparent. Because the parties agreed not to re-value all Class II property on an annual basis, it was important for them to determine how they would reduce the value of NYSWRC's total holdings if certain Class II property were sold or ceased to be used for railroad purposes. With respect to property subject to the automatic adjustment, there were at least three options for calculating value on the date of removal: 1) actual present value; 2) the value assigned for tax year 1996; or 3) the value assigned for tax year 1996 plus any value added through the automatic annual increase. See id. at 510. In Section two (formerly Section seven) the parties agreed to deduct the value assigned for tax year 1996 plus any automatic increase. Id. at 510-11, 514. With respect to property not subject to the automatic increase, the parties simply agreed to remove that property at whatever value was assigned when added. Ibid. In the context of a five-year agreement, the importance of the provision is apparent. In the context of the one-year agreements, the provision has relevance with respect to tax liability for any subsequent year in which the parties agree to extend the temporary solution to the dispute about valuation. Under these circumstances, we cannot conclude that Judge Menyuk erred in concluding that Section two has a limited purpose, which is to address the problem of reducing the value of NYSWRC's total Class II property when NYSWRC ceases to hold property. See id. at 521-22; N.J.S.A. 54:29A-17.

There is another reason to reject the Director's invitation to construe Section two as intended to permit the Director to change NYSWRC's Class II taxes during the terms of these one-year agreements when "the property comes into railroad use during the years covered by the [a]greements." The Director's interpretation is in conflict with N.J.S.A. 54:29A-17. N.J.S.A. 54:29A-17 requires the Director to

determine the true value, as of the preceding January 1, of all Class II property used for railroad purposes in this State. There shall be excluded, however, any Class II property of a railroad which passed out of railroad ownership subsequent to January 1 and before October 1 and not used for railroad purposes on October 1.

Thus, pursuant to N.J.S.A. 54:29A-17 and contrary to the Director's claim, "additional property [that] comes in and out of railroad use," during a tax year cannot change the assessment for that year. It is relevant to the assessment for the next year. See N.J.S.A. 54:29A-17.

Judge Menyuk's reading of Section two and our reading of N.J.S.A. 54:29A-17 are consistent with this court's decision in Consolidated Rail Corp. v. Director, Division of Taxation, 19 N.J. Tax 378, 388-89 (App. Div. 2001). That case demonstrates that the Director's decisions about taxing Class II property have an impact on municipal tax that militates against an agreement that is inconsistent with N.J.S.A. 54:29A-17.

In Consolidated Rail we considered the Director's ability to tax, in 1997, a building that was not ready for use by the railroad until August 14, 1996. 19 N.J. Tax at 381. On January 1, 1996, the railroad was still in the process of erecting that building, which was then nothing more than the "skeleton of the structure." Ibid. Because N.J.S.A. 54:29A-17 requires the Director to value Class II property as of January 1 of the preceding tax year and because "[t]here is no 'added assessment' provision in the Act that would allow the Director to further assess the property after the January 1 valuation date," we determined that the Director would be required to base the Class II tax for 1997 on its value as of January 1, 1996, when it was only partially complete. Id. at 388. We held that it was not arbitrary for the Director to decline to tax the building as Class II property and permit the municipality to tax the structure for tax year 1997. Id. at 389-90. We decline to conclude that the parties intended to deviate from the statutory dates for valuing Class II property.

The question that remains is whether the Director has statutory authority to increase NYSWRC's assessment by supplementing the schedule of Class II property incorporated in the agreement to include property that was omitted from those schedules and known to the Director. NYSWRC, supra, 22 N.J. Tax at 521-23.

The Director argues that the authority to re-open these closing agreements is found in N.J.S.A. 54:53-4, which governs closing agreements. He contends that the 2001 and 2002 closing agreements can be re-opened because N.J.S.A. 54:53-4 does not afford finality to a closing agreement when there is a "showing of fraud or malfeasance, or misrepresentation of fact." In short, the Director's argument here is based on his disagreement with Judge Menyuk's interpretation of the facts.

Judge Menyuk found that these improvements were not taxed because the Director's staff members, who inspected the property pursuant to N.J.S.A. 54:29A-63, failed to include the improvements they found in the detailed statement of NYSWRC's holdings, which the Director was required to provide to NYSWRC pursuant to N.J.S.A. 54:29A-17. The judge concluded that if the Director's staff had provided the statement as required, the improvements, which were inadvertently omitted by NYSWRC and known to the Director, could have been added to the schedules that were incorporated in the 2001 and 2002 closing agreements. See NYSWRC, supra, 22 N.J. Tax at 504-05, 520-23. On that basis, she concluded that there was no "fraud, malfeasance, or misrepresentation of fact by [NYSWRC] that would upset the finality and conclusiveness of the 2001 and 2002" closing agreements. Id. at 521.

We defer to Judge Menyuk's factual findings on the Director's failure to establish misstatement or fraud. The findings are supported by the record and based, in part, on the judge's assessment of the credibility of the witnesses and her expertise in this area of the law. See Yilmaz, supra, 390 N.J. Super. at 443. In doing so, we do not hold or suggest that an unintentional omission of information required to be reported cannot, as a matter of law, amount to a "misstatement" within the meaning of N.J.S.A. 54:53-4. We simply hold that Judge Menyuk was not plainly wrong in concluding that under the peculiar circumstances of this case in which the Director but not the taxpayer was aware that NYSWRC's report was incomplete, the omission did not warrant an opening of the closing agreements to permit an additional assessment of tax. Even in the context of equitable fraud, where an innocent misstatement may afford grounds to avoid a contract, a showing of reasonable reliance is required. See Jewish Ctr. of Sussex County v. Whale, 86 N.J. 619, 625 (1981).

The Director presents an additional argument based on his statutory authority to alter a tax when the taxpayer did not list the property on its return. See N.J.S.A. 54:29A-25b. If N.J.S.A. 54:29A-25b applies when the parties have executed a closing agreement, a matter we need not decide here, the Director's argument overlooks the terms of N.J.S.A. 54:29A-25b. The Director's authority under this statute applies when an improvement was not assessed "by failure of the taxpayer to include it in a return of information . . . ." N.J.S.A. 54:29A-25b (emphasis added). Based on Judge Menyuk's factual findings, these improvements went untaxed not "by failure of the taxpayer to include [the improvements] in a return of information," but by failure of the Director to follow the statutory procedures and add improvements discovered by his inspectors before executing closing agreements that incorporated incomplete schedules. See NYSWRC, supra, 22 N.J. Tax. at 520-23.

The Director makes two additional arguments based on his disagreement with the judge's factual findings. He asserts that the judge improperly rejected evidence that tended to show that the 2002 agreement was signed after the Director issued the additional assessments for 2002. Resolving conflicts in evidence concerning duplicate agreements for 2002, the judge found that the 2002 agreement was finalized and signed "months before" the notice of additional assessment. Id. at 519. The Director also contends that the judge failed to appreciate the significance of correspondence and discussions between the parties that he views as indicating a mutual understanding that the tax would be adjusted based on changes in the schedule incorporated in the agreement. After considering that evidence and the relevant testimony, the judge found nothing that would permit her to conclude that NYSWRC "had knowledge of [the Director's] intention of making additional assessments . . . ." Id. at 518. These factual findings are neither wholly unsupported by or inconsistent with the evidence. Accordingly, we accept them.

Finally, the Director claims that NYSWRC's effort to obtain the benefit of its closing agreements is the equivalent of a claim for a tax exemption and, on that basis, subject to special rules requiring heightened proof of eligibility. That claim lacks sufficient merit to warrant discussion in a written decision. R. 2:11-3(e)(1)(E).

Affirmed.

 

Although Section two, as typed, was not readable, the parties do not dispute that Section two was intended to be drafted as set forth above. NYSWRC, supra, 22 N.J. Tax at 513-14.

The language of Section two is based on Section seven of a 1999 closing agreement that covered tax years 1995 through 2000. See id. at 508, 510, 514, 521-22 (discussing the origins of Section two and the history of negotiations leading up to the 1999 closing agreement).

The Director's claim that Judge's Menyuk's conclusion is inconsistent with her factual findings is based on the Director's misreading of her opinion. As we understand the opinion, the judge did not hold that Section two had no relevance to improvements added after January 1. She concluded that it did not have the meaning the Director suggested.

(continued)

(continued)

16

A-2506-05T1

May 24, 2007