Davis v. Property Valuation and Review Division

Davis v. Property Valuation and Review Division  (91-052)

                                ENTRY ORDER

                      SUPREME COURT DOCKET NO. 91-052

                              JUNE TERM, 1991


Norton and Maxine Davis           }          APPEALED FROM:
                                  }
                                  }
     v.                           }          Property Valuation
                                  }            and Review Division
                                  }
Property Valuation                }
and Review Division               }          DOCKET NO. Addison 1990-5


             In the above entitled cause the Clerk will enter:

     Taxpayers enrolled 195 acres of their property in the farmland use-
value program, 32 V.S.A. { 3762, in 1987 and appeal from a decision of the
State Board of Appraisers affirming their liability of $3323.46, incurred
under 32 V.S.A. { 3762(e) when the property was transferred to a foreclosing
bank and consequently withdrawn from the program.  We reverse and remand.

     Under the farmland program, a person who earns at least one-half of his
income from the business of farming may enroll his actively-used agricul-
tural land in the program for a minimum of three years.  32 V.S.A. {{
3762(b)(1), (e).  The State pays local property taxes on assessed value in
excess of use value.  If the owner does not keep the land in the program for
at least three years, he becomes liable to pay a tax of three times the
benefits received for the preceding year on the affected portion of the
land.  { 3762(e).  Only actively used agricultural lands owned by a farmer
may be enrolled in the farmland program.  32 V.S.A. {{ 3762(a), (b)(2), (d).

     Taxpayers put 195 acres of their property into the program on April 1,
1987, and in August 1989 the Vermont Federal Bank foreclosed on the
property.  Because of the resultant conveyance to the bank, taxpayers
necessarily failed to keep the property in the program for three years.
Following foreclosure the director of property valuation and review removed
the parcel from the program and notified taxpayers of their liability to pay
the amount triggered by withdrawal.  Taxpayers appealed to the State Board
of Appraisers, which affirmed the director's action.  The present appeal
followed.

     Taxpayers argue that they should be relieved of liability because they
transferred the land as a result of a foreclosure, and did not voluntarily
withdraw from the program.  In opposition, the State relies on the plain
meaning of { 3762(e), which states in relevant part:

            Farmland enrolled under this section shall be enrolled
          for a minimum of three years and shall remain enrolled
          thereafter until withdrawn or converted. . . .  If
          farmland enrolled under this section is converted or
          withdrawn within the initial three-year enrollment
          period, the landowner shall be liable to pay to the
          commissioner . . . an amount equal to three times the
          property tax benefits received by the owner for the
          preceding year . . . .

After foreclosure, the land remained in agriculture but was owned by the
foreclosing bank, which did not qualify as a farmer.

     Taxpayers argue that their transfer to the bank was involuntary and
should not have triggered the recapture provision.  The State argues that
the literal application of the statute, which speaks of property
"withdrawn," mandates the imposition of treble damages.

     The State's position is that, under the "plain meaning" of the statute,
treble-damage recapture is triggered by withdrawal in fact of land in the
program, regardless of the reason for the withdrawal.  We strongly favor
the "plain meaning" doctrine as one that generally supports the intention of
the Legislature.  In Dykstra v. Property Valuation and Review Division, 2
Vt. L.W. 97, 97-98 (March 22, 1991), we held that conveyance to nonfarmers
by farmers who had enrolled property in the Working Farm Tax Abatement
Program (32 V.S.A. {{ 3764-3775) automatically converted the property to
nonfarm use under a literal reading of { 3764(2)(B), and that this "plain
meaning" result was not constitutionally irrational.

     But the "plain meaning" rule does not resolve the present issue so
easily.  The State contends that the word "withdrawn" in { 3762(e) includes
involuntary withdrawals, including foreclosures that could not be avoided
by farmer-enrollees.  But in the context of a treble-damage provision, (FN1)
taxpayers' argument that "withdrawn" implies some volitional action by the
enrollees makes sense.  Treble damage provisions, whether or not considered
penalties,(FN2) are intended to discourage violation of statutory or contractual
obligations.  See United States v. Redovan, 656 F. Supp. 121 (E.D. Pa. 1986)
(government prevailed in its action to recover damages from physician who
had not performed obligated service after participating in federal scholar-
ship program).  The court held that defendant's "refusal to live up to his
obligation subverts the lauditory (sic) goal of curing the maldistribution
of medical care in the nation. . . .  [This Court is] unable to conclude
that the liquidated damage provision is unreasonable or disproportionate to
the harm suffered because of [defendant's] breach."  Id. at 128; see also
Hoffmann v. Clark, 69 Ill. 2d 402, 429, 372 N.E.2d 74, 87 (1977) (penalty is
in nature of punishment for nonperformance of act or performance of unlawful
act and involves idea of punishment).
     On the other hand, recapture provisions as a tax law tool are generally
designed to recoup benefits that would be unjustly retained because of the
failure of the originating conditions to the benefits.  See Internal Revenue
Code { 42(j)(4)(E) (West Supp. 1991) (limitation on federal low-income
housing credit recapture by reason of casualty loss).

     The Board equates any foreclosure of enrolled property that transfers
title to the nonfarmer mortgagee with voluntary withdrawal from the program.
Its rationale would allow imposition of treble damages even if elimination
of property from the program is triggered by an event beyond the control of
the taxpayer and not planned or intended by the taxpayer.  This is not the
"plain meaning" of the statute.  We hold that the treble-damage provision of
{ 3762 is directed at intentional withdrawal from the program and that the
Board must make such finding before it applies the section to a taxpayer who
asserts that the withdrawal of property from the program was involuntary.
Our holding does not bar the Department from recovering an amount equal to
the actual tax savings to the taxpayer, and interest thereon, whatever the
circumstances of the withdrawal, i.e., whether it was voluntary or not.

     We do not conclude that every foreclosure is beyond the control of the
mortgagor, and we specifically decline to so conclude in the present case.
Were we so to hold, the door would be open to solvent landowners to default
on certain mortgage obligations and benefit from the transaction in some
instances.  We do not intend our holding to open the door to creative tax
planning strategies.  Upon remand the Board will be able to determine the
circumstances of the present foreclosure and rule appropriately.

     But where a farmer enters the program in good faith and later loses the
property to creditors in good faith and under circumstances where there are
no practicable alternatives that would allow retention of title, the Legis-
lature could not have intended to impose treble damages.  Recovery is
limited to the aggregate amount of prior tax benefit to the farmer, plus
interest.

     Reversed and remanded for further proceedings in accordance with this
opinion.


                                  BY THE COURT:


                                  _______________________________________
                                  Frederic W. Allen, Chief Justice


                                  _______________________________________
                                  Ernest W. Gibson III, Associate Justice

[ ] Publish
                                  _______________________________________
[ ] Do Not Publish                Denise R. Johnson, Associate Justice





FN1.    The recapture provision applied in Dykstra, 32 V.S.A. { 3774,
requires repayment to the tax commissioner of payments made by the State to
the municipality, but does not include a penalty.

FN2.    See Priebe & Sons, Inc. v. United States, 332 U.S. 407 (1947);
United States ex rel. Marcus v. Hess, 317 U.S. 537 (1943);  Lehrman v. Gulf
Oil Corp., 464 F.2d 26 (5th Cir.), cert. denied, 409 U.S. 1077 (1972).