Supreme Court Sides With City, Rules Against Developers on Tax Abatement

Reprinted with permission from The Legal Intelligencer


By Ruth Bryna Cohen
Of the Legal Staff

In a consolidated case this week, the Supreme Court told certain developers that a statute entitling them to tax abatement is not an unlimited wellspring.

The four Philadelphia developers who won a request for continued tax abatement at the Commonwealth Court level - Lincoln Philadelphia Real Estate Associates I and II, Nine Penn Center Associates and Philadelphia Airport Business Center Limited Partnership - suffered the reversal of that decision yesterday in Lincoln Philadelphia Realty Associates I v. The Board of Revision of Taxes of the City and County of Philadelphia and the School District of Philadelphia.

Chief Justice John P. Flaherty and Justice Ronald D. Castille both dissented from the majority opinion written by Justice Thomas Saylor. Justice Sandra Schultz Newman did not participate in the consideration or decision of the case.

Mark A. Aronchick of Hangley Aronchick Segal & Pudlin led a team that represented the city in the appeal.

The taxpayer dispute arose from an ambiguity in the language of The Local Economic Revitalization Tax Assistance Act, or LERTA, enacted in 1977. LERTA entitled developers to tax abatement for qualifying properties they built in Philadelphia. Under LERTA and its corresponding local ordinance, the local tax board has authority to grant exemptions from taxes and to determine their amount and duration, up to 10 years, as well as the geographic boundaries to which the tax relief applies. In the late 1980s, all four taxpayers applied for LERTA exemption for tax relief at well-known sites in the city: Lincoln I and II developed residential rental units at 4000 and 4040 Presidential Blvd., Nine Penn Center developed the Mellon Bank Center, and Philadelphia Airport developed properties on Island and Bartram avenues.

The tax board notified each taxpayer that its application for exemption was accepted. The exemption would begin, the letters stated, in the year following the grant of the respective building permits. The letters also specified the actual years the exemptions would apply. The taxpayers all accepted the terms without complaint, according to the opinion. Their combined tax savings amounted to $12,644,163. In October 1992, however, the taxpayers filed appeals challenging the board's establishment of the starting and ending dates of the LERTA exemption periods. Their appeals followed a Commonwealth Court decision, MacDonald, Illig, Jones & Britton v. Erie County Bd. Of Assessment Appeals, in which the court held local taxing authorities didn't have the power to establish exemption periods that differed from those specified by LERTA.

The essence of the developers' argument was that, regardless of the tax abatement they had already enjoyed, they were now entitled to have those exemptions calculated in accordance with the holding of MacDonald. MacDonald held that the abatement would commence the year after completion of a building project, not the year after the granting of a permit.

But the taxpayers were not content to shift the time period from one set of years to another. Instead, they wanted to extend the time period of their exemptions, starting at the completion of the projects and running for an additional five years. If the taxpayers got what they wanted, the $12,644,163 would mushroom to approximately $22 million, including interest, according to the opinion.

The case went to the court of common pleas and was remanded to the tax board for a determination of what relief, if any, was owed to the taxpayers; the board determined that amount was zero. Returned to the court of common pleas, the case was assigned to Judge Stephen Levin.

According to the opinion, Levin made a "crucial distinction" between the MacDonald case and Lincoln, stating that whereas the MacDonald plaintiffs challenged an assessment as soon as it was made, the Lincoln plaintiffs did nothing. Levin said the Lincoln plaintiffs waived their right to take advantage of the MacDonald decision because they had slept on their rights.

The developers appealed to the Commonwealth Court, which reversed Levin's decision "in virtually all respects." In a two-to-one decision Aronchick called "stunning and surprising," the court said there had been no waiver and that the plaintiffs were entitled to take advantage of the MacDonald ruling. The Commonwealth Court decision meant that each of the taxpayers was entitled to have its five-year exemption reinstated as if it commenced the year after completion of building.

"The financial significance of the Commonwealth Court's decision may be seen in its effect on the fortunes of Nine Penn Center, the largest taxpayer," wrote Saylor. Whereas Nine Penn would previously have been entitled to a $10 million tax cut, the Commonwealth Court had handed the taxpayer $26 million in abatements, he said.

Judge Bonnie Brigance Leadbetter had dissented from the Commonwealth Court majority, stating there was "no basis in law or equity" to give the taxpayers such a windfall. The city appealed the ruling to the Supreme Court.

Supreme Court Ruling

The court immediately dispensed with the taxpayers' claims that the tax board was "deprived of an opportunity" to consider their argument, as well as that they were denied procedural due process because of the close relationship between the city and the board.

"By requiring that an issue be considered waived if raised for the first time on appeal, we ensure that the trial court or agency that initially rules on such matters has an opportunity to consider the issue," the court said. "Here, it is apparent ... the Board did not lack such opportunity."

"Taxpayers also ... contend that the proceedings before the Board were, in essence, rigged against them. ... If the Board were the factfinder of last resort ... taxpayers' arguments might warrant closer scrutiny," Saylor said. The determination to be reviewed on appeal was not the "allegedly compromised Board," he said, "but [rather] that of the independent and impartial trial court." Saylor said the taxpayers failed to consider the significance of the court's de novo review.

Saylor said the court allowed the appeal primarily to consider whether the Commonwealth Court erred "in allowing taxpayers to challenge the validity of the tax abatements that they had requested, received, accepted and enjoyed."

The city argued that if the taxpayers were unhappy with the board's initial decision, they should have appealed within 30 days of their notice by letter.

The taxpayers said they weren't aggrieved at that point. It was only when their properties were returned to the tax rolls, they said, that they had "reason and standing" to challenge the board. But the court found that reasoning to be flawed.

"If ... as taxpayers assert, they were satisfied with the exemptions as initially awarded, they would have had no reason to be dissatisfied with the eventual return of their properties to the tax rolls. ... Given the limited nature of the exemptions, taxpayers cannot reasonably have expected that the exemptions would continue indefinitely or that they would be entitled to a second such exemption," Saylor wrote.

But Saylor said there was a more likely reason the taxpayers felt "aggrieved": the fact that the law, as it existed after the MacDonald decision, would have entitled them to a tax