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Volume 6 - Opinions of Counsel SBEA No. 9

Opinions of Counsel index

School districts (tax limits) (refund of taxes paid in excess of limitation) - New York State Const. Art. VIII, § 10; Education Law, §§ 2501 et seq.; Real Property Tax Law, §§ 550-559:

Taxpayers who paid taxes to jurisdictions which levied in excess of their constitutional tax limit may be entitled to a refund if they paid their taxes under “appropriate protest” and they obtain a court order.

In light of the 1978 decision of the Court of Appeals in the case entitled Bethlehem Steel Corp. v. Board of Education of the City School District of Lackawanna, 44 N.Y.2d 831, 378 N.E.2d 115, 406 N.Y.S.2d 752, officials in a number of city school districts have asked us to explain what liability attaches, if any, to their districts to pay refunds, if taxes levied prior to the date of the foregoing decision were in excess of the applicable constitutional limitation.

First, it is to be noted that consolidated with the Bethlehem Steel case were two other actions in which the city school district of the City of Geneva and the City of Rochester were respondents. In each instance, property-owning taxpayers initiated declaratory judgment actions seeking to recover alleged overpayments of taxes to these taxing jurisdictions. The basis of the actions was the claim that pension, social security and health care costs had been illegally excluded when calculating the tax limits of the respective districts. (The exclusions had been authorized by chapters 484 and 349, as amended by chapter 485, of the Laws of 1976.) This meant, according to the petitioners, that they had paid taxes in excess of the constitutional tax limitation.

Both the Appellate Division and the Court of Appeals concluded that the challenged statutes were unconstitutional and that applicable constitutional tax limits had therefore been exceeded. The Court of Appeals, however, reversed the determination of the Appellate Division to the extent that the latter court had held that the plaintiffs in the two consolidated actions, namely in Jones v. City School District of Geneva and Waldert v. City of Rochester, were not entitled to repayment of taxes levied and paid in excess of the constitutional tax limitation. The Court of Appeals added that: “Similarly, we believe that the plaintiff in Bethlehem Steel Corp. v. Board of Education is entitled to establish its rights to repayment of real property taxes paid in excess of the constitutional limitation if such taxes were paid under appropriate protest.” (emphasis added)

This brings us now directly to the question of whether and to what extent city school districts and cities which levied in excess of their constitutional tax limits, albeit in reliance on statutes subsequently declared unconstitutional, are responsible for refunds of taxes. In any claim for a refund of taxes, an applicant must show that the taxing jurisdiction has a legal liability to make the payment. This follows from Article VIII, section 1 of the State Constitution which provides that “no county, city, town or school district shall give or loan any money or property to or in aid of any individual or private corporation or association. . . .” In construing this provision, the Court of Appeals has declared that there must be a legal obligation on the part of a governmental body before public funds may be paid to an individual (see, Antonopoulou v. Beame, 32 N.Y.2d 128, 296 N.E.2d 247, 343 N.Y.S.2d 346, and cases cited therein).

Real property tax refunds may be obtained either administratively or judicially. The authority and procedures for administrative refunds are set forth in the “correction of errors law”, i.e., Title 3 of Article 5 of the Real Property Tax Law. However, refunds may be obtained pursuant to this title only for certain types of errors, which are narrowly defined in section 550 of the Real Property Tax Law. Specifically, the error must be one defined as either a “clerical error,” an “error in essential fact,” or an “unlawful entry.” An examination of these definitions reveals not one which is applicable to real property taxes levied in excess of the constitutional tax limitation. The only possible relief, therefore, would be judicial in nature.

In considering whether a judicial remedy lies, a distinction must be drawn between the named petitioners in the Bethlehem Steel and associated cases and all other property owning taxpayers, whether their property be located in one of the three jurisdictions subject to court order or in any other city or city school district. In addition, regardless of into which of the foregoing categories a property owner falls, a line must be drawn between those who paid “under appropriate protest” and those who did not.

First, the named petitioners in these cases are clearly entitled to the judicially mandated relief, provided they satisfy the “appropriate protest” requirement injected by the Court of Appeals. Other property owners who have paid taxes which were part of a levy in excess of the constitutional tax limit may not, however, simply rely on the Bethlehem Steel decision to compel an administrative refund of any excess payment. The order in each of the consolidated actions was directed only to the named respondents and granted specific relief only to the petitioners in each action. In the absence of such a court order, a city or city school district would have no legal duty to pay any refund of taxes. As previously discussed, without a legal liability to pay, a municipal corporation is prohibited by the Constitution from making payment.

Therefore, other property owners seeking relief similar to that granted in Bethlehem Steel would have to initiate a similar judicial proceeding for review. Lower courts would be bound by the doctrine of stare decisis to follow the mandate of the Court of Appeals. (See, e.g., S.J. Groves and Sons Co. v. State, 24 A.D.2d 829, 264 N.Y.S.2d 198; People v. Bneses, 91 Misc.2d 625, 398 N.Y.S.2d 507.)

This still leaves us with the most troublesome aspect of this Court of Appeals decision: namely, what it meant in requiring “[payment] under appropriate protest.” Nothing further was said in the opinion to clarify the meaning of this phrase, nor is the case law in this State on this subject without doubt.

Initially, we note that at one time payment “under protest” was apparently considered a prerequisite even for administrative refunds of taxes (see, discussion in 4 Op.Counsel SBEA No. 107). Since the restructuring of the “correction of errors law” in 1974 (L.1974, c.177), however, there is no longer any requirement that a payment be made under protest if the error is of the type defined in section 550. As previously noted, the definitions in section 550 do not apply to the facts at hand. Therefore, we must examine the question of payment under protest and its relationship to judicially ordered relief.

The general rule in New York State is that taxes voluntarily paid cannot be refunded unless they were paid under protest (see, Mercury Machine Importing Corp. v. City of New York, 3 N.Y.2d 418, 144 N.E.2d 400, 165 N.Y.S.2d 517, and cases cited therein). This is the rule even though the taxpayer would have had grounds for establishing a lesser tax liability had he attempted to exercise his rights in a timely fashion.

The rationale for requiring payment under protest before a refund of taxes may be granted is well stated in Mercury Machine Importing Corp. v. City of New York, supra. There, the Court of Appeals noted as follows:

The practical reason for holding payments of illegal taxes without protest to be voluntary, in instances other than duress or mistake of fact, stems from problems of municipal finance. Where protest has been interposed, the municipality is notified that it may be obliged to refund the taxes and is required to be prepared to meet that contingency. If no protest has been lodged, it is generally assumed that taxes paid can be retained to meet authorized public expenditures, and financial provisions not made for contingent funds. Such amounts may be considerable in case of highly productive taxes paid without protest, that are eventually held to have been levied illegally. (3 N.Y.2d at 426)

Again, however, the issue is unclear because of confusion surrounding the meaning of the word “voluntarily.” Several cases have suggested that payment under duress or coercion need not be expressly stated but rather may be implied given the appropriate circumstances.

For example, in Aetna Insurance Co. v. The Mayor, 153 N.Y. 331, 47 N.E. 593. the Court of Appeals concluded that there was payment under protest where “the payment was necessary to relieve the plaintiffs property from the lien to which it was made subject by the wrongful acts of the defendant’s officers, unless it instituted a proceeding to establish invalidity of the tax” (id. at 340). The rule has also been stated as follows: “When we speak of duress in this connection, it does not necessarily mean personal fear or the use of force, but rather that pressure of circumstances which compels the will of man to yield to an exaction or a payment to release his property from some illegal hold upon it” (Adrico Realty Corp. v. City of New York, 250 N.Y. 29 at 33, 164 N.E. 732). And in a similar vein, one court has noted that “payment of the tax in order to avoid penalties or free property from a lien is not a voluntary payment even though not accompanied by words of protest” (Corporate Properties, Inc. v. City of New York, 175 Misc. 306, 22 N.Y.S.2d 539 at 541, aff’d, 262 App. Div. 722, 28 N.Y.S.2d 710, app.den., 262 App. Div. 846, 29 N.Y.S.2d 145).

In light of this case law, what did the Court of Appeals mean in theBethlehem Steel decision in reciting the words “[payment] under appropriate protest?” On the one hand, we recognize that a lien for real property taxes attaches at the beginning of the real property tax collection process. For example, in the case of towns and counties subject to the provisions of the Real Property Tax Law, town and county taxes become a lien-and are first due-on January 1 each year. Said taxes remain in lien until paid (Real Property Tax Law, § 902). Moreover, continued failure to pay the tax will ultimately result in the loss of title to one’s property (Id. Articles 10 and 11).

Thus, relying on the rationale of Aetna Insurance Co. and similar cases, one might conclude that any payment of a real property tax constitutes payment under protest given the immediacy of the lien and the ramifications for failure to pay. In our opinion, this rationale, however, makes the words “under protest” mere surplusage. That is, should simple payment of a real property tax be considered as one made under protest (for the reasons suggested in the foregoing cases), then the words “under protest” were unnecessary to the Bethlehem Steel opinion. We do not believe the Court, in inserting this phrase, was indulging in gratis dictum.

Therefore, we conclude that payment alone will not serve as a sufficient basis for a court to order a refund in a case on all fours with the facts in Bethlehem Steel. Rather, it is our opinion that the phrase “payment under protest,” in the context of that decision, requires that the petitioning taxpayer show that the taxing jurisdiction has been placed on actual notice (as opposed to implied) that this taxpayer was objecting to the tax paid (either all or in part) for the years for which a refund is sought. Barring such proof, a court, in our opinion, would deny relief.

In conclusion, our advice to affected taxing jurisdictions is as follows:

(1) an application for an administrative refund of taxes under these circumstances should be denied, even if the petitioner claims the Bethlehem Steel ruling is equally applicable to his payment of taxes:

(2) if a judicial proceeding is initiated on the basis of the Bethlehem Steel case, distinguish between petitioners who gave actual notice of protest at the time of payment and those who did not. Acknowledge liability with respect to the first category but contest the alleged obligation to reimburse those in the other.

December 12, 1978

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