Special Feature:

Protesting Your Tax Assessment Before The NYC Tax Commission

By Paul J. Korngold, Esq.

Ladies and gentlemen, boys and girls and property owners in the City of New York, step right up for your last remaining chance to fight city hall and possibly save some money. The Tax Commission of the City of New York opens its doors for business on January 15, 2004, and you only have 45 days to take advantage of their services. If you lie awake at night worrying about how you are going to pay your real estate taxes, this is your only opportunity to make your argument for a reduction on your taxable assessed value for the 2004/2005 tax year.

Owners of real property have the right to object to their tax assessments if they file an application for correction with the Tax Commission of the City of New York between January 15, 2004, and March 1, 2004. Although your assessed value may be significantly less than what you believe to be the fair market value of the property, the City of New York has a fractional assessment system, which means that your assessed value is supposed to be less than the fair market value. The question is, of course, how is the fair market value determined and at what level of assessment should you be assessed. The Tax Commission does not set the tax rate or the tax assessment. The tax rate is set by the New York City Council and the tax assessment determined by the New York City Department of Finance (DOF).

As this article is being written (in order to meet the RSA newsletter production schedule, this writing is taking place while the candles are still glowing in the Hanukkah menorah and Santa Claus has just come down the chimney) rumors are circulating that the DOF is about to reduce the level of assessment to 25% from the 45% level they have used for the last twenty years. This would be a major change in policy by DOF since knowledgeable observers of New York City property practices have known for years that the 45% level claimed by DOF was not accurate and that residential rental properties are assessed at a much lower level of valuation. It is anticipated that if the DOF makes this change, it will be accompanied by a change in their capitalization rate guidelines so that there would not be an overall reduction in assessed values. However, any change in the assessment practices of the DOF will present new opportunities for property owners to contest their tax assessments before the Tax Commission and may be an opportunity not to be missed. If DOF does not change the level of assessment (technically known as the class equalization rate) it is anticipated that the 45% equalization rate will be challenged by judicial proceedings.

Most property owners who object to their assessment utilize the services of an attorney. However, attorneys are only as good as the information they receive from their clients. Whether an owner employs the services of an attorney, or appears on their own behalf, this article will review some of the basic procedures when appearing before the Tax Commission.

Which Forms to File

The taxpayer who wishes to protest their assessment is faced with the dilemma of deciding which of many different Tax Commission forms and attachments to use. With the exception of owners of Class One properties with three or fewer units who file a form TC108 and Tax Class Two condominiums, which are required to use form TC109, all property owners who object to the assessed valuation on economic grounds must file their objection on the form TC101 application. Make sure you use the form for 2004. The Tax Commission will not accept an application for correction of the 2004/2005 assessed value if it is filed on last year’s form.

Practitioners before the Tax Commission uniformly report that for the most part the bureaucratic nightmares that plagued the Tax Commission during the late 1990’s have been replaced with a "rule of reasonableness." Nevertheless, taxpayers are urged to make sure that the forms be completely filled out and that all questions dealing with the physical status of the property be fully completed by the owner. Whether the use of white-out will be considered reasonable is a question the taxpayer would be wise to avoid. If your completed application is full of white-out and other alterations to the form, it would be a smart choice to redo the application on a new copy.

Thankfully, once again there are only a few changes on the TC 101 form this year and those changes should not present a burden for the taxpayer completing the application form. Again for 2004/2005, the Tax Commission is utilizing the term "Full Property Address including Zip Code." As innocuous as this may seem, unless the hearing officer has heard about the new standard of "reasonableness," the failure to include this information may deprive you of the right to receive a hearing. So if your property is located in Queens, you must use the local post office address, such as Flushing, Forest Hills or Jamaica, rather than just Queens, followed by the zip code. There apparently was a concern on the part of the Tax Commission that the Tax Commission hearing officers could not locate the neighborhood of the property when just the traditional information of Borough, Block and Lot along with a house number and street were furnished.

When completing form TC101, all schedules and supporting documentation must be listed in question 4. If the owner occupies any space in the building, that information must also be set forth in Question 8, along with the use of the property on a floor by floor basis. There is also a grid in question 9 that requests a square footage breakdown for each floor in the building, if known by the owner. It will be deemed permissible to leave this grid blank only if there will not be an argument brought before the Tax Commission that the assessed value is wrong due to an incorrect record of the building’s square footage maintained by the assessor.

Question 11 at the bottom of the reverse side also requires a signature of the applicant along with an indication of the capacity in which the signatory is acting. The form this year requires that where a person is signing as an officer, general partner, or member or manager, the name of the entity and the person’s title must be inserted on the form. A managing agent is not an authorized person to sign the application for correction unless a duly authorized power of attorney is attached to the application along with a form TC244. If you are signing as an executor or a trustee, you will be required (unless you provided a copy last year) to supply a copy of the appropriate letters of authority from the Surrogate’s Court that are no more than six months old along with a completed copy of form TC 200. Be sure the raised seal on any court document is visible, because the Tax Commission has announced they will consider a copy of letters of authority that does not have a visible seal to be defective.

Taxpayers are warned that if they have recently purchased the property or made significant physical alterations, they must answer question 7 and may be required to file either the TC200 or TC230 form along with the TC 101 application. The TC200 may also have to be filed by certain net lessees or net lessors, individual condominium unit owners and mortgagees, receivers and bankruptcy trustees who have standing to file an application for correction. Your attorney will certainly advise you as to the correct form to use, but if you are representing yourself, be sure to read the instructions so you submit your information on the correct form.

TC201 Income and Expense Form

Unless the property has been purchased during the past year or there is some other extenuating circumstance, an owner will not receive a hearing unless a detailed statement of income and expenses for the property is completed on the appropriate TC201 income and expense form. (Cooperatives are required to use the TC203 form and are governed by a different set of rules beyond the scope of this article.) If the property has recently been purchased, the applicant must supply a closing statement prepared on form TC230 and possibly the above-mentioned TC200 form. If you are purchasing a property and the closing has not yet occurred, you must affix a portion of the contract or you will not be afforded a hearing.

For properties assessed at under $750,000, the income and expense statement may be for either 2003 or 2002. Experience has shown that the Tax Commission prefers the most recent financial statement since it is the most accurate reflection of the operation of the property and thus an owner utilizing an earlier year’s (2002) income and expense statement may be subject to greater scrutiny and adjustments in its submitted statement. In practice, the Tax Commission will grant the taxpayer a hearing, but the hearing officer may require the applicant to submit a 2003 statement attached to a form TC159 late submission form at the hearing prior to making any offer of reduction.

For properties assessed at $750,000 or more, the Tax Commission will only accept the most recent year’s income and expense statement. Furthermore, if the property is assessed at $1,000,000 or more, the income and expense statement must be accompanied by a certification from a certified public accountant filed on form TC309 attesting to the accuracy of the statement. Although the TC101 application for correction must be filed by March 1, 2004, the TC201 income and expense statement for rental properties assessed at $750,000 or more (and the accountant’s certification form TC309, if required) may be filed by March 24, 2004, as long as the application for correction was filed timely, and the income and expense statement is filed along with a duly executed supplemental income and expense application form TC150.

Real Property Income and Expense Statement

Taxpayers are often confused as to the distinctions between the requirement to file an RPIE (Real Property Income and Expense) statement with the Department of Finance and the filing of an income and expense statement with the Tax Commission. An application filed with the Tax Commission for correction of the assessed valuation on a rental property owned for at least one year must contain a TC201 income and expense statement or a hearing will not be granted. If you file this statement with your TC101 application for correction with the Tax Commission, in most cases you will not have to file the RPIE with DOF on the next due date of September 1, 2004. However, if you did not file a TC201 income and expense statement with the Tax Commission last year, or you did not timely file an RPIE statement with DOF by September 1, 2003, the Tax Commission will not grant you a hearing for 2004/2005. Even if you are barred from a hearing, you should file the application for correction since the law still allows you to seek a reduction by judicial proceedings even if no RPIE statement had been filed.

Applicants for a reduction in their assessed value are again reminded as to the importance of questions 3 and 4 on the front page of the TC 201 income and expense statement. Questions 3 and 4 deal with use and occupancy of the property. The Tax Commission has changed the form so that these questions must be answered as of January 5 (the "Tax Status" date) where in former years the answers were as of December 31. Again this year, the applicant must also list the monthly rent as of January 5 and must break the rent down between regulated and unregulated tenants. Question number 4 requires a detailed occupancy breakdown for all non-residential space for the same date. The task of completing the breakdown of rent by type of tenancy may be difficult for some owners, (and clearly moving that date from December 31 to January 5 makes it harder still) but these questions must be answered or the Tax Commission will not grant a hearing. Applicants who traditionally send these forms to their accountant for completion are warned to first complete this information since the rental information is usually not contained in the accountant’s books and records.

Breaking Down Expenses

The reverse side of the form TC201 requires the traditional income and expenses of the property. The form requests the income and expenses for two years, but the applicant is only required to submit the most recent year’s statement. Question 6 requires the taxpayer to segregate the income by category. The taxpayer is warned not to lump all of the building’s income into one category, but to carefully break out the income into the separate categories shown on the form.

The applicant must break down their expenses in the appropriate categories contained in question 7 on the form. Mortgage interest and depreciation are not proper expenses for the purpose of determining the assessed valuation of a property and are thus not listed on the form.

If a property owner has a claim based upon misclassification of the property or incorrect exemption, the taxpayer must file form TC106 and a form TC200. These forms require certain information that allows taxpayers to set forth the basis for their beliefs. Taxpayers who file a claim for misclassification should expect a telephone call from the assessor who will then make an inspection of the property and submit a report on their inspection.

Tax Commission Hearing

After filing, the application is reviewed by the Tax Commission and, if requested, a personal hearing is then scheduled and the owner or their attorney is notified of the time and date. At the hearing, the owner or its representative will have an opportunity to expand upon the written material previously furnished to the Tax Commission and to present its argument. Any new written material will not be accepted at the time of the hearing by the Tax Commission unless it is attached to a form TC159.

The hearing is not held before the entire Tax Commission, but rather before a single member of the Tax Commission, or a specially trained hearing officer who has been designated to review the application. The hearing officer does not necessarily accept the income and expense statement as presented and may attempt to make adjustments in determining the estimated expenses. The Tax Commission in the past has prepared a confidential analysis of various expenses for similar types of properties for its own use, and if the expenses or income of a particular property does not fall within the range of similarly situated properties, the hearing officer will reduce or eliminate certain expenses. It is up to the owner or its representative to document why the expenses on any given property are not within the usual range of expenses. In the event the owner feels their rent roll contains rents that are below average rents for similar types of building, the owner is strongly urged to submit a rent roll attached to a form TC159.

The Tax Commission seeks to review an assessment based upon its perceived fair market value of the property. Value is determined based upon the capitalization of income method of appraisal. The hearing officer will thus apply an appropriate capitalization rate to the net income before taxes to determine the assessed valuation. The hearing officer must rely upon the Tax Commission’s confidential guidelines as to what is an appropriate capitalization rate for a particular property. The hearing officer has some discretion in choosing an appropriate capitalization rate, as long as the hearing officer stays within the Tax Commission guidelines. The capitalization rates used by the Tax Commission are not necessarily the same rates used by the Department of Finance in determining the assessment and may be higher or lower. In fact, as of the date of the writing of this article, the Department of Finance still had not publicly promulgated their guidelines as to what capitalization rates are being used to determine the 2004/2005 assessed values.

Furthermore, with the exception of Class 1 private homes, the Tax Commission has never used any equalization rate lower than 45% when determining a claim based upon inequality of assessment, despite any evidence a taxpayer may have to the contrary. This unfortunately may deprive a taxpayer of a reduction since it clearly appears that the equalization rate is a number far less than 45%. As stated earlier in this article, it is anticipated that DOF is about to reduce the Class 2 ratio to 25%, which would have a major impact in the determination of the tax assessment. Since DOF no longer automatically uses a percentage of sales price in the determination of an assessed valuation, the income and expenses of a particular property are paramount in setting the valuation. Unfortunately, if you are a new owner of real property, it is unlikely that the Tax Commission will grant you a reduction if the sales price multiplied by the admitted equalization rate (whether 45% or 25%) is greater than the assessed valuation.

At the conclusion of the hearing, the hearing officer will place the matter on reserve and send a written decision at a later date. The written notification will not state a reason for the decision. If the owner wishes to accept the offer, an acceptance form TC70 must be filed with the Tax Commission within the prescribed time limit. The Tax Commission will not grant any extensions of time to accept an offer. If the owner does not receive an offer of reduction from the Tax Commission, or if the owner deems the offer inadequate, the owner’s only other remedy is to commence a proceeding for judicial review pursuant to Article Seven of the Real Property Tax Law by filing a petition with the New York State Supreme Court prior to October 24, 2004.