Berne Corp. v. Government of the Virgin Islands (262 F. Supp. 2d 540, 2003)

PROPERTY TAX LITIGATION CONSOLIDATED TRIAL ON ON COMMON ISSUES

MEMORANDUM

MOORE, District Judge.

I. SYNOPSIS

Although the Virgin Islands is a non-self-governing territory of the United States, one of the areas of autonomy Congress has granted these Islands is the taxation of real property. All Congress requires is that the Territory design and implement a real property tax system based on the property’s actual value. Unfortunately, the statutory framework for taxing, real estate enacted by the Virgin Islands Legislature and the administration of this system by the Virgin Islands Tax Assessor and Board of Tax Review violates that federal mandate. The present Governor, his Attorney General, and the Tax Assessor, have known they are violating federal law since the Fall of 2000 when I granted the first plaintiffs’ motion for a preliminary injunction. The Attorney General acknowledged as much in settling that case and agreeing to overhaul the process to insure that within two years all property would be assessed at its actual value. For whatever reason, the Governor decided to bypass that agreement and to relitigate the issue in these later-filed cases. Not only has the Attorney General thereafter been defending the indefensible in this Court, but also, during the very trial of these common issues, he mislead the Legislature into passing an amendment that obstructs the processes of this Court and perpetuates the illegal collection of property taxes without allowing for retroactive credits once the system complies with federal law.

In addition to the Executive Branch, the Legislature has also miserably failed the people of the Virgin Islands by not living up to its responsibility to determine how much revenue property taxes should contribute to the overall budget of the Virgin Islands Government. The best evidence of this shirking of legislative responsibility is the Legislature’s failure to change the tax rate of 1.25 percent since it was set by Congress in 1936 — almost seventy years ago. This failure to adjust the property tax rate to accommodate changes in the Government’s budget puts undue and unnecessary pressure on the Tax Assessor’s levels of assessment, which I believe has affected the integrity of the property tax system and has contributed to its failure to provide reliable and credible assessments. The Legislature has further contributed to the illegality of the property tax system by enacting provisions over the years that prevent the Tax Assessor from appraising commercial and residential property at actual value.

I accordingly will enter a decree enjoining the Tax Assessor from appraising and assessing any real property in the Virgin Islands until he has upgraded the system of appraisal and assessment to comply with federal law by assessing each property on its actual value. I will also enjoin the Government of the Virgin Islands from requiring payment of real property tax bills for the 1999 tax year and later years until the Tax Assessor is capable of reliably and credibly appraising and assessing all real property at its actual value and the Board of Tax Review consistently holds timely hearings and reaches timely decisions on all property tax appeals and the Department of Finance consistently remits any refunds resulting from Board’s decision within the time prescribed by law.

II. INTRODUCTION

With the very first lawsuit of this consolidated civil rights litigation against the Government of the Virgin Islands and its Tax Assessor, it became clear that the system for assessing and taxing real property in the Virgin Islands is broken and does not implement the federal statutory requirement that all real property must be assessed at its actual value. The Government explicitly recognized this in its settlement of the Berne Case in December of 2000 by agreeing to bring the Tax Assessor’s assessment procedures and processes into compliance with the uniform national appraisal standards, and to appoint an independent special master to review for compliance.

Unfortunately, but all too typically, rather than committing the necessary resources to fix its failed property tax system, the Government chose to ignore the Berne Settlement and relitigate the same issues in these other cases, elected to challenge this Court’s federal question jurisdiction, failed to negotiate or conduct discovery in good faith, and, ultimately, decided to defend the indefensible at trial. The Government has lost on all counts: the Court of Appeals for the Third Circuit upheld this Court’s jurisdiction and this Court is about to enjoin permanently the collection of property tax bills based on assessments made in violation of federal law, beginning with tax year 1999. But it is the people of the Virgin Islands who have truly lost by the Turnbull Administration’s conduct of this litigation, for the real property assessment system still does not fairly or equitably tax their real property at its actual, fair market value.

On February 6, 2003, while this litigation was in progress and during the trial of the common facts and issues, the Governor of the Virgin Islands, Charles W. Turnbull, on the advice of his Attorney General, Iver Stridiron, sent to the Legislature and prompted those solons to enact a law that directly contradicts pre-existing orders of this Court and thus seriously obstructs the processes of this Court. In the face of this Court’s valid and still binding ruling in Berne that the 1999 commercial property tax bills are based on an assessment process that violates federal law, the Attorney General misled Governor Turnbull into making certain representations in a letter dated February 2, 2003, to the President of the Legislature, Senator David Jones. The Governor wrote that

[t]he Attorney General has stated, however, that it is his opinion that if the law is changed, there would be no violation of the current Settlement Agreement. It is his opinion that the Government would still be able to continue with the process of sending out corrected commercial real property tax bills until such time as new appraisal guidelines are implemented.

(Letter from Governor Charles W. Turn-bull to Senator David S. Jones of Feb. 5, 2003, at 2.) The Legislature later enacted, and the Governor signed into law, a provision that would use these illegal commercial property assessments for 1999 as “the basis of computing commercial property taxes for the tax years 2001, 2002, 2003, and 2004.” Act of Feb. 27, 2003, No. 6574 (amending 33 V.I.C. § 2402(b)). Attorney General Stridiron did not even attempt to save the validity of the Act by recommending that it allow for credits to those commercial property taxpayers whose 1999 bills turn out to be excessive once their properties are reappraised and assessed at their actual values by a fair and equitable system. The net result of the amendment is that the Turnbull Administration and the Legislature would require Virgin Islands commercial property owners to pay four more years of property taxes that have been assessed in violation of federal law.

III. GENERAL BACKGROUND

This is not the first time that special interests and the recalcitrance of local Virgin Islands officials have required federal intervention to correct the Territory’s system for assessing and collecting real property taxes. The first time was almost seventy years ago, while drafts of the 1936 Organic Act were pending. The Congress of the United States exercised its legislative authority over this unincorporated territory to address an urgent problem with the assessment of real property taxes that “had been the target of criticism by all competent observers since the Virgin Islands came under the American flag” in 1917. (Ex. J-l, Letter of Harold Ickes, Secretary of Interior Apr. 23, 1935.) According to the committee of local government officials appointed by the Governor, “there is little probability that an equitable assessed valuation property tax could be got through the local” municipal councils because they were “largely made up of large property owners.” For this reason it was necessary for the Congress to act, while at the same time giving the local municipal legislatures as much latitude as possible by making the “Federal tax operative only in the absence of local legislation conforming to the Federal requirements.” The rate of 1.25 percent was suggested by these local officials. (Id. Justification attached to Sen. Report 1973.) Accordingly, on May 26,1936, it was declared to be “the policy of Congress to equalize and more equitably to distribute existing taxes on real property in the Virgin Islands of the United States and to reduce the burden of taxation now imposed on land in productive use in such islands.” 48 U.S.C. § 1401.

Congress accomplished this harmonization by imposing an ad valorem property tax system that required real property to be taxed at 1.25 percent of its actual value. See 48 U.S.C. § 1401a (“For the calendar year 1936 and for all succeeding years all taxes on real property in the Virgin Islands shall be computed on the basis of the actual value of such property .... ”); id. § 1401b (“Until local tax laws conforming to the requirements of sections 1401 to 1401e of this title are in effect in a municipality the tax on real property in such municipality for any calendar year shall be at the rate of 1.25 per centum of the assessed value.”). The federal tax rate of 1.25 percent has never been changed and presently is codified at 33 V.I.C. § 2301. The Virgin Islands statute that originally implemented this federal ad valorem property tax set forth nine factors the assessor shall consider in computing the actual value of real property subject to taxation. See 33 V.I.C. § 2404(a). In 1985, the Virgin Islands Legislature added a provision that would allow the Tax Assessor to use a “capitalization of income method of assessment” for commercial property, but only if it “results in a greater assessment than if it is not utilized.” See id. § 2404(b). Then, in 1988 the Legislature amended section 2402 to prohibit the Tax Assessor from “increas[ing] the valuation and assessment of noncommercial property more than 10% over the previous valuation and assessment except [in cases where improvements have been made to the subject property subsequent to the previous valuation and assessment or where the subject property was sold after the previous valuation and assessment].” See id. § 2402(a).

Plaintiffs are taxpaying owners of real property in the Virgin Islands who brought these consolidated civil rights actions against the Government of the Virgin Islands and its Tax Assessor to vindicate plaintiffs’ federal statutory right to have their property appraised, assessed, and taxed based on its actual value. Plaintiffs cover the complete spectrum of all real property taxpayers in that they are owners of real property in the Districts of St. Thomas/St. John and St. Croix who complain about the method of assessing real property taxes on vacant land, agricultural land, commercial properties, residential properties, condominiums, and timeshare units. The parties tried their cases to the Court for seven days in January 2003 and I am now prepared to render my rulings on the issues of fact and law that are common to all. I first recap the tortured procedural history of this litigation and recite this Court’s federal and local jurisdiction over these complaints and the remedies available to the Court over the Virgin Islands property tax system.

IV. PROCEDURAL AND JURISDICTIONAL BACKGROUND

A. The Berne Injunction

In the first case filed (Civ. No.2000-141), Berne Corporation and B & B Corporation [collectively “Berne”] alleged that the defendants had illegally assessed the value of their commercial properties based on replacement value, rather than the actual value required by federal law. The Berne, case set the pattern for all the other cases and resulted in a settlement in which the Government agreed to bring the Tax Assessor’s Office into compliance with federal law.

Berne sued the acting tax assessor, Roy Martin [“Martin” or “the Tax Assessor”] in his official capacity under Section 1 of the Civil Rights Act of 1871, 42 U.S.C. § 1983. Section 1983 renders certain “persons” liable for deprivations of federal statutory and constitutional rights. The federal statutory right involved here requires that “all taxes on real property in the Virgin Islands shall be computed on the basis of the actual value of such property ....” 48 U.S.C. § 1401a (emphasis added). Although Berne can not sue a territorial official such as Martin in his official capacity for money damages under section 1983, Berne and the other plaintiffs can and did seek under section 1983 to enjoin Martin from continuing to deprive them of their federal statutory right and to mandate that he assess their property on its actual value as required by that federal statute. Berne included a taxpayer’s suit under 5 V.I.C. § 80, as more fully discussed below.

On September 21, 2000, I ruled “that 48 U.S.C. § 1401a creates a federally protected right actionable pursuant to 42 U.S.C. § 1983.” Berne Corporation v. Government of the Virgin Islands, 120 F.Supp.2d 528, 535 (D.Vi.2000). I also held that plaintiffs have standing to bring suit under section 80 on behalf of all similarly situated taxpayers to restrain violation of the statute requiring property taxes to be based on actual value. Id. Finding that plaintiffs met'all the prerequisites, I preliminary enjoined the Government and its Tax Assessor from assessing and collecting commercial property taxes in violation of 48 U.S.C. § 1401a. The Government initially appealed my ruling, but later withdrew its appeal upon reaching a settlement with Berne. Accordingly, this ruling remains binding on the defendants.

B. The Berne Settlement

The parties negotiated a settlement of the litigation, which I approved on December 19, 2000. The Government and the Tax Assessor agreed to bring the Virgin Islands real property tax system into compliance with the federal requirement that property be assessed on its actual/market value and to select a special master to

a. ... review the procedures and process to be used by the Virgin Islands Tax Assessor’s office in appraising commercial properties pursuant to a mass appraisal approach and Uniform Standards of Professional Appraisal Practice (Hereinafter' referred to as “USPAP”) Standards. For appeal purposes only, USPAP standards for single property appraisal will apply. (Subject to Jurisdictional Exception of USPAP)

b. ... certify the procedures to be used as proper.

c. ... do appropriate random sampling, of no more than ten percent 10%, of assessments for compliance [and]

d. ... submit a report to the Court, as to compliance, every 180 days for a period of two (2) years ....

(Ex. 10.) I approved the parties’ joint stipulation naming Joseph E. Hunt [“Hunt”] as special master on February 14, 2001, and the Government officially retained Hunt on April 16, 2001. Hunt inspected the Tax Assessor’s Office in June to familiarize himself with the office’s organizational structure and make a preliminary evaluation of the components of the Virgin Islands real property assessment system. In August, Hunt met with Martin, tax consultant Kenneth Voss and other members of the Tax Assessor’s Office staff to discuss the Territory’s current tax assessment system and what was needed to bring it into compliance with US-PAP.

In September 2001, after the Government had issued the 2000 property tax bills based on the concededly illegal methods of assessment, Berne and 21 Queen’s Quarter moved to enforce the settlement agreement. At a September 21 hearing, I denied the motion to enforce as premature, noting that the Berne Settlement gave the Government two years to bring its assessment system into compliance. I encouraged the parties to continue to communicate and work with each other to establish the new assessment system. The Government’s delay in implementing the settlement and the 2000 property tax bills, however, allowed other property owners to file lawsuits.

C. The Government Voluntarily Extends the Berne Settlement to All Improved and Residential Property

One of these new plaintiffs, Equivest St. Thomas, Inc., successor to Bluebeard’s Castle, Inc. [“Equivest”] (Civ. No.2001-151), moved on September 14, 2001 for a preliminary injunction to enjoin the collection of its 2000 property tax bills. In their motion to stay all discovery except document production “Pending Implementation of Berne Corporation Settlement” filed on December 21, 2001, defendants made a binding judicial admission that “[p]ursuant to the terms of that settlement, all commercial property in the Virgin Islands is to be appraised at actual value in accordance with 48 U.S.C. § 1401a, and 33 V.I.C. § 2404, and in accordance with the Uniform Standards of Professional Appraisal Practice.” (Defs.’ Mot. to Stay Disc., at ¶ 1 (filed in Civ. No.2001-155).) The defendants specifically represented to the Court that the “new procedures are being implemented with regard to commercial properties first, and when completed, will then be implemented with regard to residential properties.” (Id. at ¶ 4; see also Defs.’ Opp. to Plaintiffs Mot. for Prelim. Inj. and Defs.’ Opp. to Plaintiffs Mot. to Deem Mot. for Prelim. Inj. Conceded, at ¶ 3) (filed in Civ. No.2001-155) (“It is anticipated that the new system, once implemented, will value all commercial and residential real properties at ‘actual values’ in accordance with 48 U.S.C. § 1401a and 33 V.I.C. § 2404, and in accordance with the Uniform Standards of Professional Appraisal Practice (‘USPAP’), in accordance with the terms of the settlement.”); Tr. II at 116-118; Martin Test., Tr. II at 180, 187-188; Tr. Hr’g Berne v. Government of the Virgin Islands, Civ. 00-141, Sept. 21, 2001 at 61-62).)

Based in part on these judicial admissions, on January 31, 2002 I granted the defendants’ motion to stay all discovery except document production. The Government also asserted willingness to settle all of these cases, but claimed that it could not simultaneously litigate and implement the new assessment system. Several new plaintiffs were able to negotiate settlements.

D. The Equivest Injunction

On May 21, 2002, Equivest renewed its motion to preliminarily enjoin the collection of its 2000 property tax bills after settlement discussions with the defendants proved fruitless. At a hearing on June 5 the defendants moved to dismiss the case for lack of subject matter jurisdiction and argued that Equivest was not entitled to injunctive relief because it had failed to exhaust its administrative remedy of appeal to the Board of Tax Review. Finding Equivest’s claims to be valid and the defendants’s arguments to be meritless, I granted Equivest’s motion for preliminary injunction in part on June 18, 2002, reaffirmed this Court’s federal question jurisdiction and enjoined the Government “from collecting property taxes against the hotel properties owned by Equivest St. Thomas, Inc. until the tax assessor can establish at a trial on the merits that the property taxes on those properties have been assessed on their actual value.” Equivest St. Thomas, Inc. v. Government of the Virgin Islands, 208 F.Supp.2d 545, 553 (D.Vi.2002), aff'd sub. nom., Bluebeard’s Castle, Inc. v. Government of the Virgin Islands, 321 F.3d 394 (3d Cir.2003). I also rejected defendants’ claim that Equivest had not exhausted its administrative remedies by failing to file an appeal with the Virgin Islands Board of Tax Review.

By this time it had become obvious that the politicians in the Turnbull Administration had decided to litigate rather than to implement the settlement agreement and correct the admittedly broken real property assessment system. With this change in posture, I acknowledged that the Court might have to reconsider the stay on discovery. On July 2, I lifted the stay on discovery and set these eases for trial on October 21, 2002.

E. The Defendants Obstruct the Discovery Process

On August 20, Equivest moved the Court to compel the defendants to respond to its interrogatories and document production requests. Finding that the defendants “ha[d] taken a rather cavalier attitude toward their obligations to supply discovery,” I ordered them to fully and completely respond to Equivest’s discovery requests. Two months later, on October 22, I again had to admonish the Government for its “continuing obfuscation of the discovery process and its failure to comply with my August 27th order.” See In re Tax Litig., Civ. No.2000-141 et al., 2002 U.S. Dist. LEXIS 22354, at *2 (D.V.I. Oct. 22, 2002) (granting in part Equivest’s motion for discovery sanctions and overruling Government’s objections to discovery requests).

In the meantime, the defendants moved to continue the October 21 trial date on the ground that they were unable to conduct both discovery/trial preparations and settlement negotiations. At the September 17 hearing, and upon the Government’s reasserted willingness to negotiate settlements, I continued the trial to January 6, 2003. At the request of the parties, I also scheduled individual cases for settlement conferences. Unfortunately settlement negotiations promptly broke down again, mainly due to the Government’s refusal to disclose the re-appraisal reports of tax consultant Kenneth Voss for the individual properties on the ground of privilege. After reviewing in camera those Voss reports that had been completed, I found the Government’s claim of privilege to be baseless and ordered the immediate disclosure of the reports to the plaintiffs. See In re Tax Litig., Civ. No.2000-141 et al. (D.V.I. Nov. 19, 2002) (Order). When I denied the defendants’ motion to reconsider this order, the Government petitioned the Third Circuit Court of Appeals for a stay. Only after the Court of Appeals refused to stay my order on January 9, 2003, three days into the trial of these common issues, did the Government finally turn over the Voss reports to the plaintiffs.

F. This Court Has Jurisdiction over Federal Aspects of the Virgin Islands Property Tax System

On February 28, 2003, the United States Court of Appeals for the Third Circuit upheld this Court’s federal question jurisdiction in these matters, ruling that Equivest “properly pled a federal claim” for equitable relief against Roy Martin in his official capacity as tax assessor for violation of plaintiffs federal civil rights under 42 U.S.C. § 1983. Bluebeard’s Castle, Inc. [Equivest] v. Government of the Virgin Islands, 321 F.3d 394, 396 (3d Cir. 2003). Rejecting the Government’s contention that there is no federal jurisdiction because this dispute arises solely under Virgin Islands law, the Court of Appeals affirmed that the 1936 federal statute, 48 U.S.C. §§ 1401-1401e, “contemplates a hybrid scheme of real property law: the general requirements are set by the federal government, with specifics established as a matter of territorial law consistent with federal law.” Id. at 398. Thus, section 1401a’s requirement that all real property in the Virgin Islands be assessed at its actual value still binds the Government of the Virgin Islands and its tax assessor.

The principles of federalism and comity do not require the hands-off approach a federal court must adopt regarding the administration of a sovereign state’s property tax system because the Virgin Islands property tax law does not derive its local character from the separate sovereignty of a state within the federalism embraced by the Constitution. By the grace of Congress in a self-restrained exercise of its authority under the Territorial Clause of the Constitution and the infamous Insular Cases, Congress only requires the Virgin Islands to establish and maintain a system designed to assess the tax on real property’s actual value. The local Government otherwise has complete autonomy over its property tax system.

As the Court of Appeals found, the Virgin Islands “tax system is not a state tax system, nor is it entirely a territorial tax system. It is partially a federal tax system, and it is not apparent that the federal government should adopt a hands-off approach to the federal aspects of a hybrid federal/territorial system.” See Bluebeard’s Castle, 321 F.3d at 400. Thus, for example, this Court is not subject to the prohibition on tax injunctions under the Tax Injunction Act, which prevents a district court from enjoining, suspending or restraining “the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.” 28 U.S.C. § 1341. The Tax Injunction Act simply does not apply to the District Court of the Virgin Islands. See Equivest, 321 F.3d at 397 n. 5; Pan Am. World Airways v. Duly Authorized Government of the Virgin Islands, 459 F.2d 387, 391 (3d Cir. 1972).

The Court of Appeals went on to limn this Court’s federal question jurisdiction in these cases.

Congress was not required to treat the Virgin Islands as though it were sovereign, but in large measure it has chosen to do so. The tax system is, for the most part, a matter of local governance. And the territorial courts, mirroring state courts, have been given primary jurisdiction over local matters. Accordingly, although § 1401a adds a significant federal element to the Virgin Islands tax regime, it remains a local system — created, enforced, and adjudicated locally....

[Thus, a]n aggrieved taxpayer does not state a federal claim by objecting that its taxes are not based on the actual “actual value” of its property. If an assessor arrives at a figure greater than what the taxpayer believes to be the correct number, the assessor has not necessarily violated the requirement that the tax assessment be based on actual value. Only if the assessment method does not constitute a reasonable attempt to determine the actual value can a claim be brought under § 1401a. A challenge to the system of tax assessments in federal court may be permissible depending on whether it directly implicates federal law; an ordinary challenge to an assessment must be brought in territorial court.

Plaintiff here has adequately alleged a violation under 48 U.S.C. § 1401a. It contends defendants systematically employed a method of assessment not calculated to determine the actual value of its properties. Because plaintiffs claims “arise under” § 1401a, they are subject to the jurisdiction of the District Court under 48 U.S.C. § 1612 [granting jurisdiction of United States district court] and 28 U.S.C. § 1331 [granting jurisdiction over federal questions].

Id. at 401, 402 (citation omitted).

G. This Court Has Supplemental Jurisdiction over Plaintiffs’ Taxpayer Suit (5 V.I.C. § 80)

The Berne plaintiffs included a taxpayer’s suit under Virgin Islands law to restrain Martin from assessing and the Government from collecting property taxes on real property in the Virgin Islands until such assessments and taxes are redetermined based on the actual value of each property. See 5 V.I.C. § 80 (“A taxpayer may maintain an action to restrain illegal or unauthorized acts by a territorial officer or employee, or the wrongful disbursement of territorial funds.”). This Court has supplemental jurisdiction over plaintiffs’ non-federal, territorial taxpayer suits authorized by Virgin Islands law pursuant to 28 U.S.C. § 1367(a) (district courts having original jurisdiction “shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy”). The plaintiffs have since expanded their claims under section 80 to include injunctive and declaratory relief against the Government and its Board of Tax Review for consistently failing to comply with the Board’s enabling legislation.

IV. THE SYSTEM OF PROPERTY TAX ASSESSMENT

A. The Purpose

Although this case mainly involves the role and methodology of the Executive Branch acting through its Tax Assessor, it is equally important to ácknowledge that the Legislature has utterly failed to understand and perform its role in this process. The roles of the three branches of government in taxing property in the Territory of the Virgin Islands are well stated in the 1970 manual used by the Tax Assessor, outdated though it may be as a guide for the Tax Assessor’s Office.

All three branches of government — the legislative, the executive, and the judicial — are involved in the taxation of property. The revenue to be derived from property is a decision of the legislative body, but before the amount of revenue can be determined by fixing the tax rate, the executive branch, through the assessor, must establish the property tax base on which taxes are to be computed by determining the valuation of taxable property. The function of the judicial branch is to review, on appeal, the legality of legislative and administrative acts....

(Def.’s Ex. G1, Introduction to REAL PROPERTY ASSESSMENT, Manual of Procedures 3 (2d ed. 1970) [“Manual”].) The Legislature has never lived up to its responsibility to determine how much revenue property taxes should contribute to the overall budget of the Virgin Islands Government. The best evidence of this shirking of legislative responsibility is the fact that the Legislature has never changed the tax rate of 1.25 percent (0.0125) since it was set by Congress in 1936 — almost seventy years ago. This is relevant to these proceedings because it lends itself to abuse, as the special master, Joe Hunt, observed.

Hunt discussed the interplay between the roles of the Legislature in setting the budget and tax rate and the Executive assessing the property values. He described them as the “assessment function”, the “budget function”, and the “property tax levy”.

[T]he assessment function produces a taxable assessment base for all property in the jurisdiction. The assessment base is used to distribute the property tax to property owners according to the value of the property owned. The budget function determines how much money must be raised by the property tax. The levy is the legal act of enacting the property tax to raise the required amount of money necessary to fund governmental expenditures. The levy is expressed as a property tax rate. The resulting property tax rate is simply the total dollar amount of the jurisdiction’s budget (that will be funded by the property tax) divided by the total assessment base. When the tax rate is multiplied by an individual property assessment, the tax for that property will be calculated.

If assessment values are not tied to some uniform measure of value (Market Value) and applied in the same manner to all properties, the result is a shift of the property tax from one group of taxpayers to another group

The assessed value is not intended to function as the means to increase or decrease revenue to the jurisdiction because value is controlled by market influences and not by budgetary needs, and therefore is not reliably predictable

(Ex. J-3, Special Master’s Report, July 24, 2002, at 3-4 (underline in original; italics added).)

Joe Hunt went on to report that, “[h]is-torically, the Virgin Islands Government has not adjusted the property tax rate to fund increasing budget demands,” and that this “inability or reluctance to adjust the tax rate to reflect changes in the government’s budget puts an undue amount of pressure on assessment levels.” (Id. at 6.) At trial Hunt testified that he was concerned “over the integrity of the property tax system” because the tax rate had been static for so many years. (Hunt Test., Tr. 1 at 154.)

The Tax Assessor’s thirty-year-old Manual also describes the role of the assessment function.

The primary objective of the assessment function is to provide the basis for spreading the levy on property in proportion to the value of each individual’s ownership, thereby establishing the proportion of the tax burden each is to bear. The omission of property or its under valuation results in an increase in the amount which the owners of other property not so favored must pay. The assessor — and, with him, the board of Tax Appeals [Tax Review] — are charged with a responsibility that is vital to the interests of each and every owner of taxable real property in the Virgin Islands.

(Manual at 3.) In addition to the Legislature’s abdication of its responsibilities, the system of assessment as presently established and operated by the Tax Assessor is structurally incapable of equitably and reliably implementing the federal statutory mandate of taxing all real property on its actual value. Moreover, the Board of Tax Review is utterly useless as a safety net to correct the Tax Assessor’s systemic errors.

B. Some Definitions

Actual value equals fair market value. The terms actual value and fair market value are synonymous and may be used interchangeably, per the former Tax Assessor, (see Callwood Test., Tr. I at 250-251, 255), as confirmed by the Special Master, and plaintiffs’ experts Kathleen Conroy and Steven Jamron, (see Hunt Test., Tr. I at 112, 203; Conroy Test., Tr. IV at 225-226, 229-230.) Similarly, the Tax Assessor’s Manual indicates that real property should be taxed on market value. (See Manual at 12 (“there has emerged a term that has been sanctioned by the courts as the accepted concept of value for assessment purposes and on which taxes are to be computed. This term is market value.”).) The equivalence of actual value and market value is clinched by the web site for the Office of the Tax Assessor:

The Tax Assessor does not dictate values. The actual value is determined from the market. This is the amount that your property may bring in the open market between a willing buyer who is fully informed of all the advantages and disadvantages of your property and as a willing seller is fully informed and under no duress to sell would accept.

(Ex. J-9, www.ltg.gov.vi/departments/tax-detailhtml.)

Mass Appraisal/Single Property Assessment. Mass appraisal is “the process of valuing a universe of properties as of a given date using standard methodology, employing common data, and allowing for statistical testing.” (Ex. J-2, Special Master’s Report, Jan. 15, 2002, at 2.) The components needed to produce a credible and reliable mass appraisal are a good mapping system, a good database that describes all the appropriate property characteristics, an analysis system to convert market data to assessment values, a trained and competent staff able to interact with the system and to review the estimates of value of the system, a data processing system able to handle the requisite number of appraisals on an annual basis, and a review system to verify the quality of the valuations and compliance with statutory requirements. (Hunt Test., Tr. I at 117-118.) In contrast, a single property appraisal is an appraisal of a single property to produce an estimate of its actual value. {Id. at 118.)

Market value for property tax assessment purposes is generally determined through the application of mass appraisal techniques. Although the techniques differ between a mass appraisal and a single property appraisal, the goal of both techniques is the same, namely, to arrive at the actual/fair market value of real property. {Id. at 120.) Because both a mass appraisal and a single property appraisal attempt to reach an accurate estimate of a property’s the market value, a single property appraisal is a valid and recognized means of checking a mass appraisal valuation. {Id. (agreeing that “the goal of the mass appraisal system is to arrive at a value for each individual parcel subject to the assessment that would be roughly equal to the fair market value as determined by a single property appraisal.”).) For this reason, it is accepted practice, both generally and by the Office of the Tax Assessor, to consider an individual appraisal in determining the accuracy of a mass appraisal valuation. (Callwood Test., Tr. I at 258; Martin Test., Tr. VI at 156-157; Jamron Test., Tr. V at 54.)

Uniform, Standards of Professional Appraisal Practice. USPAP is the generally accepted and recognized minimum standards of appraisal practice in the United States. {See USPAP, Forward (Appraisal Standards Board, 2002); Hunt Test., Tr. II at 97-98, 104.) Standard 6 of USPAP, “Mass Appraisal, Development and Reporting” specifically applies to mass appraisals and requires that, “[i]n developing a mass appraisal, an appraiser must be aware of, understand, and correctly employ those recognized methods and techniques necessary to produce and communicate credible mass appraisals.” The term “appraisal” or “mass appraisal” refers to the process which produces a value; “assessment” is the statutory conversion of appraised value to taxable value, {see Hunt Test., Tr. II at 99); the Virgin Islands defines the assessed value as the actual value of the property, although the tax is levied on sixty percent of the assessed or actual value, see 33 V.I.C. § 2301(a).

The “Jurisdictional Exception Rule” of USPAP, mentioned in the Berne Settlement, states that, “[i]f any part of these standards is contrary to the law or public policy of any jurisdiction, only that part shall be void and of no force or effect in that jurisdiction.” The purpose of this rule is strictly limited to providing a saving or severability clause to preserve the balance of USPAP if one or more of its parts is contrary to the law or public policy of a jurisdiction. (USPAP, Comment to the Jurisdictional Exception Rule at 8.)

IAAO Standard on Ratio Studies. One of the recognized methods of evaluating the reliability and credibility of the assessment values produced by a mass appraisal system is through “ratio studies”. (Hunt Test., Tr. I at 179-180; Callwood Test., Tr. I at 259; Martin Test., Tr. II at 65-66.) A ratio study is a generic term for any comparison of assessed values estimated for tax purposes with market values derived independently from actual recorded sales prices or independent appraisals. The components of the ratio are the tax assessor’s assessed values as the numerator and the independently derived market values as the denominator. (Standard on Ratio Studies §§ 5.1.2 and 5.1.3 (IAAO 1999); Hunt Test., Tr. I at 180.) Obviously, the ideal is a ratio of 1, which happens when assessed value equals market value (assessed -h market = 1). Assessors and taxpayers can use ratio studies to evaluate how fairly the computer’s mass appraisal program distributes the real property tax burden, that is, how close appraised/assessed values approximate actual/market values. (Standard on Ratio Studies § 2.3.3; Hunt Test. Tr. I at 178.)

Unfortunately, the Virgin Islands does not have its own ratio study performance standards, (Martin Test., Tr. II at 76-78), even though Martin is a member of the IAAO and the IAAO standards state that “each state, province, and local jurisdiction should have ratio study performance standards.” (Standard on Ratio Studies § 14 (Ex. J — 11); Martin Test., Tr. II at 53.) Moreover, USPAP standards and IAAO standards are “fairly synonymous”. (Hunt Test., Tr. II at 97.) For example, Canon 6 of the IAAO Code of Ethics and Standard of Professional Conduct requires all IAAO members to comply with USPAP. Indeed, IAAO Ethical Rule 6.1 states that it is unethical for an IAAO member to fail to observe the requirements of USPAP. Martin claimed that ratio study performance standards for the Virgin Islands are in the Manual, but never was able to point them out to the Court. The Manual does warn, however, that, “[i]f the difference between the stated consideration and the appraised value is significant, it is a signal that there may be something wrong with the appraisal.” (Manual at 108.)

In lieu of any local ratio study performance standards to assess the Tax Assessor’s performance and compliance with the Berne Settlement, the plaintiffs presented at trial and the Court adopts the IAAO’s suggested ratio study performance standards for jurisdictions where market/actual value is the legal basis for assessment. These are set forth in Table 7 of the Standard on Ratio Studies, according to which “[t]he overall level of appraisal of the jurisdiction and each major class of property (such as residential, commercial/industrial, and vacant land) should be between 0.90 and 1.10 (within ± 10 percent of the statutorily required level of assessment).” (Standard on Ratio Studies at § 14.1 & Table 7; Hunt Test., Tr. I at 122-123.)

C. The Three Main Appraisal Approaches or Models

The three main approaches to appraising real property, the cost approach, the sales comparison approach and the income approach, all may be used in either a mass appraisal system or a single property appraisal. The goal of all three is to reach a reliable estimate of the actual, ie., fair market value of real property. The cost approach and the sales comparison are not defined or even mentioned in the relevant provisions of the Virgin Islands Code, mainly 33 V.I.C. § 2404. Although the income approach is defined in section 2404(b), the Tax Assessor can use it only if it increases the assessed value. All three approaches, however, are set forth in the Manual, which the previous Tax Assessor described as his “bible”. (Callwood Test., Tr. 1 at 236.)

The cost approach to appraising property improved with structures begins with the replacement cost new of the improvements, subtracts depreciation, whether physical or caused by functional or economic obsolescence, then adds in the value of the underlying land. The land value is most frequently determined by the sales comparison approach. The cost approach is based on the principle that a rational, informed purchaser would pay no more for a property than the cost of constructing an acceptable substitute. The cost approach is thus less reliable when an informed buyer in the marketplace would be inclined to pay less for an improved property than the cost to replace the buildings on it. This often is the case for income producing property, because the buyer will rely more on the income the property generates rather than what it would cost to replace it, and for older structures as well, where depreciation is subjective and difficult to measure.

The sales comparison approach estimates a property’s value by reference to fair market sales of comparable properties. This approach is generally viewed as the most reliable of the three approaches since there is no better evidence of market value than recent sales of comparable property in the marketplace between a willing and knowledgeable buyer and a willing seller dealing with each other at arms length. (See, e.g., Standard on Ratio Studies § 2.1 (IAAO 1999) (“Sales prices provide the only objective estimates of market values and under normal circumstances should provide good surrogates of market value”); Callwood Test., Tr. I at 238 (if sufficient market information is available, comparable sales is the “best answer, because the answers are already there”); Martin Test., Tr. TV at 39.)

The income approach to valuation is based on the concept that current value is the present worth of future benefits to be derived from the income the asset can be expected to produce over the remainder of its economic life. The income approach uses capitalization to convert the projected benefits into an estimate of present value. This generally is the most reliable approach to valuation for income producing properties. (Callwood Test., Tr. I at 238 (after comparable sales, income approach is the “next best” approach); Conroy Test, Tr. IV at 254-255.)

V. THE DEFENDANTS ARE VIOLATING FEDERAL LAW

A. The Virgin Islands Statutory Scheme for Real Property Assessment Violates the Federal Requirement to Tax Actual Value by Allowing the Use of the Income Approach Only if it Increases the Assessed Value of Commercial Property and by Restricting the Maximum Annual Increase for Residential Property to Ten Percent

The Virgin Islands Legislature added subsection (b) to 33 V.I.C. § 2404 in 1985 to restrict the tax assessor from using the income approach for assessing commercial property unless it “results in a greater assessment than if it is not utilized.” See id. § 2404(b). The Tax Assessor clearly interprets 2404(b) as prohibiting him from using the income approach to reduce a commercial property owner’s assessment, except in negotiations to settle a case in litigation. (Martin Test., Tr. II at 196-97.) Such a restriction directly conflicts with the clear mandate of federal law that all taxes on real property in the Virgin Islands be computed on the basis of actual value. (See Hunt Test., Tr. I at 107 (Section 2404(b) “is inconsistent with the expected estimates or research that an appraiser would do to estimate value described as actual market value”).) Section 2404(b) must therefore be stricken as inconsistent with 48 U.S.C. § 1401a. I hardly need experts to tell me that section 2404(b)’s directive that the income approach be used only for the purpose of increasing the assessment constitutes a statutorily mandated “method of assessment not calculated to determine the actual value of its properties,” to use the words of the Court of Appeals.

If the property being assessed is commercial property, the assessor may utilize a capitalization of income method of assessment in conjunction with utilization of the factors listed in subsection (a) of this section so long as the utilization of such method results in a greater assessment than if it is not utilized. For purposes of this section, the "capitalization of income method” is a method of assessing commercial property by the conversion of rent to the real property value by the utilization of a capitalization rate applicable to the type of property involved. Determination of the capitalization rate shall be made by the Tax Assessor of the Virgin Islands after careful consideration of the comparable rate used by lending institutions.

The experts merely confirmed that section 2404(b) is inconsistent with a determination of market or actual value, because investors in the marketplace use the income approach to determine value even if it decreases the property’s value. Thus, section 2404(b) effectively creates unequal rates of taxation between non-commercial properties, which are to be taxed on fair market value, and plaintiffs’ commercial properties, which are to be taxed without using the appraisal approach most appropriate for evaluating commercial properties. Martin testified that he has used only the cost approach to determine the value of improvements on all commercial properties during his tenure as acting Tax Assessor. (Martin Test., Tr. VI at 111— 14.) As will be discussed in the next section, the evidence confirmed that plaintiffs commercial properties indeed are being taxed on values artificially inflated above market value.

Although the parties did not dwell on it, 33 V.I.C. § 2402(a) restricts the ability of the Tax Assessor from fairly and reliably determining the actual or fair market value of residential property, except this time it skews the system in favor of the taxpayer. (See Martin Test., Tr. Ill at 59) (mentioning the additional statutory restriction.) Such a restriction again is inconsistent with the standard methods and expected research an appraiser would otherwise use to estimate actual market value. Similarly, I do not need experts to tell me that this restriction directly conflicts with the clear mandate of federal law that all real property in the Virgin Islands be assessed its actual value. Section 2402(a) thus constitutes a statutorily mandated method of assessment not calculated to determine the actual value of residential real property. Accordingly, section 2402(a) must also be stricken as violating 48 U.S.C. § 1401a.

Section 2404 originally implemented the federal value-based property tax by setting forth nine factors for the assessor to consider in computing the actual value of real property: location and surroundings; quality or fertility; condition of structures; recent cost to the present owner; recent sale price of adjacent property; recent bona fide offer; accessibility; proximity to public facilities, conveniences and utilities; and rental or income derived directly from the property. See 33 V.I.C. § 2404(a). Martin interprets and implements section 2404(a) as an exclusive list of the only factors he can consider in determining the actual market value of real property. (See Martin Test., Tr. II at 56-57.) According to plaintiffs’ expert, interpreting section 2404(a) as an exclusive list of assessment factors would be inconsistent with the assessment of actual value required by 48 U.S. § 1401a because these nine factors are

not in and of themselves totally adequate for someone to determine market value.... [T]hey are incomplete in giving a professional appraiser or assessor all of the tools that you need to conduct an appropriate ... development of an appraisal process and apply methodologies and arrive at a reasonable and supportable opinion of value.

(Conroy Test., Tr. IV at 232-33; see Hunt Test., Tr. I at 188 (noting that his opinion that USPAP could be followed under § 2404(a) was premised on being able to consider factors in addition to those set forth in § 2404(a)).) In contrast to Martin’s testimony at trial, the defendants’ have taken the position in written pleadings that section 2404(a) “does not require exclusive application for the computation of actual value,” and that nothing in its plain language limits “the tax assessor’s consideration to only those nine elements listed.” (Tr. II at 116-117.) Inasmuch as the Legislature will have to revisit the entire subtitle on real property taxes, namely Subtitle 2 of Title 33, Virgin Islands Code, Sections 2301-2584, to revise section 2404 and the other sections specifically mentioned here, and to modernize many more provisions, I will not formally rule that section 2404(a) is also voided by 48 U.S.C. § 1401a.

I find that plaintiffs have proved their federal claim that Roy Martin, acting in his official capacity as the Tax Assessor for the Government of the Virgin Islands, violated plaintiffs’ civil rights under 42 U.S.C. § 1983 by systematically employing a method of assessment not calculated to determine the actual value of properties, as required by 48 U.S.C. § 1401a, namely, he did not use the income capitalization approach in appraising and assessing plaintiffs’ commercial properties and abid-ed by the limitation on the assessment of residential property imposed by 33 V.I.C. § 2402(a).

B. The Tax Assessor Violates Plaintiffs’ Civil Rights under 42 U.S.C. § 1983

As already noted, Martin has only used the cost approach to determine the value of improvements on all commercial properties during his tenure as acting Tax Assessor. I agree with the evidence that it is not consistent with USPAP to use only the cost approach if there are other methodologies or data that should be taken into consideration to arrive at fair market value. {See Conroy Test., Tr. IV at 252.) Even Martin stated on several occasions in testimony under penalty of perjury that using the cost approach exclusively did not conform to USPAP. {See Martin Dep. at 21-28, Dec. 19, 2002; Tr. of Prelim. Inj. Hr’g, Equivest v. Government, Civ. No.2001-155, at 91-92, June 2, 2002.) In another baffling instance of varying his testimony under oath, Martin changed his position at trial to say that exclusive use of the cost approach to assess commercial real estate would comply with USPAP. {See Martin Test.) Tr. II at 59-60.)

1. Ratio Studies: Confirmation that Martin’s Mass Appraisal is not Calculated to Assess Actual Value

One of the clearest pieces of evidence confirming that the present practices and procedures employed by the Tax Assessor’s office to appraise real property are flawed and generate fundamentally unfair and unreliable assessments is plaintiffs Joint Exhibit 13. Exhibit J-13 is the sales ratio study for St. Thomas from January 1, 1997 through December 31, 1999 of only the “qualified” sales of improved real property, ie., it lists only land sales or sales of improved property that qualify as arms-length transactions. (Tr. II at 79, Martin Test., Tr. II at 119-120.) All parties agree that property sales that are not arms-length transactions are not appropriate for inclusion in a sales ratio analysis. Only sales of improved real property were analyzed in Joint Exhibit 13 because the majority of the plaintiffs’ properties include improved real estate. Ideally, the ratio of Martin’s assessed values to actual sales values at arms length would be 1, that is, the estimated values established by Martin’s assessment system would equal the actual value in the marketplace. An acceptable ratio short of the ideal according to the Standard on Ratio Studies would be “between 0.90 and 1.10,” ie., within ± 10 percent of actual value. (Standard on Ratio Studies at § 14.1 & Table 7; Hunt Test., Tr. I at 122-123.)

At face value, the raw numbers on Exhibit J-13, produce an assessment to sales ratio of 0.90, taking the aggregate value of assessments of improved real property of $243,003,827 as the numerator and the aggregate value of arms-length market sales of improved real property of $268,702,405 as the denominator (243,003,827 -h 268,-702,405 = 0.9). A ratio of 0.9 is at the outer edge of the acceptable IAAO performance range and only 10 percent off the ideal ratio of 1. Without further examination of the underlying sales data, a ratio of 0.9 would tend to indicate that Martin’s assessments undervalue improved real property, ie., that improved property sold for more than its assessed value. As plaintiffs painstakingly demonstrated at trial, however, Martin made a number of serious errors that grossly distorted the sales prices of several of the qualified properties, (see Tr. II at 119-178), such as, counting one transaction of several parcels of property at one total dollar figure as separate sales of each parcel at the dollar figure. For example, Martin listed Equi-vest’s purchase of the seven Elysian Hotel properties for a total of $13,000,000 as $13,000,000 for each of the individual seven parcels! Although Martin allocated separate assessed values to each of the individual parcels, he listed the full $13,000,000 seven times, once for each the seven properties. From this transaction alone, then, the aggregate sales value was overstated by $78,000,000 (6 x $13,000,000). Ml in all, Martin had to concede that over $109,750,000 was improperly included in the aggregate value of qualified arms-length sales of improved property listed on Exhibit J-13, which reduced the denominator of the ratio from $268,702,405 to $158,952,405. The corrected and more accurate proportion of $243,003,827 divided by $158,952,405 gives a ratio of 1.53, rather than 0.9. This means that Martin’s method of mass appraisal assesses improved real property in the Virgin Islands an average of one-and-one-half times its actual, market value. Thus, one of the universally recognized method of evaluating the reliability and credibility of the assessment values produced by a mass appraisal system conclusively confirms that Martin’s system of assessment is not reliable, not credible, and fatally flawed.

2. Building Costs: Unreliable and Overstated

The replacement cost new values generated by the Tax Assessor for plaintiffs’ properties generally are unreliable, incredible, and overstated. (See Jamron Test., Tr. V at 88.) For example, Martin’s per square foot building costs are significantly overstated. (Id. at 89-90 (noting that the Tax Assessor’s replacement cost new figures were “much too high”).) In his July 24, 2002 report, special master Hunt stated that his review of the documents and materials at the Tax Assessor’s office revealed no reliable market research or documentation to support that the “replacement cost used in the current system has any relationship to actual cost of construction in today’s market.” (Ex. J-3, Special Master’s Report, July 24, 2002, at 9.) Hunt went on to add that the periodic, across-the-board increases to the costs tables described by Martin at trial “increase [] concern for accuracy of cost rates in the existing system.” (Id.) I find Hunt’s evidence to be credible, independently adopt his finding, and share his concern for the accuracy of the costs used by the Tax Assessor.

Kenneth Voss, the Tax Assessor’s expert consultant, performed single property appraisals of certain of plaintiffs’ commercial properties using the cost approach, all of which were significantly lower that those of the Tax Assessor using his computer assisted mass appraisal program. The table immediately following compares the respective cost approach values for these properties. The first column lists Martin’s values, the second lists Voss’ values, and the third shows the percent by which Martin’s values exceed Voss’ values.

MARTIN VOSS COST DIFFERENCE

Shell Seekers $1,307,660 $1,167,000 12.1%

21 Queen’s Quarter $3,679,780 $2,715,000 35.5%

Frosteo Building $4,962,619 $3,065,000 61.9%

Buccaneer Mall $7,361,386 $6,625,000 11.1%

Orange Grove Apts. $5,190,325 $3,732,000 39.1%

The unreliability and inaccuracy of Martin’s appraisals is even clearer when I compare Voss’s values using the appropriate income approach to Martin’s values using the inappropriate cost approach:

MARTIN VOSS INCOME DIFFERENCE

Shell Seekers $1,307,660 $1,116,000 17.2%

21 Queen’s Quarter $3,679,780 $2,591,000 42.0%

Frosteo Building $4,962,619 $2,859,000

Buccaneer Mall $7,361,385 $6,576,000 11.9%

Orange Grove Apts. $5,190,325 $2,100,000 47.2%

In every instance, the Tax Assessor’s methodology produced a statistically significant higher value than his own expert. Martin tried to explain the difference, at least in regard to the cost approach, by criticizing Voss’s use of Marshall & Swift Valuation Service [“MVS”] for cost data as not being representative of Virgin Islands building costs, notwithstanding that MVS is “an industry recognized cost estimation source which [courts] generally find helpful,” Industrial Equities Group, LLC v. County of Anoka, 1999 WL 1116799 *3 (Minn.Tax Nov. 30, 1999), and notwithstanding that Voss used adjustments to the MVS data “including the appropriate local and current cost multipliers.” (See, e.g., Summ. Appraisal Report of The Fro-steo Building at 27 (Ex. J — 50).) One of plaintiffs’ expert appraisers, Steven Jam-ron, also testified that the MVS cost estimates include adjustments for Virgin Islands building costs and that MVS is a reliable source of cost information. (Jam-ron Test., Tr. VII at 11-12, 18.) I find Jamron’s testimony on this issue to be credible, and the Tax Assessor’s testimony relating to his costs data not to be credible, as shown by the discrepancy between his figures and those of his consultant.

3. Depreciation: Unreasonable and Erratic

The second step of the cost approach is to subtract the accumulated amount of depreciation from the replacement cost new of the improvement. The longer the period, the slower the depreciation accumulates and the higher the appraised value will be. Further evidence of the Tax Assessor’s systematic failure to produce reliable actual values through exclusive use of the cost approach to assess plaintiffs’ properties is his selection and application of depreciation, very often a 110 year straight-line depreciation schedule. All the expert appraisers testified that a maximum of sixty years might be acceptable in some instances, although a thirty- to forty-year depreciation schedule was more appropriate, and that a 110 year depreciation period was unreasonably long. (Conroy Test., Tr. IV at 254-255; Jamron Test., Tr. V at 84-85.) Significantly, Martin’s own expert con