In a decision with potentially important implications for taxpayers, the El Paso Court of Appeals has reversed a trial court order dismissing a school district’s appeal of an ARB denial of the district’s challenge of the valuation of certain mineral interests. In Iraan-Sheffield Independent School District v. Pecos County Appraisal District and Kinder Morgan Production Co., LLC (No. 08-20-00122-CV), the district entered into a contract with attorney Brent Lemon to investigate and pursue claims against Kinder Morgan for inaccurate valuation or omission of certain mineral property. The contract set Lemon’s compensation at 20% of gross recoveries received by the district. Lemon filed a challenge with the Pecos CAD contesting valuations for tax years 2013-2018 and 2019, which the ARB denied. The district appealed to district court. Kinder and the CAD filed a Rule 12 motion to show authority and a plea to the jurisdiction, alleging that the district’s contract with Lemon constituted an unlawful tax ferret contract on a contingent fee basis. After a hearing, the trial court agreed with Kinder and dismissed the district’s appeal. The district appealed.
The district alleged that the trial court abused its discretion in finding its contract with Lemon void and impermissible. The court of appeals agreed, reversed, and remanded to the trial court for further proceedings. In its analysis, the court traced the development of Texas law from an initial SCOTX opinion in 1938 to the contemporary version of § 6.30, Tax Code, which permits taxing units to contract with private attorneys for delinquent tax collection on a contingency fee basis up to 20%. The early precedent, White v. McGill, 114 S.W.2d 860 (Tex. 1938), held that a county’s contract with a tax ferret to find personal property that had escaped taxation (both state and local taxes) was void. Under the predecessor statute to § 6.30 at the time, the Attorney General and Comptroller had approval authority over contingency fee contracts to collect delinquent state taxes, which had not been granted in this case.
The court then turned to an Attorney General Opinion (JC-0290, 2000) responding to an inquiry regarding whether a local taxing unit could hire a business to locate omitted property for a percentage of the amount of tax generated for the unit. The AG concluded that no taxing unit could enter into such a contract without explicit legislative authorization, so any such contract would be void. Just last year, SCOTX handed down an opinion in Kinder Morgan SACROS, LP v. Scurry County, 622 S.W.3d 835 (Tex. 2021), which sidestepped the tax ferret issue. The Court sent the case back down for resolution of a TCPA issue without reaching the issue of the validity of the county’s contract with a tax ferret.
Before the court of appeals, the district argued that its contract with Lemon was not a tax ferret contract because it did not involve new or omitted property, but the undervaluation of property already on the tax roll. As such, § 6.30, Tax Code, specifically authorized the district to retain an attorney to challenge the market value of Kinder’s property. The court of appeals disagreed, finding that a tax ferret contract is “not limited to one in which a private party is hired to identify property that has wholly escaped taxation by virtue of having been previously undiscovered by the tax appraiser.” Citing a number of precedents, the court noted that “property may be ‘omitted’ from the tax rolls and thus escape taxation by virtue of undervaluation resulting from taxpayer fraud” (citations omitted). Just because Lemon’s contract may be characterized as a tax ferret contract, however, does not mean it is not valid under Texas law. According to the court of appeals, the evidence showed that Lemon’s contract contemplated a variety of services, including investigating omitted property, litigating rendition issues already identified, and determining if any property was omitted or excluded from appraisal. The question then became whether the district had statutory authority to enter into a tax ferret contract.
The court of appeals answered that it did under § 6.30. Kinder argued that the statute did not apply because the underlying lawsuit did not involve the collection of delinquent taxes, as the statute provides. Relying on White, the court declined to interpret “delinquent taxes” in technical terms but according to its common meaning as “being overdue in payment.” The gravamen of the district’s claim is that Kinder fraudulently caused property to be excluded from the tax roll and is aware that taxes are due and owing. It is these taxes the district hired Lemon to pursue at the statutory maximum fee of 20%. Even if Lemon was also hired to investigate and identify property on which additional claims may be made, the contract does not agree to pay an unauthorized contingent fee. The court concluded that the contract was not void and that Lemon had sustained his burden under Rule 12 to show authority to prosecute the underlying lawsuit. Finally, in response to Kinder’s argument that Lemon’s contract should be governed by § 2254.1038, Government Code, which requires the attorney general to approve contingent fee contracts for local governmental entities, the court held that the approval requirement does not apply to § 6.30 agreements.
This is an interesting case, particularly with respect to the scope of § 6.30 contracts with law firms to collect delinquent taxes. The court of appeals’ interpretation of “delinquent” to include taxes that might be owed on excluded, omitted, or undervalued property certainly seems to promote taxing unit ARB challenges and further litigation. This practice is probably going on everywhere anyway, but to see it show up in the law may create new marketing opportunities for firms that specialize in representing taxing units in property tax matters.